Freedom Is Slavery: Laissez-Faire Capitalism Is Government Intervention, A Critique of Kevin Carson’s Studies in Mutualist Political Economy

Kevin Carson’s new book Studies in Mutualist Political Economy (Fayettvile, Arkansas, 2004, 409 pp.) centers on the incredible claim, self-contradictory on its face, that capitalism, including laissez-faire capitalism, is a system based on state intervention, in violation of the free market: “It is state intervention that distinguishes capitalism from the free market,” declares the book’s preface.” Capitalism, writes Carson, is “a system of privilege in which the State enable[s] the owners of capital to draw monopoly returns on it, in the same sense that the feudal ruling class was able to draw monopoly returns on land; or, as the left-Rothbardian Samuel Konkin put it, `Capitalism is state rule by and for those who own large amounts of capital (p. 92).’” Perhaps not surprisingly, in view of his description of capitalism, Carson hopes his book will provide a foundation for “free market socialist economics (p. 10).”

Exposition and Critique of Carson’s Framework

For the most part Carson is a Marxist. But not entirely. He adds to Marxism a large dose of what he calls “individualist anarchism” and, beyond that, a significant dose of apparent syndicalism.

Carson is a Marxist insofar as he upholds both an essentially absolutist labor theory of value and the Marxian exploitation theory, which follows from such a version of the labor theory of value.[1] According to the exploitation theory, all exchange value and thus all income is produced by labor and therefore properly belongs to wage earners. Under capitalism, however, a more or less considerable part of the income that properly should go to workers as wages is instead unjustly appropriated as profit, interest, and land rent, i.e., as one or another of the various forms of “surplus value.”

Marx held that exploitation is inherent in the nature of commodity production, because the determination of the value of commodities by the quantity of labor expended in their production is a universal law, applicable to labor itself, no less than to its products (hence the expression/complaint that under capitalism, “labor is a commodity”). According to Marx, the labor expended in the production of labor itself, is the labor expended in the production of the wage earner’s minimum necessities. It is this quantity of labor, the so-called necessary labor time that allegedly determines the value of labor.[2]

Thus, for example, if 6 hours of labor are required to produce the necessities that enable a worker to work for 12 hours, all that the capitalist pays for the 12 hours of labor is a wage corresponding to those 6 hours. The capitalist is thereby enabled to obtain the benefit of the employment of 12 hours of labor, and thus the addition of 12 hours of labor value to the value of his materials and machinery consumed in the production process, for a wage corresponding only to the 6 hours. The 6 hours the worker works over and above the necessary labor time, Marx calls “surplus labor time.” It is the alleged basis of all surplus value. As illustration, if $1 of product value corresponds to each hour of labor expended in production, the worker’s 12 hour day adds $12 of value, while the capitalist pays him a wage of only $6, and thereby gains $6 of profit or surplus value.[3]

Carson accepts this analysis, but with one alleged significant difference. Namely, he claims that in what he conceives of as a free market, namely, a market without alleged state intervention on behalf of capitalists, the value of labor would not be determined by the so-called necessary labor time, as Marx claimed, but by the full value that the worker’s labor adds to the value of the materials and machinery used up in the production. In other words, the worker’s wage would correspond to the 12 hours of labor he worked, and not merely to the 6 hours required to produce his minimum necessities. It would be $12 and not $6. It is this that Carson describes as “individualist anarchism's central insight (p. 10).” In Carson’s own words that insight is “that labor's natural wage in a free market is its product, and that coercion is the only means of exploitation. It is state intervention that distinguishes capitalism from the free market.”

Carson does not realize it, but he has fallen into a veritable abyss of error. Not only is the entire Marxian analysis as utterly wrong as an economic theory can be,[4] but in his efforts to modify it, he adds to it still more major errors.

Carson describes numerous forms of state intervention in the course of his book, many of them actual, such as wars of conquest, taxation, tariffs, subsidies, conservation laws, and licensing legislation. All such intervention, of course, is opposed by all consistent advocates of capitalism. Carson, however, includes under the heading of government intervention what he calls, following the anarchist Benjamin Tucker, “the land monopoly” and “the money monopoly,” which he regards as the respective foundations of rent and profit/interest. It is in the absence of this alleged intervention that labor would be able to receive its alleged full product as wages.

What Carson means by the land monopoly, at least as far as it relates to his claim that laissez-faire capitalism is a system of state intervention, is nothing other than that legal protection of the rights of landowners to collect contractually agreed upon rents represents government intervention (Carson, pp. 197, 200). He declares that, according to “Mutualists,” of which he is one, “[t]he actual occupant is considered the owner of a tract of land, and any attempt to collect rent by a self-styled landlord is regarded as a violent invasion of the possessor's absolute right of property” (p. 200).

Thus, for example, if I, a legitimate owner of a piece of property, legitimate even by Carson’s standards, decide to rent it out to a tenant who agrees to pay the rent, the property, according to Carson, becomes that of the tenant, and my attempt to collect the mutually-agreed-upon rent is regarded as a violent invasion of his [the tenant’s] “absolute right of property.” In effect, Carson considers as government intervention the government’s upholding the rights of a landlord against a thief. He believes he has the right to prohibit me and the tenant from entering into an enforceable contract respecting the payment of rent and that such action is somehow not a violation of our freedom of contract and not government intervention.

What Carson means by the money monopoly is equally bizarre: namely, the inability of the banking system to engage in a permanent policy of radically easy money that would drive the rate of interest and rate of profit to “near zero” (Carson, pp. 219-24). He believes that this inability is the result merely of “the state's licensing of banks, capitalization requirements, and other market entry barriers [which] enable banks to charge a monopoly price for loans in the form of usurious interest rates. Thus, labor's access to capital is restricted, and labor is forced to pay tribute in the form of artificially high interest rates” (p. 200).

Although Carson quotes a few paragraphs from Mises, and even claims to agree to the correctness of the time preference theory of interest, he apparently never heard of Mises’s demonstration of why unlimited credit expansion can succeed only in destroying the value of money, not in permanently reducing the rate of interest. He also seems to be unaware that in a free market, competition, if not the laws against fraud, would severely limit or totally eliminate credit expansion and that it is only government intervention that has enabled it to become as great as it has and that the unlimited credit expansion he advocates would require massively more government intervention in money and credit.[5]

Carson also claims that capitalism has been subsidized by history, as though it could be guilty of practicing government intervention retroactively:

the single biggest subsidy to modern corporate capitalism is the subsidy of history, by which capital was originally accumulated in a few hands, and labor was deprived of access to the means of production and forced to sell itself on the buyer's terms. The current system of concentrated capital ownership and large-scale corporate organization is the direct beneficiary of that original structure of power and property ownership, which has perpetuated itself over the centuries. (Carson, 2004, p. 144)

Some readers may be tempted to stop reading further, having reached the conclusion that Carson is nothing but a fool, ignorant of the nature of individual rights, of economics, and of logic, and, in claiming, on such a patently absurd basis, that capitalism rests on state intervention, dishonest to boot, seeking to hijack the concept of the free market into the service of its opposite, much as an earlier generation of socialists did with the word “liberalism.” Nevertheless, as Mises used to point out in his seminar, it is dangerous simply to dismiss people as cranks, or to attack their motives, without fully unmasking their errors. And, following that advice, this is what we must do with Carson [in the remaining 36 pages of this article].


George Reisman, Ph.D. is Pepperdine University Professor Emeritus of Economics and is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). His web site is www.capitalism.net.

This article is excerpted from the author’s much larger article of the same title which appears in The Journal of Libertarian Studies, Vol. 20, No. 1. The entire issue of the journal, which also contains articles by Walter Block, Roderick Long, and Robert Murphy, is devoted to an analysis of Carson’s book. A closely related article by Murray Rothbard is devoted to a critique of the wider doctrine of individualist anarchism.

____________________________________________________
Notes

[1] See Carson, 2004, p. 14, where he disingenuously quotes Ricardo along these lines, totally ignoring Ricardo’s recognition of the role both of the period of time that must elapse in production and of the rate of profit as determinants of the relative value of reproducible commodities, alongside the quantity of labor required to produce them. In contrast to Ricardo’s doctrine, the absolutist version of the labor theory of value, which was held by Marx, recognizes nothing but the quantity of labor expended in production as the source of exchange value.

[2] Cf. Marx, 1867, vol. 1, pt. 2, chap. 6.

[3] Cf. ibid., pt. 3, chap. 9, sec. 1.

[4] On this subject, see Reisman (1996, chaps. 11 and 14, passim). On the subject specifically of the exploitation theory and Marx’s treatment of interest, see also Böhm-Bawerk (1959, vol. 1, pp.263–271; and idem, 1962, pp. 201-302).

[5] This same point is made by Rothbard in the first essay of the present volume, in application to Carson’s predecessors in the Mutualist school. Despite frequent references to Rothbard, Carson seems totally unaware not only of that essay but also of Rothbard’s (1962, 2001) support of a one-hundred-percent-reserve gold standard as an essential feature of a fully free market and of the fact that in such a market credit expansion would necessarily be totally absent.

References

Böhm-Bawerk, Eugen. 1959 [1914]. Capital and Interest, South Holland, IL: Libertarian Press, George D. Hunke and Hans F. Sennholz, trans.

───. 1962 [1898]. “Karl Marx and the Close of His System,” reprinted as “Unresolved Contradiction in the Marxian Economic System” in Shorter Classics of Eugen von Böhm-Bawerk, South Holland, Ill.: Libertarian Press.

Carson, Kevin A. 2004. Studies in Mutualist Political Economy. Self-published: Fayetteville, AR.

Marx, Karl. 1867. Capital, vol. 1, London.

Reisman, George. 1996. Capitalism: A Treatise on Economics, Ottawa, Illinois: Jameson Books.

Rothbard, Murray N. 1962. Man, Economy, and State, 2 vols., Princeton, N. J.: D. Van Nostrand Company, Inc.

───. 2001. The Case for a 100 Percent Gold Dollar. Auburn, Alabama. The Ludwig von Mises Institute.

Not Feldstein’s Gasoline Rationing Scheme but Economic Freedom Will Improve the Environment and Promote National Security

A noted economist, Prof. Martin Feldstein of Harvard University, has written an article for the supposedly pro-free-enterprise Wall Street Journal, in which he proposes a system of government gasoline rationing as a means of improving the environment and promoting national security. (The article, titled “Tradeable Gasoline Rights,” appears in the June 5 issue, on p. A10.)

Surprisingly, or perhaps not surprisingly, the word “rationing” does not appear in Prof. Feldstein’s article. Yet that is exactly what he proposes.

Prof. Feldstein would have the government issue what would essentially be ration coupons to motorists, the total amount of which would equal its chosen level of aggregate gasoline consumption. In purchasing gasoline, it would be necessary for the purchaser to supply the necessary coupons along with the money price of the gasoline.

The nature of the process is perhaps somewhat obscured because of the electronic form in which it would take place. Instead of physical ration coupons, such as existed back in World War II, there would be government issued ration “debit cards” that would incur an electronic deduction with every gallon of gasoline purchased at the pump.

But what undoubtedly is most responsible for leading Prof. Feldstein astray is his enchantment with the idea of what he calls “tradeable gasoline rights, or TGRs.” His use of this term is what permits him to bypass and avoid the word “rationing.”

So let us be clear. What Prof. Feldstein proposes is gasoline rationing with a market in the ration coupons.

Some alleged defenders of free markets are attracted to such schemes because they would provide an important measure of flexibility in comparison with government rationing pure and simple: namely, individuals could obtain additional rations by buying additional coupons.

But the actuality is that in the long-run they are a much worse system. Straightforward rationing at least has the virtue of being so bad and painful that people want to get rid of it. But the kind of scheme that Prof. Feldstein proposes would create a major new government entitlement to millions of people, who would never be willing to give it up. These would be all those individuals who found it preferable to sell their gasoline ration coupons rather than use them. They would derive a more or less significant amount of money from the sale of their coupons and soon look upon the proceeds as a regular part of their incomes. This group would have a vested interest in maintaining the system forever.

Feldstein actually approves of the creation of this new entitlement and regards it as a powerful political selling point. He says, “the TGR system creates winners as well as losers” and declares, in the final paragraph of his article, “[t]hat a majority of households could benefit from the TGR system . . . is both an economic and a political advantage. It would be an efficient way to reduce gasoline consumption that Congress could actually pass.”

Prof. Feldstein does not realize that there must always be a net loss under any such arrangement. If because the government arbitrarily restricts the supply of gasoline, I must pay an extra $100 a month, say, to someone else, in order to obtain his ration coupons, there is something more involved than my loss of $100 and his gain of $100. There is the loss of gasoline. The economy as a whole is poorer to the extent of the government’s forced reduction in its supply. In the absence of the government’s reduction, I would have had my $100 and my gasoline. With its interference, not only does someone else have my $100, but someone else is without gasoline.

Furthermore, it never occurs to Prof. Feldstein that comparable “benefits” to many or most households might be achieved in other ways as well, such as by creating TER, TFR, and TCR systems—i.e., “tradeable electricity rights,” “tradeable food rights,” and “tradeable children rights”—and any and all manner of other systems of “tradeable rights,” i.e., systems in which the government adopts a scheme of rationing but allows trade in the coupons. It should not be difficult to see that before long, however the money might be shuffled around, the net effect would be that virtually everyone would have less, for the simple reason that there was less of more and more things.

If one is serious about improving the environment and promoting national security, there is a simple rational solution. And that is to allow economic freedom in energy production.

Opening up the North Slope of Alaska, the whole state of Alaska, indeed, the whole territory of the United States, including the continental shelf, to oil and gas exploration and production, abolishing the restrictions on the strip mining of coal, and allowing the construction of new atomic power plants, would sharply increase the supply of petroleum while reducing the demand for it. (This last would occur because of the greater availability and lower price of the alternatives afforded by natural gas, coal, and atomic power.)

The connection to national security should be obvious. Namely, the resulting dramatically lower price of oil would cause a corresponding dramatic reduction in the oil revenues of the Arab governments that finance terrorism. The money available to finance terrorism would thus be radically reduced.

The improvement in the environment that would result is obscured by the fact that people have lost sight of what the environment means. It is not nature in and of itself, apart from its connection to human life and well-being. Rather, it is the surroundings of man, his external material world, deriving its value from its contribution to his life and well-being. When the chemical elements that constitute the petroleum deposits of the North Slope of Alaska, or anywhere else, are removed from their original location, and appropriately broken down and combined with other chemical elements, brought from elsewhere, and then brought to human beings throughout the United States and around the world in the form of gasoline, the relationship between those chemical elements and human life and well-being is improved. In the ground they did nothing to serve man’s life. As gasoline, they allow human beings to move their persons and goods quickly and easily from one location of their choice to another.

Indeed, judged from the perspective of physics and chemistry, all of production and economic activity has as its essential purpose the improvement of man’s environment. For it consists precisely of the systematic change in the location and combination of the chemical elements in ways that make them stand in a more useful relationship to man’s life and well-being. It is the adaptation of man’s environment to man, hence, its improvement.

This last represents such a radically different perspective on the environment than has become prevalent in the last few decades that most readers will require much more discussion before being convinced of it, or even being willing to consider it, than I can possibly provide in the space of this brief article. So I must close by referring to my extensive discussions of the subject in Chapter 3 of my book Capitalism: A Treatise on Economics.

The adoption of a policy of economic freedom for energy production depends on confronting and overcoming the doctrine of nature’s intrinsic value and its role in the environmental movement. That is what this chapter of my book provides. It serves to cut the ground from beneath all proposals, whether Feldstein’s or others’, that seek to address alleged environmental problems by means of the violation of economic freedom.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Something to Cheer at The New York Times

Earlier today I would not have believed it possible that I would write something in praise of an Op-Ed piece in The New York Times.

But Nicolas D. Kristof has written an article that demonstrates some serious understanding of a highly charged subject and has had the courage to express it in his column. The title of his article conveys its nature. It’s called “In Praise of the Maligned Sweatshop.”

Datelined, WINDHOEK, NAMIBIA, the article opens with the statement, “Africa desperately needs Western help in the form of . . . sweatshops.”

Kristof understands that the sweatshops would raise the demand for labor and cause a substantial improvement in economic conditions in comparison with what they are in the absence of the sweatshops. In the print-edition of the article, this point is driven home by a callout that reads, “What’s worse than being exploited? Not being exploited.”

Here are a couple of gems that his article contains:

Well-meaning American university students regularly campaign against sweatshops. But instead, anyone who cares about fighting poverty should campaign in favor of sweatshops . . . . If Africa could establish a clothing export industry, that would fight poverty far more effectively than any foreign aid program. . . . [A] useful step would be for American students to stop trying to ban sweatshops, and instead campaign to bring them to the most desperately poor countries.

Kristof even has an answer for advocates of paying a “living wage” in the sweatshops. He points out that because such a wage is above the market rate, the premium is typically pocketed by local managers, who are in a position to collect bribes for awarding the premium-paying jobs to workers of their choice, with the result that “the workers themselves don't get the benefit.”

Kristof’s article has what I experience as a kind of premonitional quality. Namely, it gives a momentary glimpse of what the world might be like if the world’s most intellectually influential newspaper were regularly filled with articles of this kind. How different the intellectual climate of our country would be. How different its political and economic policies would be. How much freer and more rational our society would be.

Of course, this is only a momentary premonition. But it makes me recall another such premonition that I experienced sometime in the mid-1970s, when I read that the Soviet government could no longer rely on the philosophy of Marxism to obtain the support of its people, but instead had to rely on Russian nationalism. That I recognized as a decisive crack in the whole edifice of socialism/communism.

It’s just possible that in Kristof’s column, we have a comparable crack in the left-liberal edifice of The New York Times. And I say this in the knowledge that Kristof has written other columns that are as horrendously bad as this one is remarkably good.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

The Flagellation of the Pursuit of Happiness

Paul Krugman is at it again. In today’s New York Times, in his official capacity as a professional bleeding heart “liberal,” he once again revels in his role of flagellating the pursuit of happiness with the whip of human misery. Specifically, he denounces the prospect of the impending Senate vote to abolish the estate tax, on the grounds that the government’s loss of revenue “will cause 65,000 people, mainly children, to lose health insurance, and lead many people who retain insurance to skip needed medical care because they can't afford increased co-payments.”

True to form, Krugman makes no mention of the fact that in each case the money paid as estate taxes was rightfully the property of the bequestor, who earned it and who had a right to determine to whom his property would go: namely, to his chosen heirs and not to anyone selected by Krugman or government officials, in defiance of his wishes. With Krugman and his ilk, the rights of bequestors and of taxpayers in general count for nothing. They are overridden by the needs of others.

His message is the endlessly repeated one of “stop, don’t use your wealth for your own enjoyment (present or future), because others are suffering and need it more than you do.” His message is that everyone’s life is mortgaged to the needs of others and that no one can breathe free and live for his own happiness and pleasure so long as anyone else, anywhere on earth is suffering and in misery.

Here is a news flash for Mr. Krugman and all others who share his beliefs: The individual owns his life free and clear. His own happiness is full and sufficient justification for his actions, irrespective of the needs, misery, and suffering of others. He did not cause their suffering and his self-sacrifice would not cure it.

An individual may be a multimillionaire (nowadays, he probably needs to be a billionaire) and desire a yacht or personal jet. He values his yacht and/or jet more than feeding the possibly thousands or tens of thousands of starving people around the world for whom the price of his luxuries might buy food. His valuation is not arbitrary or capricious. It is based on the fact that his yacht or plane will make a greater actual contribution to his life and the lives of his loved ones than will the feeding of a mass of people with whom he has no personal connection and who make no actual contribution to his life or well being.

Ironically, Krugman and virtually all the other bleeding heart “liberals” behave in essentially the same way in their own lives as does the billionaire. They too value their luxuries above the necessities of strangers. If they did not, they would live as monks under vows of poverty, in small cells, sleeping on a straw mat, and subsisting on bread and water, so that they could provide for those needier than themselves to the greatest possible extent.

Krugman closes his column with the remark, “Congress has already declared that the budget deficit is serious enough to warrant depriving children of health care; how can it now say that it's worth enlarging the deficit to give Paris Hilton a tax break?” The answer is that while Paris Hilton may not be one of the most inspiring representatives of humankind, the fact remains that like everyone else she too has the right to the pursuit of her own happiness. And neither Krugman nor anyone else is entitled to deprive her of anything that is rightfully hers because they believe that her wealth should be used differently than she would wish to use it. Paris Hilton deserves the tax break because the money is hers in the first place. Krugman’s Medicaid children do not deserve that money because it is not theirs and has been given them only by means of stealing it—i.e., taking it against the will of its owners at the point of a gun wielded by tax collectors.

Cutting Medicaid and all other government programs while reducing and eliminating taxes is precisely the policy that is needed to restore the founding principle of the United States, which is the individual’s right to the pursuit of his own happiness. This principle, not cutting the government’s budget deficit, is the primary. Implementing it means cutting government spending precisely for the purpose of cutting taxes. If there is a deficit, it means cutting government spending still more. It means cutting government spending for the very neediest to make possible the pursuit of happiness by the very wealthiest. If the pursuit of happiness is the principle, it means this above all, because only this will secure the principle.


The philosophy I have expressed above is most closely identified with Ayn Rand and her philosophy of Objectivism. And in truth, she is its most consistent advocate. Nevertheless, I would like to quote a passage from another advocate of the same philosophy, namely, Ludwig von Mises, which has the special virtue of pointing out the close connection between the ethics of egoism and the teachings of economics on the subject of the harmony of self-interests. It is the single passage in all of Mises’s writings that I value most highly and which served to make me a “Misesian” for life, when I first read it over fifty years ago. It summarizes the essence of Mises’s economic theories.

Nothing is gained when the teacher of morals constructs an absolute ethic without reference to the nature of man and his life. The declamations of philosophers cannot alter the fact that life strives to live itself out, that the living being seeks pleasure and avoids pain. All one’s scruples against acknowledging this as the basic law of human actions fall away as soon as the fundamental principle of social co-operation is recognized. That everyone lives and wishes to live primarily for himself does not disturb social life but promotes it, for the higher fulfillment of the individual’s life is possible only in and through society. This is the true meaning of the doctrine that egoism is the basic law of society.—Ludwig von Mises, Socialism An Economic and
Sociological Analysis. New Haven: Yale University Press, 1951, p. 402.

Among the most important things that Mises showed is that the pursuit of self-interest is the foundation of the saving and investment and continuous innovation and improvement of products and methods of production that serves to raise the standard of living of all. In a country governed by the principle of the individual’s pursuit of his own happiness, the standard of living of the very poorest comes to surpass the standard of living of the very richest of a few generations back.

In such a country, great business fortunes are accumulated on the basis of the earning of a high rate of profit over a long period of time and the continuous saving and reinvestment of most of that profit. To earn the high rate of profit, repeated innovations are required, as competition serves to eliminate the premium profits on earlier innovations. In their origin and disposition, the great fortunes serve to increase the supply of products and reduce their prices, while raising the demand for labor and its wages, this last being one of the effects of the greater accumulation of capital.

In his ignorance, it is precisely such fortunes that Krugman is out to undermine through his advocacy of the continuation of the estate tax. He thinks the estate tax has no negative consequences for the average person because it “is overwhelmingly a tax on the very, very wealthy; only about one estate in 200,” he says, “pays any tax at all.”

If the estates consisted of mere heaps of personal consumers’ goods, in the manner, say, of the jewels of an Indian maharajah, Krugman might have a point. He has no point when the estates consist of the means of production that serve the general buying public in providing it with goods and services and that underlie most of the demand for labor in the economic system. Estate taxes are at the expense of the supply of consumers’ goods for all and at the expense of the demand for the labor of all. They are urged in opposition to the general standard of living and the well being of all.

Krugman and the other advocates of looting and plundering the wealth of the rich for the alleged sake of the poor contemptuously dismiss these absolutely correct economic doctrines pertaining to the role of innovation and saving as “the trickle-down theory.” In doing so, they serve only to perpetuate the poverty of which they pretend to complain.

Krugman and his ilk actually care nothing whatever for the welfare of the poor. For them the suffering of the poor is merely a weapon with which to beat down the aspirations and success of the rich, which alone can elevate the poor.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site http://www.capitalism.net/ is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Nocera Replies

Dear Mr. Reisman-- I enjoyed reading your blog just now, but if you go back and read what I wrote, you'll note that I specifically set a parameter: to qualify a book had to be published in the last two decades. Atlas Shrugged was published, I believe, in 1959. The point I was trying to make is that over the last two decades, as business has become more central to American life--or least a more central topic now that Americans invest their 401Ks etc etc, and as business stories have become a part of the front page as well as the business page, and the subject of many non fiction books, where are the novelists? My point still stands, I believe.

Dear Mr. Nocera:

Thank you for your reply. Unfortunately, I believe it merely serves to dig you deeper into the hole of an indefensible position.

The “parameter” you set of books published in the last two decades was purely arbitrary, and so I chose to ignore it. You could not possibly have chosen it if you had read and appreciated Atlas Shrugged. This is a book of such importance that it automatically dictates a time period long enough to include it.

And your notion that it is such things as 401Ks that are significant in determining the importance of business to people’s lives is incredibly myopic. The importance of business is manifested in the difference between the standard of living in the United States and that of the Third World and the pre-industrial era. Where do you think the advances of the last two centuries or more have come from if not from the continuous innovation and the saving and investment of businessmen? This is an essential part of the message of Atlas Shrugged. It is a lesson that you and your colleagues at The New York Times, and most of the rest of the contemporary intellectual establishment, have not learned and refuse to consider.

George Reisman

Does the Name “Ayn Rand” Ring a Bell?

In his New York Times column of June 3, Joseph Nocera asks:

who among our better novelists has put business front and center? . . . Tom Wolfe comes to mind, of course; his first novel, "Bonfire of the Vanities," tackled Wall Street in the 1980's, while "A Man in Full," his second novel, had real estate as its backdrop. Surely, though, there must be others that are escaping me.

Does the name “Ayn Rand” ring a bell? You know, the author of Atlas Shrugged, the novel that describes the collapse of our entire civilization on the basis of its hostility to business and businessmen? It’s only sold several million copies and has reportedly had a more profound influence on more people in the United States than any other book ever written, with the exception of the Bible.

Perhaps Mr. Nocera is simply ignorant of these facts. If so, that should be considered astounding, given his position as a professional business writer who is presumably familiar with a wider intellectual world than exists within the confines of his newspaper and the universities which have shaped the minds of its personnel.

Or perhaps he is aware of these facts but simply chooses to ignore them. If this is the case, it would be a classic illustration of the mentality of those once aptly described as “an effete corps of impudent snobs.” That is, a collection of ignoramuses feigning knowledge while going back and forth between ignoring and ridiculing those, such as Ayn Rand and Ludwig von Mises, who actually possess it.

There may also be a third possibility: a seemingly inexplicable failure of memory on Mr. Nocera’s part. If that is the case, let us hope for his sake that it is nothing more than a bizarre, isolated instance and not an indication of a developing permanent condition.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

The Sorry State of Our Union

Congressmen no longer read the bills they vote on and thus do not require them to make sense. (The latest example is the passage of a bill by the House of Representatives making “price gouging” illegal while leaving it undefined.) They leave it to the President and the Supreme Court to sort things out.

Unfortunately, the present President sometimes gives the impression of being unable to read.

And, since 1937, the Supreme Court has refused to read. It has refused to read the one thing it should be reading above all: the Constitution of the United States. Instead, its members now look for inspiration to the decisions of foreign courts.

The Sarbanes Oxley Act of 2002 requires corporate executives not merely to read but to certify the accuracy of their companies' financial reports. Why are Congressmen (i.e., both Representatives and Senators) held to a lesser standard? Why are they not required under penalty of perjury to certify that they have read and carefully studied each bill that they vote for? Don't the American people have the right to demand that their legislators know what they are doing?
After all, the stakes are far higher in cases of Congressional nonfeasance or malfeasance than in cases of business nonfeasance or malfeasance. In the latter, the most that one can lose is an investment. In the former, what can be lost is human life, and on a massive scale. And it is much easier to avoid the financial losses inflicted by wayward businessmen than it is to avoid the losses inflicted by wayward Congressmen. To avoid the first, it is only necessary to avoid making a bad investment. There is no such simple way to avoid the harm that can be wreaked by the second.

Yes, let us agree that there is simply no way for a Congressman to read and understand the torrent of legislation that is proposed in every session of Congress. It is simply too vast. And this is even more true of the absolute enormity of legislation that is enacted by the dozens of government regulatory agencies every year, under the authority that has been delegated to them by Congress. Indeed, the enormity of the job was the main reason for creating the regulatory agencies in the first place and delegating the authority to legislate to them.

But still, one leading and downright terrifying fact stands out. And that is that the people's elected representatives do not know what the government is doing. The government is supposed to be of, by, and for the people. The people's elected representatives are supposed to be in control of that government in the name of the people they represent. That is their job.

The situation we are in, and have been in for several generations, is one in which intelligent, representative government is increasingly impossible, simply because of the sheer size and scope of government. If we want a government that is controlled by our representatives, we need a government that is sufficiently limited in size and scope for it to be humanly possible for our representatives to know and understand what it is doing and what is being suggested that it do.

For the people's representatives to regain control of the government, its size and scope must be radically reduced.

A first step should be the refusal to enact any new legislation that the members of Congress are unwilling to swear or affirm under oath that they have read and carefully studied. And along with this, as another preliminary step, the promulgation of any new rule by any regulatory agency should be prohibited except upon that rule having been read, studied and voted into effect by a majority of the House and Senate Committees having jurisdiction over that regulatory agency. Thus, for example, before the SEC or EPA could enact any new rule, a majority of the members of the House and Senate Committees having jurisdiction over them would have to approve the new rule. This measure would effectively place members of Congress in charge of the various regulatory agencies.

Yes, the effect of these proposals would be a radical reduction in the enactment of new laws and new rules and regulations. Exactly that is what is needed if there is to be any hope of the people and their representatives regaining control of their government. As things stand, the government is comparable to a high-speed freight train hurtling down the tracks with no one in the cab of the locomotive and thus with no one to see what lies in front of the train and where it is going. That is our government today: a train wreck, a thousand train wrecks, just waiting to happen.

Comparisons to train wrecks hardly do justice to what's at stake. It's the wreckage of our country that is waiting to happen, and has been happening. And it's been happening and will continue to happen for the very simple reason that the government of the United States is out of control in the most literal sense. It is out of the control of the American people and their elected representatives. That control must be reestablished.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Platonic Competition, Part II

This essay originally appeared in Ayn Rand’s The Objectivist, vol. 7, nos. 8 and 9, August and September, 1968. It was posted on May 23, 2006, not May 18.

The doctrine of “pure and perfect competition” marks the almost total severance of economic thought from reality. It is the dead end of the attempt to defend capitalism on a collectivist base.

Ironically, that attempt took hold in economics in the late nineteenth century (and has been gaining influence ever since) through the efforts of Victorian economists to refute the theories of Karl Marx on the subject of value and price. The rationing theory of prices was advanced as the alternative to the Marxian labor theory of value. The irony is that the “pure and perfect competition” doctrine is to the left of Marxism.

Marxism denounced capitalism merely for the existence of profits. The “pure and perfect competition” doctrine denounces capitalism because businessmen refuse to suffer losses. The argument of the supporters of “pure and perfect competition” is not that businessmen make excessive profits through any kind of “monopoly,” but that they are “monopolistic” in refusing to sell their products at a loss—which businessmen would have to do if they treated their plant and equipment as costless natural resources that acquired value only when they happened to be “scarce.”

The “pure and perfect competition” doctrine distorts the facts of reality to a greater extent than did the traditional critiques of capitalism. Those critiques recognized that competition is a fundamental element of capitalism, but they denounced it.

Capitalism, they claimed, is ruled by the “law of the jungle,” by the principles of “dog eat dog” and “the survival of the fittest.” The “pure and perfect competition” doctrine proceeds from the same base as these earlier critiques, and is in full agreement with them in their objections to such characteristics of the process of competition as the continuous improvement in products, the variety of products, advertising, and the existence of idle capacity. Both schools regard all these characteristics of competition as a “waste” of “society’s scarce resources.”

But the “pure and perfect competition” doctrine regards these characteristics as “imperfections” and attacks capitalism on the grounds that capitalism lacks competition.

Every industry, it asserts, is “imperfectly competitive” (with the barely possible exception of wheat farming). Every industry is guilty of “monopolistic competition” or “oligopoly.” In the words of Professor Bach:

“There is a spectrum from pure competition to pure monopoly. Where there are a good many sellers of only slightly differentiated products, but not enough to make the market perfectly competitive, we call the situation ‘monopolistic competition.’” And: “Where there are only a few competing producers so each producer must take into account what each other producer does, we call the situation ‘oligopoly,’ which means few sellers.” (George Leland Bach, Economics: An Introduction to Analysis and Policy, 6th ed., Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1968, p. 337. Bach expresses the same view in the eleventh edition of his book, published in 1987, pp. 376–377, but not as succinctly.)

The concepts of “monopolistic competition” and “oligopoly” are indistinguishable, both in theory and in practice. As examples of “monopolistic competition,” Professor Bach cites Kellogg and Post in the field of breakfast cereals, and RCA and Philco in the field of television sets—even though these industries are fully as “oligopolistic” as the automobile or steel industry. (Even small retail establishments, a more popular example of “monopolistic competition,” can also be classified under “oligopoly,” since there are only a few of a given kind in a given neighborhood.) In any case, these two concepts embrace virtually all industries, except the few that are called “pure monopoly.”

The competition that capitalism is accused of lacking—as a result of “monopolistic competition” and “oligopoly”—is called price competition.

The nature of price competition, as contemporary economists see it, is indicated in another passage in Professor Bach’s textbook:

“Analytically, the crucial thing about an oligopoly is the small number of sellers, which makes it imperative for each to weigh carefully the reactions of the others to his own price, production, and sales policies. The result is a strong pressure to collude to avoid price competition or to avoid it without formal collusion.” (Ibid., p. 361.)

Capitalism is accused of lacking price competition on the following grounds: if there are few sellers in a market, any seller who cuts his price must take into account the fact that the other sellers will match his cut—so he may be better off if he refrains from price cutting; thus prices will not be driven down to the level of “marginal cost” or to the point where they “ration” the benefit of “scarce” capacity.

Consider the evasion entailed in the accusation that capitalism lacks price competition. Every decade, since the beginning of the Industrial Revolution, commodities have become not only better, but also cheaper—if not always in terms of paper money (the value of which has been constantly reduced by the policies of governments), then in terms of the labor and effort that must be expended to earn them. What is it that has made producers lower their prices for the last two hundred years? Blankout.

Actual price competition is an omnipresent phenomenon in a capitalist economy. But it is completely unlike the kind of pricing envisioned by the doctrine of “pure and perfect competition.” It is not the product of a mass of short-sighted, individually insignificant little chiselers, each of whom acts to cut his price in the hope that his action won’t be noticed by any of the others. The real-life competitor who cuts his price does not live in a rat’s world, hoping to scurry away undetected with a morsel of the cheese of thousands of other rats, only to find that they too have been guided by the same stupidity, with the result that all have less cheese.

The competitor who cuts his price is fully aware of the impact on other competitors and that they will try to match his price. He acts in the knowledge that some of them will not be able to afford the cut, while he is, and that he will eventually pick up their business, as well as a major portion of any additional business that may come to the industry as a whole as the result of charging a lower price. He is able to afford the cut when and if his productive efficiency is greater than theirs, which lowers his costs to a level they cannot match.

The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity. Furthermore, his cost-cutting ability permits him to forestall the potential competition of outsiders who might be tempted to enter his field, drawn by the hope of making profits at high prices, but who cannot match his cost efficiency and, consequently, his lower prices. Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.

Price competition is not the self-sacrificial chiseling of prices to “marginal cost” or their day by day, minute by minute adjustment to the requirements of “rationing scarce capacity.” It is the setting of prices perhaps only once a year—by the most efficient, lowest-cost producers, motivated by their own self-interest. The extent of the price competition varies in direct proportion to the size and the economic potency of these producers. It is firms like Ford, General Motors and A & P—not a microscopic-sized wheat farmer or sharecropper—that are responsible for price competition. The price competition of the giant Ford Motor Company reduced the price of automobiles from a level at which they could be only rich men’s toys to a level at which a low-paid laborer could afford to own a car. The price competition of General Motors was so intense that firms like Kaiser and Studebaker could not meet it. The price competition of A & P was so successful that the supporters of “pure and perfect competition” have never stopped complaining about all the two-by-four grocery stores that had to go out of business.

Competition is the means by which continuous progress and improvement are brought about. And nothing could be more pure and perfect—in the rational sense of these terms—than the competition which takes place under capitalism.

The ideal of the “pure and perfect competition” doctrine, however, is a totally stagnant economy—the “static state,” as it is called—in which production and consumption consist of an endless repetition of the same motions. (For a valuable discussion of the influence of this “ideal” on contemporary economics, see von Mises, Human Action.)

It is in the name of this “ideal” that the supporters of “pure and perfect competition” attack the constant introduction of new or improved products, the evergrowing variety of products, and the advertising required to keep people abreast of what is being offered.

And only from the standpoint of this “ideal” can one declare that idle capacity is a “waste”—for only in a “static state” would there be no need for any unused capacity.

A capitalist economy is not “static.” Producers know that they must respond to changes in conditions. They endeavor always to have a margin of idle capacity, which can be brought into production if and when it is needed. Under capitalism, the normal state of production requires the possession of extra machines and tools in every industry, to meet every foreseeable change in demand. This is not a “waste,” not any more than the fact that consumers under capitalism own more shirts than the ones they happen to be wearing.

What the “pure and perfect competition” doctrine seeks is the abolition of competition among producers. Its “ideal” is a state in which no producer is able to take any business away from another producer. If a man is producing at full capacity, he cannot meet the demand of a single additional buyer, let alone compete for that demand. And if he is not producing at full capacity and is charging a price equal to his “marginal cost,” he still cannot compete for the demand of any additional buyers because he is forbidden to “differentiate” his product or to advertise it.

The “pure and perfect competition” doctrine seeks to replace the competition among producers in the creation of wealth, with a competition among consumers in the form of a mad scramble for a fixed stock of existing wealth. It seeks a state of affairs in which no additional buyer can obtain a product without depriving some other buyer of the goods he wants—for that is what competition at full capacity would mean. It seeks to make men competitors in consumption rather than in production. It seeks to transform the competition of human beings into a competition of animals fighting over a static quantity of prey. In other words, when it denounces capitalism, it is denouncing the fact that capitalism is not ruled by the law of the jungle.

The supporters of “pure and perfect competition” are aware of the fact that their doctrine is inapplicable to reality. This does not trouble them. Their view is expressed by Professor Wilcox, who observes casually (in a passage immediately following his alleged definition—the list of conditions I quoted earlier):

“Perfect competition, thus defined, probably does not exist, never has existed, and never can exist. . . . Actual competition always departs, to a greater or lesser degree, from the ideal of perfection. Perfect competition is thus a mere concept, a standard by which to measure the varying degrees of imperfection that characterize the actual markets in which goods are bought and sold.”

This “concept” divorced from reality, this Platonic “ideal of perfection” drawn from non-existence to serve as the “standard” for judging existence, is one of the principal reasons why businessmen have been imprisoned, major corporations broken up and others prevented from expanding, and why economic progress has been retarded and the improvement of man’s material well-being significantly undercut. This “concept” is at the base of antitrust prosecutions, which have forced businessmen to operate under conditions approaching a reign of terror.

Such are the effects of mysticism when it is brought into economics. Non-existence has no consequences; but those who advocate it, do.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). His web site is http://www.capitalism.net/. This essay is available as a pamphlet from The Jefferson School of Philosophy, Economics, and Psychology. The author wishes to note that his book Capitalism contains a far more comprehensive and detailed treatment of the subjects dealt with here (see in particular, pp. 425-437). Where possible, references have been updated to conform with those in Capitalism.
Copyright © 1968 by The Objectivist; Copyright © 1991, 2005 by George Reisman. Provided that credit is given to the author and he is notified by e-mail, permission is hereby granted to post this essay on the internet and otherwise noncommercially distribute it electronically or in print, other than as part of a book. All other rights reserved.

Platonic Competition, Part I

The following essay originally appeared in Ayn Rand’s The Objectivist, vol. 7, nos. 8 and 9, August and September, 1968.

The doctrine of “pure and perfect competition” is a central element both in contemporary economic theory and in the practice of the Anti-Trust Division of the Department of Justice. “Pure and perfect competition” is the standard by which contemporary economic theorists and Justice Department lawyers decide whether an industry is “competitive” or “monopolistic,” and what to do about it if they find that it is not “competitive.”

“Pure and perfect competition” is totally unlike anything one normally means by the term “competition.” Normally, one thinks of competition as denoting a rivalry among producers, in which each producer strives to match or exceed the performance of other producers. This is not what “pure and perfect competition” means. Indeed, the existence of rivalry, of competition as it is normally understood, is incompatible with “pure and perfect competition.” If that is difficult to believe, consider the following passage in a widely used economics textbook by Professor Richard Leftwich:

“By way of contrast, intense rivalry may exist between two automobile agencies or between two filling stations in the same city. One seller’s actions influence the market of the other; consequently, pure competition does not exist in this case.” (Richard H. Leftwich and Ross D. Eckert, The Price System and Resource Allocation, 9th ed., The Dryden Press, Chicago, 1985, p. 41.)

While competition as normally, and properly, understood rests on a base of individualism, the base of “pure and perfect competition” is collectivism. Competition, properly so-called, rests on the activity of separate, independent individuals owning and exchanging private property in the pursuit of their self-interest. It arises when two or more such individuals become rivals for the same trade. The concept of “pure and perfect competition,” however, proceeds from an ideology that obliterates the existence of individuals, of private property, and of exchange. It is the product of an approach to economics based on what Ayn Rand has characterized as the “tribal premise.” (Ayn Rand, Capitalism: The Unknown Ideal, The New American Library, New York, 1966, p. 7.)

The tribal premise dominates contemporary economic theory, and is, as Miss Rand writes, “shared by the enemies and the champions of capitalism alike . . .” The link between the concept of “pure and perfect competition” and the tribal concept of man, is a tribal concept of property, of price and of cost.

According to contemporary economics, no property is to be regarded as really private. At most, property is supposedly held in trusteeship for its alleged true owner, “society” or the “consumers.” “Society,” it is alleged, has a right to the property of every producer and suffers him to continue as owner only so long as “society” receives what it or its professorial spokesmen consider to be the maximum possible benefit. As Professor C. E. Ferguson, a supporter of the “pure and perfect competition” doctrine, declares in his textbook: “At any point in time a society possesses a pool of resources either individually or collectively owned, depending upon the political organization of the society in question. From a social point of view the objective of economic activity is to get as much as possible from this existing pool of resources.” (C. E. Ferguson, Micro-economic Theory, 5th ed., Richard D. Irwin, Inc., Homewood, Illinois, 1980, pp. 173f.)

According to the tribal concept of property, “society” has a right to one hundred percent of every seller’s inventory and to the benefit of one hundred percent use of his plant and equipment. The exercise of this alleged right is to be limited only by the consideration of “society’s” alleged alternative needs. Thus, a producer should retain some portion of his inventory only if it will serve a greater need of “society” in the future than in the present. He should produce at less than one hundred percent of capacity only to the extent that “society’s” labor, materials and fuel, which he would require, are held to be more urgently needed in another line of production.

The ideal of contemporary economics—advanced half as an imaginary construct and half as a description of reality, with no way of distinguishing between the two—is the contradictory notion of a private-enterprise, capitalist economy in which producers would act just as a socialist dictator would wish them to act, but without having to be forced to do so. (For an account of the origins of this alleged ideal, see Ludwig von Mises, Human Action, 3rd ed. rev., Henry Regnery, Chicago, 1966, pp. 689-693.) In accordance with this “ideal,” contemporary economics tears the concepts of price and cost from the context of individuals engaged in the free exchange of private property, and twists them to fit the perspective of a socialist dictator. It views the system of prices and costs as the means by which producers in a capitalist economy can be led to provide “society” with the optimum use and “allocation” of its “resources.”

A price is viewed not as the payment received by a seller in the free exchange of his private property, but as a means of rationing his products among those members of “society” or the “sovereign consumers” who happen to desire them. Prices are justified on the grounds that they are a means of rationing, superior to the issuance of coupons and priorities by the government. Indeed, rationing itself is described by Professor George Stigler, in his popular textbook, as “non-price rationing,” prices allegedly being the form of rationing that exists under capitalism. (George J. Stigler, The Theory of Price, rev. ed., The Macmillan Company, New York, 1952, p. 83.)

Similarly, a cost, according to contemporary economics, is not an outlay of money made by a buyer to obtain goods or services through free exchange, but the value of the most important alternative goods or services “society” must forego by virtue of obtaining any particular good or service. On this point, Professor Ferguson writes:

“The social cost of using a bundle of resources to produce a unit of commodity X is the number of units of commodity Y that must be sacrificed in the process. Resources are used to produce both X and Y (and all other commodities). Those resources used in X production cannot be used to produce Y or any other commodity. To use a popular wartime example, devoting more resources to the production of guns means using fewer resources to produce butter. The social cost of guns is the amount of butter foregone.” (Ferguson, op. cit., p. 173.)

On the basis of this concept of cost, contemporary economics holds that the only relevant cost of production is “marginal cost.” As a rule, and roughly speaking, for the concept can only be approximated, “marginal cost” is held to be the cost of the labor, materials and fuel required to produce an additional unit of a product. Their value is supposed to represent the value of the most important alternative goods or services that “society” foregoes in obtaining this additional unit.

The concept of “marginal cost” excludes the cost of existing factories and machines. The reason for this exclusion is that these assets are “here,” they were paid for in the past and, therefore, their cost is not regarded as a concern of “society” in the present.

All prices, according to this view, should be scarcity prices, i.e., prices determined by the necessity of balancing a limited supply against a comparatively unlimited demand.

Supply, in the context of this doctrine, means the goods that are here—in the possession of sellers—and the potential goods that the sellers would produce with their existing plant and equipment, if they considered no limitation to their production but “marginal cost.” Demand means the set of quantities of the goods that buyers will take at varying prices. Every price is supposed to be determined at whatever point is required to give the buyers the full supply in this sense and to limit their demand to the size of the supply.

The essence of this theory of prices is the idea that every seller’s goods and the use of his plant and equipment belong to “society” and should be free of charge to “society’s” members unless and until a price is required to “ration” them. Prior to that point, they are held to be free goods, like air and sunlight; and any value they do have is held to be the result of an “artificial, monopolistic restriction of supply”—of a deliberate, vicious withholding of goods from “society” by their private custodians. After that point, however, the value they may attain is limited only by the importance which buyers attach to them.

On this view, every price is supposed to be an index of the intensity of “society’s” need or desire for a good—an index of the good’s “marginal social utility.”

Thus the tribal view of property, of price, and of cost leads to the view of competition held by contemporary economics.

Competition is viewed as the means by which prices are driven down either to equality with “marginal cost” or to the point where they exceed “marginal cost” only by whatever premium is necessary to “ration” the benefit of plant and equipment operating at full capacity.

This is not competition as it exists in reality. The competition which takes place under capitalism acts to regulate prices simply in accordance with the full costs of production and with the requirements of earning a rate of profit. It does not act to drive prices to the level of “marginal costs” or to the point where they reflect a “scarcity” of capacity. The kind of “competition” required to do that, is of a very special type. Literally, it is out of this world. It is “pure” and “perfect.”

No one has ever defined “pure and perfect competition”—the procedure is merely to present a list of conditions which it requires. A fairly full list of these conditions is presented by Professor Clair Wilcox (who is not an advocate of capitalism) as if it were a definition of “pure and perfect competition.” He writes:

“The requirements of perfect competition are five: First, the commodity dealt in must be supplied in quantity and each unit must be so like every other unit that buyers can shift quickly from one seller to another in order to obtain the advantage of a lower price. Second, the market in which the commodity is bought and sold must be well organized, trading must be continuous, and traders must be so well-informed that every unit sold at the same time will sell at the same price. Third, sellers must be numerous, each seller must be small, and the quantity supplied by any one of them must be so insignificant a part of the total supply that no increase or decrease in his output can appreciably affect the market price. . . . Fourth, there must be no restraint upon the independence of any seller or buyer, either by custom, contract, collusion, the fear of reprisals by competitors or the imposition of public control. Each one must be free to act in his own interest without regard for the interests of any of the others. Fifth, the market price, uniform at any instant of time, must be flexible over a period of time, constantly rising and falling in response to the changing conditions of supply and demand. There must be no friction to impede the movement of capital from industry to industry, from product to product or from firm to firm; investment must be speedily withdrawn from unsuccessful undertakings and transferred to those that promise a profit. There must be no barrier to entrance into the market; access must be granted to all sellers and all buyers at home and abroad. Finally, there must be no obstacle to elimination from the market; bankruptcy must be permitted to destroy those who lack the strength to survive.” (Clair Wilcox, “The Nature of Competition,” reprinted in Joel Dean, Managerial Economics, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1951, p. 49. An essentially identical list of requirements appears in the much more recent textbook The Price System by Leftwich and Eckert, op. cit., pp. 39–41.)

To summarize these conditions: uniform products offered by all the sellers in the same industry, perfect knowledge, quantitative insignificance of each seller, no fear of retaliation by competitors in response to one’s actions, constant changes in price, and perfect ease of investment and disinvestment.

To understand the alleged need for all these conditions and what they would mean in reality, it is necessary to project them on a concrete example. This is usually not done at all, and is never done fully—if it were, neither the theory of “pure and perfect competition” nor the rationing theory of prices could be propounded. So I shall use an example of my own, which will not be of a kind used by their supporters, but which will express accurately the meaning of these theories.

Imagine a movie theater with 500 seats. The picture is about to go on; the projectionist, the ushers and the cashier are all in their places. “Society” has the alleged right to the occupancy of 500 seats. If they are not all occupied for this performance, no future satisfaction can be obtained by any storing up of the use of the seats for a future time. The seats, the theater, the film, the necessary workers are “here.” “Society,” supposedly, “has them” and now it demands the full benefit from its alleged property.

If the film is not run, the only thing that “society” can save is the electric current which might be made available elsewhere, or the coal which must be consumed to generate the current. The costs of the theater, the film, the workers are all “sunk costs”—“water over the dam,” as the textbooks say— and, since “bygones are bygones,” the only thing which counts for “society” now is the cost of the electric current.

The theater, according to the tribal-rationing theory, should charge an admission price which will guarantee the sale of 500 tickets for the performance. If droves of people are standing in line for admission, it should raise the price to whatever point is required so that only 500 people will be able to afford it. If all the people in line have identical incomes, the same medical disabilities, and natures of equal sensitivity, such a price, supposedly, will mean that the 500 people who want to see the film most, will see it. If they are unequal in these respects, that is already supposed to be an “imperfection,” as Professor Wilcox would say, in the justice of the “market mechanism.”

If, however, there are few people standing in line, the theater should begin reducing its admission price. It must keep on reducing its admission price until it has attracted 500 customers. If an admission price of only two cents is required to get this many customers, then, supposedly, that is what should be charged, provided only that the revenue brought in at the box office covers the cost of the electric current.

If the theater persists in charging its standard price of, say, one dollar, at which it sells less than 500 tickets, then, according to the tribal-rationing doctrine, it is guilty of “administering” its price and of “monopolistic restriction of supply.” It is engaged in a process of “price control”—in violation of the “laws of supply and demand”—and in creating an “artificial scarcity” of seats by “monopolistically” withholding a portion of its supply from the market to maintain a high price on those seats for which it does sell tickets.

If the theater cannot sell 500 tickets even at one cent per ticket, then, according to this theory, it must either open its doors for free or cancel the performance. In this case, a theater seat is, allegedly, a free good—it is no longer “scarce” in relation to the demand for it, and so there is no longer any need for a price because there is no longer any need to ration theater seats. If there are 100 people who want to see the movie and who are prepared to make it worth the theater owner’s while, he should perhaps run the film—contemporary economics would hold—provided he sells the remaining 400 tickets at whatever price is required to unload them, including zero. This, however, would be another “imperfection” in the “market mechanism”—price discrimination. The “ideal solution” in such a case, it is alleged, would be to have the government nationalize the theater, charge nothing and subsidize the loss.

In the process of adjusting its price to attract customers, the theater must not, of course, send anyone out in the street to tell people about the movie it is playing or the price it is charging. That would be another “imperfection”— advertising. Advertising, according to this theory, is a wasteful and vicious means of “demand creation”—it makes the “consumers” act differently than they really want to act. So, as the theater is reducing its price, it must be careful not to be too obvious about it. Simply changing the price in the cashier’s window should be enough.

However, while advertising by the theater is an “imperfection,” “perfection” requires that all potential customers of the theater possess perfect and instantaneous knowledge of its price changes and of the picture it is showing. It is another “imperfection” in the operation of the “market mechanism” if people about to enter other theaters, or riding in their automobiles, or making love, do not receive instantaneous communication of the price changes, so that they may speedily alter their plans. And, presumably, it is an “imperfection” if they have not already seen all the movies many, many times—to be perfectly informed about them.

Because the theater owner wants to “maximize his profits,” he will not act in accordance with the theory’s tribalistic precepts. However, he would, it is argued, if knowledge were perfect and automatic, if people did race back and forth between theaters in response to penny price differences, and if a number of further conditions were also fulfilled. If, for example, there were 401 identical theaters in the same neighborhood, all showing the same movie, and all in the same position with regard to empty seats, then, it is argued, the cunningly clever, “profit-maximizing” businessman would reason as follows: “At my standard price of one dollar, I can sell only 100 tickets today. But if I charge 99.999 . . .9¢ (it is a standard assumption of the theory that all economic phenomena are mathematically continuous and thus capable of treatment by calculus) I can sell all 500 tickets. For in response to this insignificant price change, which is infinitely close to my present price, I could attract away one customer from each of the 400 other theaters. This would be very good for me, and none of the other theater owners would really notice the loss of just one customer, and thus no one would match my lower price. So that is what I will do.”

The same thought, however, will be racing simultaneously, it is assumed, through the heads of the other 400 theater owners, and so everyone’s price will be trimmed just so much, and no one will end up with any additional customers drawn from other theaters. Each theater may attract one percent of an additional customer who otherwise would not have gone to the movies, but that is all.

The same process is repeated at the infinitesimally lower price, as each theater owner seeks to “maximize his profit,” led by the idea that his insignificant price change will draw an unnoticed amount of business from each of many competitors, who will not reduce their prices in response to his action. This process of infinitely small price reductions is supposedly performed with infinite rapidity—presumably through the “automatic market mechanism”— and so, instantaneously, the price is brought down either to marginal cost or to the point where one’s theater is jammed to capacity, which circumstance alone, in the eyes of the theory’s supporters, would justify the price being above marginal cost.

According to the theory of “pure and perfect competition,” the large number of sellers is the main condition required to drive prices to “marginal cost,” or else to the point where they reflect a “scarcity” of the capacity that is “here.” If the individual seller were a significant part of the market and were in a position to handle a major part of the business done by his competitors, then, supposedly, he would never cut his price because he would know that as a result of his action others will lose so much business that they will have to match his cut and that he will thus be left basically only with the lower price. When there is a large number of small sellers, every price cut is also matched, but, the argument is, not because of one’s own price reduction, but because the other sellers are led to cut their prices independently, guided by exactly the same thought.

The significance of all sellers having an identical product is supposed to lie in the greater responsiveness of customers to price changes. If each theater is playing a different movie, customers are not likely to shift their business among the various theaters in response to infinitesimal price differences, and so a theater owner will have less incentive to trim his price. The significance attached to perfect knowledge is similar.

This portrait of the economic world of perfection is not yet complete, however. There remain two other major requirements if “society” is to derive the maximum benefit from its “scarce resources.” It must be possible, as Professor Wilcox puts it, for investment to “be speedily withdrawn from unsuccessful undertakings and transferred to those that promise a profit. There must be no barrier to entrance into the market . . .” This condition would be achieved if movies were shown in tents, with projectors using candlelight instead of electricity. Then, whenever demand changed, theater owners would merely have to unfold or fold up their theaters, and light or blow out their candles.

This would be “perfection,” but not quite in its full “purity.” For in addition, “the market price,” as Professor Wilcox says, “uniform at any instant of time, must be flexible over a period of time, constantly rising and falling in response to the changing conditions of supply and demand.” This would be achieved if, after leaving the theater and going to a restaurant for dinner, one were not given a menu, but were seated in front of a ticker tape—and were offered a futures contract on dessert; and if afterward, on leaving the restaurant and walking back to one’s apartment, one would not know whether one could afford to live there that night, or whether the rentals of penthouses had collapsed. Only then would the world be “purely perfect.”

(To be concluded in my next posting.)

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). His web site is www.capitalism.net. This essay is available as a pamphlet from The Jefferson School of Philosophy, Economics, and Psychology. The author wishes to note that his book Capitalism contains a far more comprehensive and detailed treatment of the subjects dealt with here (see in particular, pp. 425-437). Where possible, references have been updated to conform with those in Capitalism. Copyright © 1968 by The Objectivist; Copyright © 1991, 2005 by George Reisman. Provided that credit is given to the author and he is notified by e-mail, permission is hereby granted to post this essay on the internet and otherwise noncommercially distribute it electronically or in print, other than as part of a book. All other rights reserved.

Is Bernanke An Admirer of Galbraith?

In today’s New York Times, Robert H. Frank, who is described as “the co-author, with Ben S. Bernanke, of `Principles of Economics,’” writes that Galbraith should have won the Nobel Prize—for the ideas expressed in the The Affluent Society.

In case anyone needs a refresher about Galbraith, and the fascistic nature of his ideas, be sure to see my "Galbraith's Neo-Feudalism," which recently appeared on this very blog.

What makes this matter important is that it almost certainly sheds light on the thinking of Bernanke himself. Call it guilt by association if you wish, but I don't see how anyone can write a textbook with someone else and not be in agreement with him on at least the great majority of points pertaining to the subject of the textbook, which in this case, of course, is the principles of economics. Until I hear to the contrary from Bernanke, I have to assume that his views about Galbraith don't radically differ from those of his co-author. Perhaps he should step up and give a statement on the subject, to make clear where he stands.

It's not a comforting thought having someone in a position to wreak havoc on the economic well-being of the American people and likely being an admirer of an author who had no compunctions about doing precisely that if it appeared to serve the interests of the State. Bernanke can wreak havoc with his powers of money creation, and it looks like he's already started to do so. He needs to assure the American people that he holds no brief for Galbraith.

If there were any other men of courage and principle in Congress besides Ron Paul, Bernanke would be brought before Congress and called upon to do so.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Gasoline at 10 Cents a Gallon and Falling

Does gasoline at 10 cents a gallon and falling sound impossible in today’s world?

Well, if you think it’s impossible, you’re wrong. Because that’s where gasoline actually is, and it looks like it’s going even lower.

Of course, it’s not 10 cents a gallon in today’s paper money. But it is 10 cents a gallon in the Constitutional money of the United States, which is gold coin and bullion.

Gold is now at $700 per ounce, and rising. Above is a picture of a $20 United States gold coin known as a Double Eagle. If you look carefully, at the bottom of the coin, you can actually see where it says “Twenty Dollars.”

This coin contains approximately one ounce of actual gold, which means that at today’s market price of gold, it’s worth $700. And this means that one gold dollar is worth $35 of today’s paper dollars. And that means that one gold dime is worth $3.50 in today’s paper money. This last, of course, is roughly what a gallon of gasoline costs in today’s paper money. Which means that a gallon of gasoline costs just 10 gold cents.

So why does a gallon of gasoline cost $3.50 in the paper money? Well, one explanation is that we’re expressing the price of gasoline in terms of a money that is itself very cheap and getting cheaper. Just think: if $20 gold dollars are worth $700 paper dollars, one paper dollar is worth only one thirty-fifth of a gold dollar. That’s less than 3 cents. It shouldn’t be surprising that buying things with 3-cent dollars is going to require a lot of such dollars.

The key point here is that our money is getting cheaper and that’s why prices are rising. Don’t be surprised if in the future, gasoline is a lot more expensive in paper money than it is today and, at the same time, cheaper than it is today in our Constitutional gold money. Look for $5 per gallon gasoline in the paper and 7 cent per gallon gasoline in gold. That’s a real possibility.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

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Bolivian Gas Nationalization OK According to The New York Times

A truly Orwellian op-ed piece in The New York Times of May 6, says of Bolivia’s nationalization of the natural gas industry in its territory:

Nor is this a classic nationalization in the sense of the confiscations that took place in the region in the 50's and 70's. In those days, Latin American governments expropriated everything and kicked out the companies the next day. This time Bolivia will exert greater control over the companies, including significantly higher taxes and 50 percent-plus-one state ownership, but Mr. Morales has pledged to create an environment conducive to private profit-making, and the government has repeatedly stated that it is a "nationalization without confiscation," with no expulsion of foreign companies nor expropriation of their assets.

So, raising taxes and grabbing 51 percent ownership, in return for nothing, is not confiscation. No. It’s a policy “to create an environment conducive to private profit-making.”

To The Times’ writer, these mind-boggling contradictions are so self-evident and reassuring that he feels a need to explain why the Bolivian army was used to impose this "nationalization without confiscation" that is profitable to its victims. Not being a real confiscation, but a source of profit to its victims, the use of the army and the presence of its deadly weapons was necessary merely as a show “to placate masses of radicalized Bolivians who demand `confiscation without compensation’ to the companies.” This last, of course, is a policy very different from that of Mr. Morales, who merely takes property in exchange for nothing.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

You Can Earn College Credit for Studying the Works of George Reisman and Ayn Rand! Click here for Details.