What is the correct size and proper function of the state? Pt I

Here at Bogpaper we follow Detlev Schlichter’s blog with interest; An Austrian economist with a best-selling book outlying the issues in how we look at the economy from a libertarian and Austrian perspective.

Below he takes a slight turn from his usual musings on the economy and its financial state, instead he looks at what being a libertarian means for the state.

You can read Detlev’s blog here.

This is a question that was posted to me by a journalist who has read my book and is following this website. He suggested I make it into a blog.

This essay is not directly about the fiat money crisis so it might at first look a bit “off message”, but I guess for everyone who has read Paper Money Collapse and has been reading this website, the connections are obvious enough. This is a big, big topic, and probably too ambitious for any single essay. Although the following is fairly long even by the standards of my website, it still cannot be an exhaustive treatment. Many questions will be left unanswered and many objections – including many I already anticipate – will not be addressed. I hope the reader still finds it worth the effort.

For a long time I considered myself a classical liberal – as did Ludwig von Mises who inspired much of my work. I no longer think that this position is logically consistent. The classical liberal position, although advocating a much smaller state than today’s political consensus, still assigns too many powers to the state. Nevertheless, it offers a good starting point for the discussion. So let us start here.

Utilitarian arguments for the strictly limited state

The classical liberal position on the role of the state can approximately be described as follows: the state should stay completely out of the economy. There is no role for the state in industry, banking or money. Money is gold, or any other commodity chosen by the trading public. The supply of money is thus outside of political control, and banking and finance are entirely free market businesses with no state support, no guarantee nor any explicit or implicit backstops. (For an explanation of why such a system is not only possible but indeed more stable than our present system, and why it is even the only system that is compatible with the free market economy, please see my book Paper Money Collapse.)

Additionally, all means of production are privately owned and their use is directed by market prices, and by the opportunity for profit and the risk of loss. Profit and loss are essential tools for the consumers to direct the activities of private enterprise so that they conform as much as possible to the wishes of the buying public. The state is not involved in education, healthcare or old age provision or any other so-called social services. All these activities are organized privately for the simple reason that all these activities require the use of scarce resource, including labor, and any rational allocation of scarce resources requires market prices. Only on the basis of market prices is rational economic planning possible. Only market prices convey the urgency that the public assigns to the various competing ends to which resources can be put at each point in time. But market prices can only be determined if the resources are privately owned and traded on free markets. Private property is thus the essential tool for extensive social co-operation. Private property allows trade and the formation of market prices. This then allows the rational and efficient employment of these resources by entrepreneurs. The whole process is the only one logically possible to facilitate an extensive division of labor and the constant accumulation of capital employed in private enterprise, and it is the system of extensive division of labor and the constant accumulation of capital that makes our high living standards and any further advances in living standards possible.

An example:

Britain’s National Health Service will never deliver a satisfactory service. This is not because the people who work in it are incompetent or lazy. They could be the most motivated, devoted and well-meaning people on the planet and they could still only deliver suboptimal results and do so at considerable cost. Why? Because the NHS has to deliver health services for an entire nation without the help of true market prices and profit and loss accounting. These are the tools of capitalism that – day in and day out – allow the private sector to make informed decisions about best resource use – ‘informed’ because they reflect the preferences and wishes of the customers, the consumers.

Despite the widespread sentimental attachment to the NHS and its superficially appealing motto of delivering health care “free of charge” (obviously not true for the majority of citizens), the fundamental shortcomings of any service organized along socialist lines should be glaringly obvious to anyone. While the still fairly unrestricted private mobile phone industry in Britain delivers the latest advances in telecommunications technology to people across the entire social spectrum with remarkable speed and at constantly falling prices, the nationalized health service bureaucracy has people wait in line even for many routine and long-established procedures and provides such service at ever more staggering cost to the taxpayer.

That health service and education are too important to be left to the private market is a common prejudice that puts economic logic on its head. Because they are important they should be allowed to employ the tools of the private market.

But what does that mean for those who are too poor or for whatever reason unable to obtain the market income to afford themselves even a minimum of these services? – I am not going to evade that question. It is, of course, a standard response. I will come back to it a bit later.

What does the argument so far mean for the size and role of the state? – The state would, of course, be rather small by today’s standard. It would only have one function: to protect private property, which necessarily includes property in ourselves. The state’s role would be to protect every citizen and his or her property from aggression, whether that aggression comes from inside the country or outside the country. The state would be reduced to what the German social democrats of the late 19th century derogatorily but still accurately called the ‘night-watchman state’. The state would provide security services, including police, army, courts and related services. Its only function would be to provide security and protection.  Those citizens who do not transgress against other peoples’ person or property or those who are not being transgressed against, would hardly ever come into contact with the state and its representatives. This would indeed be a minimal state.

Thus far, we have argued on the basis of utilitarian considerations. A prosperous society requires high degrees of division of labor and efficient resource use, which in turn require market prices, which in turn require private property. Under utilitarianism, private property is first and foremost a social convention, a means to an end. And the function of the state is to secure this means: private property, the existence of every individual’s inviolable private domain, as the basis for voluntary contractual cooperation and the spontaneous growth of society.

Ethical arguments for the strictly limited state

But such a minimal state can also be constructed on ethical grounds and considerations of justice. Every state is an institution that is based on compulsion and coercion. It can be seen as a depository of legalized, institutionalized and regulated force or threat of force. But what type of force is ethically defendable and could therefore provide an acceptable conceptual basis for institutionalized force? Only defensive or protective force fulfils that requirement.

To answer questions of ethics we need to start with the acting individual. In an otherwise peaceful, cooperative society, at what point am I justified to apply force or the threat of force when dealing with other people? Only if and when these people threaten my life, health or my property. This does not mean that any type of violent response is deemed justified in such situations, but it is clear that if force and violence can be justified at all, it must be in situations of self-defense, which include defense of property. If I am justified to defend myself from attack, I must also be allowed to defend those material goods that I have obtained through my work by applying my own body and mind. If this were not the case and if others were allowed to avail themselves of the fruits of my labor by simply taking them from me,  it would mean they could live off my work and thus practically enslave me, which would be equivalent to an attack on my person.

By transferring the individual’s right to self-protection and self-defense of life and property to a specialized organization that fulfils the task of looking after these rights for all members of the community, no new special rights have come into existence. It is not claimed that the state has any rights or powers that the individual citizen does not have already. In fact, the state’s legalized force would have its origin in a concept of natural rights that originate with the individual citizen and that that citizen would have even in a stateless society (although in such a society he would have to enforce these rights himself or in voluntary cooperation with others). The state could perhaps be thought of as a pooling of these individual rights to allow for their more organized, standardized and thus more predictable safeguarding.

The utilitarian case against the welfare state

We can now turn to the question of provision for poor citizens or for those who for any reason are unable to adequately support themselves. While good arguments can be made that those in society who are better off have moral obligations to give support to weaker members of society, it is clear from the reasoning above that the state should not enforce such support. Again, the state is an organization that operates through compulsion and coercion. By assuming ‘social’ responsibilities the state must redistribute income and property on an ongoing basis by application of force or the threat of force, and must thus be permanently in violation of its original mission, which was to protect rightfully gained private property from violent interference, and thus support the institution of private property that we identified as absolutely essential for any functioning society. The state cannot simply add a redistribution function to its property protection function – the former must always violate the latter. Both functions stand in logical conflict. Either the state is a property-protector or a property-re-distributor and property–re-allocator. The state cannot be both at the same time.

In the original concept of the state as organized force for the purpose of security provision, a person who rightfully obtained property through production or voluntary exchange with other members of the community should be able to rely on the state to protect his ownership from any violation by a third party. But the moment the state assumes any responsibilities for ‘social justice’ or ‘distributive justice’, the state has to become a private property invader itself, and every person has to fear that parts of their income and property – although lawfully obtained – will be taken by the state by force and reallocated to other members of the community.

It is clear that under a state that assumes ‘social’ responsibilities, any right to private property is ultimately conditional. Rights to property are only protected by the state as long as the state does not consider third parties more in need and morally more worthy of ownership of the property. Every piece of property in such a society is therefore under a cloud of uncertainty, and this stands in direct conflict to the original mission of the state. The element of uncertainty is magnified by the fact that while it is possible to lay down clear and universal rules for how property can be rightfully and legally obtained, and to therefore give every member of society clear rules that are knownbefore the act of what constitutes rightful and what constitutes unlawful attainment of property, any notion of what constitutes ‘distributive justice’ after the acts of production and trade must necessarily be arbitrary and subject to considerable change over time. It should not be surprising that all states have greatly expanded their range of redistributive policies and social legislation and regulation in recent decades. Once the state has taken it upon itself to pursue the logically non-definable goal of social equality or justice, it can ask for ever more wide-reaching powers. The idea of a minimal state has now become utterly unrealistic.

By contrast, any redistribution of property or income through acts of charity stands in no conflict to the institution of private property. The giver and the recipient of charity both know who the rightful owner of the property is. The recipient is aware that he is being supported by the generosity of others. The giver also retains control over who he wants to support and to what extent he wants to support that person. All of this changes when the state as monopolist of legal coercion becomes the middleman. The recipient no longer considers himself dependent on the economic success and charity of others but now has a legal claim on support from the state – receiving support becomes the person’s legally enforceable right. With at least a minimum of income now secured, the incentives to change one’s behaviour to regain economic independence are weakened. The original owner of property, meanwhile, no longer has control over where his money goes and will probably lose any interest in the plight of those who require support. By having been taxed by the state, he considers all duties to society’s weaker members fully discharged of.

The defenders of the welfare state will argue that it is more just to introduce an element of uncertainty into the lives of the economically independent than to keep society’s weakest members subject to the complete uncertainty that poverty and dependency on charity inevitably entail. While this is an appealing argument and probably a widely shared sentiment, it cannot dispel concerns over the fundamental conflict between securing private property on the one hand and persistently redistributing private property on the other. A welfare state is, fundamentally and conceptually, a persistent threat to the notion of private property, and private property is undeniably the economic foundation of any society. Additionally, any concept of ‘social justice’ is by definition arbitrary and will be the source of tremendous strife whenever it is supposed to guide practical politics. Furthermore, a state that concerns itself with the distribution of income and property among its citizens will never be a small state, or even a limited state.

2 comments on “What is the correct size and proper function of the state? Pt I

  1. Morris8
    March 10, 2012 at 1:23 pm #

    Perhaps another legitimate role for the state–a provider of unbiased information; eg effects of drugs, effectiveness of medical treatments, safety and efficiency of marketed products, etc etc.

    There is a moral issue with the small state–will the poor really truly get their needs via mass charity? The honest old roadmender can’t afford a £30k life-saving operation: the successful old crook can. The witless teenager’s baby lies dead in the gutter. It sounds a bit eighteenth century!
    What should be done? By whom? How?

    • Bogpaper.com
      March 13, 2012 at 5:13 pm #

      We agree that the role of the state is a moral issue. In regard to drugs and the National Health Service, which you mention above, you might be interested in watching Jan Skoyles, from The Real Asset Co, interview Dr Tim Evans. He is a libertarian campaigner for small government and talks at length about the role of the NHS and government. You can find the interview here http://bogpaper.com/2011/12/25/dr-evans-interview/

      This is something which does require debate, which is something we would like to promote on Bogpaper.

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