TGIF: Birthright Citizenship and the Constitution

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States....

—U.S. Constitution, Amendment XIV

Donald Trump says he wants a "revolution of common sense." If he means it, he will abandon his unilateral attempt to cancel birthright citizenship, which the 14th Amendment to the U.S. Constitution, ratified in 1868, expressly acknowledges. The opening words of that amendment have a common-sense meaning that requires grotesque mental contortions to evade.

Opponents of birthright citizenship will seek refuge in the amendment's legislative history and case law, but I don't see how that trumps the plain meaning of words. The amendment says that if you were born in the United States, you are a citizen unless a parent was a foreign diplomat. It's worth remembering that the debate over birthright citizenship is merely one part of the all-out assault on the freedom to move and work that Trump is spearheading. Since violations of this freedom affect foreigners as well as Americans, the controversy is worth paying attention to.

The Constitution does not instruct its readers on how to interpret its clauses. Common sense is called for, and no one applied common sense to the law more clearly than the 19th-century libertarian and constitutional scholar Lysander Spooner. Spooner was also an abolitionist during the slave era. He insisted, contrary to his fellow abolitionists, that the constitutional text did not sanction slavery. He spelled this out in The Unconstitutionality of Slavery.

Spooner insisted that the language of a constitution must not be interpreted contrary to the very purpose of the document itself unless the language was so unambiguous as to preclude any other interpretation. In the American case, a pro-liberty reading is required if it is not expressly ruled out. He proceeded to show that the purportedly pro-slave language of the Constitution had to be construed in a way that was consistent with individual natural rights and natural law because the purported aim of the Constitution was to protect natural rights. Nowhere in the original Constitution were the words slave or slavery used. He wasn't arguing that the framers did not intend to protect slavery. Rather, his point was that no one was bound by what the framers meant but did not say. That makes perfect sense. If those men wanted to say something, they should have said it. What stopped them? We have no obligation to perpetuate injustice.

"[I]n the interpretation of all statutes and constitutions," Spooner wrote, "the ordinary legal rules of interpretation be observed. The most important of these rules, and the one to which it will be necessary constantly to refer, is the one that all language must be construed 'strictly' in favor of natural right." (Spooner's emphasis.)

Also: "The legal rules of interpretation, heretofore laid down, imperatively require this preference of the right, over the wrong, in all cases where a word is susceptible of different meanings."

And "[A]n innocent meaning must be given to all words that are susceptible of it."

Surely, Spooner would have applied this principle to the opening words of the 14th Amendment. It's unclear what meaning, other than the natural-right meaning, could possibly be given to those words. Some will argue that the post-Civil War amendment was only meant to recognize the citizenship of the freed slaves. So why didn't they say that? We are not bound by a meaning that contradicts natural law if the text can be read otherwise. .

How do we know the plain meaning is consistent with natural rights and natural law? We know because only under the plain meaning will the state leave people alone who have violated no one's rights. That was the original American way. If you did not aggress against persons or property, you were unlikely to come into contact with government officers.

If Trump has his way, people who have harmed no innocent persons or property could be rounded up by armed government agents and exiled. That would violate those people's rights. Therefore, the pro-liberty meaning is the common-sense meaning and must prevail if the Constitution is to fulfill what we are told is its purpose: "establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity"

As Spooner put it, "[I]n order that the contract of government may be valid and lawful, it must purport to authorize nothing inconsistent with natural justice, and men’s natural rights. It cannot lawfully authorize government to destroy or take from men their natural rights: for natural rights are inalienable, and can no more be surrendered to government—which is but an association of individuals—than to a single individual."

The case presented here might seem to justify no more than legal residency. What about citizenship? To take that step, one need only consider that a legal resident is subject to the government's power to tax and regulate. Since his bid for exemption from U.S. government impositions would not be recognized, we are forced to the second-best disposition, namely, that the legal resident ought to have a say—as small as it is—over government policy, that is, the privileges and immunities of citizens. Those who are concerned that this could bring growth in an already overgrown government should turn their attention directly to the size and scope of the state, rather than seeking to limit individual rights. Besides, the offspring of American citizens have not exactly been genetically or culturally predisposed against big government, have they? Immigrants are not responsible for America's falling score on the world indices of freedom.

Ironically, anti-immigration action is what would make the government bigger and more intrusive. If you ask the state to "protect" the culture from foreigners, don't be surprised when you wake up in bed with a monster.

The Constitution has serious basic flaws, as Spooner himself would later elaborate in "The Constitution of No Authority," but as long as it's the supreme law of the land, liberty's advocates are obliged to push the interpretation that most constrains the state and expands freedom.

TGIF: Why McKinley?

Now what will hasten the day when our present advantages will wear out and when we shall come down to the conditions of the older and densely populated nations? The answer is: war, debt, taxation, diplomacy, a grand governmental system, pomp, glory, a big army and navy, lavish expenditures, political jobbery—in a word, imperialism. —William Graham Sumner

In his inaugural address on Monday, Donald Trump paid tribute to only one former president, William McKinley, No. 25, who Trump said "made our country very rich through tariffs and through talent." He praised the Republican McKinley in touting his plan to take control, militarily if necessary, of the Panama Canal. McKinley, who was assassinated in 1901 and succeeded by Theodore Roosevelt, began the expansionist process that led to the canal's construction. (No doubt Greenland was on Trump's mind too.)

Perhaps Trump's choice of a president to honor was revealing for another reason. McKinley took America to war against Spain in 1898. As the late historian Ralph Raico wrote, the war against Spain was "our first engagement with a foreign enemy in the dawning age of modern warfare. Aside from a few scant periods of retrenchment, we have been embroiled in foreign politics ever since." It was the war that inaugurated the American empire and made the United States a Pacific power. The U.S. government took possession of Puerto Rico, Guam, and the Philippines, where it savagely repressed an independence movement from 1899 to 1902. It established influence over but did not annex Cuba.

The country burst with pride over America's new world-power status. Well, not everyone. Some advocates of the old republicanism, with its pillars of individual liberty, free enterprise, and barely noticeable government objected. One of the best-known among them was William Graham Sumner, the Yale professor of sociology and laissez-faire liberal. In 1898 Sumner delivered a lecture at Yale with the shocking title "The Conquest of the United States by Spain." After the stunning and quick military victory over the old Spanish empire, what could Sumner have meant?

He started by giving a preview:

Spain was the first, for a long time the greatest, of the modern imperialistic states. The United States, by its historical origin, its traditions, and its principles, is the chief representative of the revolt and reaction against that kind of a state. I intend to show that, by the line of action now proposed to us, which we call expansion and imperialism, we are throwing away some of the most important elements of the American symbol and are adopting some of the most important elements of the Spanish symbol. We have beaten Spain in a military conflict, but we are submitting to be conquered by her on the field of ideas and policies.

Sumner was asking: for what shall it profit a nation if it shall gain the whole world, and lose its own soul?

Sumner drew the stark contrast between Spain, "the first, for a long time the greatest, of the modern imperialistic states," and the United States, "the chief representative of the revolt and reaction against that kind of a state." Empire versus Republic. Which way, America?

I intend to show that, by the line of action now proposed to us, which we call expansion and imperialism, we are throwing away some of the most important elements of the American symbol and are adopting some of the most important elements of the Spanish symbol. We have beaten Spain in a military conflict, but we are submitting to be conquered by her on the field of ideas and policies.

Sumner was a secular prophet who respected the law of identity. A republic can not take on the features of an empire and remain unchanged in other ways.

Expansionism and imperialism are nothing but the old philosophies of national prosperity which have brought Spain to where she now is. Those philosophies appeal to national vanity and national cupidity. They are seductive, especially upon the first view and the most superficial judgment, and therefore it cannot be denied that they are very strong for popular effect. They are delusions, and they will lead us to ruin unless we are hard-headed enough to resist them.

He warned of the perils to liberty from the unintended consequences of foreign adventurism.

We talk about “liberty” all the time in a big and easy way, as if liberty was a thing that men could have if they want it, and to any extent to which they want it. It is certain that a very large part of human liberty consists simply in the choice either to do a thing or to let it alone. If we decide to do it, a whole series of consequences is entailed upon us in regard to which it is exceedingly difficult, or impossible, for us to exercise any liberty at all. The proof of this from the case before us is so clear and easy that I need spend no words upon it. Here, then, you have the reason why it is a rule of sound statesmanship not to embark on an adventurous policy. A statesman could not be expected to know in advance that we should come out of the war with the Philippines on our hands, but it belongs to his education to warn him that a policy of adventure and of gratuitous enterprise would be sure to entail embarrassments of some kind. What comes to us in the evolution of our own life and interests, that we must meet; what we go to seek which lies beyond that domain is a waste of our energy and a compromise of our liberty and welfare. If this is not sound doctrine, then the historical and social sciences have nothing to teach us which is worth any trouble.

But that was not all.

There is another observation, however, about the war which is of far greater importance: that is, that it was a gross violation of self-government. We boast that we are a self-governing people, and in this respect, particularly, we compare ourselves with pride with older nations. What is the difference after all? The Russians, whom we always think of as standing at the opposite pole of political institutions, have self-government, if you mean by it acquiescence in what a little group of people at the head of the government agree to do. The war with Spain was precipitated upon us headlong, without reflection or deliberation, and without any due formulation of public opinion. Whenever a voice was raised in behalf of deliberation and the recognized maxims of statesmanship, it was howled down in a storm of vituperation and cant. Everything was done to make us throw away sobriety of thought and calmness of judgment and to inflate all expressions with sensational epithets and turgid phrases. It cannot be denied that everything in regard to the war has been treated in an exalted strain of sentiment and rhetoric very unfavorable to the truth.

Sumner was pointing out that the war had not been a policy freely chosen by the American people. They were stampeded into it by glory-seeking, even if well-intended rulers supported by romantic newspapermen with their tales of horror, who do their best to manipulate public opinion and suppress dissent. Sound familiar?

At present the whole periodical press of the country seems to be occupied in tickling the national vanity to the utmost by representations about the war which are extravagant and fantastic. There will be a penalty to be paid for all this. Nervous and sensational newspapers are just as corrupting, especially to young people, as nervous and sensational novels. The habit of expecting that all mental pabulum shall be highly spiced, and the corresponding loathing for whatever is soberly truthful, undermines character as much as any other vice. Patriotism is being prostituted into a nervous intoxication which is fatal to an apprehension of truth. It builds around us a fool's paradise, and it will lead us into errors about our position and relations just like those which we have been ridiculing in the case of Spain.

So what do Americans, who prosper through freedom, get out of the gore and glory?

Let us be well assured that self-government is not a matter of flags and Fourth of July orations, nor yet of strife to get offices. Eternal vigilance is the price of that as of every other political good. The perpetuity of self-government depends on the sound political sense of the people, and sound political sense is a matter of habit and practice. We can give it up and we can take instead pomp and glory. That is what Spain did.... She lost self-government and saw her resources spent on interests which were foreign to her, but she could talk about an empire on which the sun never set and boast of her colonies, her gold-mines, her fleets and armies and debts. She had glory and pride, mixed, of course, with defeat and disaster, such as must be experienced by any nation on that course of policy; and she grew weaker in her industry and commerce and poorer in the status of the population all the time. She has never been able to recover real self-government yet. If we Americans believe in self-government, why do we let it slip away from us? Why do we barter it away for military glory as Spain did?

Unless the nation changed course, the future would be bleak, despite the promise of glory.

The most important thing which we shall inherit from the Spaniards will be the task of suppressing rebellions. If the United States takes out of the hands of Spain her mission, on the ground that Spain is not executing it well, and if this nation in its turn attempts to be school-mistress to others, it will shrivel up into the same vanity and self-conceit of which Spain now presents an example. To read our current literature one would think that we were already well on the way to it. Now, the great reason why all these enterprises which begin by saying to somebody else, We know what is good for you better than you know yourself and we are going to make you do it, are false and wrong is that they violate liberty; or, to turn the same statement into other words, the reason why liberty, of which we Americans talk so much, is a good thing is that it means leaving people to live out their own lives in their own way, while we do the same. If we believe in liberty, as an American principle, why do we not stand by it? Why are we going to throw it away to enter upon a Spanish policy of dominion and regulation?

He concluded:

My patriotism is of the kind which is outraged by the notion that the United States never was a great nation until in a petty three months' campaign it knocked to pieces a poor, decrepit, bankrupt old state like Spain. To hold such an opinion as that is to abandon all American standards, to put shame and scorn on all that our ancestors tried to build up here, and to go over to the standards of which Spain is a representative.

Sumner insisted that America could not be made into a great empire—with all the brutality and presumptuousness that implied—without killing what was best in America politically. The figure who signed the death warrant was President William McKinley—the man Trump would presumably nominate to the next vacancy on Mount Rushmore.

TGIF: The H-1B Controversy

Does anyone still believe that the market process should set prices, including wages? Apparently not. Take the controversy surrounding the H-1B visa, the program that "permits" employers to hire highly educated and skilled foreign workers, such as hi-tech personnel.

Judging by the narrow range, everyone involved in the debate is a social engineer. Only three options are on the menu: continue the program, reform it to prevent its misuse, and end it. What's missing? The "let the market set wages" option Sorry, that's not on offer.

Let's start with how the U.S. Department of Labor describes the program:

The H-1B program applies to employers seeking to hire nonimmigrant aliens as workers in specialty occupations or as fashion models of distinguished merit and ability. A specialty occupation is one that requires the application of a body of highly specialized knowledge and the attainment of at least a bachelor’s degree or its equivalent. The intent of the H-1B provisions is to help employers who cannot otherwise obtain needed business skills and abilities from the U.S. workforce by authorizing the temporary employment of qualified individuals who are not otherwise authorized to work in the United States.

The law establishes certain standards in order to protect similarly employed U.S. workers from being adversely affected by the employment of the nonimmigrant workers, as well as to protect the H-1B nonimmigrant workers.

Of course, the government has something to say about wages:

Employers must attest to the Department of Labor that they will pay wages to the H-1B nonimmigrant workers that are at least equal to the actual wage paid by the employer to other workers with similar experience and qualifications for the job in question, or the prevailing wage for the occupation in the area of intended employment – whichever is greater.

Is anyone offended that in a country that thinks itself free, the government decrees that employers need permission to hire "nonimmigrant aliens" and can get it only if certain conditions apply? "Nonimmigrant aliens" are people, in case anyone needs reminding. How's that good for a country supposedly devoted to freedom and free enterprise?

The standard answer is that those jobs are American jobs. However, if capitalist entrepreneurs want the freedom to hire consenting workers living abroad, the jobs obviously are not American jobs. Who has the right to declare them otherwise? A job is a continuing transaction between an employer and an employee. It has no national label. To insist that it does have such a label because the employer operates on U.S. soil is to accept a premise that requires proof, namely, that the government or a majority of voters owns the country. That premise glaringly clashes with the principle of liberty. It makes freedom a delusion.

When left free, the market sets prices, including wages, through the process that emerges from countless choices by individuals collaborating to achieve their personal goals. These choices include selling, renting, and buying material resources and products. Supply and demand generate a vast money-price system that enables everyone to make plans using economic calculation, as Ludwig von Mises long ago spelled out. Without calculation we could not make more than the simplest plans or judge a project's success or failure—through profit or loss—afterward. Waste would abound In a world of scarcity, which would be a disaster. Poverty would rule.

Among other things, prices and wages signal to producers what consumers want most keenly. Again, in a world of scarcity, that's important. Since we can't have everything right now, we must make choices. Resources producing automobiles cannot be producing washing machines or computers. What to do? Let the price system work its magic—except that it is not magic. It is human action and its welfare-enhancing consequences. When the government prohibits the price system from doing its job, scarce resources are wasted as far as consumers are concerned. In a free and competitive economy, their choices shift resources to the purposes consumers most want to be fulfilled. The whole point of an economy is to serve consumers, remember?

This is no less true for labor. If high-tech companies can find satisfactory foreign software engineers who are willing to work for less than their American counterparts, that's a signal to be heeded. The Americans have asked too much. They have no right to those jobs or a higher wage. There's other work to be done—or would be if the government did not interfere. Consumers are never fully satisfied.

Those are the basics. What about H-1B? That is not a market institution. It's an intervention to somewhat ameliorate the predicament of employers who are denied the full freedom to hire whomever they want. It's no more than second-best, and it has downsides. For example, its restrictions enable employers to pay foreign workers less than those workers would have earned if they could work freely in America. To get a visa, foreign workers must have employer sponsors. If they wish to quit their jobs, they must find other qualifying jobs or be deported. That undoubtedly keeps visa holders in jobs they would prefer to quit. That's not right.

But beware those shedding tears over H-B1 "indentured servants." Those are crocodile tears because those opponents would not replace the visa program with open visas, that is, free immigration. They would shut down the program altogether. My hunch is that visa candidates would prefer the current program to closed borders. They wouldn't come here if the conditions were not superior to those at home. So let's hear no more sobbing from "left" and "right" statist populists like Steve Bannon and Batya Ungar-Sargon. These opponents of freedom should not be making economic policy.

Has the program been misused, that is, used contrary to its stated purpose? Undoubtedly. That's standard operating procedure. When the government hands out favors, political entrepreneurship will emerge on the part of those who don't want to be left out. This is purely the result of government violations of freedom. Get rid of the program and you get rid of the misuse.

It is certainly to be expected that if foreign workers can freely come to America, some wages will go down. That's supply and demand. On the other hand, other wages will go up. Immigrants buy consumer goods and start businesses, in some cases, highly successful businesses. Lower market-set wages, by the way, bring lower consumer prices, raising the standard of living. As noted, wage differences signal consumers' most highly valued wants.

Finally, some might say that we Americans could have the benefits of high-skilled foreign workers without importing them. How? Through trade with their countries. But hold on. The same people who want to shut down H-1B also want tariffs against foreign goods to "protect American jobs." Even if we have free trade, however, that is not a good answer. Foreigners are much more productive here than they are over there. Why? Because America has more capital and better management techniques than India and elsewhere. Because capital investment per worker is so high in America, any human being will be many times more productive here than anywhere else. That's good for the workers—and for consumers. Remember: everyone is a consumer.

This matter is not "just economics." Freedom itself is at stake.

Production Is Spiritual, Not Material

"Production is not an act of creation; it does not bring about something that did not exist before. It is a transformation of given elements through arrangement and combination. The producer is not a creator. Man is creative only in thinking and in the realm of imagination. In the world of external phenomena he is only a transformer. All that he can accomplish is to combine the means available in such a way that according to the laws of nature the result aimed at is bound to emerge....

"Only the human mind that directs action and production is creative. The mind too appertains to the universe and to nature; it is a part of the given and existing world. To call the mind creative is not to indulge in any metaphysical speculations. We call it creative because we are at a loss to trace the changes brought about by human action farther back than to the point at which we are faced with the intervention of reason directing human activities. Production is not something physical, material, and external; it is a spiritual and intellectual phenomenon. Its essential requisites are not human labor and external natural forces and things, but the decision of the mind to use these factors as means for the attainment of ends. What produces the product are not toil and trouble in themselves, but the fact that the toiling is guided by reason. The human mind alone has the power to remove uneasiness.

"The materialist metaphysics of the Marxians misconstrues these things entirely. The 'productive forces' are not material. Production is a spiritual, intellectual, and ideological phenomenon. It is the method that man, directed by reason, employs for the best possible removal of uneasiness. What distinguishes our conditions from those of our ancestors who lived one thousand or twenty thousand years ago is not something material, but something spiritual. The material changes are the outcome of the spiritual changes."

—Ludwig von Mises, Human Action

TGIF: Efficient Bureaucracy?

With all the talk about government efficiency, it would be useful to remind ourselves why bureaucracies differ radically from for-profit businesses. Ludwig von Mises devoted a short but enlightening volume to this subject in 1944, Bureaucracy. Elon Musk and Vivek Ramaswamy, who will co-chair the nongovernmental Department of Government Efficiency, should do some homework by reading that book.

Mises, as an advocate of limited government, did not argue that bureaucracy has no place in a free society. In contrast to anarcho-capitalists, he thought government and therefore some bureaucracy was necessary to protect what he valued most: peaceful social cooperation through the division of labor—that is, the market economy. Violence against persons and property was clearly antithetical to the continuing welfare-enhancing collaboration we call the market process. But Mises did not want bureaucracies trying to do what free, private, and competitive enterprises could do better. Moreover, if the government went beyond its mere peacekeeping duties, it would undermine the market process and make us all less well off despite any good intentions.

Mises began by reminding readers (or perhaps teaching them from scratch) what the free market is and what it accomplishes. It's a great primer for those who lack the time to read his longer works. He wrote:

Capitalism or market economy is that system of social cooperation and division of labor that is based on private ownership of the means of production. The material factors of production are owned by individual citizens, the capitalists and the landowners. The plants and the farms are operated by the entrepreneurs and the farmers, that is, by individuals or associations of individuals who either themselves own the capital and the soil or have borrowed or rented them from the owners. Free enterprise is the characteristic feature of capitalism. The objective of every enterpriser—whether businessman or farmer—is to make profit.

The uninitiated might ask who runs things. He replied: "The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship."

However, let's not jump to conclusions about who really runs things, Mises advsed:

But [the capitalists, etc.] are not free to shape [the ship's] course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer.

Neither the capitalists nor the entrepreneurs nor the farmers determine what has to be produced. The consumers do that. The producers do not produce for their own consumption but for the market. They are intent on selling their products. If the consumers do not buy the goods offered to them, the businessman cannot recover the outlays made. He loses his money. If he fails to adjust his procedure to the wishes of the consumers, he will very soon be removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.

All the conventional controversy about bosses and workers overlooks the critical point:

The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses.

Capitalism is not a profit system, Mises taught. It is a profit-and-loss system. If the consumers give thumbs down to a product, the entrepreneur could lose everything. He may have to seek a job from a superior entrepreneur.

The performance of businesses, Mises wrote, can be appraised only because private property in the means of production, free exchange, and the resulting money prices permit economic calculation and thus planning by economizing individuals. This was Mises's pathbreaking demolition of the economic case for central planning—socialism in its national and international forms—over a century ago.

Economic calculation matters when comparing a business to a bureaucracy. As Mises wrote:

The manager of the whole [business] concern hands over an aggregate to the newly appointed branch manager and gives him one directive only: Make profits. This order, the observance of which is continuously checked by the accounts, is sufficient to make the branch a subservient part of the whole concern and to give to its manager’s action the direction aimed at by the central manager....

As success or failure to attain this end can be ascertained by accounting not only for the whole business concern but also for any of its parts, it is feasible to decentralize both management and accountability without jeopardizing the unity of operations and the attainment of their goal. Responsibility can be divided. There is no need to limit the discretion of subordinates by any rules or regulations other than that underlying all business activities, namely, to render their operations profitable.

What about a bureaucracy? The answer is implicit in what has already been stated. By nature a bureaucracy faces no profit-and-loss test. It has money expenses in a market-oriented society: it hires willing workers and buys equipment and supplies from willing vendors. However, it does not offer its output to potential consumers, that is, people who are free to say no and take their money elsewhere. Instead of consumers, a bureaucracy has taxpayers, who must pay whether they want the output or not. This disconnect must have far-ranging consequences. (Government services for which user fees are charged differ in this respect, but the government typically forbids competition.)

Instead of the business directive "Make profits," Mises wrote:

Bureaucratic management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. His discretion to act according to his own best conviction is seriously restricted by them....

The absence of the seller-buyer relationship makes a big difference:

The objectives of public administration cannot be measured in monetary terms and cannot be checked by accountancy methods.... In public administration there is no connection between revenue and expenditure....

In public administration there is no market price for achievements....

Now we are in a position to provide a definition of bureaucratic management: Bureaucratic management is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. Remember: We do not say that a successful handling of public affairs has no value, but that it has no price on the market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money....

Bureaucratic management is management of affairs which cannot be checked by economic calculation.

This would be a valuable lesson for Musk and Ramaswamy to take to heart. Their task should not be primarily to search for ways to make the bureaucracies more efficient. Rather their task ought to be to identify those current functions the government should not be performing, those that should be turned over to free, private, profit-motivated, and competitive enterprise. We ought to replace coercion with consent.

We must, in other words, revisit the question: what is the proper role of government, if any, in a society that aspires to be free?

Competition Is Cooperation

"The pricing process is a social process. It is consummated by an interaction of all members of the society. All collaborate and cooperate, each in the particular role he has chosen for himself in the framework of the division of labor. Competing in cooperation and cooperating in competition all people are instrumental in bringing about the result, viz., the price structure of the market, the allocation of the factors of production to the various lines of want-satisfaction, and the determination of the share of each individual. These three events are not three different matters. They are only different aspects of one indivisible phenomenon which our analytical scrutiny separates into three parts. In the market process they are accomplished uno actu. Only people prepossessed by socialist leanings who cannot free themselves from longing glances at socialist methods speak of three different processes in dealing with the market phenomena: the determination of prices, the direction of productive efforts, and distribution."

—Ludwig von Mises, Human Action

TGIF: Capitalist Exploitation or Interest?

The completely just proposition that the worker is to receive the entire value of his product can be reasonably interpreted to mean either that he is to receive the full present value of his product now or that he is to get the entire future value in the future. But ... the socialists interpret it to mean that the worker is to receive the entire future value of his product now.

—Eugen von Böhm-Bawerk

The free-market economy—laissez-faire capitalism—may be unpopular because people think it authorizes the exploitation of workers. They are not paid the full value of their product—or so it seems. This indictment has been wielded to justify not only full socialism but also substantial government interference with the market economy, including strong pro-union measures.

Few people realize, however, that the market economy was decisively acquitted of the exploitation charge back in 1884 by the second-generation Austrian economist Eugen von Böhm-Bawerk in his History and Critique of Interest Theories. The key to understanding the acquittal is time.

Ludwig von Mises, a student of Böhm-Bawerk, and Murray Rothbard, a student of Mises, refined Böhm-Bawerk's pioneering work when they examined the overriding importance of time in the market process. This sadly neglected matter is obviously relevant to the exploitation charge. Here's Mises in Human Action:

The prices of consumers’ goods are by the interplay of the forces operating on the market apportioned to the various complementary factors cooperating in their production. As the consumers’ goods are present goods, while the factors of production are means for the production of future goods, and as present goods are valued higher than future goods of the same kind and quantity, the sum thus apportioned ... falls behind the present price of the consumers’ goods concerned. This difference is the originary interest.... [Emphasis added.]

The difference between the sum of the prices of the complementary factors of production and the products which emerges ... is an outcome of the higher valuation of present goods as compared with future goods. As production goes on, the factors of production are transformed or ripen into present goods of a higher value. This increment is the source of specific proceeds flowing into the hands of the owners of the factors of production, of originary interest.

He went on:

Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. [Emphasis added.]

In other words, all action takes place in time, including the production of consumer goods, which in an advanced economy takes place through many stages over long periods, each progressively closer to the final consumer-goods stage. It is helpful to think of all the factors of production as unfinished consumer goods to some degree. The capitalist pays factor owners in the present to combine their labor, land, and capital goods to advance the "ripening" of the factors into future finished consumer goods. Consumption is what the market process is all about. He can do this through free market exchanges because some people more eagerly prefer money sooner, before the goods are finished and sold, rather than later, after the finished goods are sold. Because we prefer money sooner rather than later, present money is discounted against future money. Waiting for a future payment requires a premium, that is, interest; advance payment requires a discount of the future amount.

What looks to the unschooled like exploitation, is not exploitation at all. The workers and landowner must have found the exchange worthwhile or they would not have agreed to it. If the capitalist's vision of the future is wrong and consumers don't like the final product or the asking price, the capitalist is out of luck. He suffers losses. He can't get a refund from the workers and landowners.

In Man, Economy, and State, Rothbard explained the structure of production and the remuneration of the factor owners in much greater detail, drawing on the pioneering work in capital, rent, and interest theory by the American "Austrian" economist, Frank A. Fetter (1863-1949). Joseph Salerno has noted that Rothbard's 1962 treatise was a major original contribution to our economic understanding. Rothbard wrote (all emphasis in the original):

An individual or a group of individuals acting jointly can..., at present, offer to pay money to the owners of land and labor, thus buying the services of their factors. The factors then work and produce the product, which, under the terms of their agreement, belongs to the new class of product-owners. These product-owners have purchased the services of the land and labor factors as the latter have been contributing to production; they [product-owners] then sell the final product to the consumers.

What has been the contribution of these product-owners, or “capitalists,” to the production process? It is this: the saving and restriction of consumption, instead of being done by the owners of land and labor, has been done by the capitalists. The capitalists originally saved, say, 95 ounces of gold which they could have then spent on consumers’ goods. They refrained from doing so, however, and, instead, advanced the money to the original owners of the factors. They paid the latter for their services while they were working, thus advancing them money before the product was actually produced and sold to the consumers.

That is known as a harmony of interests, not exploitation. Diverging time preferences create opportunities for mutual gains from trade.

The capitalists, therefore, made an essential contribution to production. They relieved the owners of the original factors from the necessity of sacrificing present goods and waiting for future goods. Instead, the capitalists have supplied present goods from their own savings (i.e., money with which to buy present goods) to the owners of the original factors. In return for this supply of present goods, the latter contribute their productive services to the capitalists, who become the owners of the product.

Or as he put it elsewhere, "[W]hen a capitalist hires a worker or rents land, he will pay now, not the factor’s full marginal product, but the expected future marginal product discounted by the social rate of time-preference."

Rothbard emphasized that what prompts the capitalist's offer to workers and landowners is the anticipated spread between what he pays now and what he expects to reap when he sells his goods later. That spread is the interest rate. The return is not to capital; it's to waiting. Time and time preference permeate the market process.

Rothbard made a crucial point about the ownership of capital goods that further debunks the exploitation theory:

[T]hese capital goods, it must be stressed, do [the owner] no good whatever. Thus, suppose that a capitalist has already advanced 80 ounces over a period of many months to owners of labor and land in a line of production. He has in his ownership, as a result, a mass of fifth-, fourth-, and third-order capital goods. None of these capital goods is of any use to him, however, until the goods can be further worked on and the final product obtained and sold to the consumer. [My boldface emphasis.]

The capitalist's vulnerability is not to be envied. What does he own? Goods-in-process-of-completion (capital goods), which may require many more stages over a long period before they are ready for the retail shelves—assuming shoppers will want them at the price asked. Consumers have no use for unfinished goods. Rothbard wrote:

Popular literature attributes enormous “power” to the capitalist and considers his owning a mass of capital goods as of enormous significance, giving him a great advantage over other people in the economy. We see, however, that this is far from the case; indeed, the opposite may well be true. For the capitalist has already saved from possible consumption and hired the services of factors to produce his capital goods. The owners of these factors have the money already for which they otherwise would have had to save and wait (and bear uncertainty), while the capitalist has only a mass of capital goods, a mass that will prove worthless to him unless it can be further worked on and the product sold to the consumers.

Another reason the capitalist's revenues might exceed his payments to factor owners is pure entrepreneurial profit. Profit, as opposed to interest, is a confirmation of the entrepreneur's hunch that the market had undervalued the factors of production with respect to consumers' wants. Israel Kirzner, a student of Mises, would say that the entrepreneur has improved market coordination. The entrepreneur might have been wrong and suffered a loss. The future is uncertain. Profits do not last, however, because they attract competitors, who bid up the factor prices and lower the price of the consumer good.

The socialists have it wrong. What they see is not exploitation. Rather, it is all-pervasive time, time preference, interest, and risk tolerance.

Crucial Economic Calculation

"The advocates of totalitarianism consider 'capitalism' a ghastly evil, an awful illness that came upon mankind. In the eyes of Marx it was an inevitable stage of mankind’s evolution, but for all that the worst of evils; fortunately salvation is imminent and will free man forever from this disaster. In the opinion of other people it would have been possible to avoid capitalism if only men had been more moral or more skillful in the choice of economic policies. All such lucubrations have one feature in common. They look upon capitalism as if it were an accidental phenomenon which could be eliminated without altering conditions that are essential in civilized man’s acting and thinking. As they neglect to bother about the problem of economic calculation, they are not aware of the consequences which the abolition of the monetary calculus is bound to bring about. They do not realize that socialist men for whom arithmetic will be of no use in planning action, will differ entirely in their mentality and in their mode of thinking from our contemporaries. In dealing with socialism, we must not overlook this mental transformation, even if we were ready to pass over in silence the disastrous consequences which would result for man’s material well-being."

—Ludwig von Mises, Human Action

Which Came First: The Individual or the Group?

"It is illusory to believe that it is possible to visualize collective wholes. They are never visible; their cognition is always the outcome of the understanding of the meaning which acting men attribute to their acts. We can see a crowd, i.e., a multitude of people. Whether this crowd is a mere gathering or a mass (in the sense in which this term is used in contemporary psychology) or an organized body or any other kind of social entity is a question which can only be answered by understanding the meaning which they themselves attach to their presence. And this meaning is always the meaning of individuals. Not our senses, but understanding, a mental process, makes us recognize social entities.

"Those who want to start the study of human action from the collective units encounter an insurmountable obstacle in the fact that an individual at the same time can belong and—with the exception of the most primitive tribesmen—really belongs to various collective entities. The problems raised by the multiplicity of coexisting social units and their mutual antagonisms can be solved only by methodological individualism."

—Ludwig von Mises, Human Action

The Socialist Spirit

"Of course, not Marxists alone, but most of those who emphatically declare themselves anti-Marxists, think entirely on Marxist lines and have adopted Marx’s arbitrary, unconfirmed and easily refutable dogmas. If and when they come into power, they govern and work entirely in the socialist spirit."

—Ludwig von Mises, Socialism, Preface to 2nd German edition