All Commentary
Friday, September 1, 1989

Book Review: A Theory of Socialism And Capitalism: Economics, Politics, And Ethicsz by Hans-Hermann Hoppe

Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell, MA 02061 • 1989 • 275 pages • $40.00 cloth

This book is an interesting blend of scholarship and polemic. The text is 210 pages, followed by 48 pages of notes, a 13-page bibliography, and a brief index, which makes it a good source document for anyone who wants to research any of the many interesting points that Hoppe raises. It is decidedly anti-statist and presents a strong case for capitalism on both a priori and empirical grounds.

When I read a book, I make marginal notations and underline the points that I think are worth reading a second time. With this book, I found that I had to restrain myself because I was making so many notations that it slowed my reading. Practically every paragraph has at least one point worth reflecting upon. Hoppe’s writing style is entertaining in spots, and some of the examples he gives do a good job of pointing out the absurdity of commonly held collectivist viewpoints. The text is also heavy in spots, as is often the case with philosophy, but Hoppe partially overcomes this weightiness by summarizing what he has just said in the first few paragraphs of the next chapter. These short summaries provide a good overview of the previous chapter and give readers a second chance to digest what has just been read.

After a brief introduction, Hoppe explains the relationship of property, contract, and aggression to the two economic systems—capitalism and socialism. Capitalism is the institutionalized policy of nonaggression that recognizes and respects property and contract. Socialism is the system that aggresses against property and contract. One who aggresses increases his or her satisfaction at someone else’s expense. Someone gains and someone loses. One who enters into a contract, on the other hand, is part of a win-win situation because both parties expect to benefit by the voluntary exchange. Socialism is an economically inferior system because, by relying on aggression, it causes less property to be created, and the property that is created is not put to optimal use. Politics and force, not economics and voluntary exchange, determine how property is allocated. Aggression is used to take from some people to give to others.

Hoppe spends the next four chapters explaining how different ways of deviating from a pure capitalist system lower investment, increase consumption, and cause a change in the composition of the population by favoring nonproductive over productive people. Under Soviet-style socialism, the style advocated by Marxian socialists, the means of production are nationalized. Investment must be made by caretakers of property rather than by owners, since there are no owners. Such an arrangement is inferior to capitalism for a number of-reasons. For one, caretakers do not have the same incentive to care for “socialized” property as they would have to care for their own. Second, there is less incentive to maximize utility of the property since the caretakers do not get to keep what they produce. Also, the lack of a pricing system makes it impossible to plan rationally. Less urgent needs get satisfied at the expense of more urgent ones. Socializing the means of production causes relative impoverishment, a conclusion that can be drawn logically, since socially owned assets must necessarily be used less efficiently than privately owned ones. Where the incentive to produce is lessened, there will be less production.

Substantial empirical evidence also exists to verify this conclusion. East and West Germany are offered as examples. The populations are homogeneous, yet the West German economy thrives while the East German economy stagnates. The difference is caused by the economic systems used to allocate resources.

The second variety of socialism is the so-cial-democratic model. Under this system, the idea of socialized production is exchanged for taxation and equalization. The means of production can be privately owned, with some exceptions, such as education, traffic, communications, central banking, the police, and the courts. Individuals have the right to own and produce, but not to keep all of the fruits of their labor. Some of these fruits belong to “society,” which means the rights of the natural owner have been aggressively invaded. Thus, the difference between Soviet-style and social-democratic-style socialism is one of degree. In the first case, private ownership isn’t permitted. In the second case, private ownership is permitted, but the state determines how much of the fruits can be kept by the rightful owner. Ownership rights are purely nominal. Social-democratic socialism settles for partial expropriation and the redistribution of producer incomes. The results, as with Soviet-style socialism, are reduced incentives to produce and relative impoverishment.

The third form of socialism is the socialism of conservatism, the ideological heir of feudalism. Like social- democratic socialism, conservative socialism allows private ownership, but not the right to keep all the fruits of private ownership. But whereas social-democrat-ic socialism distributes from the producing haves to the nonproducing have-nots, conservative socialism distributes from the producing haves to the nonproducing haves; it aims at maintaining the status quo rather than increasing equality. The difference between the two kinds of socialism lies in the group of nonproducers who receive the fruits of other people’s labor. Also, whereas the social-democratic form uses taxation to achieve its goals, conservative socialists favor the use of price controls, regulation, and behavioral controls. Again, the result is relative impoverishment, since use of any of these techniques causes productive resources to be misallocated from higher uses to lower uses.

The fourth form of socialism is that of social engineering. Whereas the Soviet, social-democratic, and conservative brands of socialism all fail on economic grounds, the fourth type of socialism doesn’t claim to be economically superior to capitalism. It states, in effect, that even though socialism might be economically inferior to capitalism, it is morally superior. This empiricist-positivist Popperian style of socialism sees empirical proof of capitalism’s superiority as ill-conceived. Socialism is made immune to criticism because any failures can be explained away as caused by some as yet uncontrolled intervening variable. We can never know in advance what the outcome of some policy will be. We must try it first. Then, if the policy fails, we can explain it away.

Hoppe then defends capitalism on ethical grounds and shows why socialism is indefensible. Under socialism, an individual’s rights are determined by his class. Some individuals have an obligation to pay taxes, and others have a right to consume them. The computer industry, for example, must pay to subsidize farmers, the employed must subsidize the unemployed, individuals without children must subsidize those with children. The whole system is based on aggression.

The remainder of the book is devoted to the theory of the state, capitalist production, the problem of monopoly, and public goods theory. The state exists on the principle of divide and conquer, and the continuous threat of violence. It attempts to control basic services such as education, traffic and communications, the supply of money, and the production of security. Hoppe points out that monopoly cannot exist without government support, and that many of the services provid-ed by the state can be provided more economically by the market. Public goods do not exist. Anything that is worth providing can be provided by the market. If the market does not provide a particular good or service, it is because consumers have determined that it isn’t worth producing. Having the state step in to provide something that the market does not results in misallocating resources from higher to lower uses. []

Professor McGee teaches accounting at Seton Hall University.

  • Robert W. McGee is an associate professor of accounting at Fayetteville State University. He has had more than 40 years of experience working in a variety of capacities, including public accounting, corporate accounting, tax law, banking, consulting, and education. Clients include the United States Agency for International Development, the World Bank, the African Development Bank, and the Central Intelligence Agency. He has participated in several USAID Accounting Reform programs. He was in charge of assisting the Finance Ministry in Armenia convert the country to International Financial Reporting Standards; in charge of reforming the accounting curriculum at all the major universities in Armenia and Bosnia; drafted the accounting law for Armenia and Bosnia, and reviewed the accounting law for Mozambique; reviewed securities legislation for Turkey; trained government ministry officials in Bulgaria, Rwanda and Tanzania, accountants in Russia, and economists in Ukraine. He has lectured or consulted in more than 30 countries and has earned 13 doctorates from universities in the United States and 4 European countries.