from Volume 8 of Essays on Liberty, published in 1961 by The Foundation for Economic Education, 30 S. Broadway, Irvington-on-Hudson, NY 10533, reprinted from an earlier issue of THE FREEMAN.
ll the politico-economic systems in which the world's peoples make their living can be divided into centralized or multiple economies. In the first of these two great classes all production is directed by a central authority which consists of, or derives its power from, a chief, council of elders, king, or in the case of communist countries a political staff under the over-all command of a dictator. It is conceived by socialists that an authority directing a centralized economy could derive its power from an elected assembly, but in practice, democracy and the centralized economy have rarely co-existed.
The great characteristic of a centralized economy is that all economic activities are directed or planned by a central authority so that the people are subjected to a hierarchical control. Every man has a superior whom he must obey. The most outstanding examples of the centralized economy are:
|"What, actually, is the
difference between communism and fascism? Both are forms of statism,
authoritarianism. The only difference between Stalinís communism
and Mussoliniís fascism is an insignificant detail in organizational structure."
-- Leonard E. Read
There is nothing new in any of these centralized economies. They, and the hierarchical system by which they are controlled, have been known for countless ages. The subjection of the individual to the blind instincts of the group, which is their outstanding characteristic, may be said to be the natural condition of man before he trained himself for civilization. That some of these centralized economies make use of and even develop the modern products of capitalism cannot alter this fact.
The centralized economy still has a very great attraction for many people.
It relieves them of responsibility for the conduct of their own lives so
long as they adhere to the prevailing collective ideas and emotions. In
misery and war increasing numbers of men will always revert to it. This
to some extent explains the easy acceptance of Nazism and fascism in such
comparatively civilized countries as Germany and Italy. Most of the modern
collective ideologies arise from this instinctive desire to be taken care
of by a superior authority. This instinct lies latent in most of us as
the result of our background of centuries of tribal communism. It can only
be overcome by a firm belief in philosophy or religion.
A MULTIPLICITY OF DIRECTORS
On the other hand, the multiple economy depends for its efficiency, not on the concentration of economic direction, but on the breaking up of that direction into as many hands as is reasonably possible. It makes every capitalist direct his own small share of the economy. His right to do so arises from his ownership of property. A multiple economy is planned or directed by the owners of farms, factories, ships, banks, trucks, shops, and in fact the owners of any property which is capable of assisting in the great work of the production of goods.
Now this type of economy with its multiplicity of directing authorities seems to be quite beyond the comprehension of the socialist who cannot understand this diversity of direction. He believes that if more than a tiny group of experts direct an economy, then chaos must inevitably result. How can a vast complicated economy be planned and ordered without competent economists to direct it from its center? One cannot run even a single business without planning it carefully; how, therefore, can one run an economy such as that of America or Great Britain without such planning?
We saw something of this line of reasoning in the first conference of the British Labour Party after the war when at the instance of Professor Laski a resolution was passed stating that "there must be no return after the war to an unplanned competitive society," and proposing instead "the planning of production for community consumption." Similar demands for a planned economy by socialist and American "liberals" have been too numerous to recall.
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THE MECHANISM OF CONTROL
But fortunately for humanity, the multiple direction of the economy by innumerable capitalists - each concerned with only a tiny part of the total production - does not mean chaos. On the contrary, it means the most efficient direction and planning of an economy that the world has yet been able to attain. The reason for this is that the capitalist's control of his section of the economy is not absolute. He is under the strictest orders of a power far greater than himself. His bonds may appear to be light for they are of an impersonal nature, but they are extremely strong. Any disobedience will be revenged, as a last resort, with bankruptcy.
This powerful master of all capitalists who coordinates their production, and in fact plans their whole economy, is none other than the people themselves who exercise their power by means of the free price mechanism, which is the most efficient instrument for directing and planning an economy that has yet been devised. The production and investment of the apparently independent capitalists are directed by the rise and fall of the prices of commodities and services. A movement of prices will tell producers far quicker than can any state economic planner what their masters, the consumers, want them to produce and where to invest their capital. The free price mechanism, by preventing waste and by giving swift directions to capitalist, which must be obeyed on pain of bankruptcy, has made the multiple economy the most efficient system for supplying the wants of the people that the world has ever known.
Under such a system, gluts and scarcities cannot occur except as the result of some unforeseen natural phenomena. Such maladjustments as the United States has experienced with her farm supplies, or such depressions* as that inflicted upon the world in the thirties cannot possibly occur.
Far from chaos and unbalance being the result of the multiple or free market economy, as socialists claim, many economists have been struck by the efficient co-ordination or planning it brings about. Professor H. D. Henderson, for example, in his Cambridge Economic Handbook, SUPPLY AND DEMAND, writes of this co-ordination in the following words: "Just as in the world of natural phenomena, which for long seemed so wayward and inexplicable, we have come gradually to perceive an all-pervading uniformity and order of a similar, if less majestic kind."
The great Bastiat** speaks of this same co-ordination in the following words: "On entering Paris which I came to visit, I said to myself - Here are a million of human beings who would all die in a short time if provisions of every kind ceased to flow toward this great metropolis. Imagination is baffled when it tries to appreciate the vast multiplicity of commodities which must enter tomorrow through the barriers in order to preserve the inhabitants from falling a prey to the convulsions of famine, rebellion, and pillage. And yet all sleep at this moment, and their peaceful slumbers are not disturbed for a single instant by the prospect of such a catastrophe. On the other hand, eighty departments [areas of France] have been laboring today, without concert, and without any mutual understanding, for the provisioning of Paris."
It may be argued that owing to the great increase in the government control of economic affairs since the days of Bastiat such an illustration as he has given us is no longer applicable. It is true that the directing power of the price mechanism has been reduced with many unhappy results, but it still remains the most effective economic guide we have. This is illustrated by the great improvement which occurred in the British economy as soon as the Conservative government released it from many of the direct controls which their socialist predecessors retained long after the war had ended.
Sometimes the socialist will claim that the freedom of the market must
be restricted for the sake of the freedom of the people. They do not realize
that in interfering with the price mechanism it is this very freedom of
the people they destroy.
A JUST AND IMPERSONAL GUIDE
The first attributes, then, of the multiple or market economy are order and efficiency, but it has other virtues equally important. We have seen that the owner of capital in a multiple economy must submit to the demands of the market which he will find a completely ruthless master. At the same time it is a master which has the inestimable virtue of being completely just and impersonal. It does not rule by sending Commissars or Gauletiers to the capitalist's office to instruct him what he must produce. It is impervious to the corrupting influence of pressure groups. The capitalist must obey the market, but he need submit to no visible human master. It is because of this impersonal rule that the multiple economy is the one form of economy in which men can be free.
In the multiple economy the market rules a great part of our lives. When in our youth we choose the occupation we will follow, the market tells us what remuneration we may expect and influences us accordingly. In most modern states this influence is qualified by the efforts of trade unions, and to some extent by legislation, but the market rate for wages is still a most important element. The market helps us to decide what we shall eat and how we shall clothe ourselves and furnish our home. We must consider the market when we choose the house in which we will live. Where there is no free market the people do not choose their houses for themselves; they are "housed." The market decides whether our work gives satisfaction to a great many people, in which case it will make us wealthy, or whether it gives only average satisfaction, in which case our rewards will be of a corresponding nature. If, with our capital or our labor, we do nothing for the community, the market will give us nothing in return.
If a man is to live without either robbery or charity, then he must supply the market with goods or labor. These must be of a type the market demands, otherwise they will not sell.
We may safely say that the market controls more than half of earthly
activities. This means that even the freest of us are for a great part
of our lives in bondage to the wishes of other people, but as their demands
are expressed through the market, these bonds appear to us to be light.
THE POLITICAL MASTER
Thus we may say that the chief master of human activities consists of nothing less than the people themselves ruling through the price mechanism. But there is a second master who also has a very great command over our lives. This is, of course, the government of the country in which we live. This second master rules through established laws and sometimes through regulations and fiats, and its instruments for enforcing its rule are the police.
For centuries the provinces of these two rulers were not clearly defined. All economic power and political power resided in the same hands. Between the Renaissance and World War I, however, all development toward freedom and civilization has also been toward the separation of these two masters of human destiny. We see this separation growing with the Tudo revolution, the English civil war, the later revulsion against mercantilism, and in the insistence of the nineteenth century liberals that the state should not interfere with the economic system. It was the origin of those provisions in the American Constitution which seek to limit both the power of the federal government and of the state.
It is the separation of economic and political power which makes liberty possible. This separation is found only in the multiple economy. In that economy the capitalist, with his rights in his property, protected by law, is free to follow the directions of the people expressed through the market. He knows that as long as he satisfies the market he is secure and independent. If he satisfies his customers, he need call no man master. He can denounce the government to his heart's content without fear of losing the position which the market economy has given him. He can demand the right to travel abroad, the right to free speech and free press, and he knows that his independence is safe, and that no official can harm him. So long as the law continues to protect his property and those rights which have been associated with property in all civilized countries, he knows his freedom is assured. His property, as well as giving him freedom from the power of the state, also protects him from the ill will of his neighbors.
The owner of property can be agnostic in a Protestant or Catholic district,
or can be a colored man in a white neighborhood. An owner of property may
be uncouth, uneducated, and rude, but nevertheless, if he manages his property
wisely he can laugh at those who dislike him. It is surprising what prejudices
we will overcome to deal with a man who provides us with honest goods or
efficient service. Only in a property-owning economy can the outsider,
the eccentric, or the original mind flourish. In centralized economies
even the laughter or the ridicule of one's neighbors seems to be enough
to keep the divergent individual in line. Property with its rights securely
enforced by the courts is the very basis of human freedom. It is no accident
that in all countries where private property has ceased to exist, freedom
ARE WORKERS FREE?
Someone may here say, "This is all very well for the property owner, but what of the people who have no property - can they be equally free?" Not, perhaps, quite so free. A worker who must obtain a job will be well advised to avoid airing extreme views. It is just possible that racial or religious considerations may affect him more than they would an independent capitalist. But for all essential purposes, a worker in a multiple economy is as free as the capitalist. He need not fear his foreman or employer as a communist worker fears his immediate superior. The basis of his freedom is the multiplicity of property owners who can employ him. With many potential bosses he need be subservient to none. Furthermore, he knows that he himself can become a property owner and employer.
Property rights have often been described by socialists as "reactionary barriers against the will of the people." Not so. They are barriers against the state, and they protect the people from the abuse of its power. But they are effective barriers only so long as the two masters of men, the free market on the one hand and the government on the other, are kept separate and distinct. These masters must be confined to their own provinces of control.
When there is no free price mechanism to co-ordinate the economy, then dislocation is bound to arise. Depressions - such as that which followed World War I when political considerations controlled a great part of the world's economy -- become unavoidable and lead to still further control and further economic dislocation. If this development is allowed to continue, the rule of the economy by the people through the price mechanism comes to an end; their place is taken by the planner under the instructions of the political group in power. With the merger of economic and political power into the hands of the one authority the multiple economy is destroyed and freedom comes to an end.
In the centralized economies all men are subject to a hierarchy of control. Of course we know that in a multiple economy such a control exists in every individual firm from the manager right down to the office boy, but it exists only during business hours. Moreover, if an employee does not like the orders given him during his working hours, he can always find another job. But in a centralized economy there is only one employer, the state, and this all-powerful employer always interferes with the people, even when their working hours are over. Along with the control of man's economic activities in a centralized economy, there there always goes control of his religion or ideology. Not only a man's labors, but his very mind must be subject to the will of those who control the economic system. If a man's mind were allowed to be free, then he might resent his place in the hierarchy, or even cease to believe in the prevailing economic system; and that would be dangerous in a centralized economy for all men depend on the current politico-economic plan for their livelihood.
As the economy is planned by the central authority, its smooth working
depends upon all fulfilling the work allotted to them. Even the right to
possess a private garden or cow is a privilege that distracts a man from
his job, interferes with the over-all plan, and can seldom be allowed.
He who does not do his job sabotages the whole political plan. As all capital
is controlled and directed by the state, so also must all labor be allotted
its task by the state. He who expresses an opinion dangerous to the government
is invariably endangering the whole economy and is therefore, in the eyes
of the regimented people, justifiably silenced. As a consequence, the centralized
economy not only controls all productive activity, but the very minds and
lives of its people. The nonconformist must die. The centralized economy,
whether it calls itself socialist, communist, fascist, or Nazi, always
PLANS MUST BE MILITARIZED
We in the Western world have not yet realized how much power the destruction of the free market and the establishment of a centralized economy must inevitably place in the hands of those who control the state. In no instance have freedom and democracy long survived the establishment of a centralized economy.
Dean Inge seems to have realized this when he wrote, "If a multitude is to be subjected to a plan, it must be militarized. If individuals are allowed a free choice, the plan is thrown into confusion. Bureaucracy, under an absolute ruler, or rulers, is necessary. Popular consent can be secured only by rigorous censorship and prohibition of free discussion. Espionage is a necessary part of the system, and a considerable amount of terrorism. Since private expenditure must be controlled, it is wise to keep private incomes near a subsistence level and to dole out any surplus on collective pleasures such as free holidays. We shall not understand totalitarian tyranny unless we realize that it is the result of the planned economy."
This is not to say that the state has no economic function whatever to perform. The state must help to keep the machinery of the market in working order. The basis of that machinery is the legal contract entered into by free men. Only the state can see that these contracts are enforced against men who disregard their obligations. The state must also see that the price mechanism is not impeded by cartels and monopolies - though this is largely a negative function of not granting privileges or licenses in the first place.
The primary rule of all good government is to realize that the power
of the state must be strictly limited. The state must never be the enemy
of the market, it should be its great protector. With the help of the multiple
economy, the people themselves can be masters of all production and masters
of the government as well. Destroy the multiple economy and they will be
masters of neither.
This, of course, implies that whether people are free or not depends
on their politico-economic system. A critic may here point out that Karl
Marx said very much the same thing. But there is a difference. The multiple
economy is based on the rights of private
property, and it is this that makes the system possible and thereby
insures the freedom of mankind.
Ruff's Third Law of Economic Dynamics: "An economy in motion tends to stay in motion, and an economy at rest tends to stay at rest. A free market is constantly in motion. A centrally planned market slows until it eventually dies completely." -- Mike Ruff
For a quick demonstration of the way capitalism gives people incentives to organize themselves for maximum efficiency spontaneously, voluntarily and even eagerly, see THIS delightful short story, the "autobiography" of an ordinary pencil.
For clarifications of what RIGHTS are, and what they are NOT, see THIS page.
For clarifications of the differences between Collectivism and Individualism, see THIS page.
For some refutations of traditional objections
to Capitalism check out THIS
For an analysis of "that gap between rich and poor" see THIS.
For the truth about "robber barrons" see THIS.
For a selection of easy-to-read introductions to basic economics look HERE.
"Anything other than free enterprise always means a society of compulsion and lower living standards, and any form of socialism strictly enforced means dictatorship and the total state. That this statement is still widely disputed only illustrates the degree to which malignant fantasy can capture the imagination of intellectuals." -- Lew Rockwell
*For an extensive exposition on exactly how the economic depression of the 1930's was caused and intensified by politicians and governments and not by anyone's enjoying freedom, see THESE references HERE.
**For further exploration of the thought of Frederic Bastiat, call or write The Foundation for Economic Education, Inc., 30 South Broadway, Irvington-on-Hudson, NY 10533. Phone 914-591-7230, Fax:914-591-8910, Email firstname.lastname@example.org, and ask for the complete book catalog.
Also see more articles from THE FREEMAN on line at http://www.FreedomKeys.com/freeman.htm.
You can find some other very good Frederic Bastiat links here.
The Publisher of this web page wishes to thank Jacob G. Hornberger, former Director of Programs at The Foundation for Economic Education, Inc,. for his kindness (and enthusiastic interest, even) in taking the time to dig up this article for him.
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