Chapter 14






We are ready to examine critically the market concepts we have just reviewed. Those ideas raise issues that classical liberals mostly have not explored, primarily because they have for so long felt themselves on the defensive against the world Left.  These issues show that the ideas are not as definitive as the advocates of the axiomatic system have long thought them to be. It will become apparent that the pure laissez-faire model of classical liberalism has significant flaws and omissions.  This means that erstwhile supporters of "free trade" should not feel themselves untrue to their own philosophy if they find it necessary to reformulate it to meet the economic conditions of the present and the future.

          Our critique will see each flaw both as it applied to the theory of a market system as we have known that system and as it applies to the new polarized global capitalism.  When supporters of a free market carry over their principles to defend the more recent form of capitalism, they are not only misapplying them by making them fit something that differs greatly from their original intention; they are also carrying over ideas that have never adequately been fully developed.

          None of this will be a reason to abandon classical liberalism.  There is much in it that will continue to help protect the rights of the individual, limit the power of the state, foster continued innovation, and establish legitimacy,  At the same time, an adapted classical liberalism will need a central egalitarian feature to make sure that the bulk of the population participates in the well-being produced by the new technology.


Objections that have been invalid


It should first be noticed that some long-standing criticisms of the market economy are not valid.  A critique of problems in the theory is not the same thing as an endorsement of those invalid criticisms.  It will help to include a discussion of those so that as we go along we can distinguish criticisms that are sound from those that are not.

          The "exploitation theories." The hugely influential view that capitalism victimizes millions of people has been prominent among the invalid objections to a market economy. For two hundred years, a central part of the Left's outlook has been that many millions of people are systematically and oppressively taken advantage of under a market system, a consequence of which in the Left’s thinking is that the state or an ideological movement needs to take up their cause as a liberating mechanism against the exploiters.  (This was the core insight held, for example, by the German socialist Ferdinand Lassalle.)  If the view is correct that a market economy is inherently exploitive, classical liberalism is simply a sham, with "individual liberty" a cover for something insidious (which is precisely the view taken by the various forms of class, racial and feminist "deconstructionist" theory).  The criticism goes to the heart of a "bourgeois free society."  It sees such a society as something far different from what it purports to be. 

          Exploitation theory is examined in detail in Chapter 12 of my book Socialist Thought.[1]      Instead of just one theory, there are at least four distinguishable ideas: the socialist version of the Labor Theory of Value; class theory; bargaining power theory as it applies to wages; and bargaining power theory as it applies to other conditions of employment and to many transactions outside the labor market.  I saw merit only in the last of these (and we will discuss it here in connection with the theory of the “act of exchange”).  This last criticism was not, in my opinion, fatal to capitalism, since a more sophisticated approach to the legal and ethical framework of the market could remedy it.

          Here are summaries of the critiques I made of the three exploitation theories I considered unsound:


          The Labor Theory of Value, in its socialist form as propounded by Rodbertus and Marx, says it is unjust for any of the return from an enterprise not to go to the workers; the profit the owner makes from the difference between what the product sells for and what he pays the workers is a form of theft.  Thus, the whole "wage relation," which is involved when one person hires another, is a form of oppression.  The essential fallacy in this is that it is a moral judgment that presupposes the very thing it is trying to prove.  It makes sense if one starts with a socialist preference for a non-market system of production and distribution in which trade and personal benefit play no part; it is absolute nonsense if one accepts private property and the centrality of the act of exchange.  Anyone who sees value in the latter will find no merit in a moral judgment condemning profit as theft.  Instead of being a reason for socialism, the socialist normative application of the Labor Theory of Value is valid only if someone already accepts socialism on other grounds.  The theory commits the fallacy of using the conclusion to justify the premises.


          Socialist class theory says all employers are monolithic as members of the same class, so that going to work for one employer is the same as going to work for any other.  If we ask ourselves empirically whether this is actually descriptive of things in a competitive market (presupposing, also, that we are talking about a classically liberal society, in which class structure will not have been permitted to harden), it is impossible to say that it is.  There is just far too much economic and social mobility for that.


          Bargaining power theory as applied to wages says that an employer can dictate wages, telling workers "here it is, take it or leave it."  But somebody working for wages will find this only temporarily true.  As he talks with others or otherwise comes to know the alternative employments that exist, he can respond to better opportunities.  Fundamentally, because of mobility, it is supply-and-demand, not employer fiat, that sets wages.


                    There is validity to a "bargaining power" criticism about other matters.  This will be discussed later in our critique of the "act of exchange," which will be part of the discussion of valid criticisms.

          The Berle-and-Means Thesis.  This is the view, commonly attributed to Adolf Berle and Gardiner Means in their 1932 book The Modern Corporation and Private Property, that corporate boards of directors aren't meaningfully accountable to the firm's stockholders where the stockholders are many in number and are diffuse and unorganized; most often, stockholders will simply return proxies to existing management, which can reelect itself time after time.  Because management isn't effectively accountable to stockholders, it has no accountability to anybody.  To Berle and Means, this "irresponsibility" meant that corporations should be put under the wing of government.

          The first part of this is descriptive, the latter part normative.  The description is essentially true, but the normative conclusion about putting corporations under quasi-public control doesn't follow for anyone who is not otherwise in favor of government direction of business.  Free-market theorists point to the fact that the investing public seems little concerned about this purported "problem," and that in any case the managers of firms are under considerable competitive discipline to do well, because if they do not they will be vulnerable to hostile takeovers. As a matter of fact, a criticism is often made that runs the opposite direction from the Berle-Means Thesis: that management is too concerned about quarterly profits and serving the stockholders, and should have longer-term goals and even "other ‘stakeholders'" in mind.

          The attribution of the original idea to Berle and Means has long been an act of ideological fraud – an instance of the long-continuing dissimulation by which American "liberal" thought has obscured its connection with socialist ideas.  Attributing it to these two men has made it seem that the idea came from two American "liberals."  In fact, by 1932 the point had already been prominent in socialist literature.  British socialist G. D. H. Cole stated it, and so did Thomas Kirkup in his History of Socialism as far back as 1909.[2]  Berle himself argued it in The New Republic in the 1920s.

          For these reasons, the thesis really wasn’t tenable as originally posed.  But there is substantial validity to the thesis under current conditions.  The excesses in executive compensation that have become a hallmark of the globalized market economy aren’t adequately explained by what is necessary for firms to attract excellent talent.  The common explanation that they are the result of “an old-boy network” of conflict-ridden relationships between corporate boards and the executives is plausible, especially when we see the compensation granted in the many millions of dollars as a company fails and its stock falls.

          Business enterprises are under immense pressure to cut costs and to innovate rapidly even to survive, but the cost-cutting is somehow not applied at the higher levels, where the people involved “look after their own.”  This sort of cronyism is now common in all sorts of organizations, such as in universities at the higher administrative levels and even at the college and department levels, not just in large business enterprises. 

          There is certainly a lack of accountability that isn’t prevented by market discipline.  Accordingly, free-market theory should itself call for safeguards put into the incorporation statutes or otherwise.  John Bogle, who we recall was the founder of Vanguard Funds, argues forcefully that capitalism has changed its nature from “owners’ capitalism” to “managers’ capitalism,” precisely because stockholders, including most particularly the mutual funds and other large investors, have assumed an acquiescent posture that allows the managers near-complete autonomy.  He takes the Berle-Means Thesis seriously, although without joining them in the call for the socialization of business (or perhaps even noticing it).  Bogle calls for major reforms to put the owners back in charge.

          Before we leave the subject, it is worth reflecting upon important cultural realities.  The taking care of each other at the top of each stratum involves more than just associates scratching each others’ back.  It is a visible sign of an elitist mentality among some that they have great entitlement while they accept it as normal for the bulk of people to be sinking; and it reflects, too, the effects of the hyper-mobility that has gone far to destroy the bonds of loyalty that employees, including executives, have to firms.  Feelings of long-term commitment and a sense of duty are at a low ebb. 

                   American culture has also changed in related ways.  Free market ideology is now applied by many to justify any amount of what used to be called “greed.”  Profit-seeking is properly seen as crucial to the dynamic of a market economy.  But there is a point at which it is appropriate to speak of it as “greed,” since under the present circumstances the pursuit of personal self-aggrandizement is little constrained by a larger value-system.  Even the tie to national loyalty has largely disappeared as one chief executive after another declares how he no longer wants his firm to be considered, say, “an American company.” And what are we to think of the mental landscape of an individual who makes a hundred million dollars a year while those working around him (and with whom he may deal daily on a personal basis) are seeing wage stagnation and worrying about lay-offs?  In addition to mobility and ideology, it is likely that the persisting cultural legacy of the 1960s, with its disdain for “bourgeois values,” has played a role in the shifting attitudes.

          Underconsumption-overproduction theory.  According to socialist author Maurice Cornforth, Marxist theory says the trade cycle that periodically disrupts capitalism is due to the employers' keeping workers' pay as low as possible, which causes the workers not to have the means "to consume the products of the ever-increasing industrial machine."  Because of this gap, production outstrips purchasing power, precipitating a crisis.[3]

                    Ironically, this is precisely the problem that is now looming for the years ahead from the increasing adoption of non-labor-intensive technology. There is going to be a vast "purchasing power problem" (as well as revolutionary turmoil and a general refusal to countenance a market economy) unless a way is found to include everyone in the productivity of the new technology as it develops through the market system. At the same time, a mechanism such as a social market economy will increasingly be needed to provide the demand that will sustain business enterprise, innovation and scientific advance. 

          Why, then, do I include the Marxist theory among the major erroneous criticisms of capitalism?  Because it has been false during all of the time prior to the present, and even into the future until the displacement of work becomes pronounced.  People went from agriculture into industry, and from industry into services, with their standard of living going ever-upward based on increasing real wages and success in the marketplace.  When the production required large amounts of labor, the payment of wages inherently provided a system of broad distribution.  Under those conditions, the market economy has worked well, and the trade cycle has, contrary to socialist analysis, had other explanations rooted in monetary fluctuations.  The fact that there will be a distribution problem in a near-workless future does not validate two centuries of misplaced criticism of an institution that has served humanity so well.  


Major problems that do exist in free-market thinking


There is much to be objected to about certain of the pivotal concepts of free-market theory – even as applied to capitalism as we have known it.  As we will see, these conceptual weaknesses are often compounded in the context of the new capitalism. 


Insufficient analysis of the "act of exchange."

          As we saw in our review of free-market thinking, the "act of exchange" (also called "the transaction") is a key building-block in market theory, something from which all else grows when voluntary exchanges occur by the millions. Recall the frequently-made point that voluntary transactions are entered into because all parties are motivated by the prospect, as they see it, of bettering their situation.  All parties win.  An economic system based on vast networks of such transactions will constitute, in effect, a "positive sum game" from which people in general benefit immensely.

          My criticism of the act of exchange won't be intended to diminish our understanding of its vital role in a free society, where voluntary relationships prevail in contrast to a command system.  What we will be noting is that the analysis of it hasn't been adequate and that the simple "each person benefits" insight doesn't tell the whole story.  A sophisticated analysis is much more complex.  Since "the transaction" feeds into the "optimum allocation of resources" concept to provide a value judgment that supports a closed ideology that bars other considerations, it is valuable to pierce the over-simplified view of it that allows it to be so easily used in that way.

          I mentioned earlier that in my opinion there is one “bargaining power” criticism that is valid. We see this if we confront the assertion (presented as a truism) that in a transaction "all parties benefit."  No doubt in terms of immediate individual judgment they seem to (at least as the parties see it at the time of the transaction; it is relevant, however, that somebody can easily look back later and say "I was really taken on that one.")  But let us consider the situation in which there is "unequal bargaining power."  I mean the situation, so common in today's market (and not nearly so common in Adam Smith's day when individuals largely dealt with other individuals), where one of the parties is able to spell out all of the subsidiary terms of the contract on a "take it or leave it" basis.  Quite commonly in the modern commercial system, the other party doesn't even read the terms, much less bargain over them.  Let us suppose you find a farm tractor, a computer, a car, or a dishwasher you like, and decide to buy it.  Will you work out with the seller the terms of the warranty?  By no means.  As a lawyer I can tell you that the warranty will have been written entirely by the seller's legal and marketing departments working together, often with one eye out for actually limiting, not increasing, the seller's liability and the other for having something that sounds good when it can be said "this carries a warranty."

          It is too easy to set up a mental image of "the transaction" as necessarily being an "amply-negotiated" one.  In an important transaction between two well-organized and more or less equal parties, every detail of the contract is worked out, negotiated, and renegotiated, until each side is satisfied its needs are met in all particulars, at least to the extent that the compromises inherent in negotiation allow.  But such full consideration, amply advised by counsel, which is really necessary for a contract to attract our admiration, isn't the model for the typical transaction.  And since it isn't, the result in terms of "mutual satisfaction" is often far less than the simple view of "the act of exchange" suggests.      

          When I graduated from law school, I rented an apartment in Denver.  After I moved in, the property manager brought up a lease for me to sign, which hadn't been mentioned before.  I read it and was horrified.  Among the small print was a provision that the property manager and owner would have no responsibility for harm to me from any act of negligence of theirs, including from such things as faulty wiring or exploding boilers.  I took the lease to the attorney for the property management company, who told me "we don't change the terms of our lease form for individual tenants; if you don't like it, move" – which is what I did at the first opportunity.  Modern landlord-tenant law has since outlawed a disclaimer-of-liability ("exculpatory") clause such as this one on the ground that it is "unconscionable" (so grossly unfair that it violates conscience). This is a legal development that makes the market more satisfactory and should receive support from free-market theory; but it does run counter to what we should perhaps call “the naive view of the transaction,” which is that it is purely voluntary, everybody benefits, and there's no basis for "paternalism" in "a court's remaking the contract for the parties."       

          This has vastly important application in the employment relationship.  Everybody knows before taking a job what wage is being offered, but much of the subordinate features of the relationship will just be put in place by the employer and certainly not negotiated with the employee.  A person signs on for employment, knowing the wage or salary; but, especially as the months and years go by, the organization sets the "conditions of employment."  The employee will choose to stay with the job as long as the net effect is better than any alternative he sees (including a consideration of the costs and inconveniences of changing jobs and perhaps even the community he lives in), but there are many things about the relationship that lack mutuality in the sense of looking after the interests of both parties.  Will there be a "fair procedure" for such things as promotion, demotion, transfer, discipline or discharge?  Is the employment structured in a way that allows dependable planning for retirement?  Is there a way to maintain income in case of disability?  What about health insurance?  The idea that "both parties benefit" just doesn't look far enough to tell all there is to tell.  Most of the time the employment relationship is far from analogous to the amply-negotiated type of contract.  These are things that are enormously important to peoples’ most basic needs.  Classical liberal thought hasn't been sensitive to them, and this has allowed a vast opening for its critics and has also caused the public during much of American history, in keeping with its native common sense, to see that body of thought as irrelevant to much that counts.

          Another weakness in the simple view of the transaction is that it has for the most part been oblivious to the legal, institutional and cultural prerequisites of satisfactory transactions.  Most people don't know it, but the wonderful storyteller Jack London was a revolutionary socialist.  In his socialist novel The Iron Heel a century ago, he made a devastating anti-capitalist point by telling about a man who, though described as a fine worker, lost his arm in an industrial accident because of a momentary lapse of care.  Unable to perform the work, he lost his job.  There was no insurance, and when the man sued the company to try to recover something, he ran into highly capable corporate attorneys who were able successfully to invoke all of the defenses available under common law negligence theory (the absence of the employer's negligence, the worker's assumption of risk, and the employee’s contributory negligence). 

          Even though the employment relationship was voluntary and an act of exchange in which both parties benefited, it was nevertheless profoundly insufficient to see to the most fundamental needs of one of the parties.  The world cried out for greater affluence and more sophisticated market development so that insurance could become an auxiliary to the employment relation to cover industrial accidents.  The "transaction" needed plug-in institutions, something that the theorists of the "act of exchange" rarely see the need to talk about. 

          This is an important criticism of the theory, which I cite in order to encourage an expansion of the thinking.  But it is valuable to keep these issues in perspective.  Otto von Bismarck introduced "workman's compensation" (now called "workers' compensation") into late-nineteenth century Germany as an insurance system which was then copied by other countries.  It was part of his social legislation that formed the nucleus for the "welfare state."  This would not have been possible, however, if the productivity of the Industrial Revolution and of the marketplace had not already brought about enough affluence so that people could afford it, and if the modern insurance industry had not begun to come into being so that it could serve as an auxiliary institution.  Capitalism deserves immense credit in this context.  Its theory, though, lagged far behind, having virtually nothing to say about such things as it clung to the over-simplified view of the transaction.

          A final criticism of the theory of the transaction is that it doesn't look beyond the parties themselves to account for the entire setting.  It sees a broader picture to the extent that it envisions peoples' linking transactions together to form a dynamic economy, but it has no willingness to see detrimental effects that the particular circumstances of trade may bring to a country's well-being.  To avoid acknowledging such effects, it prefers to see the act of exchange atomistically as exclusively a matter between the parties.  This dropping of context has been especially important in the long-standing "Free Trade vs. Protection" debate.  I will talk about this in detail later in this chapter when we examine the laissez-faire view that "free trade [like any act of exchange] is always beneficial."

          These things will have added force in the context of globalization, polarized income and wealth, and labor displacement.  In a number of ways, it will be clear that everyone is not benefiting, and that most have no prospect to.  Nor will the system as a whole be working well, unless substantially revamped: 

          A feature we have hardly mentioned is that the global market has become hypersensitive to major panics, threatening a crash of the world economy as a whole, because of the explosive growth within just a very few years of an ocean of investment capital (estimated by David Smick in 2008 at above $100 trillion) that speeds around the world at lightning speed at the click of a computer mouse, not only seeking every profit opportunity but also cashing in speculatively on every central bank miscue, national currency weakness, or other perceived failing, with the effect not of correcting such things but of making them worse even to the point of collapse.  Smick says the vulnerability is extreme.  It offers at any given moment to make hapless victims out of many millions of people who will have contributed in no way to the fiasco.  The idea that “everybody benefits” rings hollow in such a context.  There is no “invisible hand” guiding the mass psychology that drives the great pool of investment money.  This removes any assurance of continuity to the world economy and to peoples’ lives.  It hardly needs to be said that this is an intolerable situation.

          The opening of the advanced economies to the competitive forces unleashed by global markets and low-cost foreign labor and the rapid development of non-labor-intensive technology have made entrepreneurial effort far riskier but much more potentially profitable, while at the same time creating a supply-and-demand situation in the labor market that has for several decades increasingly undercut the wages and salaries going to the bulk of the population in those economies.  We have seen that the result is a dramatically new situation in which some people do extremely well but the broad middle class, long the hallmark of American capitalism, struggles to stay afloat.

                   The concept of a “shared market economy” calls for continuing, energetic business activity, albeit with a system of distribution through shared ownership.  Even if that is adopted, a successful international economy will depend on returning things to a manageable scale, including such restraints on financial speculation as are found to be necessary for the purpose. This in itself will require some radical rethinking, hopefully contributed to by the world’s top economists (who so far have mostly been missing-in-action).

                   A free-marketer’s objection that to constrain the world financial pool would be to “intervene in the freedom of the market” would perpetuate a common error.  This is to see a market economy as a stand-alone entity sufficient in itself, whereas in fact it cannot operate without a sophisticated framework of law, institutions, ethics and culture that are intended to make it work better, not impede it.

                   For all these reasons, and perhaps others, it isn’t correct to say that “everyone benefits” from a piling up of millions of “acts of exchange.”


The insistence that wages are tied to productivity

          It is a truism that if there is no output to be sold, there is nothing from which to pay wages.  If productivity goes down, the sum of wages paid out will have to go down, too, unless investors or creditors pump in money to sustain a firm on what would have to be a temporary basis, contingent upon things improving.

          It is also true under theoretical model-related conditions in a free market that if productivity goes up and yet wages stay the same, profits to the business will rise; that this will attract a flow of other capital, always on the lookout for profit opportunities, into the industry to compete for the profit; and that that will create more demand for the pool of workers, bidding wages up (if the size of the worker-pool remains roughly the same).  This is all standard economic theory, which postulates a constant tendency toward re-adjustment within a marketplace in response to opportunities.  You will notice that wages do go up in response to the increase in productivity.

          The truisms of the preceding two paragraphs are what give rise to the economic maxim that we discussed in Chapter 8 that wages are tied to productivity.  It is repeated frequently in economic literature.  Mark Skousen in The Freeman says that "productivity is the key to rising or falling wages.  Many years ago, F. A. Harper... wrote a grand little book entitled Why Wages Rise... He demonstrated that... ‘Higher wages come from increased output per hour of work.'  Ludwig von Mises adds, ‘if you increase capital, you increase the marginal productivity of labor, and the effect will be that real wages will rise.'"[4]  Hans Sennholz writes that "working conditions and wage rates depend on labor productivity, which is a direct function of the stock of capital invested per worker."[5]  Paul Krugman says in the Harvard Business Review that "one last assertion that may bother some readers is that wages automatically rise with productivity.  Is this realistic?  Yes.  Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages."[6]   

          So here we have it.  The theory is presented as "realistic," suggesting that it describes the situation as it is in fact.  But you will notice that the theory contains certain factual predicates, assumptions that must be met for the theory to apply.  One of these is that capital will flow to the increased profit opportunity, expanding the amount of capital invested per worker and bidding up wages.  Another is that the number of people in the pool of potential workers remains approximately the same as it was before (i.e., that the supply of labor wasn't changing as the demand for it increased).  Economic theory has to make such assumptions for its analysis.  One of its key concepts is ceteris paribus, the express assumption that "everything else [other than the variable that is being changed] remains the same."

          How do these factual predicates fare in today's world?  We certainly have the first one – the ready mobility of capital to move toward any profit opportunity.  That is one of the more salient features of the global economy, with its worldwide financial flows (if we ignore, which seems justified in the context of the general point, the obstructions to total mobility that exist in many countries).

          We just as certainly don't have the second one.  The more that improvements in communications and transportation make labor markets global, not local, the more there is a vast expansion in the labor pool in both skilled and unskilled work. This has already had a major impact on employment and wages in the advanced economies, but has much further to go. The day has arrived when an accountant in Goodland, Kansas, is in direct competition with accountants in New York City, the Philippines and India, because of computers – even if the accountants all stay where they are and don't migrate.  Computers and instantaneous communication place them in "virtual" proximity to each other.  What happens to the conclusion that "wages will rise" if the labor pool is expanded by a factor of a hundred or a thousand, bringing in billions of people who have hardly been receiving any wage at all compared to what workers in the advanced economies have been getting?  The theory will simply say that ceteris paribus didn't hold, and that the flow of capital will enhance wages under the new conditions of a vastly increased supply of labor; but that, of course, those enhanced wages will be much lower than they were before for those who had been part of the earlier, much smaller labor pool.  In other words, given a worldwide extension of the labor pool and given a sizeable immigration from the Third World, higher productivity will be concomitant with drastically falling wages for many workers in such places as the United States and Europe.  The theory can account for this, but the standard expression that "higher wages are a realistic prediction" certainly does not.  It is a case of economists not reexamining the minor premises of their theorems; i.e., not checking how much the facts match what the major premises of the theory call for.

          Moreover, we face a new phenomenon.  As capital flows in, the theory says, it will create more demand for labor, so that wages will be bid up.  This does not take into account that much of the emerging technology is precisely non-labor-intensive, actually decreasing by leaps and bounds the demand for labor. Again, it is a ceteris paribus delusion. 


The fallacy of the "optimum allocation of resources" linchpin

          Now we come to perhaps the most important concept, the one that is the linchpin of the entire closed system since it provides the sweeping value judgment that validates the outcomes that arise from the laissez-faire market.  This is the claim that the millions of acts of exchange that constitute the marketplace make an "optimum allocation of resources."  I told of this concept in the preceding chapter and quoted prominent market theorists to show that what is meant is not just a technical meaning of "optimum," but a claim that the allocation of resources (and of everything that follows by way of incomes, wages, social position, etc.) in a market economy is the "best" allocation.  I said that this conclusion results from a logical fallacy, which I didn't spell out at that time but left for discussion now.

          Recall that the claim is a value judgment that is thought to follow from the point that "consumers are sovereign, since their demand is what entrepreneurs have to respond to to make a profit."  I quoted Mises as saying, "to assign to everybody his proper place in society is the task of the consumers."  In that earlier discussion, we did notice by way of criticism that this slips a value-judgment into a body of thought that claims to be a purely descriptive science.  That is serious enough, but we have yet to come to the logical fallacy that nullifies the entire point.

          To avoid misunderstanding, I should point out that I, too, favor an allocation of resources and of social position on the basis of consumer choices (although I don’t believe this precludes a given culture’s finding ways to reward or diminish social position from what the market bestows).  I don’t, however, base this preference on the ground that that allocation is necessarily best as an allocation.  Best or not, I as a classical liberal support it because it is the allocation that arises out of freedom.  I don't favor individual liberty and the act of voluntary exchange because they produce the best allocation of resources; rather, I favor the allocation of resources because it is the one produced by a free process.

          When a market theorist says the sovereignty of the consumers makes the optimum allocation of resources, he is making what is called "a holistic argument."  Ludwig von Mises himself is the one who argued most persuasively against "holistic" concepts.  Chapter VIII of his monumental treatise Human Action contains a section of several pages with the heading "A Critique of the Holistic and Metaphysical View of Society."  In the following passage Mises is talking about the imputation of distinct existence to "society" as a collective whole separate from the individuals who make it up:


          The individual lives and acts within society.  But society is nothing but the combination of individuals for cooperative effort.  It exists nowhere else than in the actions of individual men.  It is a delusion to search for it outside the actions of individuals.  To speak of a society's autonomous and independent existence, of its life, its soul, and its actions is a metaphor which can easily lead to crass errors.[7]


          The concept of "society" is useful in many ways, but it contains what we might call "the fallacy of wrongly-imputed consciousness" if it is used in a way that attributes consciousness and decision-making to the abstraction as an aggregate.  It is true that a society can make decisions through individuals who are its selected representatives.  But the aggregate itself isn't a conscious thing.  To talk as though it is is to treat it "holistically."  (Interestingly, human beings are validly holistic creatures, since people do have consciousness and are in that way more than simply the cells that make them up.  But it is a metaphor to speak of society as having its own consciousness.)

          What Mises somehow overlooked was that the concept of "the consumer" is the same.  Consumers taken as an aggregate don't have a consciousness; only consumers as individuals do.  It is odd that Mises didn't see this, since he saw it so powerfully in other connections.

          Now, let us ask: from whence can value judgments come?  The answer is: only from a conscious being.  Inanimate objects such as rocks, water, clouds, and sky don't make value judgments.  Nothing is good or bad, desirable or undesirable, to a rock.  A God, in most conceptions of God, is a consciousness, and so can decide what is good and bad, what is to be preferred and what is not.  But note this: between the consciousness of a God and of individual people, there are no consciousnesses.  Many thinkers who don't want to base their value judgments on a God feel very uncomfortable about attributing them to no stronger a reed than individual minds and the preferences to which they give rise, and so search for some source of values below God but above individuals.  All efforts of this kind demand attributing consciousness to some metaphorical entity that doesn't really possess consciousness.  I wrote an article years ago pointing this out about the philosophies of Victor Frankl, Abraham Maslow and Nathaniel Branden, who otherwise are three very distinct thinkers.[8]

          Can "consumers," taken holistically, make a value judgment? Are they collectively a consciousness that can decide what is "best"?  Of course not.  The aggregate does not have a mind in itself, but is the sum of countless individual consumers, each making decisions about what is best in his own case.

          Then let us notice that from the perspective of each one of these individuals as an individual the person may or may not think the allocation of resources flowing from the total economy is the best possible.  Almost certainly he would prefer an allocation that would bestow more resources on him and the things he cares about.  Actually, in spending his own money, he has not given the slightest thought to the economy's total allocation; he has only paid attention to his own little corner of the world.

          Next, let us think of each individual as a philosopher or social observer.  Will he then think, as he looks out upon the sum total of what is resulting from market transactions, that what he sees is entirely to his liking in light of his philosophy?  Probably no one, including Mises himself, would be completely satisfied from that perspective.  There are many things consumed, such as excessive alcohol, dope, pornography, or what-have-you, that hardly square with anyone's idea of what is "best," even from the point of view of those who engage in the consumption (if asked in their sober moments).  Indeed, people from competing philosophies and cultures bring very different preferences to bear on what they would like to see happen.  It is for them more than just a matter of individual preference or not liking certain features such as drug consumption.

          If "consumers" as a metaphor can't judge, and individuals as consumers aren't judging, and individuals as philosophers find aspects to take issue with, and we aren't premising the whole "optimum allocation" claim on a judgment made by God, what is there to the claim that a market economy makes the best possible allocation of resources?  Nothing.  The most we can justifiably say is, as was said above, that "I will accept the allocation, with a few exceptions as provided by the society, because it is what results from a free process."  The seeming deficiency in this, and the reason the closed system of market theory has so eagerly accepted the "optimum allocation" argument in its place, is that it has no metaphysical pretensions, and hence much less polemical power. 

          Socialists, of course, have never accepted that the allocation of resources made by a market economy is ideal.  They always urge a different set of priorities.  Given that difference, you would think they would have raised the criticism made here, pointing to the conceptual flaw.  If any of them has, I am not aware of it.  In so competitive a world ideologically, it is amazing that even ones opponents' concepts often go unexamined.  Maybe it is because people don't pay much attention to what people who differ with them are saying.

          Later in this chapter we will examine Friedrich List's early-nineteenth century criticism of Free Trade theory.  It is worth noting that he didn't see the sense of the argument that when people strive to further their own interests, they "always further the interests of the community."  He cited several counter-examples where it wasn't true.[9]

          The idea that a market economy produces an optimum allocation, although fallacious, had at least a rough-hewn plausibility when the market resulted in prosperity for a broad middle class.  Even that plausibility is greatly reduced, if not removed altogether, as the new polarized capitalism ceases to serve the bulk of the population. 


The need to qualify property rights theory

          The preceding chapter talked about "private property" as a major element in classical liberal philosophy and about the varied theories relating to its origin and justification.  It is a feature that has great utility to a philosophy that wants some sort of individual autonomy and significant limits on the power of the state.  A widely diffuse holding of property provides the stuff with which individuals can act, and the diffusion itself means that the state doesn't have a centralized grip on one of the main things that is pivotal to peoples' ability to exist.

          One of my good friends who is strongly pro-market has urged me to "remind people of the importance of private property."  His admonition means that he is not losing sight of fundamentals.  I will be curious, though, to see whether he responds favorably to the discussion I am about to make of one very important question about private property.  This is:


          whether the claim to property by the owner is properly (i.e., in the context of the philosophy of a free society as best formulated) to be considered as absolute; or whether, on the other hand, the ownership shouldn't be seen as often subject to a rightful claim, for at least part of its value, on behalf of the community.


          To ask such a question is clearly heretical within classical liberal thought.  For a century and a half, any admission that private property is subject to qualifications has been thought to create a disastrous loophole through which the Left could attack the entire system of private ownership.  During that time, this defensive posture has almost certainly been necessary for precisely that reason (although later here we will see why this may simultaneously have been extremely damaging to classical liberalism).  It has seemed better from a classical liberal point of view to defend the institution entirely, not giving an inch.  Henry George and his followers disagreed, but they remained a minority within free-market thinking.

          The problem, as the Georgists point out, is that this total defense hasn't been fully sound.  And what is even more important now, it will become far less so under the onrushing world conditions.  If conservatives, libertarians, and classical liberals are to adapt in a way that will allow their points of view to survive and that will preserve their primary values in a world of vast economic displacement, they are going to have to revise their view of property (including earnings), doing so in a way that is intellectually defensible.

          Let us begin with George's insights a century ago, since they voice much of what I have in mind.  The first thing to notice is that George was a devout free trader and classical liberal.  Most of his writing gave powerful expression to the various points of market theory.  He was a crusader for Free Trade and against Protectionism (which was the main issue of political economy in the nineteenth century, just as it is becoming again).  His intellectual method was that of a moral purist, even though he mixed into this many arguments that were made on purely empirical, utilitarian grounds.  Any free market theorist who hasn't already done so will enjoy going back and reading his books.  They provide a vigorous defense of the entire complex of ideas that make up classical liberalism as we know it.

          They do, that is, with one exception.  This has to do with his perception that certain types of property come to their owners unearned, as windfalls merely dropping into some peoples' laps from the fact that they live among other people.  Land was, under the conditions of his day, the principal form of property of this type.  No human being has made the land, although improvements to the land are another matter.  The land per se comes to have value because of the growth of human population, not because of anybody’s creative act.  Since this is so, George saw no reason why land should not be a resource of the whole population, rented out to individuals who want to use and improve it.  This rent would then create a fund that could be used for a variety of projects that would benefit everybody, as well as for placing a floor under all members of the community to keep them from poverty.  In the private property system as it has been known, the owners of property enjoyed an enormous privilege, especially in a predominantly agricultural society such as existed until a few decades ago, while those who owned none of it had to toil for everything they got.  Such a thing places a serious stain on the generally accepted market philosophy, since it isn't fundamentally just.

          George quoted Herbert Spencer, whose credentials as a libertarian philosopher are solid, as agreeing with him; and he said he was merely picking up from the French thinkers Quesnay and Turgot, whose ideas fed into Adam Smith's.  Rather than include a number of direct quotes from George here, I am including them in the endnote.[10]

          It is significant that he thought the same applied to minerals: "...the ground values of great cities and mineral deposits are due to the general growth of the population" [emphasis added].[11]  Natural resources are not created by anyone's effort.  They take on value by virtue of the presence of people who will find them useful, and the value increases as population grows and as technology and a way of life come to be centered upon them.  George would have the community charge a rent equivalent to this value.  In addition, of course, a major portion of resources' value is attributable to other things traceable to specific effort – i.e., the invention that discovers their usefulness, and the capital and labor that go into extracting and applying them.  These, pursuant to George's reasoning, would not be charged a rent, since they are not a windfall but the product of someone's thought or effort.  

          These were the insights held by George and several other major classical liberals.  It may be an eye-opener to some that it has not only been socialists who have believed that these types of property should belong to the community as a whole.  George felt that the system of private property would actually be stronger, and certainly much more morally justified (and hence defensible), if it did not include a privileged position for some.

          As just mentioned, most classical liberals have resisted this, preferring an across-the-board system of private property, without exceptions that could be expanded to destroy the system as a whole.  That resistance, though I have thought it was best, has had its costs, probably the major one being that the market has been left to seem "heartless" to those who haven't fared well in it.  Labor has had a certain affinity to capitalism because workers in general aspire to be among the middle class, but the opportunity for alliance and sympathy between those who have done the drudgery and others has been surrendered.  By not following George, classical liberalism set itself up to allow socialism at least in part to "occupy the moral high ground" throughout the twentieth century.  As I ponder this, I am by no means certain it has been wise to follow the majority classical liberal position.

          Whatever was wisest in the past, it is rapidly becoming clear that classical liberalism must immediately move to George's position – and indeed to an expanded view of it.  When work is displaced and either vast unemployment or marginalized work results, people are going to be desperate for a place at the table; and they will have been knocked away not because of any flaw in their character or lack of effort on their part, but because of omnipresent forces over which they have no control.  Their need is, however, only half of it: the second half is that under the new technology there will be some people reaping immense wealth, only a certain fraction of which they will have created through their own contributions.

          When, for example, heavy-weight boxer Mike Tyson made $30 million dollars (before it was reduced by a fine of $3 million) for his part in the infamous ear-biting fight with Evander Holyfield, how much of that was "due to his own efforts"?  Earnings at that level were the product of a set of worldwide marketing institutions made possible by advanced communications.  Did Tyson create that?  Certainly not.  Did anyone in particular?  No.  It was a product of the accretion of vast scientific-technical-entrepreneurial-even governmental effort by countless people.  Because of that accretion, Tyson was in effect walking into a field and "mixing his labor" with orchards overhanging with fruit, with bushes loaded with berries, with venison waiting patiently to be taken.  To be sure, his own skill as a prizefighter was essential for its own sake and for the mass-marketing (as the product to be packaged), but it was just a rather small part of a vast mechanism.

          Likewise, those who reap immense compensation from the new technology will not have earned all of that return.  (In the axiomatic system, they will be said to have, on the simple ground that it is coming to them through contract, reflecting acts of exchange.  But it is that way of looking at it that needs to be seriously qualified.)  The answer is: because each person makes, at best, only a relatively small, incremental addition to a technology that has been built up, like a coral reef, through the efforts and intellectual contributions of countless predecessors.  Imagine a young person in the year 2050 who works as a technical specialist in some advanced technology, being so good at it that the rewards are extremely high.  Everything he does will be standing on the shoulders of people developing computers, biotechnology, robotics, genetics, etc., today, before he is even born.  What he brings to it will be valuable, no doubt; but he will be creating only part of the value.  Humanity itself will have created by far the largest part.  To some considerable extent, this has always been true, even though Henry George himself did not include it in his critique of the market.  It could be overlooked for the sake of individual autonomy so long as "the system worked" to provide opportunity for everybody.  It must not be overlooked at such time as the system comes no longer to function acceptably in that sense.

          Under such circumstances in which the great vehicle for affluence is more than ever an accumulation of accomplishments from those who have gone before, if a people begin to divide into those who are fabulously-rich and a great mass of second-class citizens, will the classical liberals of the future be true to their own beliefs if they find it sufficient just to say that "they all earned their place"?  If they say that, they will be clinging to what has largely been true in the past, while at the same time being untrue to the essential purposes of their own philosophy.  Classical liberalism will have been transformed into what socialists have so long argued erroneously that it has been, a special-pleading rationale for the rich. (This is the image of “crony capitalism” that has already become so powerful in the public mind in recent years.) One of the purposes of this book is to persuade those who cherish individual liberty that they will be truer to their own philosophy if they see that there are limits to polarization.  This means that "the market" and "contracts entered into within the market" cannot under the coming circumstances be considered the sole criteria for what ought to be.


We have noted that many societies have accepted vast inequality as normal.  By contrast, in the eighteenth century, classical liberals didn't accept it when they saw in the aristocratic, hierarchical societies of the ancien regime an hereditary inequality that had no market justification.  They knew that that inequality was of a kind that was antithetical to liberty.  Later, however, in the debates between classical liberalism and socialism that for more than two centuries have followed the French Revolution, classical liberals had good reason to defend a fair amount of "inequality" as both the motive-power and by-product of a competitive market system.  They have been correct, in my opinion, in looking upon this market-based "inequality" as a hallmark of freedom as against the demands for an egalitarian leveling. 

          But what is essential now is for the proponents of individual liberty to grasp that the inequalities of the high-tech future will not all be of this beneficial kind.  Not only can major inequalities calcify into the sort of class system that classical liberals earlier knew to be inimical to a free society, but the inequality will find little legitimacy based on the theory of property, earnings and contract that has been fundamental to classical liberalism. 

          This is the stuff of which revolutions are made.  Notice, too, that it would be a rotten version of classical liberalism that would defend it.  This would be a version that by clinging to the closed ideological system under radically changed circumstances will have forfeited its tie to the main classical liberal values.  If the "act of exchange" and the resulting allocation of resources remain classical liberalism's central criteria under the new circumstances, they will be totally inappropriate.  The act of exchange ought to remain central to the productive economy, but the distribution of the product needs to be qualified by the insight into what has been earned and what has not. 

          I am one of the many who have always worked for such attainments as have come their way.  I have seen others who haven't applied themselves so diligently who haven't done as well.  So I have a strong moral conviction that what people get, they earn.  This change in perspective, acknowledging that a significant part of someone's success is derived from what other people have done or from the whole context of developed community, isn't one that I naturally find congenial. Nor is the insight that the desperation of millions of people will not be attributable to their moral failings. But aren’t these insights true?  And aren’t they essential?  Especially as the displacement creeps in upon us?

          The implications of these insights are extensive.  It means that there will be no moral crime, no violation of private property or of contractually-earned income, if a community treats a significant amount of the economic product of the new technology as a common resource to be used or distributed for the good of all.  It means, too, that there can be, as George wanted, a full return to people for their own labor, intelligence, or capital.  If we wish to maintain a thriving competitive market economy, the reward to those contributions will be necessary and rightful.  That reward simply won't be the entire return, but something more commensurate to the person's own input.  In A Restatement of Economic Liberalism (1988), Samuel Brittan, who centers his thinking on Friedrich Hayek's, has already thought along these lines, although without seeing the coming displacement of labor as the reason for its necessity.[12]

          There is no way that the proportion between what humanity has contributed and the individual has contributed can be calculated exactly.  This indeterminacy shouldn't be too great an objection; the division can be made in keeping with the criteria of the "rule of law” – i.e., according to established rules known in advance and applicable to everybody.  Recall how Chapter 11 gave the figures that in 1980 executive compensation had been 30 to 40 times that of the firms' average workers, whereas by 2005 this had grown to a difference of 262 to 1?  Let us say that tax law in the United States were to provide that the highest management person in a firm should be entitled to thirty or even fifty times the average earnings (or some multiple of the earnings of the lowest-paid employee), but no more; and that the rest should be taxed away.  Would that be unjust?  Would it be something that "no market economy can live with?"  Hardly.  Enormous incentive would still be present for executive leadership.  Whether that leadership would abandon the United States for some other place where a higher ratio were permitted would depend upon a number of factors, not the least of which might be an international tax convention setting the same ratio for all countries or at least for all advanced economies.  It is arguable that the United States would be better off without such people, since one thing that is needed is a business culture in which the participants recognize when “enough is enough,” as John Bogle has argued.  Business enterprise boards of directors ought to look, too, to whether someone who is willing to command such compensation does not by that fact alone disqualify himself as a “leader.”  It is hard to imagine that he holds the welfare of the organization as his highest value.

          Executive leadership aside, what we have said about those who prosper because of the technology can be said for everybody who makes a vast fortune in today's (and especially tomorrow's) mass market.  If a professional football player, or a movie actress, or a rock star, makes $50 million dollars in a year, how much of that is due to the person's own ability and contribution, and how much of it is because technology has evolved to the point at which communication makes available a worldwide audience?  Did the ballplayer, actress or rock star create that system of worldwide communication, with its fiber optics and satellites?  No.  One is tempted to say, only half tongue-in-cheek, that Bill Gates did; but even that would be an immense simplification, because Gates was himself standing on the shoulders of countless ingenious people like himself.

          If we may add still another shocking heresy (and a heresy to no one more than myself), it is to say that this fully justifies a system of strongly progressive taxation.  Once the non-labor-intensive technology has more fully come in, if some people become enormously wealthy and others have no or only very meager earnings, there should be no objection from a classical liberal point of view to taxing away a good portion of the high earnings to make provision for everyone in the society.  To the objection that "that would run afoul of, maybe even totally destroy, the sanctity of earned income and private property," it must be answered that it does no such thing – and further that there is no alternative.  A market economy going forward to new innovative heights, with free individuals employed within it through contract, all within a setting in which everyone in the society shares in the prosperity and has purchasing power with which to buy the products – all this is much more compatible with classical liberal aspirations than for the market and individual liberty to drown in a sea of opprobrium and revolution.  

           Many market theorists will doubt whether the displacement and polarization will actually occur.  They may be strongly inclined to think that the early chapters of this book overstate what is going to happen and that, therefore, the premises underlying this book are incorrect. Let us assume, therefore, even though only for sake of argument, that the new technology does not radically alter the shape of things, that most people stay employed without seeming to become severely marginalized.  What then?  Won’t much of what I have just said, building upon Henry George, still be true?  Doesn't what we have seen provide a rationale for making the market society "more just"?  Do we have to be socialists to think so?  The questions answer themselves.

          Market advocates will want to be alert to, and avoid, a psychological possibility that may explain, as time goes on, their expectation of continued normalcy: the willingness, which I discussed briefly in Chapter 4, to accept a growing impoverishment for the less intelligent or industrious half, or some other fraction, of mankind as being a "natural condition."  Such insensitivity is altogether possible, since it has historically been thought normal and appropriate in countless societies.  I shouldn't think that any true classical liberal would build his feeling of normalcy on a lack of empathy.  There is reason to fear, though, that some of those who are strongly loyal to the axiomatic system of market thinking may easily talk themselves into doing precisely that, since they are in a mental box that is hard to escape.  It is a part of all classical liberal thinking, of course, to accept the inequalities that flow from the normal working of the market (though less so in Henry George’s case).  Their ideology may keep them from seeing the distinction between this and the roots of inequality in a world beset by economic displacement. 

          The final chapter will discuss the source of funds to make the transition to (and thereafter to maintain) a "shared market economy" in which much of the stock in business is owned (through two intermediary institutions) by the entire spectrum of people in the society, while a competitive world market continues to go forward with the participants in it making personal profit (albeit limited as I have just indicated).  We will see ways this can be done that will least disturb the current system of income and property.  Progressive taxation to accomplish that spread of ownership will be justifiable, but may not need to be central.


The insistence that international Free Trade is always beneficial

          As we critique market concepts, there is much to add to our Chapter 7 discussion of  “free trade ideology.”

          A leading feature of a market economy, according to economic theory, is that the act of exchange and search for profit lead to an elaborate division of labor.  The continuing tendency is toward everyone's doing what he can do at lowest cost, while others gravitate toward what they can themselves do most cheaply.  If firms in one country are able to make shirts most efficiently, and farmers in another country are best at growing papayas, both will do the thing for which they are best suited.  And, as David Ricardo argued with his "law of comparative cost," this will occur even if one set of producers is better at everything than the others; it will profit the former more to leave the things they do less efficiently to the latter, even though they're better even at them than the latter. Everybody will have something to do, and by the division of labor efficiency will result compared to a situation in which everyone tries to be a "Jack of all trades" and do everything. 

          Adam Smith expressed this in a famous passage:


          It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.  The taylor does not attempt to make his own shoes, but buys them from the shoemaker.  The shoemaker does not attempt to make his own cloaths, but employs a taylor.  The farmer attempts to make neither the one nor the other, but employs those different artificers...


          What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.  If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our industry, employed in a way in which we have some advantage.[13]


          When the efficiencies of the division of labor are added to the notion of the "optimum allocation of resources," an abiding conviction seems justified that any governmental intervention into the process detracts from human well-being rather than adding to it.  This amounts to a powerful argument for laissez-faire.  When applied in the international arena, it is a compelling argument for Free Trade.  Any attempt by governments to impede the flow of goods and services will be retrogressive.  Likewise, any effort to develop trades or crafts within a given nation that is not in line with "buying most cheaply" is thought wasteful.

          This view sees important parts of the truth.  The division of labor is highly beneficial, just as described.  But, as with much else in the laissez-faire ideology, it is not the whole truth.  There are at least three reasons we shouldn't accept the view as part of an axiomatic system that allows of no (or only minor) departures:

          ·  That Free Trade looks at the process as a whole, but overlooks the aspirations of various of the parts, which if developed might eventually benefit the whole more than if they are not developed.  According to Adam Smith's principle, it is best to acquire something from the cheapest source, and that will often be from someone other than yourself.  Today, if the Taiwanese produce VCRs most cheaply, by all means buy from them; one’s own industry can do something more profitable even if this means losing all knowledge or other capacity needed for making VCRs. 

          In Chapter 7 I spoke of the early nineteenth century German economist Friedrich List.  He is almost always treated dismissively in market theory as the principal apologist for "Protectionism," but he actually had a much more sophisticated understanding of international trade than did Smith or Ricardo.  It surprised me that List was no apologist for statism, but was actually quite a thoughtful classical liberal.  Before we go on, it will be worthwhile to become more acquainted with him.  As we did with Henry George's views, we will provide a summary in the text and leave extensive quotation to the endnotes.

          List's classical liberalism shone through all his work, except that it was a liberalism that saw the individual, and trade itself, as part of a free community.  Far from being a statist, he said that protection (such as tariffs) is only good if it is in combination with progressive civilization and free institutions.  By no means did he fully reject the Free Trade idea, although he concerned himself with how each nation fared in the course of it.  He was strongly favorable to individual liberty, but again qualified one value by keeping others in mind: individual liberty flowers as part of a well-ordered free society.  List strongly opposed socialism, such as was then presented in the writings of Saint-Simon and Fourier, as the annihilation of individual liberty.[14]

          A certain J. S. Nicholson wrote the introduction to the 1904 edition of List's work.  Nicholson sums up one of List's central observations about trade: "To buy at the time in the cheapest market and to sell in the dearest may not always be the wisest national policy.  The distinction between present and future advantage from the national standpoint is fundamental throughout the whole work."[15]  A key problem with Smith and Ricardo is that they looked only to what is advantageous at present, which is a remarkably over-simplified perspective.  People who read them naturally assume that an infinite series of moments in which a person achieves advantage must add up to long-term advantage.  But that isn't necessarily so. 

          Let us go back to Adam Smith's example of the tailor and the shoemaker.  The tailor, he says, should not himself make shoes, but buy them from the shoemaker, who can make them for less than he can.  But what if the tailor thinks he could become a better shoemaker than the shoemaker now is, which if true means that they should trade places?  To accomplish this development of his newly-aspired-to skill, he has to set out to make some shoes, even if at first they aren't as cheap as he could buy from the present shoemaker.  Applying this to a whole country, the given situation of "who's best at something" will remain static, as though it were set in cement, unless some people break out of the mold to develop new skills at which they previously haven't been the most capable.

          This is the basis for the "infant industry" exception to the Free Trade principle.  It should, however, be understood as going far beyond its traditional meaning.  Those who are second-best had better continue and work on their capability rather than drop out of a market totally if they hope ever to become the best.  To turn markets permanently over to those who are now the best is to insulate them from competition and to atrophy the abilities of the others.  The retention and development of capability will also depend upon the societal and cultural context in which the attempt is made, and is not entirely a matter of individual effort.  The many conditions bearing on "who can produce something most cheaply" can change over time, making one source the cheapest now, another the cheapest later.  This is especially true in today's world of hyperspeed-changing technology and world markets.  Many competitors need to stay well-prepared right on the fringe, rather than to surrender their skills and their productive plant.  They even have the potential of contributing explosively to technological innovation as they strive to leap over the existing leaders.  Seen in light of these things, the "infant industry" phenomenon takes on a permanent and widespread significance as suggesting a policy of perpetual readiness, and need not be limited to just a "one time" development of a nation's industry. 

          There has been a growing recognition in economic theory that this is so.[16]  Stephen S. Cohen and John Zysman ask "why can't the United States simply buy semiconductors and embed cheap semiconductors into expensive computers?," but then answer it with another question: "Will U.S. producers of computers be able to stay ahead of Hitachi if they depend on Hitachi for semiconductors?... If the technology is changing rapidly, the question becomes vital... Dependence on foreign sources for a technological innovation could affect the entire range of user industries...."[17]  List's insights about these things are set out in the endnote.[18]

          The dynamic view of comparative advantage – that competitive standing changes over time if some of those who are not the cheapest producer retain their capacity to compete – is a much more sophisticated view of the market than the static view.  That the thinking should have stayed at that unsophisticated level is typical of the closed-system market rationale.  The static concept actually works in favor of less innovation, less competition, less ultimate consumer satisfaction.  And it arrives at that because it looks no further than to a simplistic "truism": that "what is beneficial to the parties in one transaction, or even a string of transactions, must be best for long-term benefit."

          This realization is not just important for economics and efficient productivity.  It leads to an understanding that given peoples and nations are not necessarily well-advised to settle for being an increasingly remote second-best in things that they consider important to themselves.  This is important to culture and nationality (things that are played down in classical theory in part because they are thought to run counter to a developed division of labor).  If the iron logic of static comparative advantage loses its grip, people find themselves able to think in terms of their own preferences about their development as a people or a nation.  Cultural preferences can come in without being tagged as economically harmful. 

          List was primarily concerned with how his own people, the Germans, could amount to anything as a productive, talented people if "buying cheapest" from the British, who already had a magnificently developed industrial and commercial economy, was, at every point along the way, the sole criterion. 

          Many nineteenth-century Americans felt the same concern.  Again, if "buying cheapest" from Britain controlled, the United States would remain an agricultural country and wouldn't develop its own industrial, commercial capacities.  The "comparative advantage" of the time would be taken as a given.  Because so many Americans realized this, average U.S. tariffs were set at over 30 percent during the period between 1865 and 1900; James Fallows explains how national circumstance molded the national outlook: "While American industry was developing, the country had no time for laissez-faire.  After it had grown strong, the United States began preaching laissez-faire to the rest of the world."[19]  Economist Ravi Batra of Southern Methodist University says that during the nineteenth century the United States "became the preeminent economic power in the world.  Would free trade have done that?  Absolutely not.  If it were up to free traders, America would still be a prominent agrarian economy."  He adds: "The U.S. success occurred because the nation was able to generate the ingredients for growth – large consumer markets and vigorous competition – even in the absence of foreign trade."  A key to this was fierce domestic competition.[20]

          ·  That in the new age of unemployment or of marginalized work, it will be essential that the closed system be departed from enough to allow a solution to the dual problems of distribution and purchasing power.

          I haven't been eager to become involved in the Free Trade vs. Protection argument, which has raged for hundreds of years.  I raise it now because it was an eye-opening experience, in terms of my own classical liberalism, for me to read List; and because his insights add so much to an intelligent critique of the closed system of market thought.  That critique is imperative now that world changes are bearing down on us in ways that will make a lock-step adherence to that system disastrous.  

          The idea of a "shared market economy" – in which all members of a society receive through an independent agency income from shares in index mutual funds that represent market-wide investment in the competitive economy – will scandalize the closed-system ideology.  To its adherents (who include many of my valued friends), such a thing will be "government intervention" and "giving people something for nothing."  Moreover, the effort by individual nations to deal with this need, necessarily through political action to create the broad sharing of ownership, will seem "impermissible economic nationalism," especially since no one people such as the American people can conceivably share ownership with everyone in the world, and each people will have to limit the sharing to its own members.  Stringent ideological barriers stand in the way of solving the coming "crisis of the [relatively workerless] market."  Those barriers have to be removed if the solution is to be accomplished.  And the best way to remove them is to see that they really don't make sense anyway – certainly not to a conclusive extent.

          ·  That in the coming age of reduced scarcity, in which technology is so incredibly productive, the fine-honing of degrees of economic efficiency won't be nearly so important as it has been in the past or as economic theory has described it.  This makes it increasingly justifiable for local peoples to cultivate their preferences about the direction of their own activity.

          Cultural conservatives of all persuasions, left or right, have thought all along that market ideology puts too much stress on economic performance and not enough on "the small platoons to which people belong" – family, community, a person's own country.  It is not just Free Trade ideology that leads to this deracination: the mobility within a market economy is itself a force that breaks these local bonds, such as when adult children, say, move half-a-continent away or even across the world to pursue jobs.

          The incoming technology can, if people choose, shift the balance.  Comparative productivity may become far less important, relative to other values, in a world in which there is abundant productivity.  We can think of this in economic terms as a matter of "marginal utility": the utility of additional increments of productivity becomes far less when the increments are on top of an already-vast productivity; and the relative utility of other things becomes higher.  However, to give expression to this heightened interest in non-economic values, people will have to question the market view that productivity trumps everything else.

          *  That the untenable nature of the argument that “international trade always benefits everyone” is especially apparent in the context of a world capital market that is out of control.  It is impossible to argue that “everyone benefits” when, as so many well-informed commentators say, the system of global finance perpetually “totters on the edge of universal catastrophe.”


Nothing I have said here suggests that a vigorous system of trade and profit-seeking should be abandoned.  The sharing of ownership within a “shared market economy” will only produce its best results if the economy remains innovative and highly productive.  We have no quarrel with the consensus that has come into being in recent years that a competitive market system is far more innovative and productive than any alternative.





1. Dwight D. Murphey, Socialist Thought (Washington: University Press of America,1983); the book is also available on 

[2].  See G. D. H. Cole, Labour in the Commonwealth (London: Headley Bros. Publishers, Ltd., no date given), p. 107; and Thomas Kirkup, History of Socialism (New York: The Macmillan Company, 1909), p. 356.  My own discussion of it appears in Dwight D. Murphey, Liberalism in Contemporary America (McLean, VA: Council for Social and Economic Studies, 1992), Chapter 10 and particularly pp. 168-174.  That chapter was republished in the Journal of Social, Political, and Economic Studies, Summer 1992, pp. 183-202.

[3].  Maurice Cornforth, The Open Philosophy and the Open Society (New York: International Publishers, 1968), pp. 210, 212.

[4].  Mark Skousen, "Overworked and Underpaid?," The Freeman, 1996, pp. 734-735.

[5]. Hans Sennholz, "Notes from FEE," The Freeman, November 1996, unpaginated center feature.

[6]. Paul Krugman, "Does Third World Growth Hurt First World Prosperity?," Harvard Business Review, July-August 1994, p. 116.

[7].  Mises, Human Action, p. 143.

[8].  See my "Three Contemporary Psychologists and the Meaning of Life" in The Occasional Review, February 1974 (this is available at no charge on  It is entirely a postscript to my present discussion to bring it up, but the treatment given to this article provides a hilarious case-in-point about the travails an independent thinker goes through.  The editor liked my analysis of Frankl, Maslow and Branden, but when he got to the end and found that I wasn't basing my critique on a belief in God, but rather on the fact that individual people are the source of value judgments, he cut out the final three pages.  I had to complain to the journal's publisher, who then insisted that the editor include the conclusion of my article as a "Postscript" in the next issue.  So to read the entire essay you have to pick up the ending from the Fall 1974 issue (also on the web site just cited). 

[9]. Friedrich List, The National System of Political Economy (Fairfield, NJ: Augustus M. Kelley, Publishers, 1991 reprinting), p. 166.

[10].  Here are passages from Henry George's Protection or Free Trade that illustrate the summary I have made in the text:


P. 273: "Land is not the produce of labor; it existed before man was...[T]he value of land is a value of appropriation, based upon the amount that can be appropriated, and therefore tends to increase as the progress of society increases production."


P. 272: "If infants ceased to be born and men to grow up in America, his land would be valueless.  The profits on such investment do not arise from the growth of land or increase of its capabilities, but from the growth of population."


P. 280-1: "All we have to do is to treat the land as the joint property of the whole people...In other words, we can leave land now being used in the secure possession of those using it, and leave land now unused to be taken possession of by those who wish to make use of it, on condition that those who thus hold land shall pay to the community a fair rent for the exclusive privilege they enjoy--that is to say, a rent based on the value of the privilege the individual receives from the community in being accorded the exclusive use of this much of the common property, and which should have no reference to any improvement he had made in or on it, or to any profit due to the use of his labor or capital."


P. 281: "As Herbert Spencer has said of it: ‘The change required would be simply a change of landlords.  Separate ownership would merge into the joint-stock ownership of the public.'"


P. 284: "A large and constantly increasing fund would be provided for common uses, without any tax on the earnings of labor or on the returns of capital."


P. 311-2: "Among the purposes which will suggest themselves to the reader by which the surplus income of the community could be used to increase the sum of human knowledge, the diffusion of elevating tastes, and the gratification of healthy desires, there is none more worthy than that of making honorable provision for those deprived of their natural protectors, or through no fault of their own incapacitated for the struggle of life... Citizenship in a civilized community ought of itself to be insurance against such a fate."  One possibility: "No taxes at all, and a pension to everybody" [quoting an English member of parliament].


[11].  George, Protection or Free Trade, p. 322.

[12]. Samuel Brittan, A Restatement of Economic Liberalism (Atlantic Highlands, NJ: Humanities Press International, Inc., 1988), p. 300.

[13].  Quoted by Irwin M. Stelzer in National Review, March 16, 1992.

[14]. Friedrich List, The National System of Political Economy (Fairfield, NJ: Augustus M. Kelley, Publishers, reprinted in 1991).  See the following passages:


P. 112: "A restrictive commercial policy can be operative for good only so far as it is supported by the progressive civilisation and free institutions of a nation...."


P. 175: "A nation in its normal state...must afford to those who belong to it a high degree of security and liberty, and must promote religion, morality, and prosperity; in a word, must have the well-being of its citizens as [its] object."


P. 335: "A high degree of economical development has only been attained in those nations whose form of government has been such as to secure to them a high degree of freedom and power, of steadiness of laws and of policy, and efficient institutions."


P. 360: "The Saint-Simonians and Fourrierists (sic) ...Their annihilation of individual freedom and independence is their weak side; with them the individual is entirely absorbed in the community...."


[15].  J. S. Nicholson in his introduction to List, The National System, no pagination for the Introduction.

[16].  See Michael E. Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990), pp. 12 and 13: "The standard theory assumes that there are no economies of scale, that technologies everywhere are identical, that products are undifferentiated, and that the pool of national factors is fixed.  The theory also assumes that factors, such as skilled labor and capital, do not move among nations.  All these assumptions bear little relation, in most industries, to actual competition... More and more industries do not resemble those that the theory of comparative advantage was built on."

[17].  Stephen S. Cohen and John Zysman, Manufacturing Matters: The Myth of the Post-Industrial Economy (New York: Basic Books, Inc., Publishers, 1987), pp. 238-9.

[18].  List, The National System: 


P. 80: "How pitiable and unpractical seems that theory of political economy which would have us refer the material welfare of nations solely to the production of individuals, wholly losing sight of the fact that the producing power of all individuals is to a great extent determined by the social and political circumstances of the nation."


P. 138: "It is (says J. B. Say) that science which teaches how riches, or exchangeable values, are produced, distributed, and consumed.  This is undoubtedly not the science which teaches how the productive powers are awakened and developed, and how they become repressed and destroyed" [List's emphasis].


P. 295: "As in all human institutions so also in industry, a law of nature lies at the root of important achievements which has much in common with the natural law of the division of labor... [this is] the confederation of the productive forces, whose principle, namely, consists in the circumstance that several generations following one another have equally united their forces towards the attainment of one and the same object...."


[19].  Patrick Low, Trading Free: The GATT and US Trade Policy (New York: The Twentieth Century Fund Press, 1993), p. 53; James Fallows, "How the World Works," The Atlantic Monthly, December 1993, p. 80.

[20].  Ravi Batra, The Myth of Free Trade (New York: Touchstone Books, 1993), p. 137.