—Joseph Schumpeter

From its beginning, the common wisdom has been that capitalism is bad. It is claimed that capitalism is ethically wrong, has bad practical consequences, and is unnecessary. But this claim is entirely false—in fact, the opposite is true: capitalism is both morally and practically optimal, and there is no other possible social arrangement compatible with modern society.

It is important to precisely define ‘capitalism’ from the outset to avoid being misunderstood. Capitalism is the free market system, based on property, contract, and voluntary exchange. In a truly free society, where people are free to live as they please, free markets are practically guaranteed to arise as the result of voluntary production and trade undertaken by people seeking to improve their conditions. In other words, capitalism is the default social system of a free society.

Much of the anti-capitalistic sentiment is aimed not at this voluntaristic conception, but at the currently existing system of state capitalism. This interventionist system is characterized by a market that is no longer free but hampered by all sorts of government restrictions, which result in many undesirable and unintended consequences. It is primarily these outcomes that the anti-capitalists—in mistakenly attributing them to free market capitalism—object to.

Morality

A widely held objection to capitalism is that it is immoral. This charge is mainly based on Marx’s claim that capitalists exploit laborers by taking as profits what properly belongs to the workers. This incredibly naive view was exploded long ago, but it persists today among those ignorant of economics—it can hardly be denied that profits are widely considered antisocial and evil.

Marxian exploitation can only exist if goods acquire their value from the labor imbued in them. But this notion—the labor theory of value—was long ago rejected and replaced by the subjectivist notion of prices being determined by the relationship between supply and demand. It turned out that the persistent profit that Marx thought was a sure sign of exploitation was in fact an interest return—compensation to the capitalist for purchasing inputs such as materials and labor up front and only collecting revenue from sales later on. In fact, if the workers wished to earn this interest return, they could arrange to be paid only once the goods are sold. The fact that they do not indicates that they prefer to forgo the interest return in favor of regular, steady pay.

As capitalism has showered the common man with wealth and eliminated mass poverty wherever freedom has existed, the anti-capitalists have resorted to accusing capitalism of corroding virtue. According to them, capitalism breeds consumerism, materialism, and selfishness. While this is manifestly not true, even if it were, what is the alternative? People can only exhibit virtue if they are free to choose so. Forced virtue is not virtue at all. Only freedom—which entails capitalism—can allow people to exhibit virtue.

Capitalism is merely the result of leaving people free to live as they please (provided that they do not infringe on the freedom of others.) If they decide to engage in mutually consensual capitalist acts, who has any right to interfere? Capitalism is the outcome of freedom: any attempts by government to curtail capitalism must do so at the expense of freedom. Capitalism and freedom share the same fate.

Economics

Another popular myth is that capitalism enriches the capitalists and impoverishes the masses. This is flatly contradicted by history—the common person has been lifted out of poverty and has gone on to become fantastically wealthy as a result of capitalistic mass production. Economic science can explain: competition among firms brings prices down to the level of costs, and it also creates strong incentives for innovation. Large scale production has brought the unit cost, and hence price, of most goods down to levels easily within the reach of the common person.

This myth is rooted in zero-sum thinking—that the gains of business come at the expense of the rest of us. But voluntary exchanges benefit both parties, otherwise the exchanges would not occur. Capitalism is positive-sum: businesses earn their incomes by competing to sell goods that consumers want. Capitalists become rich by enriching consumers with better and cheaper goods. They lose their wealth as soon as they fail to stay abreast of the competition to serve consumers.

In fact, the fruits of capitalist efforts largely accrue to workers. Increased capital investment reduces unit production costs while competition quickly eats away any profits that arise. But more capital also increases the productivity of labor, so wages get bid up by competing employers. So, while capitalists earn fleeting profits, workers enjoy a steady rise in wages. Truly, capitalism is good to the common person, both as a consumer and a worker.

Faced with these arguments, opponents of capitalism often turn around and blame capitalism for being unsustainable. Capitalism, they say, is short-sighted. It depletes the earth’s resources without concern for the future. Such arguments are totally wrong, ignoring the fact that prices serve to allocate resources through time. For example, if it was forecast that X would run out in a few years, speculators would buy lots of X now in order to sell it later at a higher price. By doing so, speculators conserve X today for use in the future. The higher present price of X would guide people to use X more efficiently and sparingly, and to find substitutes.

Necessity

Finally, for all their hatred of capitalism, the critics have no workable alternative compatible with modern living standards for the common person. The more the market is hampered by government interventions, the worse off the common person will be. And there are no non-market alternatives that could sustain modern society. Society is a bottom up, emergent order, incompatible with top down management.

Conclusion

But if all these claims of the anti-capitalists are false, why are these ideas so popular? Why have the correct ideas not slowly gained acceptance over time? Evolutionary psychology provides the answer: the aversion to capitalism is an artifact of our evolution in small communal bands. In the world of our distant ancestors, such things as zero-sum thinking and judging actions based on their intentions were pretty good rules to follow. But in the modern world, they are wholly inaccurate and can only serve to stand in the way of progress for the bulk of humanity.

The claims of the anti-capitalists are not only completely false, but totally backwards. Capitalism is the product of a society where each is free to live and associate as they wish. Interventionism and socialism depend on government force and are thus inescapably exploitative. Capitalism, far from impoverishing the masses, enriches them at an incredible rate. Far from being unsustainable, capitalism allocates resources optimally between present and future.

Capitalism is the optimal social arrangement on both moral and practical grounds. But if people are bound to believe otherwise because of their evolved preferences, then a counteracting educational program is of utmost importance. The ideas are simple yet powerful, but the challenge is to get them heard.

“Everybody got a gri-gri.“ In their Bullshit episode on recycling, Penn and Teller call out recycling for what it is. When I first heard the economic arguments against recycling, I couldn’t find fault with the logic, yet it was extremely difficult to swallow. Recycling just seems so obviously good; to question it seems beyond the pale. But truth trumps feelings, and so I made the tough adjustment to my views on recycling. This gri-gri is so powerful that I still feel a twinge of guilt when I trash recyclables.

In retrospect, the argument that recycling actually wastes resources follows from very basic economics. In the profit and loss system of a market economy, if a firm is unprofitable (and there are no externalities), it means that the resources it uses have more valuable uses elsewhere. Other firms can use these resources to make products that consumers value more highly (they’re willing to pay a price that covers the cost of the resources). In other words, the outputs are less valuable than the inputs—resources have been wasted. These resources could be any inputs: natural resources, land, labor, etc.

Government recycling programs are instituted precisely because it is unprofitable to operate a recycling business (for the typical consumer recyclables: paper, plastic, glass, cans, etc. Industry profitably recycles all the time.) This could be a result of government providing free landfills, which disguises the real cost of trash. But in reality, the cost of landfills is relatively small compared to recycling, so even in a world of private landfills that charged for trash, it would still be unprofitable to recycle. Further, modern landfill technology makes externalities insignificant, so the costs are fully borne by the landfill operators. And landfills only take up an insignificant amount of space relative to the space available on Earth.

Thus, we can conclude that unprofitable government recycling does not save resources; it actually wastes resources! The costs of recycling (labor, truck fleet, processing plant, etc) exceed the value of the recycled materials. We would be better off putting our waste in landfills and using those resources elsewhere, where they can more effectively satisfy consumer wants. So don’t feel bad about using the trash, you’re the one who’s actually saving resources.

Further learning

• EconTalk podcast with Mike Munger on the economics and politics of recycling
• “Eight Great Myths of Recycling”

Libertarians often don’t vote because there are no candidates that represent their principles. Furthermore, many libertarians dislike voting and would prefer not to participate in a coercive political process even if it is democratic. So libertarians are often expressive non-voters. Since our individual votes won’t make any difference, we may as well not vote—to express our objections to the coercive nature of democracy (as well as its non-trivial practical failings.) This way, when people bring up the topic in conversation, we can explain why we don’t vote (and why they shouldn’t either.) If other voters are going to vote expressively and ruin policy, then libertarians might be most effective by expressively non-voting.

This is a fairly common economic fallacy. To prove it’s false, I’ll show that in a society of all “gods”, people would still do the low-skilled work, and furthermore that low-skilled wages wouldn’t be any lower than high-skilled wages.

Assume that everyone is equally highly-skilled and that there are high-skilled and low-skilled jobs on the market. Because of competition, wages are determined by productivity: employers bid wages up to the point where they are equal to the value the employee contributes to the firm (the discounted marginal revenue product). You might think that the high-skilled jobs will pay more since they are more productive, and this is true, but this arrangement can’t last. Since everyone is equally skilled, they will flock to the high-skilled jobs, increasing the supply of high-skilled labor, and lowering its wage (this is because of diminishing marginal productivity: the productivity of high-skilled jobs decreases as their number increases). Similarly, the supply of low-skilled labor will fall, increasing its wage.

This process will continue until the two wages meet. To see why, suppose the low-skilled wage is less than the high-skilled wage. Then it pays for those in low-skilled jobs to take high-skilled jobs by bidding down those wages, which also has the effect of increasing low-skilled wages. So wages will be equal across the board.

But doesn’t this contradict the fact that wages are determined by employee productivity? No, because of diminishing marginal productivity and the prices of the goods produced. As more people take high-skilled jobs, the productivity of each additional worker falls (marginal productivity). This is because, with only a few workers,  they can just do the most productive work. With many workers, they will also be doing less productive work, diluting the productivity of high-skilled labor. Similarly, with few workers in low-skilled jobs, they just do the most productive work.

A further effect comes from changes in the prices of the goods they produce. With many people producing high-skilled goods, their price falls (as a result of increased supply), reducing the productivity of high-skilled labor. With few people producing low-skilled goods, their price rises, increasing the productivity of low-skilled labor. For example, if there were very few gas station attendants, their wages would be quite high, so high in fact that it may become cheaper to automate the job with technology (as has happened with gas pumps and is happening with checkout lines).

So even though the gas station attendant does the same work, he becomes more productive (in the economic sense) as the general productivity of labor rises. As more and more people leave the gas station attendant profession for more productive jobs, the remaining gas station attendants become more valuable and their wages must rise to compensate them for the opportunity cost of taking a more productive job.

In a world with large variations in individual productivity (with both “gods” and “clods”), people do the work they are most productive at and are paid accordingly. And if nobody is willing to take a job at a given wage, then that wage will have to rise, or the job might be automated if that is cheaper. So general increases in productivity benefit individual clods because their opportunity cost, and hence their wage, rises.

The jobs fallacy is the belief that job creation promotes prosperity. It just seems obvious that more jobs means more prosperity: more jobs means more income. Politicians are constantly clamoring about job creation. But there’s a subtle error here. Bastiat points out the absurdity of this argument.

Labor is a means to the end of consuming goods. The means is not the end, and all value derives from the end. Labor itself does not make us prosper—the results of labor are what we consider prosperity. Labor itself impoverishes us—it is costly: at the very least we lose leisure time. We only engage in labor because we expect the products of labor to enrich us more than the labor impoverishes us. What we’re after is to make a profit—a surplus of enrichment over impoverishment. We want to maximize the ratio of product to labor, of output to input, of result to effort.

Obviously, the best possible case would be to have all result with no effort—no work and an abundance of goods. The worst possible case would be all work and no result (which Bastiat called ‘Economic Sisyphism’). Protectionists, who argue that free trade eliminates domestic jobs, are actually advocating a reduction in the result to effort ratio. They want to reduce the amount of cheap goods—the “result”—coming from abroad, and increase the amount of effort—”create more jobs”—required to produce a given result. Wouldn’t it be wonderful if foreigners put us all out of work by flooding us with free goods? Wouldn’t it be awful if all trade between persons were prohibited and each one of us had to be self-sufficient, fully employed for every waking hour, yet barely (or not even) surviving?

The jobs fallacy is a part of a larger fallacy: favoring the interests of producers over consumers, i.e., favoring the means over the end. Production is only a means to the end of consuming the goods produced. Production derives its value from the value of the product. If some goods are no longer valued, their production loses its value. Production itself is not a source of value.

Consumer demand is the source of value. The more people are willing to pay for a good, the more producers of that good will be willing to pay for the inputs required to manufacture it, and so on until value is imputed all the way back to labor, land, and natural resources. In this way, the entire economic structure of production is dictated by consumers, via the price structure established by this backwards imputation of value.

Since all value is derived from consumer demand, it follows that satisfying consumer wants to the greatest extent possible maximizes prosperity. Promoting production can only increase prosperity to the extent that it satisfies consumer wants. But interfering with free trade always harms the interests of consumers and thus impoverishes. Therefore, free trade is the optimal policy.

It’s common for people to think that if domestic producers earn more due to a trade restriction, then they will spend those extra earnings, and the money will work its way through the economy, and no harm will have been done. This is a perfect illustration of the fallacy of the seen and the unseen, as Bastiat put it. The gain to the protected industry is highly visible—the number of jobs “created” is easily countable. But the losses to consumers are harder to see—each consumer loses a tiny bit because of the higher price of the protected good, but summing across all consumers, the loss is greater than the “gain”. Similarly, removing the protections will cause a highly visible loss of jobs, but also a small enrichment to each consumer, which adds up to a net gain. To downplay these small increases in consumers’ prosperity is to stand in the way of human progress. The history of progress has consisted of innumerably many such small enrichments of consumers.

Crusoe economics can add valuable insight into this problem. Consider a small group that washes up on an isolated island after a shipwreck. If there were a friendly primitive population on a neighboring island willing to trade with them, to do so would be in their interest. We can immediately see that “protecting the domestic producers” by restricting trade is a pure loss. Clearly, labor has an opportunity cost: increasing the amount of labor required to produce a given output impoverishes the islanders. That extra labor could have instead been spent resting, or on other productive activities, such as fashioning tools.

It’s all too easy to fall for Keynesian sophisms when thinking about a modern economy in all its bewildering complexity. Hence the importance of reasoning from fundamental principles and using conceptual tools such as Crusoe economics to avoid lapsing into fallacy.

In summary, the jobs fallacy is at root a confusion about the source of prosperity. Jobs are only a means to prosperity. Job creation via protectionist measures is literally sacrificing the end to the means.

Evolutionary Psychology and the Antimarket Bias

The argument for free trade is a simple, logical proof. Trade is defined as voluntary exchange. From this it follows that all trades are mutually beneficial (ex ante). In other words, each party in a trade expects to benefit. If this were not so, then the exchange would not occur. Nobody will make a trade that they believe will leave them worse off. One would only make a disadvantageous exchange if it were involuntary—but this violates our definition of trade as voluntary exchange. Evidently, if all trades are undertaken because both parties expect to benefit, then any restriction of trade can only serve to eliminate gains from trade. Unrestricted free trade maximizes prosperity. This follows directly from the logic of voluntary exchange.

Now, if economists contend that tariffs are bad because they eliminate mutually beneficial exchanges and breed inefficiency, then they must also oppose sales taxes. For what is a sales tax but a tariff on trade between individuals? Sales taxes increase the cost of trades, eliminating mutually beneficial exchanges. They discourage specialization and trade, and encourage inefficient self-sufficient production.

Furthermore, this principle applies to all taxes that add to the marginal cost of production and trade. An income tax, for example, increases the marginal cost of producing for trade (a portion of each additional dollar earned is lost as taxes). This discourages production and reduces prosperity. It also encourages inefficient self-sufficient production (they don’t tax the work you do for yourself… yet). The only tax that wouldn’t harm incentives to produce and trade would be a tax of fixed amount unrelated to income or wealth (also known as a head tax). Of course, taking peoples’s money via taxation harms them, but a head tax wouldn’t do the added damage of reducing the incentive to produce and trade. Needless to say, a head tax would never be implemented in practice, as it would effectively end the welfare state.

In conclusion, if economists are to be consistent in their principled support of free trade, they must also oppose sales taxes on exactly the same grounds. If a tariff is a bad way to raise government revenues, then so is a sales tax. By the same principle, they must also oppose any tax related to income or wealth. These taxes harm the incentives to produce and trade. If economists are not willing to accept these conclusions, then they must also weaken their support for free trade.

At the most basic level, all goods are produced locally to some people (at least the producers and their neighbors). Why does the location of production matter at all? A head of lettuce moving in a refrigerated truck is the same as a head of lettuce sitting in the refrigerator of the local store. Transportation doesn’t change the nature of the product. Furthermore, “local” is an arbitrary point on a continuum—is local 100 or 1000 miles? Why not 101 or 1001 miles? Taken to its logical conclusion, localism implies that everyone should be a self-sufficient producer and eschew all trade—it doesn’t get any more local than that. To put it bluntly, localism is a bad idea, based on a non-understanding of the economics of trade. Trades are mutually beneficial (else they would not occur) on all levels: from local to global.

Consider an Alaskan and a Colombian trading salmon and coffee. Despite the great distance separating them, this arrangement is the cheapest way of providing the Alaskan with coffee and the Colombian with salmon. If they were to “buy local” they would have to resort to very costly (wasteful) methods of production (such as greenhouses or cold-water tanks) or forgo the product entirely. Needless to say, they are both much worse off without trade.  The general principle I’ve outlined is that cost, not location, is the key factor. Alaskans can produce salmon at a much lower cost than Colombians, who can produce coffee at a much lower cost than Alaskans. If the savings from using efficient production exceed the transportation costs, then they both gain by trading because they can acquire the other product at a lower cost than if it were produced locally. By specializing and trading, they minimize waste and conserve scarce resources. To forgo mutually beneficial trades because of location is to shoot yourself in the foot.

The economics lesson here is about scarcity. Since resources are scarce, we must economize their use in order to maximize prosperity. By using the lowest cost methods of production, we minimize the amount of resources that are used up in producing goods. This leaves more resources for the production of other goods, increasing our well-being. In other words, the least cost method is the least wasteful method. So rather than worry about where the product comes from, just look at its price. If local goods happen to be cheaper, then they were produced less wastefully. Same for faraway goods. (Keep in mind, however, that this only holds in a free market, as government distorts prices which hides true costs). A lower price means that less resources were used in bringing the product to you (including the resources used up in transportation). This is why so many goods are produced non-locally: the savings from producing in a more efficient location exceed the costs of transportation. We all benefit from these savings by enjoying more goods at lower prices.

Globalization is often smeared as evil, but in truth, it is one of the greatest triumphs of human civilization. Localism is the real evil as it engenders waste, which can only bring poverty. Global free trade is the engine of worldwide prosperity and continues to be one of the most important solutions in the eradication of world poverty.

Consider the following thought experiment: suppose that the minimum wage is raised to $1000/hour. What are the implications? Evidently, most employers can’t pay that much and they’ll go out of business. If that weren’t so, we could all become fantastically wealthy just by decreeing a ridiculously high minimum wage. Now suppose that the minimum wage is lowered to $0.01/hour. Again, employers won’t pay that wage (even though they’d like to) because other firms are bidding for the same workers, and this drives wages up. The reason employers don’t pay the decreed wages is that wages are determined by supply and demand, not government edict. Firms hire workers with the goal of earning profits, while wages are costs. They competitively bid wages up to the point where the wage (cost) equals the benefit or extra profit gained from hiring that worker. So competition for profits practically ensures that workers get paid according to their productivity, according to the value of their labor. (In economics jargon, they get paid their discounted marginal revenue product.)

Now let’s trace out the effects of an increase in the minimum wage on the employers affected (e.g., those hiring unskilled labor). First, the increased labor costs lead some firms to lay off workers and others to shut down, since demand for their goods and hence their prices have not changed. But the downsizing and shutdowns reduce the supply of the goods, increasing their price. This new, higher price justifies the higher wage for those who kept their jobs, since they are now producing a more valuable product. The end result is that some workers lose their jobs, while the rest enjoy the higher wage. Consumers lose because prices are now higher.

Since workers are paid according to their productivity (like all factors of production), all the minimum wage does is to make it illegal to buy or sell labor beneath the price floor. The government is essentially saying: “You must be this productive to legally work in our country.” This is most harmful to the least skilled of workers, the ones we want to help most. They will be the first to be fired, and will be cut off from the chance to gain the work experience and job skills needed to earn a legal wage. Allowing such people to work for lower than minimum wages gives them a chance to work their way to a better life. To deny them the freedom to negotiate their own wages and to leave them legally prohibited from working is a moral outrage.

Some clever economists might argue that the minimum wage can increase the total wages paid to all workers. This could happen if the amount of workers unemployed was more than offset by the increased wage. But what is this except human sacrifice?! They would knowingly unemploy the most needy in order to increase the aggregate income of workers. This position is morally bankrupt and an insult to those who genuinely want to help the less fortunate.

In sum, the minimum wage harms the very people it intends to help. It’s a moral outrage that ought to be instantly abolished. Freedom is the best policy to help the poor.

Recommended learning:

• Gene Callahan’s excellent analogy, in which he compares the minimum wage with a hypothetical “minimum stock price”. Find it in his book, Economics for Real People (free online), pages 189-194.
• Roger Garrison’s Mises University lecture. You can follow along by downloading his powerpoint.
• Mary Ruwart, Healing Our World (free online). A great book for leftists, Ruwart shows how government restrictions hurt the poorest to the benefit of the wealthy and politically connected.

Hans Hoppe has found the answer. In his outstanding book, Democracy—The God That Failed, he shows that democracy is the cause of these modern ills. This is a very bold claim, given democracy’s current status as a secular religion. But Hoppe’s careful theoretical reasoning is airtight—this is a paradigm-shifting book.

The process of civilization

To understand how democracy destroys civilization, we must first understand how civilization comes about. Civilization is the outcome of saving and investment, in other words: capital accumulation. As people save and invest in capital goods (e.g., tools and machines), the production of goods increases—they become wealthier. With more resources at their disposal, saving becomes less costly, and people can invest even more in capital goods. This again results in greater production and a corresponding drop in the cost of saving and investing. This self-reinforcing cycle of capital accumulation is known as the process of civilization.

As Hoppe explains in Chapter 1, people’s time preferences—their degree of present- or future-mindedness—determine the amount of saving and thus the rate of capital accumulation. A high time preference denotes a high premium on the present over the future: the cost of foregoing consumption in favor of saving is higher. Alternately, a low time preference denotes a low premium on the present over the future: the cost of foregoing consumption in favor of saving is lower. To illustrate, a person with a high time preference would engage in activities that pay out in the present (and even at the expense of the future), such as impulse spending, eating junk food, promiscuity, drunkenness, drug abuse, etc. A person with a low time preference would take on activities that pay out in the long term, such as saving and investing, maintaining good health, improving skills or education, developing a good reputation, etc.

The process of civilization is characterized by a fall in the time preference of society. As people become wealthier from the increased production of capital goods, the cost of saving (foregoing consumption) falls—their time preference falls. As this process unfolds, people become ever wealthier and more farsighted.

The decivilization effect of democracy

The existence of government weakens the process of capital accumulation. Under democratic rule, this weakening effect is considerably enhanced. Unless it is stopped, democracy will eventually raise time preferences to the point of capital consumption, and a self-reinforcing process of decivilization will be set in motion—ultimately leading towards the destruction of society.

There are many ways that democracy destroys civilization; the most significant being taxation, war, legislation, and redistribution. These effects are further amplified because public resistance to government is systematically weakened under democracy.

Taxation

Any and all taxation falls directly on producers—taxation is a penalty on production. As a result of taxation, the rate of return on investment is diminished. Saving to invest becomes less lucrative, so people consume more and save less than they otherwise would have. People become more present-minded and the process of civilization is impeded. The amount of taxation determines how significant this effect will be.

If the government is privately owned (i.e., a monarchy), then this effect will be limited. Since the government is his personal property, a monarch has an interest in both the present tax revenues and the long-term capital value of his kingdom. His incentive is to tax moderately, so as not to diminish the future productivity of his subjects, and hence his future tax revenues. On the other hand, if the government is publicly owned (i.e., a democracy), then this effect will be significantly more prominent. Since elected rulers are only temporary caretakers, not owners, of government property, their time horizons are very short—they’re very present-minded. They have no interest in the long term value of the government. Rather, their incentive is to maximize their own benefits while they are in power. Accordingly, democratic rulers tend to tax (and inflate the currency) as much as politically possible, even if it decreases the productivity of private citizens and hence future tax revenues. But this should come as no surprise, as public government, like all public property, is plagued by the tragedy of the commons.

Consider the analogy of public farming. Imagine a farmer who is given the use of some land to grow crops on, but he doesn’t own the land and only gets to use it for four years. His incentive will be to maximize his benefit over the four year term, without regard for the soil quality after the fourth year. Because he can’t reap the benefits of maintaining good soil quality after his term ends, his incentive is to deplete the soil to squeeze out as much benefit from it as possible before he loses its use—in other words, he engages in capital consumption. The same incentives are at work under public government. Without private property ownership, there can be no long-term economic planning.

War

While all governments can externalize the costs of war, a public government will be much more warlike than a private one. A king personally owns the resources that pay for the war and thus his incentive is to keep warfare limited (war is outrageously expensive) and pursue his foreign policy through peaceful means, such as contractual acquisitions of territory and intermarriage with other ruling families. Democratic rulers have no such interest in saving money—it’s not their money to begin with and they can’t privately pocket the funds if they don’t go to war. Consequently, democracies lack a major deterrent to engaging in warfare.

Democratic warfare is also excessively brutal. Once again, because the rulers have no incentive to save money, war spending is much higher, resulting in larger wars. And because the government is public, the government’s wars are the public’s wars: nationalist fervor sweeps the people and support for the war becomes the unquestioned norm. Wars also become open-ended ideological wars (e.g., “making the world safe for democracy” or the “war on terror”). The entire populace becomes part of the war machine, resulting in total war: domestic tyranny (extreme taxation and regulation), conscription, enormous war expenditures, mass destruction, and mass murder of both militants and civilians.

Legislation

Since the kingdom is the private property of the king, he has a strong incentive to uphold the integrity of private property law (the validity of his ownership of the kingdom depends upon it). The king also has an incentive to uphold economically beneficial law—private property law—to increase value of his kingdom. Democratic rulers have no private ownership stake in the government and thus have no incentive to uphold the integrity of private property law. Nor do they have an incentive to maintain economically beneficial law. On the contrary, they can benefit by creating artificial laws—legislation—that serve to undermine private property law for their own benefit. Under democracy, mountains of legislation erode private property law: property owners become increasingly restricted in what they can do with their property. As private property law is continually weakened, long-term planning becomes more and more uncertain and people become more and more present-minded.

Redistribution

Because of the electoral nature of democracies, special interest politics becomes the name of the game. In order to win an election, politicians must compete for the support of interest groups. The largest and most lucrative interest group (most votes) is the “have-nots”, and politicians can cater to them with wealth redistribution policies. Thus, democracies take on a redistributionist role: the welfare state is born. As basic economic reasoning tells us, if you tax productivity and subsidize non-productivity, you will end up with less producers and more nonproducers. A destructive cycle sets in: as producing becomes less and less lucrative and nonproducing becomes more and more so, welfare spending increases while production and thus taxable income decreases. Thus, welfare policies only exacerbate the problems they intend to cure. They reward present-mindedness and discourage future-mindedness and, if left to run their course, will inevitably lead to a Soviet-style economic collapse.

Public resistance

It’s worth noting that democracy’s tendency towards big government is significantly helped along by its public image. Any government ultimately rests on the consent of the governed, and democracy can more easily secure such consent. By fostering the illusion of self-rule (i.e., “We are the government”, “We are doing it to ourselves”), democracy systematically weakens public resistance to government interventions. Under monarchy, one has no hope of joining the ruling family and benefiting from the state’s activities. Under democracy, however, one has the opportunity to be part of a majority or even to become one of the rulers, and so can potentially benefit from state activities. Thus, monarchical subjects tend to be more resistant to government than citizens of democratic states. This acceptance allows democracies to become much larger and much more interventionist without igniting revolutionary sentiment.

Evidence

The devastation of democracy is clearly evident in the historical record. As Hoppe writes:

Let’s take a closer look at the historical evidence concerning taxation, war, legislation and redistribution under monarchy and democracy (discussed by Hoppe in Chapter 2):

Taxation

• Monarchy: 5-8% of national income; no inflation (commodity money).
• Democracy: Over 50% of national income; plus paper-money inflation. Remarks Hoppe: “Now, year in and year out the American government expropriates more than 40 percent of the incomes of private producers, making even the economic burden imposed on slaves and serfs seem moderate in comparison.” (pp. 243)

War

• Monarchy: Limited wars for settling territorial disputes. Battles fought by hired mercenaries with minimal bloodshed. Civilian life was unaffected by wars.
• Democracy: Total wars fought for ideological goals (“Liberty”, “Democracy”, “fighting terrorism”, etc.) and thus open-ended and grotesquely brutal. Civilian life is heavily disrupted by wars, not only because of domestic burdens (taxation, regulation and conscription), but because civilians are no longer considered “off limits” to combatants.

Legislation

• Monarchy: Kings were considered judges, not legislators. Law was considered fixed and immutable (and the king’s own property rights rested on its validity). Legislation was unheard of.
• Democracy: Rulers rise above the law, they become judges and lawmakers. Vast mountains of legislation regulate virtually every aspect of private life. This is effectively totalitarian power.

Redistribution

• Monarchy: Consumption state—wealth redistributed from subject to sovereign.
• Democracy: Welfare state—wealth redistributed not only from citizen to state, but between citizens. Public welfare spending typically amounts to 25% of the national product.

Ideological progress

Was the change from monarchy to democracy a step backwards? In practical terms, there is no question: democracy has had tremendously bad effects compared to monarchy. But in terms of ideological progress, democracy has been a (confused and pathetic) step towards more justice. While monarchy and democracy are both forms of unjust political rule, monarchy is exclusive rule by accident of birth while democratic rule is open to anyone. Democracy is fairer in the sense that the opportunity to rule is universal, whereas monarchy only allows for arbitrary family rule. In other words, if there must be rulers, then it’s more just that the rulers are selected through open competition than by arbitrary heredity. But this was the fateful error of the classical liberals: to see exclusivity rather than privilege as the problem. They merely replaced personal privileges (of the king) with functional privileges (of the democratic ruler). Of course, the real solution is to remove the privilege of ruling altogether, so that there is no ruler-ruled distinction.

To be sure, when democracy is rejected as illegitimate, we won’t be headed back to monarchy. Democracy will join monarchy as laughable and politically unthinkable. Given the natural human inclination to justice, we will move towards something perceived to be right and just. Anarchy, a society without rulers, is the pinnacle of this progress in political ideology. Once it dawns on the public that democracy is the dead-end sign on the road of statism, we will have a stateless society. Then the process of civilization will take off and humanity will prosper like never before.

The downside is that, until democracy is delegitimized in the public eye, we should expect an accelerating decivilization, and even the ultimate destruction of society through complete economic disintegration. Chances are that it won’t get that far, because the failures of democracy will become ever more apparent and people will eventually be forced to recognize their error if they want to maintain modern living standards. The sooner people realize that democracy is a social death wish, the less devastation we will have to endure. What we need then, is an ideological revolution to make the world safe from democracy! Democracy is insane—it ought to be called democrazy!

Conclusion

While all of this may seem no more than an intellectual curiosity, it has extremely important ramifications for the general public, as well as for minarchists. What better way of delegitimizing democracy than to show people that democracy is the destroyer of civilization and even worse than monarchy? People in democratic countries are deeply indoctrinated with a quasi-religious faith in democracy, so this is an explosive subject, but if used carefully it could ruin democracy forever in many minds. Democracy is the last remaining bastion of statism, and by attacking democracy we strike at the very heart of statism.

As for minarchists, if they are truly interested in limited government, then they must grapple with the fact that public government is prone to cancerous growth and that private government is the only sustainable form of limited government. Since they generally believe that democracy is legitimate while monarchy isn’t, this forces them into an awkward choice: either limited government through private government ownership (i.e., monarchy); or democracy (i.e., constitutional republic) and its inevitable big government. The cognitive dissonance is delicious!

Perhaps most importantly, Hoppe’s insight is the key to understanding and interpreting the 20th century. We now have the answer to the previously baffling question of why civilization is in decline despite enormous scientific and technological progress. It is public government that causes a vicious cycle of rising time preference, and is responsible for the accelerating destruction of society. It is public government that inexorably pushes mankind from civilization back to the jungle. Practically all social ills can be traced back to the effects of the democratic state, from war and poverty to dysfunctional families and widespread bad health. Happily, we also have the solution to this problem: a market anarchist society based on universal private property rights. Only by abandoning democracy and statism will we be able to reap the enormous increases in prosperity that we should expect from such incredible progress in science and technology.

Further reading

For more on this topic, see Democracy—The God That Failed, especially chapter 1. Chapter 2 contains a highly informative historical analysis of monarchy and democracy.