All Commentary
Sunday, October 1, 1995

Misplaced Hope

Exploitative Governments Do Not Readily Yield Their Coercive Powers

The welfare state thrives on the toils and talents of its productive members. It is an exploitation state that builds on political force and, in the end, is bound to self-destruct. When confiscatory taxation and onerous regulation become intolerable and the abuses of government are insufferable, many good citizens rise up on election day and put their faith in the opposition party. They may succeed in removing the incumbents from positions of power and elect the critics and opponents. Many others who feel exploited and abused by the system despair of the political process and seek an escape.

Some victims descend into the underground economy where income is not reported. Or they defiantly embark upon production that violates political mandates such as government licensing, inspection and label laws, labor laws, export and import controls, money and banking regulations, and countless others. Some may try to “get even” by collecting entitlement benefits even while they are laboring in the underground.

The fugitives may react against abuse and exploitation not only in their political and economic lives but also in their very attitudes toward government. In desperation, they may conclude that the transfer laws and regulations are immoral and that which government makes illegal may actually be moral. Some may even question the viability and morality of the democratic form of government itself. When millions of people who were once loyal and law-abiding citizens come to look upon democratic government as a consummate body of immorality, then society faces a social crisis.

Political attempts at “rolling back” the exploitation system are likely to fail when the majority of voters derive their livelihood from transfer funds or reap popular benefits from the system. In the United States this point has long been passed. The youth generation claims a birthright to educational benefits from the nursery to graduate school. The elder generation claims a vested right to Social Security and Medicare benefits. And millions of middle-aged Americans thrive on government payrolls or subsist on public assistance. Government employment now exceeds that of all American manufacture.

Roll-back administrations face great difficulties and insurmountable obstacles. They have to take unpopular measures which actually give aid and comfort to the political opposition. Every step denies someone his “entitlement” or special privilege, providing grist for the critics’ mills. Short-term legislatures and administrations are unable to roll back the entitlement system which, like a malignant tumor, has slowly penetrated and poisoned the body politic. Roll-backs are symptoms of crises of the exploitation state which moves in waves, rolling on for long periods of time, and rolling back briefly and fruitlessly. They afford an opportunity to the entitlement coalition to regroup and prepare for another advance.

Unable to reverse the course, many welfare states are approaching the ultimate crisis: the debt crisis. When the burden of government debt seriously impedes the entitlement spending, when interest payments on the pyramid of debt hamper the entitlement programs, the transfer forces face a new task: the reduction of the debt. It cannot simply be repudiated because this would devastate the financial structure that rests on $5 trillion of federal debt. It must be distributed among all subjects with income and wealth either through gradual currency depreciation, through capital levies on private property, or both. Inflation, which is a common method of debt depreciation, places the burden primarily on the owners of money and claims to money.

The debt crisis is hastening the coming of a new political and economic system in which national governments lose their exploitative powers and legal importance. The phenomenal technological innovations in recent years, especially those in communication and transportation, have ushered in the “Information Age” which has fostered a vigorous world market of ideas and entrepreneurship. Markets have sprung up virtually everywhere, internationalizing commerce and capital and depriving governments of their restrictive powers. They have given productive capital unprecedented mobility, allowing it to escape exploitation and confiscation with the speed of E-mail.

The internationalization of information and entrepreneurship has generated intense competition for liquid capital, managerial ability, and technological knowledge. As multinational corporations emerge and multiply around the globe they become the principal competitors for the most productive locations. They are capable of observing and adjusting to institutional conditions, forcing national governments to compete with each other in their legal institutions, their tax systems, regulatory structures, monetary order, labor legislation, etc. Exploitative governments obviously fare poorly on the competitive world scene; their exactions are manifested in economic stagnation, rising rates of unemployment, falling wage rates, and lower standards of living. Exploitative governments clearly show themselves in the light of international competition.

Ironically, productive capital is finding protection from the depredations of national governments in those international markets that are spontaneous, unregulated, and devoid of sovereign law and power. International markets function smoothly and efficiently outside the law, safeguarding private property from the exploitative aspirations of governments which were supposed to protect life and property.

As the world markets are growing in scope and strength, the coercive powers of national governments are shrinking. Exploitative policies are becoming more painful and onerous, more difficult to enforce, and less lucrative in revenue; this exerts powerful pressure on governments to reduce the exactions. The pain may even induce some pressure groups to leave the halls of government and, instead of pleading for handouts and privileges, to pursue entrepreneurial profits in world markets.

Exploitative governments do not readily yield their coercive powers. Seeking to retain and reaffirm their authority, they may turn “protectionist” and erect prohibitive barriers against the movements of goods, capital, and labor. They may try in vain to shelter their exploitation system through association, cartelization, combination, and other means of trade restraint.

Many loyal and law-abiding Americans still place their hopes for reform in legislators and regulators. They are unaware that the age of politics is drawing to a close. Hope still drives lengthy and costly election campaigns, but it is also the source of much frustration and disappointment later.


Hans F. Sennholz

  • Hans F. Sennholz (1922-2007) was Ludwig von Mises' first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, 1992–1997.