Paul A. Cleveland is Assistant Professor of Economics and Business Administration at Birmingham-Southern College
A man woke his wife early one morning to tell her that he was dead. As his wife became conscious enough to hear her husband's proclamation, she told him that he might in fact die if he did not let her go back to sleep. Undaunted by the threat, the man continued to proclaim his death as his hapless wife attempted to refute all his arguments. Finally, after debating the matter for an hour, the wife phoned the man's physician to see if there was something that he could do. To the wife's relief, the doctor agreed to see her husband.
When the man arrived at the doctor's office he continued to proclaim his departure from the realm of the living. In an effort to reason with the man the doctor began to show him numerous medical books which dealt with the state of deceased persons. In particular, the doctor pointed out the fact that dead men do not bleed. Having shown the man the medical journals, the doctor took him to the morgue and proceeded to prick the toes of several cadavers. In each case he pointed out the absence of flowing blood.
Following the demonstration the doctor asked, "Are you convinced that dead men don't bleed?"
"Yes," the man responded resolutely, at which point the doctor took out a needle and pricked the man's finger.
As the blood began to stream down his finger, the doctor asked the man, "Well, what do you have to say?"
The man replied astonishingly, "What do you know, dead men bleed after all!"
The significance of this story is to point out an unusual human propensity to abandon sound reason in order to promote one's own vested interest. This tendency has been manifestly prevalent during the twentieth century which has been marked by socialistic experimentation.{1} Those supporting these experiments argue that they are the very foundation for justice. In reality, they are little more than the means by which some people benefit at the expense of others. Though general human welfare suffers, the beneficiaries of the experiments continually deny cogent economic reasoning and the incontrovertible facts of nature in order to maintain some privilege, or to gain from political largess. Even so, one long-run result is the destruction of the well being of the beneficiaries themselves. This is evidenced by the recent demise of the Soviet Union. Though the ruling communist elite benefitted greatly at the expense of the general population, the final result was economic collapse.
The purpose of this paper is to develop the tale of two competitive spirits. One produces wealth, while the other destroys it. One requires moral integrity, while the other only claims to be moral and at the same time abandons all morality. One involves true entrepreneurship, while the other offers only a cheap imitation.
The cheap imitation of true entrepreneurship is the competitive pursuit of governmental favors and privilege. It comes in many forms. It is at the heart of direct monetary transfer programs, in-kind transfer programs, business subsidization, and regulations aimed at providing special privileges or rights. On the revenue raising side of the ledger, we know it must exist when we find graduated income taxes, inheritance taxes, estate taxes, gift taxes, tariffs, and special excise taxes, as well as various other fees, penalties, and taxes based on one's ability to pay or which arise as a result of the creation of some special privilege. Ultimately, its existence in society involves the disregard of property and can best be labeled public theft. To understand why this is the case, it is first useful to examine the nature of theft itself.
Humans are born into this world with wants. To meet these wants productive efforts are necessary to fashion existing raw materials and partially finished materials into forms useful for satisfying human desires. At any point in time, the sum total of all resources which can be used in this process is of course limited relative to the immensity of human want. This condition in turn necessitates choice and economy. The individual can either rely on his own production to provide for the satisfaction of his wants or upon someone else's. If he relies on the production of someone else, he can obtain the good desired by receiving it as a gift, as the result of a voluntary trade, or as a result of theft. In the latter case, the individual's aim is to take the desired property without permission either by force or by deception.{2}
On the surface, stealing would appear to be an extremely efficient means of providing for one's needs. It requires very little effort on the part of the individual to consume the bounty resulting from theft. Yet it should be apparent that this reasoning suffers from the logical fallacy of composition. Certainly, the individual thief gains much with little effort. But, the extent to which the individual forgoes some productive endeavor is the extent to which there is that much less to consume in the aggregate. That is, if the individual ceases applying his effort towards some production, he no longer has a product to consume directly or to trade with others for what he wants. If more individuals should engage in thievery, then total output falls below what it would have been otherwise. Further, the larger the number of people attempting to live in this fashion, the greater will be the competition among thieves to steal the remaining output. In effect, an increase in the practice of stealing to provide for one's desires becomes less successful. In the limit, as all choose this path, wants remain entirely unsatisfied because no one is left to produce anything of value.
The only conclusion that can be reached in this regard is that stealing destroys wealth. On this basis alone it should be rejected as a proper mode of behavior on the part of either the individual or the group. Nevertheless it is often rationalized. Theft is most pernicious when it is institutionalized in such a way that government becomes the vehicle through which the violation of property is accomplished. For example, the Romans contended that property was the construct of legal convention rather than a indispensable fact of nature. The same argument is still common today. But does this position adequately explain the facts of nature? The answer is no. As Bastiat pointed out:
In the full sense of the word, man is born a proprietor, because he is born with wants whose satisfaction is necessary to life, and with organs and faculties whose exercise is indispensable to the satisfaction of these wants. Faculties are only an extension of the person; and property is nothing but an extension of the faculties. To separate a man from his faculties is to cause him to die; to separate a man from the product of his faculties is likewise to cause him to die.{3}
Bastiat's argument is persuasive and, therefore, it is most reasonable to conclude that property rights exist prior to the social contract and legislative law. If there were any remaining doubt however, it is eliminated by divine revelation which serves as "the ultimate foundation of moral obligation..."{4} In the Decalogue, God prohibits stealing. This law comes as the proclamation of the only Being who can possess the title infallible. Since no earthly potentate can presume to be infallible, this admonition ought to be strictly adhered to. Just the same, we find advocates for violating it in every age. It might be noted that only the most arrogant and conceited people ever attempt to adopt such a position. Thus only these people deny both sound reason and revelation to pursue legislation which is in opposition to the nature of property; yet, there are those who do so in every age. They must ultimately be motivated by a need to justify some form of theft through the granting of, or the protection of, some special privilege. Human history is filled with attempts to accomplish this very thing.
In the case of Rome, the contention that property was only a legal convention was needed to rationalize the use of slave labor to produce the wealth the ruling class enjoyed. To admit that property preceded human law would have destroyed the position of privilege. Consequently, the Romans rationalized that the extent of property was merely the result of legislative discretion in order to continue to live as plunderers of other people.{5}
In modern times, redistributionists have advocated the forced reallocation of property in order to obtain an equality of outcomes. This misguided sense of justice denies the very nature of property. Yet, the proponents of redistribution rationalize their position by assuming that the problem of production has been solved and what is needed is a more equal distribution of resources.{6} Unfortunately, this assumption is wholly unfounded. The problem of production in an industrial society could only be said to have been solved if the matter were viewed from a static position. "That is, it has only been solved for today and a few more days, after which it will emerge once more if something is not done. Redistributionist schemes derive such plausibility as they have by abstracting a static picture from the situation as it momentarily exists."{7} Accordingly, all the schemes which have been employed to redistribute wealth fail to accomplish the purpose in mind and end up destroying the general welfare while only temporally benefitting some subset of society.
In both these cases the real problem is that rationalization leads to "legal plunder."
That is, it leads to government policy which undermines rather than protects the property rights of the individual. If the rationalization is believed, public theft can continue without troubling one's conscience. The end result is the decay of morality in society as more and more people attempt to live off the produce of others.{8} As already pointed out, this decay will invariably lead to economic decline as well.
The intellectual power of understanding the nature of property in this way can be seen by considering the concept of rent seeking. The theory of rent seeking has been developed by Gordon Tullock, James Buchanan, and other writers.{9} Tullock defines rent seeking as the use of resources to attain benefits for a minority while reducing the total product of the economy.{10} Buchanan uses the term "to describe behavior in institutional settings where individual efforts to maximize value generate social waste rather than social surplus."{11} As applied, the term is generally used to describe the process by which private citizens vie for government privilege in order to erect, displace, or maintain some competitive advantage.
The social loss from rent seeking behavior arises from two sources. First, it comes from the resource expenditures made by citizens in an effort to gain economic rents since these create no capital assets. Secondly, it comes from the subsequent reduction in output that would follow from successfully capturing monopoly privilege by way of government restraint. As Tullock concludes, "Competition is not always a good thing. In a well-organized market, the individuals aiming solely at benefiting themselves end up benefiting other people. In a sufficiently badly organized market...they simply generate waste."{12}
One theme that emerges from this literature is that the underlying behavior of the individual is essentially the same as all human behavior and can be characterized as competitive. In this analytic format, the same behavior is understood as leading to positive outcomes under certain institutional arrangements and negative ones when alternative structures exist. But this argument hinges upon what constitutes the arrangements necessary for "a well-organized market."
What are those institutions? Buchanan does not leave us in the dark. "So long as governmental action is restricted largely, if not entirely, to protecting individual rights, personal and property, and enforcing voluntarily negotiated private contracts, the market process dominates economic behavior and ensures that any economic rents that appear will be dissipated by the forces of competitive entry."{13}
Given the prior development of the nature of theft, along with that of rent seeking, it seems that rent seeking behavior is really nothing more than public theft. In this sense, the poorly organized institutions are only those which can arise due to the efforts of people who would steal from others and use government as the means by which to accomplish the task. The extent to which government can be kept from being used in this fashion depends upon the vigilance of the general populace and their willingness to act towards one another with personal integrity and character. That is, the extent to which they are self-governed. In this case, the institutional arrangements discussed by Buchanan and Tullock would merely deter potential tyrants and thieves instead of serving as a conduit for their activity.
From this perspective, the detrimental effects of rent seeking are understood as arising from the use of government to effectively take property from one group of people so as to benefit some other group. In essence, the process is really nothing more than a form of theft. This approach is superior in that there is an essential, identifiable difference in individual behavior. Specifically, there is a distinct difference between stealing and respecting the property of others and, therefore, a real difference exists between the competition among thieves and the competition among entrepreneurs.
Though the argument is based in morality of behavior, nonetheless, it serves the positive purpose of describing the necessary consequences which follow from certain actions in certain situations. Thievery, whether it is carried out solely by individuals or through the political manipulation of government, invariably results in the same outcome--namely the destruction of property and a reduction in output. Alternatively, respect for property and its use in voluntary trade consistently promotes productive activity, capital accumulation, economy of resource use, and growing economic output. The latter form of behavior is properly called entrepreneurship while the former, in all its forms, is called stealing.
The recent failure of communism is an excellent case study of the problem of public theft and the human tendency to steal. The truth of this proposition was made clear to me while reading The Moscow Times on a recent trip to the former Soviet Union.{14} In an article by Steve Liesman titled, "Playground for the Political Elite", the author details the opulence of a resort for communist party officials located at the base of the Zaliski Alatal mountain range. As the writer states in his opening paragraph, "If you ever had any doubts that the Soviet Communist Party enjoyed luxury and privilege at the expense of the people, a visit to the Alatal Sanatorium will settle the issue once and for all." He goes on to detail the magnificent features of the resort which, based on his description, rivals some of the finest accommodations in the world.
Though the communist experiment promised a new egalitarian society, the reality was the ruling elite lived lives of self-indulgence by robbing ordinary citizens. Communism collapsed because there was so little left to drain from the average person in society. The collapse was economically driven and can be understood by the analogy of the parasite. Such an organism can thrive successfully off its host so long as its host is alive. However, if the parasite should kill the host, then it too will die unless another suitable host is found. Anyone who visited a communist country in the Soviet block just before or just after the Soviet demise can attest to the impoverished conditions.
The future success or failure of each of the countries emerging from communistic control depends upon whether or not legitimate governmental structures can be implemented to foster the protection of life, liberty, and property which are necessary to provide the atmosphere in which true entrepreneurship can flourish. Only then can there be hope that trust between voluntary contracting agents will develop. However, for this to take place real democracy, and not just political democracy, must develop. In a true democracy human action is controlled primarily by self-discipline within the context of a limited government. This form of society requires moral integrity and personal character on the part of the people while the government is constrained to operate within a limited sphere.
Regrettably, when the term democracy is used today, it is used predominantly to refer to a political system of majority rule. If democracy is merely understood as the rule of the majority by a vote of preference, then the system will degrade into a tyranny of the masses. If the people of former communist countries should confuse this type of political system with that which is based on self-evident human rights, then they will find that they have traded one form of tyranny for another since there will be no effective limitation of the possible actions which government might undertake. In this regard, James Madison once stated:
In all cases where a majority are united by a common interest or passion, the rights of the minority are in danger...We have seen the mere distinction of colour made...a ground of the most oppressive dominion ever exercised by man over man...Debtors have defrauded their creditors. The landed interest has borne hard on the mercantile interest. The holders of one species of property have thrown a disproportion of taxes on the holders of another species. The lesson we are to draw from the whole is that where a majority are united by a common sentiment, and have an opportunity, the rights of the minor party become insecure.{15}
In the final analysis, should these countries take on government programs fashioned after the democratic socialism which has become so fashionable in Western Europe and in America, their efforts will fail and little or no economic progress will be made. What is needed is economic freedom and true entrepreneurship. The prerequisites for this include the development of individual respect for property and a growing trust that trading partners will in fact perform according to their word. The only help that government can provide in fostering this environment is to penalize those that would lie, cheat, and steal in order to obtain that which they desire. Disastrously, these are the very types of behavior fostered under communism. In fact, the ruling elite turned lying, cheating, and stealing into an art. Therefore, it will be very difficult for these countries to overcome the past and establish the kind of government necessary to facilitate economic growth in any widespread way. Following the initial enthusiasm of gaining political freedom when communism collapsed, the obstacles of progress soon became abundantly clear. Though the opportunities for growth are tremendous, the burden of reaping the benefits remains because of the continued lack of trust that can spring forth in business relationships. This lack of trust stems primarily from a legal system which is largely unsuited for protecting property rights which in turn promote honesty among trading partners.
Moral integrity is a fundamental prerequisite for the development of orderly markets in which true entrepreneurship can thrive and in which economic growth can occur. The government's role in this process is limited. It should punish those who would lie, cheat, and steal for monetary gain. Also, it should enforce contracts that voluntary agents have entered into for the purpose of fostering trust among trading partners. Finally, it should serve as the mediator of last recourse when contractual disputes cannot be resolved in any other way. When government ventures beyond this limited scope of involvement in the economy the results are disastrous.
True entrepreneurship is nothing more than personal initiative. The entrepreneur is someone who sees something that others do not see and acts upon this insight. The rewards are most often the result of voluntary trade which occur because the entrepreneur's insight allows others to achieve their own ends more efficiently than before. No one can predict beforehand which entrepreneurial endeavors will be most successful because the success or failure is rooted in the desires and preferences of potential trading partners. Entrepreneurship is best promoted in an environment in which the individual is free to engage in trade. When this is the case, the greatest asset an individual can have is a reputation of being trustworthy.
The problem with much of government's attempt to manipulate the economy is that it invariably gives rise to the promotion of special interests at the expense of the broader economy. All arguments which support such intervention are really nothing more than rationalizations since they all suffer from the logical fallacy of composition. Notwithstanding, throughout human history, ruling elites, and now popularly elected government officials, have denied the obvious facts of the situation in order to promote their own agendas and the agendas of favored special interests. The result of this behavior is the inevitable destruction of wealth. Regrettably, in the face of the evidence, the proponents of these policies proclaim, "What do you know, dead men bleed after all!"
{1} Clarence Carson provides an excellent treatise on this in a book entitled, The World in the Grip of an Idea.
{2} Clarence Carson, Basic Economics, American Textbook Committee: Wadley, AL, 1988, pp 63-64.
{3} Frederic Bastiat, "Property and Law", Selected Essays on Political Economy, Foundation for Economic Education: Irvington, NY, 1964, p. 99.
{4} Charles Hodge, Systematic Theology, Eerdmans Publishing Company: Grand Rapids, Michigan, 1993, vol. 1, p.406.
{5} Frederic Bastiat, "Property and Law", p. 101.
{6} See the work of J.R. Commons, John Kenneth Gailbraith, John Maynard Keynes, and Thorstein Veblen for some examples of the various positions that such writers have taken.
{7} Clarence Carson, The Flight From Reality, The Foundation for Economic Education: Irvington, NY, 1969, p.216-217.
{8} Frederic Bastiat, "Justice and Fraternity", Selected Essays on Political Economy, The Foundation for Economic Education: Irvington, NY, 1964, p.134.
{9} Buchanan, Tullock, and Tollison edited an excellent primer on the subject entitled, Toward a Theory of the Rent-Seeking Society, Texas A&M University Press: College Station, Texas, 1980.
{10} Ibid, p vii.
{11} Ibid, p. 4.
{12} Ibid, p. 31.
{13} Ibid, pp 8,9.
{14} Steve Liesman, "Playground for the Political Elite", The Moscow Times, Friday, March 19, 1993, p. 16.
{15} James Madison, Notes of the Debates in the Federal Convention of 1787, Adrienne Koch, intro, Ohio University Press: Athens, Ohio, 1966, pp. 76-77.