Freeman

ARTICLE

The Handshake or the Sword

NOVEMBER 01, 1977 by THOMAS W. HAZLETT

Mr. Hazlett is a political commentator for radio sta­tion KPOL in Los Angeles.

Government action to solve social problems—whether it be the public school system, the welfare system, business regulation, the tax system, Social Security, urban renewal, or Swine Flu inoculation—presents a real world picture of colossal failure. Yet, paradoxically, our society re­sorts almost spontaneously to gov­ernment to attempt to cure social ills.

This urge to inject the state into every nook and cranny of our lives simply shows that people believe what they want to believe. If they can imagine some tangible, im­mediate benefit from government, they will nearly always grasp this "sure thing" rather than some vague social process called "economic lib­erty." Although it may be demon­strated clearly that the total cost of government almost invariably ex­ceeds its total benefit, the instinct to want to believe in the pragmatic, concrete and direct attack on a prob­lem through the coercive powers of the state is simply insurmountable nine times out of ten.

Whatever people want to believe, the fact is that government action and private action are not two sides of the same coin. The two alterna­tive means of solving social prob­lems (such as poverty, alienation, ignorance, prejudice, disease, unemployment) distinctly differ in two important respects, one a matter of social justice, and one a matter of economic efficiency.

The way in which government ac­tivity inevitably differs from private activity in the realm of social justice springs from the winner-loser rela­tionship inherent in all political so­lutions. That is, for every act of state, authorities must decide what group is to receive some benefit, on the one hand, and what group is to provide this benefit, on the other. That every activity of the government will result in some groups being rewarded and other groups being, in effect, punished is true by the nature of state action. If everyone ben­efited from a particular activity there would be no need for coercion to bring it about. Such natural ac­tion and reaction is the essence of all private, voluntary relationships taking place outside the sphere of government. Professor Milton Friedman eloquently describes this arbitrary favoritism inherent in political solutions:

A political system finds it very dif­ficult to satisfy the needs of minority groups. It’s very hard to set up a political arrangement under which, if 51 percent of the people vote one way and 49 percent vote the other way, the 51 percent will get what they want and the 49 percent will get what they want. Rather, the 49 percent will also get what the 51 percent want.

In a market system, if 51 percent of the people vote, say, to buy American cars and 49 percent vote to buy foreign cars and the government lets their votes be effective and doesn’t impose tariffs, 51 percent will get American cars and 49 percent will get foreign cars. In a market system, if 40 percent of the people vote that they want to send their children to integrated schools and 60 percent vote that they want to send their children to segregated schools, 40 percent will be able to do what they want and 60 percent will be able to do what they want. It’s precisely because the market is a system of proportional representation that it protects the interests of minorities.

—There’s No Such Thing as a Free Lunch

Economists, in attempting to im­prove the welfare of society, look for potential transactions in which at least one party becomes better off while no one becomes worse off. The idea is that, without imposing value judgments upon others, we can be safe only by encouraging transac­tions to take place which are mutu­ally beneficial in the eyes of the participants. To go further than this cooperative trading, and to justify some activities which bring good to some only at the expense of harming others, requires that we put our­selves in a dictatorial role in evaluating one man’s gain versus another man’s loss.

Coercive Redistribution

Which brings us right back to the government. All moves that the state makes involve this trading-off of one’s gain against another’s loss. Private transactions, contrarily, are inherently just—all voluntary ar­rangements are mutually beneficial or else they would never have been freely created by the people in­volved.

This favoritism effect is remarka­bly easy to see in the context of any government subsidy. One group—the taxpayers—provide the means; another group—the subsidized—consume the booty. Hence, a privileged class and a peasant class emerge; and while the enormous wealth and amazing inconsistency of the welfare state tend to confuse the dichotomy, the relationship sur­vives as a result of excessive gov­ernment involvement in society.

Over time, people learn the vi­cious "dog-eat-dog" nature of this arbitrary government power and do battle to become the one that Big Brother Likes Best. This is seen in the gang warfare that characterizes the processes of government today. Special interest groups have been born to champion every conceivable public program. Groups to eliminate foreign competition, support the price of milk, grab welfare, promote minorities, neuter puppy dogs, burn dirty books, lend businessmen money, ad nauseum, now surround Washington, D.C. like a moat with alligators. After all, if you assume that government has a responsibil­ity to "solve social problems," what does it take to cash in, save a good story (i.e. a good press agent) and some good friends?

That such rivalry for political candies produces a new caste sys­tem, a government ordered hierar­chy of pull, there can be no doubt. As Professor Friedrich A. Hayek has alerted us:

When the government has to decide how many pigs are to be raised or how many busses are to be run, which coal mines are to operate or at what prices shoes are to be sold, these decisions can­not be deduced from formal principles or settled for long periods in advance. They depend inevitably on the circumstances of the moment, and, in making such decisions, it will always be necessary to balance one against the other the inter­ests of various persons and groups. In the end somebody’s views will have to decide whose interests are more important; and these views must become part of the law of the land, a new distinction of rank which the coercive apparatus of govern­ment imposes upon the people.

—The Road to Serfdom

Professor Hayek’s observation of the authoritarian nature of political decisions leads us to the second principal respect in which these al­ternatives are mutually exclusive. The aforementioned difference being primarily a matter of political justice, this latter is essentially economic. It revolves around the contrast between the efficiency of economic activity that is directed by a disinterested bureau from above, as opposed to activity which is di­rected by the interactions of numer­ous smaller units each of which has a personal stake in the immediate proceedings.

The chief characteristic of a pri­vate enterprise solution to a prob­lem is that it coordinates the desires and information of all interested parties (consumers, producers, workers, and the like) and finds some point of balance in the imper­sonal process known as the "mar­ket." This process is impersonal only in the sense that it does not respond solely to any one party; it is respon­sive, generally speaking, to thousands and even millions of indi­vidual interests.

In lifting responsibility for economic activity from the shoul­ders of the individuals directly in­volved, the bureaucratic adminis­tration of social activity is losing an incredible sum of information (espe­cially specific information of "time and place") and those special bits of knowledge involving human incen­tives which, almost always, are lit­erally impossible to communicate from one person to another.

No Reliable Guides

The meaning of this information flow is of seminal importance. In Soviet Russia, where the authorities have known no limits in their methods to force the "proper" infor­mation out of their administrators, the entire social structure is riddled with preposterous inefficiencies. The past decade has seen a vigorous battle in the USSR between the economists, pleading for decen­tralization, and the politicians (you know what side they’re on).

The implications of this problem of government administration lead to even more severely challenging issues in a liberal democratic soci­ety. The concept of the Rule of Law, the cornerstone of " Western Liberalism, says that government must treat all its citizens equally and must never arbitrarily detour from general rules established in advance of specific situations.

This notion of fairness is funda­mental to what we respect as the Liberal Tradition, an idea whose merits are abundant. Yet this notion can rationally apply only to the necessary coercive powers of gov­ernment (i.e. the defense of individ­ual rights) and is absurd in an economic context. The supreme test of a social or economic system is precisely this: How well does it re­spond to the peculiar needs of indi­viduals? While private transactions are incessantly tapered to unique individual demands (think of all those commercial slogans!), gov­ernment solutions must not dis­criminate between individuals but must treat everyone alike. To aban­don this precept of law is to grant the state vast prerogatives to arbi­trarily use coercive powers and to create just the sort of antiliberal society Dr. Hayek warned of in his monumental Road to Serfdom.

The claim is often made that gov­ernment planning can actually pro­vide for our well-being because it has so much more information than individuals possess. This appears to be a logical argument. Certainly the Bureau of Labor Statistics, the Census Bureau, the Federal Reserve Board, and the Commerce Depart­ment’s Statistical Abstracts are im­pressive. Yet practical experience has belied the efficacy of govern­ment information sources. The biggest problem is to know which information is "proper" or "impor­tant." Billions of specific pieces—tiny pieces—of information are dis­persed throughout the society. What factors are relevant? Which are more relevant than others? What about factors which cannot be quan­tified, such as risks, incentives and personal tastes? How can statistics be of any help in telling us what unpredictable surprises are just around the corner?

Statistical Limits

Government statistics are ex­tremely helpful in a very limited way: they can tell us the aggregate results of those things which have already taken place and which can be exactly measured (of much value to financial analysts and busi­nessmen concerned with day-to-day changes). The important social and economic growth, however, takes place precisely in those areas of our lives that defy measurement: the risk that pays off, the invention or innovation, the new forms of social cooperation, improved culture and customs, discoveries of particular human needs, better methods of or­ganization and production, the emergence of meritocracies.

The only reason that social prob­lems exist is because our human knowledge is imperfect—highly im­perfect. If we already knew the cor­rect answers to our problems (or knew where to look) we would im­mediately cease to discuss and commence to solve our problems in "The Correct Way." But this is not our fate. We do not know what the best answers are or ought to be, and must rely almost exclusively upon trial and error. This being so, aggre­gate statistics are very nearly irrel­evant to the basic problem which confronts us, for they necessarily tell us only what has happened and tell us nothing of the unknown, i.e., nothing of what might have happened instead or might possibly happen next.

The only way that we may strive toward an optimal solution of our journey through an indescribable world and toward a completely sub­jective goal is to encourage as many individuals as conceivable to use their unique circumstances and op­portunities to advance the social process. In his famous essay, "The Use of Knowledge in Society," Pro­fessor Hayek elucidates:

The peculiar character of the problem of a rational economic order is deter­mined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in con­centrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals pos­sess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to any­one in its totality.

—Individualism and Economic Order

Amenable to Change

Herein lies the near-mystical beauty of a free market. While oper­ating in a world of imperfection, its momentum is continuously in the direction of improvement. Using the price system, wherein prices reflect the supply and demand for com­modities, every individual is re­warded for economizing on com­modities which are relatively expensive to society as a whole. Con­versely, within the profit system, every person is encouraged to find ways to bring more of the goods to market that are in high demand by the society as a whole. How is it possible that one administrator sit­ting in a Washington, D.C. execu­tive suite—or 50,000 administrators sitting in suites all over the nation—could provide us with even a fraction of the data we need to match the responsiveness of the free market in solving our problems?

What could be a more chilling in­dictment of contemporary society than to focus on the real world via­bility of bureaucratic administra­tion?

Picture if you will the hapless bureaucrat, surrounded by his tons of "information," completely impo­tent to deal with either his fellow bureaucrats or the outside world. Removed from the scene of activity and operating without aid of economic incentive, the adminis­trator looks down at the system from on high, receiving a splendidly clear picture of the society as a whole (he has statistics!) and having little idea as to how it got that way or how it may be induced to function better.

At any point in time, however, the argument to amass the impressive powers of the state behind an indis­putably important effort is most en­ticing. Today, for example, so-called liberals and so-called conservatives are both speeding for the pole posi­tion on a National Energy Policy. The key to this problem, as always, is lack of information. How much energy do we need? Can we conserve more energy? What is our most effi­cient (least expensive) source? Do we have undiscovered oil reserves? Are there other, undiscovered energy sources? Are geothermal, solar, wind, nuclear energy, and the like economically feasible?

Since we have no clairvoyant powers to extrapolate into the future and find how these questions will, in fact, be answered, we will have to draw upon history to deduce a gen­eral principle. Let us suppose that the year is 1900 and we wish to similarly provide for our energy needs in that era. It could be pointed out that world oil reserves were but 10 short years (one-fourth today’s re­serves) and that we had better un­dergo a crash program before Amer­ica was dragged back into the Stone Age.

Short-Run Measures

An emergency program could have halted all automobile produc­tion (they couldn’t be mass produced and were simply wasteful play­things of the super-rich), provided government subsidies for horse stud services to increase the supply of energy efficient and biodegradable thoroughbreds, and handed out free axes to enable even the poor people to chop their own firewood.

It is conceivable that such a pol­icy, given the existing level of knowledge, would have provided the best immediate solution to Ameri­ca’s energy needs in 1900. Yet, what government bureaucrat would fill out a requisition order to discover a hundred times the existing oil re­serves, what planner would direct the electric car to be replaced by the internal combustion engine, what grand official would "prioritize" Henry Ford’s mass-production scheme into existence? Importantly, if government planners had inter­vened to impose a solution based upon their limited knowledge, these incredible advances would have dropped into the file entitled: "Might-Have-Beens." And so it goes today. To impose any short-run marshaling of resources for a con­crete crisis of the moment requires a transferral of power from the men who build for progress to the men who prepare the forms to be filed in triplicate.

Given a world chock-full of social problems, we have to decide how best to cure them. Choosing between a government solution and a private solution is not merely a question of which method will solve the di­lemma most efficiently in the im­mediate future. It must be acknowl­edged that the alternative means of social development are essentially separate both in terms of "social justice" and in terms of utilizing the enormous amounts of information that are so vital to a highly complex society.

Our decision between these competing methodologies, then, be­comes painfully crucial. An un­avoidable choice with overwhelming consequences, we should take deep breaths and careful meditations in considering the relative merits of either case. And let us not stumble into the error-strewn ravine of the middle path. It is surely one or the other. Public solutions will be at­tempted or private solutions will be attempted. But not both. Albert Jay Nock set it straight:

It is unfortunately none too well un­derstood that, just as the State has no money of its own, so it has no power of its own. All the power it has is what society gives it, plus what it confiscates from time to time on one pretext or another; there is no other source from which State power can be drawn. Therefore every assumption of State power, whether by gift or seizure, leaves society with so much less power; there is never, nor can be, any strengthening of State power without a corresponding and roughly equivalent depletion of social power.

—Our Enemy, The State

While our contemporary world seems to suffer from a nasty reflex in favor of Nock’s "State power," it may well be that we have mentally ac­cepted the efficacy of "Social power"—at least subconsciously. Our language gives us away. How many times have you heard some courter of special favors denounced with the cliche: "He’s just playing politics"? Or heard some scoundrel shrivel beneath the pejorative: "He’s nothing but a politician!"? And we so often hear the opposite compli­ment: "He certainly has a business­like attitude." When people have mutual interests they exclaim: "Let’s do business together." And when they roll up their sleeves to get the job done: "Let’s get right down to business."

Have you ever heard a serious citizen of our age exclaim: "Let’s get right down to government"?  

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November 1977

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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