Drawing the Line

The Frontier between State and Market Has Only One Right Position

Socialism and communism have collapsed so completely that only a few holdouts refuse to acknowledge the rubble before their eyes. We’ve apparently reached “the end of history,” as Francis Fukuyama labeled the post cold-war era a few years ago.

But appearances can deceive. Capitalism may look triumphant, but some people are clearly uncomfortable with the fact that it seems to be the only “ism” left standing. The search for a “third way” goes on. President Clinton used that very term in his state of the union address.

Authors Daniel Yergin and Joseph Stanislaw are also looking for that chimera. In their interesting new book, The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the World, they wonder where our era will set the “frontier between government and marketplace.” (See Mark Skousen’s column in this issue for a pleasant surprise about this book.) It is ironic that in thinking about the world on the brink of the new millennium, they are thinking in such old terms. They discuss the frontier between government and marketplace in analog terms, as though that line can be adjusted in infinitely small steps. The task, as they see it, is to find just the right position, where marketplace and government balance each other and each prevents abuse by the other.

But we live in the digital age! Analog thinking is inappropriate in so many areas of life—including the politico-economic realm. A digital device deals with ones and zeroes. A switch in a computer chip is either open or closed. There is no in-between, no range of adjustment, no third way.

What does this have to do with government and the marketplace? A great deal. When we focus on the nature of state and economy, we see that the framework is digital, not analog. Let me explain. George Washington was to have said that “government is not reason or eloquence. It is force.” When you come right down to it, all government can do is compel. Every activity it undertakes ultimately relies on coercion. If you take away its power to tax, what is left? Regulations would be mere suggestions if the officers of the state did not have prisons, guns, and the legal authority to use them. Government does not produce or create; it appropriates and transfers what others produce and create.

In contrast, the marketplace is reason and eloquence. It is an environment in which people try to better their circumstances by offering to better those of others. A proffer is an act of persuasion. A price, someone said, is an argument. The marketplace is productive and creative. Think about what happens there. Production is actually transformation. A successful entrepreneur transforms pre-existing factors—labor, machines, land, raw materials—into a finished whole for which people are willing to pay more than they would pay for all the separate parts. The entrepreneur’s profit is the difference between those two prices, his reward for figuring this all out. Contrariwise, losses represent the consumers’ penalizing an entrepreneur for “misusing” the factors by turning them into a less valuable form.

State and market, then, are opposites, embodying, respectively, force and creativity. That is why the mission to finely adjust the frontier between the two, as Yergin and Stanislaw wish, is misconceived. It is not a shade of gray that we should be seeking, but the bright line between force and reason (creativity). Force is appropriate only against force. Leonard Read captured the proper conception of the scope of market and government in the words “Anything that’s peaceful.” As he wrote, “[L]et anyone do anything he pleases that’s peaceful or creative; let there be no organized restraint against anything but fraud, violence, misrepresentation, predation.. . . [L]eave all else to the free, unfettered market!”

The frontier between the state and market has only one right position, precisely at the point that leaves people free to do as they will so long as they recognize the same right held by everyone else.