Communism vs. Capitalism

This is an old Soviet poster depicting the difference between communism and capitalism. To the left, the exploited worker under capitalism; to the right, the same worker under communism. See anything wrong here?Bild

I got this picture from Wladimir Kraus on Facebook. I quote his comment:

This Soviet poster describes lives under capitalism and socialist USSR.

Under capitalism: the overworked worker is barely able to survive on his meager wage, while the fat capitalist sits on sacks of gold–wealth serving his greed and war lust.

Under socialism: a well-fed and well-dressed worker is happily carrying loads of merchandise; in the background are university, cinema, factories–wealth serving the masses.

Of course, by now everybody knows that nothing could be further from the truth. It is, to be precise, exactly the opposite! Still, it seems that little has changed in the public’s fundamental understanding of how capitalism operates and whom it benefits.

Under capitalism capitalist wealth is at the service of the buying public, i.e. the workers. Workers far from being exploited by that capital are directly benefited by the wealth of the richest capitalists precisely because they do not keep that wealth in the form of cash (or gold) but invest it in capital goods and use it to pay wages.

My own comment is that this would be funny, if it weren’t tragic. There are still people who believe the worker is exploited under capitalism and that communism will pour a horn of plenty on him. That this is praxeologically wrong may be hard to see for those unacquainted with sound economics; but is it really hard to see that it is empirically wrong?
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Who Makes What Happen?

The following statement by Barack Obama is currently making the rounds on Facebook (and on the Internet in general):

If you’ve got a business – you didn’t build that – somebody else made that happen.

OK, say you have got a business, and you have built it up from scratch. Your business needs customers, otherwise you will go out of business. Does this mean your business was built by your customers?

OK, perhaps you did not build your business from scratch; it is a family business that you inherited. Somebody else made it happen, namely your father or grandfather or great-great grandfather.

A book needs readers; a painting needs viewers; a piece of music needs listeners. That does not mean the readers built the book, the viewers the painting, or the listeners the music.

But maybe I am quoting Obama out of context here? So let me give some more extensive quotes:

There are a lot of wealthy, successful Americans who agree with me [that the wealthy should pay more in taxes], because they want to give something back.  They know they didn’t – look, if you’ve been successful, you didn’t get there on your own.  You didn’t get there on your own.  I’m always struck by people who think, well, it must be because I was just so smart.  There are a lot of smart people out there.  It must be because I worked harder than everybody else.  Let me tell you something – there are a whole bunch of hardworking people out there.

If you were successful, somebody along the line gave you some help.  There was a great teacher somewhere in your life.

Yes, there are people – even successful capitalists like Warren Buffett – who are mired in the Marxist exploitation theory, who believe their success and their wealth have come at the expense of other people, and that they therefore have a “duty” to “give back” to society. (On this issue I will refer you to George Reisman’s excellent Open Letter to Warren Buffett on the Subject of Class Warfare.)

And yes: “other people” is an important element of life. “Other people” can be of great help. The customers who buy your products (the readers who read your books, etc.) certainly help you succeed in your business. But that certainly does not mean that your customers made your business happen – you did. And your success is yours: if you turned out worthless products, no customer would help you succeed. If you succeed, you deserve every penny you earn. (Hank Rearden said this in Atlas Shrugged.)

Somebody helped to create this unbelievable American system that we have that allowed you to thrive.

The unbelievable American system was created by the Founding Fathers! And they built on Enlightenment thinkers like John Locke. What has Barack Obama done except undermining the Founding Father’s achievement? (True, he is not alone in this. The vision of the Founding Fathers has been steadily eroding over the centuries.)

Somebody invested in roads and bridges.  If you’ve got a business. you didn’t build that.  Somebody else made that happen.  The Internet didn’t get invented on its own.  Government research created the Internet so that all the companies could make money off the Internet.

Somebody has to invest in infrastructure like roads and bridges – but does it have to be the government that invests with money taken from the rest of us? I don’t think so; but this is a vast subject that I cannot go into now. But what about this idea that government created the Internet?

It is true that the Internet originally grew out of the ARPA net and was created by the US Department of Defense. But the ARPA net was immensely crude compared to today’s Internet. And every step taken since then have been taken by private, non-government initiative. Think of IBM, Microsoft, Apple, etc. etc. If it had stayed in the hands of government, nothing much would have happened.

Take another example. This blog is powered by WordPress. Does this mean that WordPress is creating this blog? Certainly not: I create it. WordPress has created the precondition without which I could not create this blog. (And WordPress certainly was not created by the government, even though the ARPA net is also a precondition for the existence of WordPress.)

The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.

Oh yes. This is the kernel of truth around which this web of lies is weaved.

There are some things, just like fighting fires, we don’t do on our own.  I mean, imagine if everybody had their own fire service.  That would be a hard way to organize fighting fires.

This does not mean fire fighting could not be privatized. That something has to be organized does not mean the organizing has to be done by the government.

So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together.

The same kernel of truth as above. There is nothing wrong in cooperation. But we do not want to be one neck ready for one leash:

Remember the Roman Emperor who said he wished humanity had a single neck so he could cut it ? People have laughed at him for centuries. But we’ll have the last laugh. We’ve accomplished what he couldn’t accomplish. We’ve taught men to unite. This makes one neck ready for one leash. We found the magic word. Collectivism. – Ellsworth Toohey in The Fountainhead.

But Obama should have the last word:

That’s how we funded the GI Bill.  That’s how we created the middle class.  That’s how we built the Golden Gate Bridge or the Hoover Dam.  That’s how we invented the Internet.  That’s how we sent a man to the moon.  We rise or fall together as one nation and as one people, and that’s the reason I’m running for president – because I still believe in that idea.  You’re not on your own, we’re in this together.

One neck ready for the one leash.

(The Obama quotes I have taken from here.)

PS. Others have written about this as well. I particularly recommend this article by Michael Hurd. There is also a short guest post by Jeffrey Tucker on Peter Creswell’s blog. (If you read Swedish, also read what Per Nilsson-Menger has to say.)

Update July 22: I also recommend Robert Tracinski’s latest article on RealClearMarkets, King Barack I vs. the American Gospel of Success. (I often recommend Tracinski; he is a very astute observer of the political scene.)

Also, several persons have observed the similarity between Obama’s statement and this diatribe by James Taggart in Atlas Shrugged:

He [Hank Rearden] didn’t invent iron ore and blast furnaces, did he? He didn’t invent smelting and chemistry and air compression. He couldn’t have invented his Metal but for thousands and thousands of other people. His Metal! Why does he think it’s his? Why does he think it’s his invention? Everybody uses the work of everybody else. Nobody ever invents anything.

Update August 2: There is another good article on Pajamas Media by Oleg Atbashian (a new name to me). He points out that

…if all of us can be credited for someone else’s achievement, by the same logic, all of us can be punished for someone else’s failure. Just as all individual credit goes to the society as a whole, so does all the blame.

And:

…if nothing is to your credit, then nothing is your fault.

And ends up with the following version of Obama’s speech:

If you have failed, somebody along the line ruined it for you. There was a lousy teacher somewhere in your life. Somebody helped to create this unfair American system that caused you to fail. Somebody benefited from your demise. If you’re a loser, it’s not your fault. Somebody else made that happen. The Titanic didn’t sink on its own. Corporations and insurance companies made a lot of money off of it, so they must be complicit. The point is, when we fail, we fail not only because of our individual shortcomings, but also because others have teamed up behind your backs.

Read the whole article.

Should Governments Be Replaced by Insurance Companies?

Or, to put the question more precisely: Should the legitimate functions of a government (police, military, courts) instead be provided by insurance companies? This is what Hans-Hermann Hoppe proposes in his Democracy: The God that Failed, where he devotes a whole chapter (chapter 12) to this idea and explains in some detail how such an arrangement would work in practice.

I am skeptical to this idea; but before I vent my skepticism, I want to say the following:

Historically, governments have been lousy as regards those legitimate functions. True, there are laws against such obviously rights-violating crimes as murder and manslaughter, theft, robbery, rape, arson… you name it. Governments do try to enforce such laws. Sometimes, they even succeed. But neither can it be denied that governments have done much more to violate our rights than they have done to protect them. They rob us of much of our income and call it taxation; they erode the value of the money they don’t steal outright by inflation; they conscript us and sacrifice our very lives in wars, most of which are senseless; and you can expand that litany, if you wish. So it is no wonder that people are looking for alternatives.

Even die-hard “minarchists” (adherents of a strictly limited government) recognize that government, if not severely restricted, are the worst and most dangerous rights-violators:

Instead of being a protector of man’s rights, the government is becoming their most dangerous violator; instead of guarding freedom, the government is establishing slavery; instead of protecting men from the initiators of physical force, the government is initiating physical force and coercion in any manner and issue it pleases […] so that we are fast approaching the stage of the ultimate inversion: the stage where government is free to do anything it pleases, while the citizens may act only on permission; which is the stage of the darkest periods of human history, the stage of rule by brute force. (Ayn Rand, “The Nature of Government” in The Virtue of Selfishness; also reprinted in Capitalism: The Unknown Ideal.)

…the government’s capacity for violating freedom is incomparably greater than that of any private individual or gang whose aggression it fights. One has only to compare the Gestapo or the KGB with the Mafia to realize how much greater is the potential danger that comes from government than from private individuals. […] Thus, freedom must be defined not merely as the absence of the initiation of physical force, but, in addition, in order to highlight its most crucial aspect, the absence of the initiation of physical force by, or with the sanction of, the government. (George Reisman, Capitalism: A Treatise on Economics, p. 22.)

But if governments do not live up to the ideal of only protecting our rights and never violating them, it is no wonder that people are looking for an alternative way of organizing society.

Now to my objections to the idea of letting insurance companies take over those legitimate functions.

First of all: would insurance companies even be interested in taking over those functions?

It would mean that they would have to take over the police, the military and the courts. Each and every insurance company would have their own police force, their own armed services and their own court system. Would they want to do this? Well, I haven’t asked them, but my best guess is that they would not. (I don’t think Hans-Hermann Hoppe has asked them either; if he had, he would have mentioned it in his book.)

Secondly, to some extent insurance companies already insure us against crime. To take a drastic example, if you take out a life insurance and then get murdered, the insurance policy would fall out. This doesn’t bring you back to life, but your family and heirs are indemnified against any financial disaster your death could bring on them. – To take less drastic examples, we can insure against thefts, burglaries, robberies and the like.[1]

But this is insurance against the effects of crime, not against the crimes themselves.

It is the function of a proper police and court system to apprehend the perpetrator of crime, bring him to justice and mete out the appropriate punishment. This is not the function of insurance companies, and I doubt that they would want to make it their function.

Does Hoppe himself have an answer to those objections? I have looked in vain in his book for such an answer, and I haven’t found one. I don’t think he is aware that those objections could be raised.

But if this idea is not the way to get out of our present predicament of rights-violating governments, then what is? I won’t pretend to have a full answer to this; but I would like to quote Craig Biddle:

In addressing this question [government funding in a free society], it is important to emphasize that the elimination of taxation is not the first but the last step on the road to a fully rights-respecting society. The first steps are to educate people about the moral propriety of freedom, to cut government spending on illegitimate programs, and to begin the process of limiting government to the protection of rights.

But this is a slow process. Even the first step – educating the public and swaying the public opinion – would take a couple of generations. And the other steps, too, seem to meet with insurmountable difficulties – politicians have power and privileges, and how easy is it to make them give these up? (I would like to be more optimistic, but I cannot.)

Nevertheless, there are no short-cuts. We have to fight the uphill battle.


[1]) Quite often, such small crimes are reported to the police only because insurance companies demand that they be reported. At least here in Sweden, the police doesn’t even bother to investigate them; it is not much better in the other Scandinavian countries; I don’t know about other countries. But this mainly serves to show how bad present day governments are at their legitimate function of protecting our rights.

A Short Word on Hans-Hermann Hoppe

I recently borrowed Hans-Hermann Hoppe’s Democracy: The God that Failed from Henrik Sundholm. Henrik expected me to write a review of the book, but I told him I had nothing particularly intelligent to say about it. However there are a couple of points I would like to mention.

Hoppe’s main thesis is that hereditary monarchies are to be preferred over democracies. This does not mean that monarchy is the ideal social system, but merely that democracy is even worse. He has two main (interrelated) arguments for this.

The first argument is that monarchies are private governments. A monarch regards his nation as his own private property. Democracies are public governments. In a democracy, nobody owns the nation. Politicians who are elected for the highest offices only hold the nation in trust for a limited period of time; they always risk being ousted at the next election. And if there is anything we know about private vs. public property, it is that private property is always better managed than public property.

And the second argument is that monarchies have a lower degree of time preference than democracies – or, to say the same thing with different words, they are better at planning ahead for the future. Now, why is that so?

Everything else being equal, everybody’s time preference gets higher with old age, simply because there is less future to plan ahead for. If you are 80, 90 or 120 years old, you certainly have no incentive to save money, to take one obvious example. However, if you also have children and grand-children, and if you care for them at all, then you will make provisions that will help them in their future lives. This will tend to offset the high time preference.

And this applies to hereditary monarchies, simply because they are hereditary. The monarch cares not only about his own future but also about the coming generations of monarchs.

The exact opposite is true about the leaders in our democracies. They are extremely short-sighted. They cannot think or plan beyond the next election.

Does this sound plausible?

Most of the monarchies that exist today are monarchies in name only or, as I like to call them, decorative monarchies. The monarchs yield little, if any, real power. One exception I can think of is North Korea. North Korea is not called a monarchy, but in fact it is. The power of the leader is certainly hereditary.

Another example is Saudi Arabia (and some of the sultanates in that region).

But nobody, I hope, would claim that our existing democracies are even worse than North Korea or even Saudi Arabia. Hoppe’s reasoning just flies in the face of the facts.

The second point I want to take up flies even more in the face of the facts. He claims that monarchies are less warlike than democracies. Why is that? Well, because of their low time preference and their great foresight, monarchs won’t engage in war, unless it is totally necessary. And wars cost money, so waging war obviously impoverishes the nation and thus the monarch himself and his family. Furthermore, monarchs in times past did not rely on conscription for getting soldiers to fight[1]; they typically used mercenaries, and they have to be paid and well paid. Democracies rely on conscription and thus have no qualms about sending out young men to die on the battlefields.

Sounds very plausible, doesn’t it?

But it is certainly an established fact that democracies do not wage war against one another. (People who try to refute this thesis can only come up with some very minor skirmishes, such as the “cod wars” between Great Britain and Iceland. As far as I know, there wasn’t a single casualty in those “wars”.) Wars waged by democracies have always been against non-democracies.

Hoppe also claims that wars in the monarchical era were much more limited than wars in the modern era, and that they involved the civil population much less. In all fairness I should quote his reason for this:

Typically, monarchical wars arise out of disputes over inheritances brought on by a complex network of interdynastic marriages and the irregular but constant extinction of certain dynasties. As violent inheritance disputes, monarchical wars are characterized by territorial objectives. They are not ideologically motivated quarrels but disputes over tangible properties. Moreover, since they are interdynastic property disputes, the public considers war the king’s private affair, to be financed and executed with his own money and military forces. Further, as private conflicts between different ruling families the public expects and the kings feel compelled to recognize a clear distinction between combatants and noncombatants and to target their war efforts specifically against each other and their respective private property. (P. 34.)

And a couple of pages later:

In contrast, democratic wars tend to be total wars. […] It becomes more and more difficult for members of the public to remain neutral or to extricate themselves from all personal involvement. Resistance against higher taxes to fund a war is increasingly considered treachery and treason. Conscription becomes the rule, rather than the exception. And with mass armies of cheap and hence easily disposable conscripts […] all distinctions between combatants and noncombatants fall by the wayside, and wars become increasingly brutal. (P. 36f.)

There is a kernel of truth in this. Modern wars, such as the World Wars, have been far more devastating than earlier wars.[2] Conscription is certainly a factor here (and it goes without saying that conscription is profoundly immoral and a violation of the very right to life). But he does not mention the most important explanatory factor: that today we possess far more effective weapons than were available earlier. There were no nuclear weapons in those days, there were no machine guns, and there was no bombing from airplanes.

But it still remains true that democracies don’t wage war (much less then total war) against other democracies.

Now, democracy is certainly not the ideal social system. “Democracy” literally means majority rule and thus gives the majority the “right” to violate the rights of minorities, and – as Ayn Rand pointed out – the smallest minority on earth is the individual. The proper social system would be what is called a “constitutional republic” or simply “limited government”, a government that does nothing but protect individual rights. A constitutional republic was what the Founding Fathers of the US were striving for. It is not what we have today anywhere in the world, and the US has certainly deteriorated into a democracy. But whatever may be said against democracy, it still remains true that they don’t wage war against one another, so I would still say it is the second best alternative. It is infinitely better than the totalitarian alternatives.

But Hoppe does not believe in the possibility of a limited government. (I may have more to say about that later.)

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Hoppe’s idea, in a nutshell, is that the monarchical era (which was actually characterized by endless wars) was more peaceful than the democratic era (where wars, however devastating, are the exception rather than the rule). How does he arrive at this idea? The clue is a sentence in the beginning of his book:

A priory theory trumps and corrects experience (and logic overrules observation), and not vice versa. (p. xvi; emphasis Hoppe’s.)[3]

So if you can deduce from the fundamental fact of time preference that monarchies are peaceful and democracies warlike, then this trumps, corrects and overrules the observation that it is actually the other way around!

In all fairness I should say that Hoppe has many good things to say about the relationship of theory to practice. But this summary sounds like a reductio ad absurdum refutation of praxeology.

Theory (good theory, that is) explains experience – and “explain” certainly does not “trump”, “correct” or “overrule”. But the theorems of economic theory always come with the proviso ceteris paribus or “everything else being equal”. So if an economic theorem does not exactly match reality (or even contradicts reality), one has to look for the factor that is not equal. And that factor then should be explained by some other theorem. (I may have more to say about this another time; it requires some thought to be formulated more precisely.)

But to say that theory trumps, corrects and overrules experience is just to say that theory does not explain experience, but explains it away.

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This short word became rather long. And perhaps I even had something intelligent to say.

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Update May 11: There is also some discussion of this on Facebook.

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Update June 1: In the comments section it has been said that it was unfair of me to use North Korea as an example, since North Korea is a dictatorship, not a monarchy. But is there any essential difference between absolute monarchy and a modern, family-ruled dictatorship? In both cases, the state – the apparatus of compulsion and coercion, the police, military and courts – is owned by the ruler and his immediate family; and it is certainly hereditary.

But there is another point worth mentioning: Not all monarchies in the monarchical age were absolute. For example, France under Louis XIV was an absolute monarchy; but Great Britain, at least after the Glorious Revolution, was not: the power was divided between the king and the parliament. By Hoppe’s reasoning, this was a step in the wrong direction – a step on the slippery slope to democratization. If the power is partly vested in the parliament, then it is no longer private ownership of the state; it is at least partly public ownership.

And if Hoppe were right on this, one would actually accept better economic conditions and more progress in France than in Great Britain during this period. But the Industrial Revolution first took hold in Great Britain, not in France.

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Update 27 November 2013: Peter Cresswell has written a blog post called All you need to read on Hans-Hermann Hoppe. Ever, with a link to my posts about Hoppe:

My advice is you don’t waste your time reading [his] slop, unless (as Per-Olof Samuelsson has done) it’s just as an exercise in extracting logical fallacies.

At the risk of some repetition, I quote my own comment:

To be fair to Hoppe, he does not claim that monarchy is the ideal system, “only” that it is superior to democracy and that democracy represents a deterioration. Not that this makes his reasoning much better… To what I wrote in my first blog post, I might add the following:

First, when Hoppe speaks about monarchy being superior to democracy, he has to mean absolute monarchy – since only an absolute monarch could regard his country as his own private property, and that is his main argument for its superiority. A constitutionally limited monarchy will not do – since in such a monarchy, there is some division of powers between monarch and parliament – and the parliament represents the people, or at least some significant part of the people. A constitutionally limited monarchy is thus a step toward democracy, and thus, by Hoppe’s own “rigorous logic”, a deterioration. [Well, that was actually a repetition.]

Second, if the whole country is the monarch’s private property, then obviously nobody else in that country could own private property. At best, they could have some property by the monarch’s permission, a permission he could at any time revoke at his own discretion. There would be no right to property for anyone else. At worst, everybody would work for the monarch as cattle slaves – and serve as cannon fodder in those wars the monarch has to wage to protect his property from other absolute monarchs.

In short, Hoppe’s reasoning is a mess – a rigorously logical mess, to be sure, but a mess nonetheless.

One could say the same thing about Hoppe as Böhm-Bawerk says about Marx:

His system is not in close touch with the facts.

And:

… he founds it on no firmer ground than a formal dialectic …

And:

The system runs in one direction, facts go in another; and they cross the course of the system sometimes here, sometimes there, and on each occasion the original fault begets a new fault. (Karl Marx and the Close of His System, p. 101; also published in Shorter Classics of Böhm-Bawerk, p. 287.)


[1]) This is a truth with some modification. I don’t know about every country, but Sweden, in the 30 Year War, relied heavily on conscription; recruiters were sent out to the villages in Sweden to pick one soldier from every village. This later was replaced by a standing army system, called “indelningsverket” (there is no good English translation for this term).

[2]) According to Wikipedia, WWII has been the most devastating war in terms of casualties; and WWI takes fifth place. In the places between, Wikipedia lists the An Shi Rebellion in China (755–763), the Mongol conquests of the 13th century, and the Ching dynasty conquest of the Ming dynasty (1616–1662). But I think statistics from those early periods have to be taken with a big grain of salt.

[3]) Kudos to Henrik Sundholm for marking this very sentence in the margin.