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Wednesday, March 24, 2010

How Shall We Live?

What is civilization and how is it to be achieved? How can we live together in peace and social harmony? What is wealth and how do we acquire it? Why are so many people poor and why do they remain poor? Finally, are there objective standards of behavior that must be respected if societies are to thrive?

These questions are fundamental to human life. In this essay we discuss some ways societies have organized themselves and consider the consequences of such efforts. This allows us to conclude that a society based on secure private property rights, trade, and the division of labor is not only economically efficient, it is morally superior to all other types of organization.

The Welfare State

Let us first consider the welfare state. In theory it aims to use government force to redistribute property in order to achieve a more equal consumption of economic goods. Advocates of this manner of social organization argue that it is based on the ideal of charity. However, this cannot be so since the logical implication of this form of organization is not the promotion of charity but the promotion of theft. Genuine charity involves the voluntary sacrifice of the giver. When the force of government is employed to redistribute property, there is no voluntarism in it. Rather, there is only forced sacrifice, which is the essence of theft.

Fundamentally, the welfare state is a type of social organization in which some people subsist off the fruits of other people’s labor by the use or threat of force. There are three ways to enjoy the fruits of others’ labor. The first is to receive legitimate charity. In this case, the producer has voluntarily parted with his product for the benefit of someone else. The second means is through voluntary exchange. In this case someone must make an attractive offer of something desired by the producer. The third method is to use violence or the threat thereof to appropriate the product. This form of getting what you want is especially pernicious when it is perpetrated by government, for then the victim has little recourse. (Fraud is a subtle form of theft—that is, of obtaining someone else’s product on terms other than those he would agree to.)

Theft and fraud cannot be logical foundations for economic behavior because they suffer from the fallacy of composition. It is possible for a single individual to prosper as a looter, and indeed it may be possible for many people to prosper as a robber band. However, it is impossible for everyone to prosper as thieves since all thieves must have someone to steal from. The problem with thieves is that they do not produce anything, and if everyone is a thief then there is nothing to steal.

For this reason the welfare state rests on a very sandy foundation. It assumes there will always be something that can be looted from a productive class. Moreover, it assumes the productive class will continue to produce valuable goods and services even as they are being victimized. Pay-as-you-go entitlement programs like Social Security and Medicare are built on this shaky assumption. It relies on the notion that future generations will rise to meet the claims of older generations. In other words, to use Ayn Rand’s metaphor, the welfare state assumes that the harder it presses down on Atlas’s shoulders, the harder Atlas will work to hold the world aloft.

As an alternative, people can live as the beneficiaries of charity, but this too is unsustainable. There are certainly legitimate cases in which charity and gift-giving are appropriate, such as when someone suffers some unforeseeable calamity or when someone wishes to promote the interests of his friends and family members. When people get married or begin their families, for example, gifts are often very helpful and much appreciated. There are limits, however, to our charitable impulses, limits to our ability to discern need, and limits to our ability to feed others before we feed ourselves. In addition, it should be noted that the purpose of true charity is to promote the independence of the recipient. In this regard, charity is a noble, benevolent institution that is quite appropriate to a society of free, responsible, flourishing people.

But even charity can be carried too far. When someone expects to enjoy his bread by the sweat of another’s brow, he becomes what Rand called a moocher. Such a person claims the right to the fruits of others’ labor solely on the basis of his alleged need. He seeks to make himself dependent on someone else’s labor and is not interested in his own independence.

Mooching too is unsustainable because it presupposes that something has been produced. Therefore, we cannot all expect to live this way. Mooching as such provides no way for goods to be produced and in fact encourages the wasteful use of resources. If someone wishes to depend entirely on the kindness of strangers, he or she must invest in ways to elicit that kindness. In his 2007 book, Discover Your Inner Economist, Tyler Cowen points out tragic examples of places in India where people fight over begging turf or actually pay to have limbs amputated in order to increase their begging income. To borrow the terminology of William J. Baumol, these are exercises in destructive entrepreneurship. They create no new value; instead, they destroy value in an effort to appear more dependent and helpless so as to effectively attract the sympathies of others.

This has implications for how we understand what is known as paternalism. As we have already seen, proper charity treats people with dignity and directs them toward independence rather than dependence. Examples from fatherhood (or motherhood) are appropriate. The right goal for a father is not to give his children everything they want or to see that they are blissfully happy all the time. Rather his goal is to help his children flourish as independent, responsible people in an imperfect world. At every stage in their development, he is trying to help them achieve new levels of independence. When a young adult is capable of interacting socially through the process of voluntary exchange—thereby increasing his own range of opportunities by increasing opportunities for others—then the parenting has been a success. In other words, proper human life includes production and exchange. While there are cases when such autonomy cannot be achieved due to severe disability, nevertheless, the affirmation of human dignity and independence remains the goal as far as it can be achieved.

Production, Autarky, and Trade

Another way to acquire wealth is to produce it yourself and ask your neighbors for nothing; however, total individual autarky is impossible in its logical limit. There is no such thing as an autonomous, self-made person in a market economy, and people are social creatures not because of disposition only but out of necessity. It is not a psychological propensity to truck and barter that leads us to exchange, but a praxeological truth regarding the vast increase in productivity that arises from specialization, division of labor, and division of knowledge.

Leonard E. Read’s classic example showed that no single individual knows how to make something as simple as a pencil. This fundamental insight applies to a vast range of goods. Any kind of existence greater than that of the lowest animals requires exchange, and as exchanges increase, so too do the division of labor and division of knowledge.

Even before Adam Smith, economic thinkers had been well aware that trade creates wealth by making us more productive. We argue, however, that this is only part of the story. The criticism of homo economicus as an autistic and antisocial maximizer of pecuniary profit to the exclusion of all else is simplistic and naive. The economic person cannot take care of himself without taking care of others; indeed, the person who wishes to maximize his own profit can only do so by thinking constantly and deeply about the needs and wants of others. To be sure, homo economicus does not have to care about the people with whom he interacts in a deep moral sense. But this does not stop him from caring about them in a practical sense.

The Bible enjoins us to feed the hungry and clothe the naked, among other charitable endeavors. We do this most effectively through the market process. Indeed, the very act of buying low and selling high moves resources to areas where they are more valuable. While the entrepreneur does not have to know about the people he serves, he can only expand his own set of opportunities by creating opportunities for them.

In a lecture at the 2009 Austrian Scholars Conference at the Ludwig von Mises Institute, Rabbi Daniel Lapin made this point explicitly by considering the economic and social function of peddlers, people who would go through towns buying and selling. The good peddler was better off when he left town, but he only found himself in this happy circumstance by making the townsfolk better off as well. To borrow Lapin’s example, a peddler might show up at a house and ask if the residents had anything they were willing to sell. Suppose for a moment that they said yes and pointed to an old table with a wobbly leg that they were planning to throw away. The peddler might offer to buy it for $5, which they would gladly accept. They would now be better off by $5. At this point the peddler could repair the table and find another family that was planning to buy a similar table for $20. If the peddler offered to sell them the repaired table for $15, they would find themselves better off. And so it goes: With every transaction the peddler makes people better off and enables them to feed and clothe themselves. In a word, the peddler makes a direct contribution to their ability to flourish.

Of all the ways for societies to organize themselves, the free market is the only system that is simultaneously sustainable, prosperous, and conducive to human flourishing. We cannot live together as a community of thieves, nor could we sustain ourselves as a community of beggars, moochers, or wards of charity. Further, anything that can be properly defined as a human existence must necessarily rely on specialization, trade, and division of labor. This has the happy consequence of maximizing our ability to do well and do good by our neighbors. When we focus our attention on production and trade, we necessarily feed the hungry and clothe the naked because self-interest properly understood requires a degree of focus on the wants and needs of others that is conspicuously absent from other forms of social organization. To adapt a phrase from Harvard economist Claudia Goldin, life in the pre-market world was nasty, brutish, and short. In the world of free enterprise, life is long, healthy, and rich.

  • Art Carden is a Professor of Economics, author, and co-editor of the Southern Economic Journal.