German Historical School’s critique of British economists

Adolf Wagner’s review of Marshall's Principles of Economics.

A commented summary

http://socserv2.socsci.mcmaster.ca/econ/ugcm/3ll3/marshall/Wagner.htm

Quarterly Journal of Economics, volume 5, 1891, pp. 319-38.

Introduction

Adolf Wagner was a prominent economist of the German Historical School, a school of economic thought that flourished in Germany during the 19^th century. In 1891 he published a review of Alfred Marshall’s Principles of Economics. Marshall was the top English economist of his time. He started out as a classical economist in the mold of John Stuart Mill (1806-1873) but as he grew older he adapted to the neoclassical "marginalist” fashion that still prevails today and which the German Historical School polemicized against).

Thus this review reveals the main conflicts between the two schools of thought. The German Historical School inspired the so-called “institutionalist” current in American economics, which like its parent (G.H.S.) in Europe, was not very optimistic about capitalism.  The best-known proponent of American institutionalism, Thorstein Veblen, wrote witty satires of American capitalism that can be read with profit even today.

In this review by Adolf Wagner we see three premonitions of Nazism -- which would take power in Germany some four decades later: anti-Semitism, nationalism and a predilection for state socialism.  Thus the charge made by Ludwig von Mises against the German Historical School of being chauvinists has a certain ring of truth, although it cannot be applied to all members of the School. Others like Max Weber were quite liberal. And the man generally considered the founder of the German Historical School, Friedrich List (dates?) was decidedly a progressive liberal in his day. List made no claim to originality. After a stay in the USA in the 1840s, he returned to his native Germany singing the praises of the “American School”, by which he principally meant Carey, an unabashed proponent of industrial protectionism. The current professor of economics at Cambridge Ju Jing Hao (or something like that) shares the German Historical School’s critique of classical economics. He accuses Britain and other empires of becoming powerful through protection of their home markets and then becoming free-traders once it was to their advantage.

Wagner’s polemic against David Ricardo’s excessively neat logical constructions jars loudly with Karl Marx’ unbounded admiration for Ricardo and the Ricardian method. That is because Karl Marx shared many of the attitudes of the German Historical School. Marx’ masterful (and seemingly accurate) depiction in vol. 1 of Das Kapital of “primitive accumulation” in England   between the 13^th and 17^th centuries, when Parliament conducted a radical land reform through the so-called enclosures in England that dispossessed the small holders and made them landless laborers ripe for recruitment into the factories sprouting up in the early 1800s,

COMMENTED SUMMARY

I [i.e. Adolf Wagner] protest against the belief that all German economists approve of the patronizing and pretentious attitude towards English authors [i.e. Adam Smith, David Ricardo, etc.] shown by some of the extreme German representatives of the historical school.

The most  uncompromising representatives of the older German historical school, Roscher and Knies, narrow opinions of the younger historical school - Schmoller                  

Most economists in Germany are in so far members of the historical school that we point to the need of induction side by side with deduction; [This criticism of Wagner’s against the English economists I warranted, since Ricardo tends to ignore many details in order to create a logical model. On the other hand the German Historical School has certain methodological preferences that cannot be justified by reference to induction vs. deduction. For example the German Historical School’s aspiration to a comprehensive theory encompassing the whole of society instead of just parts of it cannot be grounded in terms of induction/ deduction. On the other hand the German Historical School did do a good job of studying actual historical processes of economic change and development, e.g. Schmoller’s study of the cloth industry in Lorraine in the early modern age, which Schmoller pointedly entitled the “German" cloth industry of Lorraine, fewer than 20 years after the  German  Empire had snatched traditionally German Alsace and Lorraine from France in the  Franco-Prussian War of 1870.]

We warn against exclusive reasoning on the basis of economic self-interest. [This has always been a grave defect of the English school and remains so today. It presumes a non-existent rationality of economic behavior, Disproved by Daniel Kahnemann’s behavioral economics in the 1980s, and by John Maynard Keynes in the 1930s with his General Theory of Employment, Money and Interest, where he denounces the irrational herd behavior of the traders on the London financial markets. ]

but we do not want to do away with all abstract thought or abstract statements.

Such agreement among economists of different nationalities, whose thought has developed in entire independence of each other, is doubtless much more general than one would expect if attention were paid only to the extremists.

I doubt Marshall’s proposition that the main characteristic of modern industry is not free competition, but free industry and enterprise.

Marshall does not mention the fact that England enjoyed the favorable strategic position resulting from its insular location.  

Since the discovery of America, the situation of the British Islands

has been a factor of prime importance in  the economic development of Great Britain, because military expenditure absorbed a much smaller proportion of its strength than in continental Europe. Germany by contrast was sandwiched between bitter enemies like the Russians and the French. [Here a German nationalist tone surfaces, That was typical of the right wing of the German Historical School.]

To its geographical position and natural security England owes more than to Englishmen’s hard work.

[Anti-Semitism:]

I disagree with the praise bestowed [by Marshall] on the German Jew, whether in economic theory or in industry. In the intellectual field, as in others, the Jew is much more apt to be a middleman than an original producer; and in German industrial life his activity is generally harmful.

Hermann [This statement is not supported by historical fact. As a matter of fact Jews published the first newspapers in Germany. On the other hand it would be accurate to say that there were no Jews in heavy industry, e.g. Krupp steel, which enjoyed pride of place in the hearts of German nationalists of the time. ]

The younger German historical school is guilty of confused thinking upon this point also; and its extreme opposition to the abstract political economy of authors like Ricardo is in part a consequence of this confusion.

The hot-heads of the younger German school refuse to speak of "economic laws" at all, that being unscientific. [On the contrary, it is unscientific to deny the existence of something without proof. And it is generally quite difficult to prove that things don’t exist.]

Discussion of the whole subject of socialism.

Mistake in Marshall: wrong definition of the term "net income," -- a mistake which results partly from the failure to distinguish sufficiently between the industry of the people as a whole and the industry of any private individual. [Here Wagner is quite right, this lack of theoretical moorings is a hallmark of English thinking. Marx too deplored some English thinkers' “brutal obsession with the issues", at the expense of any clear theoretical consistency. Neglect of fundamental issues is characteristic of sloppy thinking that can turn a respectable theory into a  tool of ideological manipulation.]  

Marshall's third book begins at once the separate discussion of demand, production, and similar topics of detail. I find here the same gaps which exist in the writings of English economists and in those of the older authors of Germany and the continent. To my mind, a series of fundamental discussions should be inserted at this point. There should be a consideration of industry in general, of the industry of a given community, of population and industry in their mutually dependent relations, of the organization of industry, the State, and the legal foundations which underlie industrial life, slavery, freedom of person, the law of property.  In Marshall's book, as in that of most previous systematic authors, discussions of this sort are either entirely omitted or else not put in the proper place.

the laborer is regarded as a means for production, not production as a means for the laborer. [This critique by Wagner puts him very close to socialist thought.]

Human life and human development are, after all, the objects of all production. [Just replace “human” with “Germanic” and we get close to Nazi ideology.]  

Marshall says nothing of the organization of industry, or of law and the legal foundations of society.

Too little attention is paid to the historic development of industry, and to those developments, already foreshadowed for the future, beyond the system of simple free exchange and private industry, [Here Wagner seems actually almost Marxist in his belief that socialism is a natural outgrowth of capitalism. Which likewise seems to have no clear historical confirmation.]  

this is the point of view of the German State socialist [i.e. Adolf Wagner. See? I told you!],

who is used to government intervention and disposed to favor it,

the true relation between the theory of marginal or final utility, as developed by Jevons, Menger and Böhm-Bawerk

and the doctrine of cost of production

the German historical economists occasionally treat law of diminishing returns as an antiquated remnant

distinction between individual capital and property, and social capital and property ...

Recent economic changes have brought about an absolute improvement in the condition of the masses [About the same time the Marxist leaders of the German Social Democratic party like Bernstein and later Kautsky were saying the same thing, that capitalism had become more benign and that social welfare made life acceptable.]

Botswana: Triumph of Central Planning

Botswana: Triumph of Central Planning[1]

Carl Stoll[2]

There is one shining point of light on the bleak African continent:

Botswana has pursued goals of good governance and preserves a democratic tradition from the time before Europeans arrived. It has known no coups d’état, hyperinflation, famine or civil war. Its growth rate has been steady throughout the years, in dramatic contrast to declining per capita incomes in most other black African countries.

So, have we found the philosopher’s stone, Hayek’s oh-so-spontaneous social harmony by virtue of impersonal market forces?

Well, Hayek isn’t ENTIRELY off the track. There is a vague family resemblance between Botswana’s successful political and economic policies and Hayek’s recommendations, in that both are embedded in 19th-century liberal democratic traditions like rule of law, etc.

But in Botswana there is nothing to be seen of the drastic privatization that is often recommended invoking (not always accurately) Hayek’s ghost.

Botswana stands out because it is the only Sub-Saharan African country that has become steadily more prosperous for 35 years, while almost all other Sub-Saharan countries have had negative long-term growth rates. It has had no civil wars or coups d’état. Democratic elections are held regularly. There is little corruption.

When Botswana became independent in 1965 it was very poor and had almost no educated citizens. 84% of the land is sandy desert. Its only business was cattle. It was much poorer and far worse educated than Uganda or Zambia. But it is now richer than either of them.

Various different factors have been named as responsible for this exceptional stability and growth.

1. British colonialism did not destroy pre-existing tribal political structures. The British basically ignored their colony of Botswana, since it had no apparent mineral wealth and was not attractive for European settlers. It served principally as a buffer state to prevent expansion of German colonialism and Boer influence.

2. Traditionally the native Tswana people have had political institutions that enabled free discussion of public affairs by ordinary people, and even allowed criticism of tribal chiefs. These institutions were integrated into the republic that became independent in 1965. The chief of the most powerful tribe was elected president, but he did not particularly favour his own tribe. He later greatly reduced the power of the tribal chiefs and increased the power of government.  

3. Law and order have prevailed. This legal security afforded large segments of the population security in their property rights, encouraging people to be productive and thrifty.

4. After independence mineral wealth was discovered in the form of diamonds, whose export provides a steady income. In other African nations mineral wealth has been a factor of discord, rivalry and corruption, but not here.

Does Botswana confirm Hayek’s thesis in The Road to Serfdom?  In other words, was Botswana successful because the government is small and does not meddle with the economy?

Botswana has indeed strong restraints on the executive and property rights are secure. It has followed sound economic policies, has had low inflation, avoided budget deficits and has protected private property (of both rich and poor).

However it has in no way followed a free-market ideology. 

Government has played a big role –- but not an overwhelming one -- in the country’s economic development. The government is the sole owner of all mineral wealth. On independence the government nationalized the only industry in the country –- a slaughterhouse, and has since built two new government slaughterhouses. The government heavily subsidises veterinary medicine, vaccines and agricultural extension services for cattle ranchers. The government’s revenue from diamonds is prudently invested in productive projects.

To put it in polemical terms, Botswana is a triumph of central planning.

---

[1] All information about Botswana was extracted from An African Success Story: Botswana, by Daron Acemoğlu, Simon Johnson & James A. Robinson, MIT Department of Economics Working Paper No. 01-37, July 2001 Download at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=18621#view1373341

Of course, Botswana has not known central planning in the striuct sense of the term, namely all production and consumption of all goods and services are planned by a central board 5 years in advance, down to the last tiddlywink. However free-market enthusiasts deliberately smear all government intervention in the economy as “central planning”.

[2] Blog at www.blueplanetnotes.blogspot.com

Fascism is based on lies

“Outraged by the carnage of World War I, [Ezra] Pound lost faith in England and blamed the war on usury and international capitalism. He moved to Italy in 1924, and throughout the 1930s and 1940s embraced Benito Mussolini's fascism, expressed support for Adolf Hitler and wrote for publications owned by the British fascist Oswald Mosley.”

Wikipedia, Ezra Pound

Pound “blamed the war on usury and international capitalism”, as did all Fascists.

However, 30 years later the German historian Fritz Fischer proved that the war had been caused, not by usury and international capitalism, but instead by Germany’s relentless militarism and overweening ambition.

Fritz Fischer (1908-1999) conclusively demonstrated in the 1950s that Germany alone was to blame for the outbreak of WWI.  "Fischer was the first historian who examined all of the Imperial German government archives in their entirety and as a result ... instantly rendered obsolete every book previously published on the subject of responsibility for the First World War". http://en.wikipedia.org/wiki/Fritz_Fischer

So fascism was based on an assumption that was later proved to be false.

This is the sort of preparatory work Pound performed for the few years leading up to his decision on who was to blame for WW 1:

”… in January 1917, he had the first three trial cantos, distilled down to one … published in Poetry.^[66] He was now a regular contributor to three literary magazines. From 1917 he wrote music reviews for The New Age under the pen name William Atheling, and weekly pieces for The Egoist and The Little Review – many of the latter directed against provincialism and ignorance. However the volume of writing exhausted him and he feared he was wasting his time writing outside poetry,^[67] exclaiming that he "MUST stop writing so much prose".^[68]”

In other words Pound’s political ideas were bullshit. They were based wholly on primitive instincts and whim, not on any kind of research or reflection.

Ezra Pound is a shining example of blinkered ignorance whimsically proclaiming supposedly profound truths designed to turn society into a wretched zoo. 

New Progressive Political Economy

REPLY to "A New Progressive Political Economy"

A New Progressive Political Economy, by David Sainsbury http://www.nationofchange.org/new-progressive-political-economy-1394382915

Note: When I dashed off this review i was labouring under the misapprehension that D. Sainsbury was American. Since then I have learned that he is British. However, since Britain  and the US are both dominated by essentially the same ideological constraints, my remarks remain essentially accurate.

Firstly I wish to make clear that I basically agree with ninety per cent of the policy recommendations in D. Sainsbury’s article A New Progressive Political Economy.

However I find grave flaws in the way he presents his ideas. These flaws consist in a concerted attempt to perpetuate the pernicious ideology of the ruling classes, even while making a few concessions in the sphere of practical economic policy.   

The defects in Sainsbury’s article can be classified under several main headings:

1.       Gross ignorance of the history of economic thought. It starts with the title “NEW Progressive Political Economy”. But NONE of the ideas he presents are new.  Some of them can even be found in the 1858 edition of Principles of Political Economy by John  Stuart Mill, the last great thinker of the Classical School of English economic theory [which was soon supplanted by its nemesis the NEO-Classical School, that contradicted its basic approach and prepared the terrain for Neoliberal madness]. Other “new” ideas that Sainsbury mentions were propounded in the 1940s and 50s by the German liberal economist Walter Eucken, who greatly influenced West German economic policy between 1948 and 1973 [i.e. the German economic boom period].

This abject ignorance of the history of economic thought is the result of the fact that economics programs at American universities do not offer courses in the history of economic ideas.  This amazing lapse turns most American economists into lobotomised zombies incapable of perceiving even gross differences among various theoretical constructs, since most economic ideas are not value-free statements of fact, but instead are formulated in terms of concepts that have well defined historical pedigrees and reflect ideological conceptions that must be made explicit for the sake of clarity.

2.       Failure to designate neoliberal economic thought as an ideological venom secreted by the parasitical financial oligarchy.  Neoliberalism is  the bankster ideology par excellence, carefully fomented and propagated over many decades by the academic lackeys of banksterism, one of whose most grovelling exemplars is Thomas Sowell. The effect of neoliberalism is to blur the distinction so stressed by Classical economics [and so carefully obscured by Neo-Classical economics] between productive and unproductive economic endeavours, which matches the distinction between productive social classes and parasitical social classes. Michael Hudson explains this paramount distinction in some of the many enlightening articles to be found on his blog at www.michael-hudson.com.

3.     Ethnocentric preoccupation with specific issues affecting the United States. This would not be a problem if he only bothered clearly to label these issues as American issues. But instead he gives the mistaken impression that they are global issues. This too is a blatant sign of ignorance.
“… egalitarianism is not a popular policy even for many low-income people” [that may be true in the Benighted States of America, where free-market libertarian twaddle has penetrated every sector of the population] . “In my experience, trade unions are much more interested in wage differentials than in a simple policy of equal pay for all” [More of his ethnocentric malarkey].

4.       Sainsbury repeats, zombie-like, the mantra of “markets” when recommending “an economic system in which most of the assets are privately owned, and markets [my stress] largely guide production and distribute income “. What KIND of markets, you lamebrain? [See Walter Eucken]. As I never tire of explaining, “markets” per se are a guarantee of NOTHING AT ALL. Classical economists took great pains to enumerate the conditions under which markets assure optimal economic outcomes for all participants, i.e. all members of society. ONLY COMPETITIVE MARKETS assure optimal results.[1]  Moreover contemporary economists like George Akerlof, Joseph Stiglitz et al  have discovered new sources of market failure that Classical economists failed to detect, namely those explained by their new field called “Economics of Information”.

5.       Sainsbury perpetuates harmful myths that assert a supposed neutrality of government economic policy. He recommends that “governments abandon the belief that they have no role to play in the economy”. As Dean Bakes so ably explains, the existing distribution of income and wealth is the result of conscious and deliberate efforts to expose the American working class to the chill winds of international competition, while carefully protecting doctors and other privileged groups from similar outrages. “The recent financial crisis was made far worse by profound institutional failures, such as the high level of leverage that banks were permitted to have.” I fully agree with the content of Sainsbury’s statement, but the wimpy expression “that banks were permitted to have” conceals the ugly fact that the banksters a.k.a the parasitical financial oligarchy [or the Wall Street Hyenas, if you prefer] ARE RUNNING THE SHOW. Every single US Secretary of the Treasury in living memory has been a top Wall Street plutocrat, inducting straight from his main gig of looting the world economy’s wealth.  The correct expression is not “that banks were permitted to have” but “that banks seized by subverting and corrupting the democratic process”. As Michael Hudson perceptively notes, “The financial sector is a parasite wrapped around the real economy and sucking it dry.”[2]  An indispensable source on the wiles of banksterism is Nomi Prins, like Hudson a former top Wall Street apparatchik, who popularised the use of the term "looters" to describe the leaders of the financial industry. Her blog is an eye-opener. 

6.       Moreover Sainsbury parrots some conventional bromides that have long been exploded or at least called into question. “… there is a real tradeoff between equality and economic growth.” Okun's 1975 conclusions about the "leaky bucket" of redistribution has been relativised in terms of various political variables by the recent paper "Redistribution through a leaky bucket: What explains the leakages?" by Fabio Padovano and Gilberto Turati, online. 

As a result of all these severe and by no means coincidental defects, David Sainsbury must be classified as nothing less than a Trojan Horse in the field of progressive economic thought. Whether he is aware of it or not, Sainsbury is a member of that treacherous fifth column that releases progressive-sounding ideas wrapped in sound bites that perpetuate the parasitical financial oligarchy’s  ideological stranglehold  on the world of economic ideas. A stranglehold that consolidates and justifies its stranglehold on society and on the economy.

---

[1] I must qualify this statement by acknowledging that monopoly is not always a bad thing. However IN GENERAL monopoly is indeed a very bad thing, and any exception to this general rule should be explicitly set forth every single time any monopolistic arrangement is excused or justified. That means that the empirical and theoretical justification for any specific sort of monopolistic arrangement must be completely set forth.

[2] It is a well known fact that many of the most ruthless looters, like President  Clinton’s Secretary of the Treasury and CEO of Shiticorp, Robert Rubin, are ethnic Jews.  However, this does not prove that Jews are evil, but merely that many Jews are exceedingly clever. For some of the parasitical financial oligarchy’s fiercest  critics, like economists and Nobel prize-winners Paul Krugman and Joseph Stiglitz, ARE ALSO ETHNIC JEWS!

Those bungling capitalists!

By Carl Stoll

A review of “Chávez Decaffeinates Venezuela. Coffee shortages predictably follow his price controls", by Mary Anastasia O'Grady, Wall Street Journal, May 3, 2010

Author’s note: It is not my intention in this review to defend President Hugo Chávez’ nationalization of the coffee plantations. On the contrary, I agree with Ms. O'Grady that price controls are useful measures only in emergency situations, not as instruments of steady economic policy.

Firstly, Ms O’Grady inexplicably confuses central planning with price controls. These two sorts of state intervention in the economy are both deplorable, but should be kept analytically separate because their economic effects are different, as pointed out by Ludwig von Mises in his works A Critique of Interventionism and Middle of the Road Policy Leads to Socialism.

Ms O’Grady cites a prominent economist, the late Milton Friedman, to the effect that governments are always incompetent bunglers. Milton Friedman was undoubtedly a very talented economist and much of what he wrote is very sensible indeed. His arguments against a gold standard, his critique of federal regulatory bodies as artificially imposed cartels, and numerous other positions he espoused are well worth reading and have held up well against the ravages of time and fashion. .

Nonetheless Mr. Friedman had an unfortunate proclivity for dogmatism when it came to the issue of government participation in the economy. This proclivity drove him to propagate what can only be called blatant and horrendous lies. Mr. Friedman’s sleazy record on this score is exposed in excruciating detail by Elton Rayack in his book Not So Free to Choose: The Political Economy of Milton Friedman and Ronald Reagan, published by Praeger in 1987. Rayack cites claims from Friedman’s works that are patently ridiculous and are obviously purely ideological secretions lacking any empirical basis whatever. For example Friedman claimed that Japan’s 19^th-century industrialization was driven by private entrepreneurs, whereas the most cursory glance at Japanese economic history reveals that the state played the decisive role in every single stage of Japanese economic history since at least 1850! And that is but one example of many.

Consequently I am not terribly impressed by one more Friedman quote badmouthing government.

I admit that governments often make blunders. However the government is not the only party guilty of mismanagement. In the article "America the Resilient. Defying Terrorism and Mitigating Natural Disasters” by Stephen E. Flynn, that appeared in the March/April 2008 edition of Foreign Affairs, I read the following:

“In 2005, after a review of hundreds of studies and reports, the American Society of Civil Engineers issued a scathing report card on 15 categories of infrastructure: the national power grid … received [a] D … the best grade, C+, went to bridges …”

The US power grid is owned and operated by power companies, the great majority of which are privately owned. According to National Public Radio, "The U.S. electric grid is a complex network of independently owned and operated power plants and transmission lines. Aging infrastructure … has forced experts to critically examine the status and health of the nation's electrical systems.”

http://www.npr.org/templates/story/story.php?storyId=110997398

On the other hand US bridges are almost without exception government property.

How do you explain that, according to the American Society of Civil Engineers, in 2005 the infrastructure belonging to and maintained by the government was in better shape (score: C+) than the infrastructure belonging to and maintained by private enterprise (score: D)?

Don't bother to reply. I know the answer already. My many years of researching the issue of private vs. public ownership of the means of production have persuaded me that the slogan “the government can't do anything right” has a certain basis in reality, but it is by no means a universal rule.

Furthermore I have concluded that private enterprise is guilty of just as much incompetence, waste and sundry other misdeeds as the government.

Blaming the government for everything is merely a right-wing hobby, very much cultivated in the US, where it has become a kind of folk religion.

The US is perhaps the only industrial country that lacks an integrated national power grid. Those bungling capitalists have been extremely negligent about connecting the East with the West, and Texas has its own separate grid! (At least when I researched the matter in 2003, links among those three segments were both scarce and feeble.)

If the power grid were run by the government, as I think it should be, the US would undoubtedly have been provided with an integrated power grid many, many years ago. Like Mexico, for example, where electric power was a state monopoly for many years.

I believe that judgments on economic phenomena should be based on meticulous study of the facts and not on right-wing propaganda à la Milton Friedman.

Libertarians’ flawed economic concepts

Concept of property

Your libertarian argument based on property rights is utterly conclusive, because it is purely logical, being based on the definition of the term “property”.

However I reject your definition of the term “property”. Property is a social institution. Its definition must be adapted so as to maximise the welfare of society as a whole – without however despoiling the proprietor, which would discourage productive efforts. 

Private property exists only thanks to the vigilance of the state. Private property can be enjoyed only thanks to the provision of infrastructure, which in practically all historical instances has been provided by the state. The very concept of private property is defined by the state in its laws.

You attempt to define property ahistorically on the basis of an abstract morality that fraudulently claims to have no social or historical roots. Such a claim cannot be taken seriously.   

Defining property

You call the state a parasite because the state doesn't respect private property. However private property was created and defined by the state and is protected and maintained by the state. Without the state, private property does not exist. How can you oppose private property on the one hand to the state on the other as if private property were an independent entity unrelated to and prior to the state?

Moreover, you call the state a parasite because it encroaches on the private property that it created. However parasitism clearly implies harmful activity, activity that is pernicious to others, in this case to property owners.

To make this epithet stick, you must prove that the net effect of taxes and other state encroachments on private property is to reduce property owners’ wealth (or society’s wealth, or both).

But taxes are used among other things to pay policemen’s wages. If there were no police, property owners would be wiped out in 24 hours by bands of roving looters. So you cannot be demanding the abolition of the police. Therefore you must be implying that the state continue to maintain and defend private property for free, without charging any of its expenses to property owners. In that case, who shall pay the expense of defending property owners’ wealth?

Your theory seems to demand the existence of a class of persons who own no property, from whom the state should extract the revenue required to pay the costs of defending property.

Thus your theory of property seems to require a slave class without property rights.

The next logical step is to say, with Proudhon “Property is theft.”

Different kinds of property

Stating the issue of property as a moral question, i.e. right or wrong, is unacceptable.

There are many different sorts of property with different economic characteristics. Some assets are fixed in amount, like land, while others are easily multiplied, like human capital.

To apply a one-size-fits-all standard to these different forms of wealth would mean to restrict the state’s ability to tax them differently depending on the different effects that taxation has on them.

Many sorts of wealth are unearned. Their possessor has done nothing to earn his assets except being at the right place at the right time to collect a windfall, or has obtained his wealth through monopoly practices or by inheritance. Taxing these assets at high rates does not discourage productive efforts. Consequently they should be taxed at high rates.

The value of land is composed of the improvements that the landowner has made plus the innate value of the land that depends on extraneous factors that the owner cannot influence. This latter part should be taxed at a 100% rate.

Free-market ideology

Free-market ideology carefully avoids discussing the conditions necessary for markets to be efficient transmitters of information in the Hayekian sense.

Moreover it ignores the socio-political framework necessary for markets to exist and operate properly. Consequently free-market ideology simply fails to address fundamental issues and its conclusions are therefore irrelevant.

All the works you cite suffer from a fundamental flaw, namely that they fail to take into account numerous defects of the market, some of which are preventable and other are not.

1. Preventable market defects are monopoly, fraud, coercion and perhaps others. Any of these phenomena makes the price diverge from the competitive market price and renders the benefits of markets illusory to a greater or lesser extent.

I admit, however, that monopolies can have advantages.

The only way to prevent these defects is through government action. Government is conceived of, in this context, as a referee that sets and enforces rules and is itself not motivated by the desire for commercial gain.

2. Market defects that are not preventable are public goods and externalities. Here again the government must step in to assure the common good.

The concept of public goods is based on the concept of exclusive enjoyment, i.e. the owner’s ability to prevent others from enjoying use of his property. Goods that enable exclusive enjoyment are called private goods. Those that do not are called public goods.

Markets work well only for private goods. Public goods must be provided through non-commercial mechanisms, i.e. non-profit associations, charities or government. Free-market ideology does not address the issue of public goods. Consequently its conclusions are irrelevant.

Theoretical discussion has limitations. A more conclusive method of ascertaining the issue of whether and to what extent government intervention in the economic sphere is beneficial or otherwise is empirical research of historical cases of government action. The fact that no free-market enthusiast has ever bothered to research empirically the many cases of government action is itself an indictment of free-market ideology. I, by contrast, have researched the development of the welfare state in a number of European countries and concluded that the welfare state – if well run -- is a thoroughly beneficial institution in advanced industrial societies, which greatly increases the standard of living and assures social and political stability.

An example: the health care system in the US and in other industrial countries

In the US the health care system is highly regulated. However, this regulation cannot be considered a restriction on the freedom of action of the profit-making firms involved in the health-care industry, for the simple reason that all regulation in the industry is drafted by those profit-making firms by means of their puppets in the legislatures. Consequently the inefficiency of the US health care system cannot be attributed to government regulation as such. On the contrary, the US health care system is designed to facilitate profit-making by the firms involved.

The US health care system is a scandal, a hazard to public health. Although the US spends a huge share of its national income on health care, Americans’ health is far worse than that of comparable industrial countries. The reason is obvious: those countries have a national health care system run by public bodies and the US does not. The public bodies are not motivated by profit, but by the goal of improving public health.

The data are available in many places.

BILL DE BLASIO IS A COMMUNIST!

SHOCKER: NY Mayor hopeful Bill de Blasio IS A COMMUNIST!

Carl Stoll

Communist, eh? The president of Italy is a Communist too. In the 1950s and 60s Giorgio Napolitano was a top maker  and shaker in the Politbureau of the Italian Communist Party, He spent the summers with his family on Lake Baikal in Siberia. In 1956 Napolitano gave a press conference congratulating Communist Russia on crushing the Hungarian Revolution.

But he's changed his views.

The president of Brazil is a Communist, too. She’s very popular. She was a communist guerrilla during the brutal military dictatorship that governed Brazil after the CIA boosted the army into power in order to cut short unsettling populist experiences – unsettling for the rich ruling class, that is.  

The Brazilian economy is doing very well under its Communist president. The Brazilian  government pays poor families food allowances to encourage them to send their children to school. That way poor children can learn and eventually earn respectable incomes.

They used to have programmes like that in the US, too, but the Republicans got rid of them. Now many people go hungry in the US, because the Republicans prevent the government from spending any money to preserve the people’s health, improve their earning power and fund infrastructure investments that encourage private enterprise to invest in turn.

In the 1950s,  by contrast,  Republican President Eisenhower invested vast sums of federal tax revenue into expanding the country’s productive capacity. A lot of this productive infrastructure investment was disguised as military spending.   Among other things the federal government offered generous scholarships to the population at large. Aren’t many scholarships around these days. 

The federal government pulverised billions of dollars on a megalomaniac national superhighway system – essential for fighting off the Russians, you know. Presidents Johnson and Nixon and a wee little bit Carter were the last presidents who believed in welfare and expressly proposed to boost government investment to spur on private investment.

Keynesianism became unfashionable when it proved unable to jump-start Western economies out of the deep slump that ensued from the 1973 Arab petroleum boycott.[1]

The feebleness of the world economy after 1973 was attributed by current ideological fashion to excessive government spending, government waste, high taxes, too many giveaways to the poor.

Since that time a big theoretical issue has developed around so-called “external shocks”. In 1973, as far as I am aware, economists had not yet explored the issue of external shocks. They were known to exist, but they were not systematically incorporated into explanatory models of economic events.  

Even without explicitly using the “shock” concept, there was really no good reason to expect the world economy to recover swiftly from such a massive change in basic market parameters. The Arab oil boycott of 1973 tripled or quintupled energy prices, I forget which. Big price shocks like that demand massive readjustments that  take  a long time to play themselves out. European industry took several  years to adjust to the sudden disappearance of many businesses that suddenly became too energy-inefficient to continue producing  at the new prices. The whole profile of industry changed, new business models replaced the old, unemployment mushroomed, the pattern of foreign trade shifted and so forth.

So it seems that the dumping of Keynesianism as the standard economic policy in favour of monetarism and its successors – the  successive economic orthodoxies of the parasitical financial oligarchy -- was an error, based on suspiciously premature and hasty reasoning from a scanty data  base.

Comparison of tax rates and economic growth rates before 1973 and after 1980 reveals clearly that when the highest income tax rate was 92%, capitalists invested much more readily than when the rate went down to 28%. So the argument that raising taxes reduces investment is false. Tax rates affect investment much less than does the investor’s chance of making a profit.

After Carter the economy started going downhill. That period is known as the “Reagan Revolution”. The Conservative Republicans swore that getting government out of the economy was a prescription for sparking rapid economic growth. It never happened. There wasn’t much growth. Instead wealth began rapidly concentrating in the top income brackets. All additional national income ensuing from any growth was collected by the rich, while most people’s incomes started stagnating.

[Paragraph removed for review. I discovered that my reasoning was false. I must consult the original article before posting the corrections.] 

But in Brazil the economy has been doing very well ever since a militant labour unionist -- Lula -- became president in free elections and at once cranked up the economy with looser monetary policies, raised taxes on the rich and on corporations and  expanded government spending. You know, what they used to call Keynesianism, right? His right-hand woman was an ex-Communist guerrilla. Back during the dictatorship she was captured by the military, imprisoned and tortured.  Now she’s the boss.

Perhaps if the American President were a Communist, we wouldn't be in such a pickle, don’t you think?

I think if the US had had Communist governments over the last 20 years, a lot of very expensive blunders could have been avoided. The Commies would have spotted at once the danger resulting from dependence on overseas energy sources. By the Second Five-Year Plan, much of industry would have already been converted to other energy sources, new manufactures, etc.  With a Communist economic policy, exporting jobs overseas wouldn't have become the economy’s most dynamic segment.

I learned a rather saddening fact a few years ago. It seems to be true, since I have not noticed anyone disputing it – the US taught the Brazilian dictatorship how to torture prisoners. Taught lots of other Latam despotisms, too. Torture training was organised through the US development aid agency, USAID, and funded from the foreign aid budget.    

Author’s confession:  The above history is a summary presentation and I hold it to be accurate overall and in all its decisive aspects. However some details were simplified and certain points are polemically expressed.   

---

[1] In the context of this essay, the Arab oil boycott of 1973 is considered merely an anonymous,

 random external shock. The boycott’s causes were political in nature and cannot be dealt with in the brief confines of this economic essay.