I. The Comparative Economics of Private and Public Government Ownership
A
government is a territorial monopolist of compulsion — an agency which
may engage in continual, institutionalized property rights violations
and the exploitation — in the form of expropriation, taxation and
regulation — of private property owners. Assuming no more than
self-interest on the part of government agents, all governments must be
expected to make use of this monopoly and thus exhibit a tendency toward
increased exploitation.[1]
However,
not every form of government can be expected to be equally successful
in this endeavor or to go about it in the same way. Rather, in light of
elementary economic theory, the conduct of government and the effects of
government policy on civil society can be expected to be systematically
different, depending on whether the government apparatus is owned
privately or publicly.[2]
The
defining characteristic of private government ownership is that the
expropriated resources and the monopoly privilege of future
expropriation are individually owned. The appropriated resources are
added to the ruler's private estate and treated as if they were a part
of it, and the monopoly privilege of future expropriation is attached as
a title to this estate and leads to an instant increase in its present
value ("capitalization" of monopoly profit).
Most
importantly, as private owner of the government estate, the ruler is
entitled to pass his possessions on to his personal heir; he may sell,
rent, or give away part or all of his privileged estate and privately
pocket the receipts from the sale or rental; and he may personally
employ or dismiss every administrator and employee of his estate.
In
contrast, in a publicly owned government the control over the government
apparatus lies in the hands of a trustee, or caretaker. The caretaker
may use the apparatus to his personal advantage, but he does not own it.
He cannot sell government resources and privately pocket the receipts,
nor can he pass government possessions on to his personal heir. He owns
the current use of government resources, but not their capital value.
Moreover,
while entrance into the position of a private owner of government is
restricted by the owner's personal discretion, entrance into the
position of a caretaker-ruler is open. Anyone, in principle, can become
the government's caretaker.
From these assumptions two central, interrelated predictions can be deduced:
- A private government owner will tend to have a systematically longer planning horizon, i.e., his degree of time preference will be lower, and accordingly, his degree of economic exploitation will tend to be less than that of a government caretaker; and
- Subject to a higher degree of exploitation, the nongovernmental public will also be comparatively more present-oriented under a system of publicly owned government than under a regime of private government ownership.
(1) Government Owners' Time Preferences
A private government owner will predictably try to maximize his total wealth, i.e., the present value of his estate and his current income. He will not
want to increase his current income at the expense of a
more-than-proportional drop in the present value of his assets, and
because acts of current-income acquisition invariably have repercussions
on present asset values (reflecting the value of all future — expected —
asset earnings discounted by the rate of time preference), private
ownership in and of itself leads to economic calculation and thus
promotes farsightedness.
In the case of the private ownership of government,
this implies a distinct moderation with respect to the ruler's
incentive to exploit his monopoly privilege of expropriation, for acts
of expropriation are by their nature parasitic upon prior acts of
production on the part of the nongovernmental public. Where nothing has
first been produced, nothing can be expropriated; and where everything
is expropriated, all future production will come to a shrieking halt.
Accordingly,
a private government owner will want to avoid exploiting his subjects
so heavily, for instance, as to reduce his future earnings potential to
such an extent that the present value of his estate actually falls.
Instead, in order to preserve or possibly even enhance the value of his
personal property, he will systematically restrain himself in his
exploitation policies. For the lower the degree of exploitation, the
more productive the subject population will be; and the more productive
the population, the higher will be the value of the ruler's parasitic
monopoly of expropriation.
He
will use his monopolistic privilege, of course. He will not exploit. But
as the government's private owner, it is in his interest to draw
parasitically on a growing, increasingly productive and prosperous
nongovernment economy as this would effortlessly also increase his own
wealth and prosperity — and the degree of exploitation thus would tend
to be low.
Moreover,
private ownership of government implies moderation and farsightedness
for yet another reason. All private property is by definition exclusive
property. He who owns property is entitled to exclude everyone else from
its use and enjoyment; and he is at liberty to choose with whom, if
anyone, he is willing to share in its usage. Typically, he will include
his family and exclude all others, except as invited guests or as paid
employees or contractors.
Only
the ruling family — and to a minor extent its friends, employees and
business partners — share in the enjoyment of the expropriated resources
and can thus lead a parasitic life. Because of these restrictions
regarding entrance into government and the exclusive status of the
individual ruler and his family, private government ownership stimulates
the development of a clear "class-consciousness" on the part of the
nongovernmental public and promotes opposition and resistance to any
expansion of the government's exploitative power.
A
clear-cut distinction between the (few) rulers on the one hand and the
(many) ruled on the other exists, and there is little risk or hope of
anyone of either class ever falling or rising from one class to the
other. Confronted with an almost insurmountable barrier in the way of
upward mobility, the solidarity among the ruled — their mutual
identification as actual or potential victims of governmental
property-rights violations — is strengthened, and the risk to the ruling
class of losing its legitimacy as the result of increased exploitation
is heightened.[3]
In
distinct contrast, the caretaker of a publicly owned government will try
to maximize not total government wealth (capital values and current
income), but current income (regardless, and at the expense, of capital
values). Indeed, even if the caretaker wishes to act differently, he cannot. Because as public property government resources are not for sale, and without market prices economic calculation is impossible.
Accordingly, it has to be regarded as unavoidable that public
government ownership will result in continual capital consumption.
Instead
of maintaining or even enhancing the value of the government estate, as
a private owner would tend to do, a government's temporary caretaker
will quickly use up as much of the government resources as possible, for
what he does not consume now, he may never be able to consume.
In
particular, a caretaker — as distinct from a government's private owner —
has no interest in not ruining his country. For why should he not
want to increase his exploitation if the advantage of a policy of
moderation — the resulting higher capital value of the government estate
— cannot be reaped privately, while the advantage of the opposite
policy of increased exploitation — a higher current income — can be so
reaped? To a caretaker, unlike to a private owner, moderation has only
disadvantages and no advantages.[4]
In
addition, with a publicly owned government, anyone in principle can
become a member of the ruling class or even the supreme power. The
distinction between the rulers and the ruled as well as the class
consciousness of the ruled become blurred. The illusion even arises that
the distinction no longer exists: that with a public government no one
is ruled by anyone, but everyone instead rules himself. Accordingly,
public resistance against government power is systematically weakened.
While
exploitation and expropriation before might have appeared plainly
oppressive and evil to the public, they seem much less so, mankind being
what it is, once anyone may freely enter the ranks of those who are at
the receiving end. Consequently, exploitation will increase, whether
openly in the form of higher taxes or discretely as increased
governmental money "creation" (inflation) or legislative regulation.
Likewise, the number of government employees ("public servants") will
rise absolutely as well as relatively to private employment, in
particular attracting and promoting individuals with high degrees of
time preference, and low and limited farsightedness.
(2) Subjects' Time Preferences
In
contrast to the right to self-defense in the event of a criminal attack,
the victim of government violations of private-property rights may not
legitimately defend himself against such violations.[5]
The
imposition of a government tax on property or income violates a property
owner's and income producer's rights as much as theft does. In both
cases, the owner-producer's supply of goods is diminished against his
will and without his consent. Government money or "liquidity" creation
involves no less a fraudulent expropriation of private-property owners
than the operations of a criminal counterfeiting gang.
As
well, any government regulation as to what an owner may or may not do
with his property — beyond the rule that no one may physically damage
the property of others and that all exchange and trade be voluntary and
contractual — implies a "taking" of somebody's property, on a par with
acts of extortion, robbery, or destruction. But taxation, the
government's provision for liquidity, and government regulations, unlike
their criminal equivalents, are considered legitimate, and the victim
of government interference, unlike the victim of a crime, is not entitled to physically defend and protect his property.
Owing
to their legitimacy, then, government violations of property rights
affect individual time preferences in a systematically different and
much more profound way than crime. Like crime, all government
interference with private property rights reduces someone's supply of
present goods and thus raises his effective time-preference rate.
However, government offenses — unlike crime — simultaneously raise the
time preference degree of actual and potential victims because they also imply a reduction in the supply of future goods (a reduced rate of return on investment).
Crime,
because it is illegitimate, occurs only intermittently — the robber
disappears from the scene with his loot and leaves his victim alone.
Thus, crime can be dealt with by increasing one's demand for protective
goods and services so as to restore or even increase one's future rate
of investment return and make it less likely that the same or a
different robber will succeed a second time.
In
contrast, because they are legitimate, governmental property rights
violations are continual. The offender does not disappear into hiding
but stays around, and the victim does not "arm" himself but must (at
least he is generally expected to) remain defenseless. The actual and
potential victims of government property-rights violations respond by
associating a permanently higher risk with all future production, and
systematically adjusting their expectations concerning the rate of
return on all future investment downward.
By simultaneously reducing the supply of present and expected future goods, then, governmental property-rights violations not only raise time preference rates (with given schedules) but also time-preference schedules.
Because owner-producers are — and see themselves as — defenseless
against future victimization by government agents, their expected rate
of return on productive, future-oriented actions is reduced all-around,
and accordingly, all actual and potential victims become more
present-oriented.[6]
Moreover,
because the degree of exploitation is comparatively higher under a
publicly owned government, this tendency toward present-orientation will
be significantly more pronounced if the government is publicly owned
than if it is owned privately.[7]
II. Application: The Transition from Monarchy to Democracy (1789—1918)
Hereditary
monarchies represent the historical example of privately owned
governments, and democratic republics that of publicly owned
governments.
For
most of its history, mankind, insofar as it was subject to any
government control at all, was under monarchical rule. There were
exceptions: Athenian democracy, Rome during its republican era until 31
BC, the republics of Venice, Florence and Genoa during the renaissance
period, the Swiss cantons since 1291, the United Provinces from 1648
until 1673, and England under Cromwell from 1649 until 1660. Yet these
were rare occurrences in a world dominated by monarchies. With the
exception of Switzerland, they were short-lived phenomena.
Constrained
by monarchical surroundings, all older republics satisfied the
open-entry condition of public property only imperfectly, for while a
republican form of government implies by definition that the government
is not privately but publicly owned, and a republic can thus be expected
to possess an inherent tendency toward the adoption of universal
suffrage, in all of the earlier republics, entry into government was
limited to relatively small groups of "nobles."
With the end of World War I, mankind truly left the monarchical age.[8]
In the course of the one-and-a-half centuries since the French
Revolution, Europe, and in its wake the entire world, have undergone a
fundamental transformation. Everywhere, monarchical rule and sovereign
kings were replaced by democratic-republican rule and sovereign
"peoples."
The
first assault of republicanism and the idea of popular sovereignty on
the dominating monarchical principle was repelled with the military
defeat of Napoleon and the restoration of Bourbon rule in France. As a
result of the revolutionary terror and the Napoleonic wars,
republicanism was widely discredited for much of the 19th century.
However,
the democratic-republican spirit of the French revolution left a
permanent imprint. From the restoration of the monarchical order in 1815
until the outbreak of WWI in 1914, all across Europe popular political
participation and representation was systematically expanded. The
franchise was successively widened and the powers of popularly elected
parliaments increased everywhere.[9]
From
1815 to 1830, the right to vote in France was still severely restricted
under the restored Bourbons. Out of a population of some 30 million, the
electorate included only France's very largest property owners — about
100,000 people (less than 0.5 percent of the population above the age of
20). As a result of the July Revolution of 1830, the abdication of
Charles X and the ascension to the throne of the Duke of Orleans, Louis
Philippe, the number of voters increased to about 200,000. As a result
of the revolutionary upheavals of 1848, France again turned republican,
and a universal and unrestricted suffrage for all male citizens above
the age of 21 was introduced. Napoleon III was elected by nearly 5.5
million votes out of an electorate of more than 8 million.
In
the United Kingdom after 1815, the electorate consisted of some 500,000
well-to-do property owners (about 4 percent of the population above age
20). The Reform Bill of 1832 lowered the property owner requirements and
extended the franchise to about 800,000. The next extension, from about
1 million to 2 million, came with the Second Reform Bill of 1867. In
1884 property restrictions were relaxed even further, and the electorate
increased to about 6 million (almost a third of the population above
age 20 and more than three-fourths of all male adults).
In
Prussia, as the most important of the 39 independent German states
recognized after the Vienna Congress, democratization set in with the
revolution of 1848 and the constitution of 1850. The lower chamber of
the Prussian parliament was hence elected by universal male suffrage.
However,
until 1918 the electorate remained stratified into three estates with
different voting powers. For example, the wealthiest people — those who
contributed a third of all taxes — elected a third of the members of the
lower house.
In
1867, the North German Confederation, including Prussia and 21 other
German states, was founded. Its constitution provided for universal,
unrestricted suffrage for all males above the age of 25. In 1871, after
the victory over Napoleon III, the constitution of the North German
Confederation was essentially assumed by the newly founded German
Empire. Out of a total population of around 35 million, nearly 8 million
people (or about a third of the population above 20) elected the first
German Reichstag.
After
Italy's political unification under the leadership of the Kingdom of
Sardinia and Piedmont in 1861, initially the vote was only given to
about 500,000 people out of a population of some 25 million (about 3.5
percent of the population above age 20). In 1882, the property
requirements were relaxed, and the minimum age was lowered from 25 to 21
years. As a result, the Italian electorate increased to more than 2
million. In 1913, an almost universal and unrestricted suffrage for all
males above 30 and minimally restricted suffrage for males above 21 was
introduced, raising the number of Italian voters to more than 8 million
(more than 40 percent of the population above 20).
In Austria, restricted and unequal male suffrage was introduced in 1873. The electorate, composed of four classes or curia
of unequal voting powers, totaled 1.2 million voters out of a
population of about 20 million (10 percent of the population above 20).
In 1867 a fifth curia was added. And forty years later the curia
system was abolished, and universal and equal suffrage for males above
age 24 was adopted, bringing the number of voters close to 6 million
(almost 40 percent of the population above 20).
Russia had elected provincial and district councils — zemstvos — since 1864; and in 1905, as a fallout of its lost war against Japan, it created a parliament — the Duma
— which was elected by a near universal, although indirect and unequal,
male suffrage. As for Europe's minor powers, universal or almost
universal and equal male suffrage has existed in Switzerland since 1848,
and was adopted between 1890 and 1910 in Belgium, the Netherlands,
Norway, Sweden, Spain, Greece, Bulgaria, Serbia, and Turkey.
Although
increasingly emasculated, the monarchical principle remained dominant
until the cataclysmic events of WWI. Before 1914, only two republics
existed in Europe — France and Switzerland. And of all major European
monarchies, only the United Kingdom could be classified as a
parliamentary system; that is, one where the supreme power was vested in
an elected parliament.
Only
four years later, after the United States — where the democratic
principle implied in the idea of a republic had only recently been
carried to victory as a result of the destruction of the secessionist
Confederacy by the centralist Union government[10]
— had entered the European war and decisively determined its outcome,
monarchies had all but disappeared, and Europe turned to democratic
republicanism.[11]
In
Europe, the defeated Romanovs, Hohenzollerns, and Habsburgs had to
abdicate or resign, and Russia, Germany, and Austria became democratic
republics with universal — male and female — suffrage and parliamentary
governments. Likewise, all of the newly created successor states —
Poland, Finland, Estonia, Latvia, Lithuania, Hungary, and Czechoslovakia
(with the sole exception of Yugoslavia) — adopted democratic-republican
constitutions.
In
Turkey and Greece, the monarchies were overthrown. Even where monarchies
remained nominally in existence, as in Great Britain, Italy, Spain,
Belgium, the Netherlands, and the Scandinavian countries, monarchs no
longer exercised any governing power. Universal adult suffrage was
introduced, and all government power was invested in parliaments and
"public" officials.[12] A new world order — the democratic-republican age, under the aegis of a dominating US government — had begun.
III. Evidence and Illustrations: Exploitation and Present-Orientedness under Monarchy and Democratic Republicanism
From
the viewpoint of economic theory, the end of WWI can be identified as
the point in time at which private government ownership was completely
replaced by public government ownership, and whence a systematic
tendency toward increased exploitation — government growth — and rising
degrees of social time preference — present-orientedness — can be
expected to take off. Indeed, this has been the grand, underlying theme
of post-WWI Western history: from 1918 onward practically all indicators
- of governmental exploitation and
- of rising time preferences have exhibited a systematic upward tendency.
III.1. Indicators of Exploitation
There is no doubt that the amount of taxes imposed on civil society increased during the monarchical age.[13] However, throughout the entire period, the share of government revenue remained remarkably stable and low. Economic historian Carlo M. Cipolla concludes,
All in all, one must admit that the portion of income drawn by the public sector most certainly increased from the eleventh century onward all over Europe, but it is difficult to imagine that, apart from particular times and places, the public power ever managed to draw more than 5 to 8 percent of national income.
And he then goes on to note that this portion was not systematically exceeded until the second half of the 19th century.[14]
Until then, of all Western European countries only the United Kingdom
had an income tax (from 1843 on). France first introduced some form of
income tax in 1873, Italy in 1877, Norway in 1892, the Netherlands in
1894, Austria in 1898, Sweden in 1903, the United States in 1913,
Switzerland in 1916, Denmark and Finland in 1917, Ireland and Belgium in
1922, and Germany in 1924.[15]
Yet even at the time of the outbreak of WWI, total government
expenditure as a percentage of Gross Domestic Product (GDP) typically
had not risen above 10 percent and only rarely, as in the case of
Germany, exceeded 15 percent. In striking contrast, with the onset of
the democratic-republican age, total government expenditure as a
percentage of GDP typically increased to 20 to 30 percent in the course
of the 1920s and 1930s, and by the mid-1970s had generally reached 50
percent.[16]
There is also no doubt that total government employment
increased during the monarchical age. But until the very end of the
19th century, government employment rarely exceeded 3 percent of the
total labor force. In contrast, by the mid-1970s government employment
as a percentage of the total labor force had typically grown to above 15
percent.[17]
The
same pattern emerges from an inspection of inflation and the money
supply. The monarchical world was generally characterized by the
existence of a commodity money — typically silver or gold. A
commodity money standard makes it difficult, if not impossible, for a
government to inflate the money supply.
There
had been attempts to introduce an irredeemable fiat currency. But these
fiat-money experiments, associated in particular with the Bank of
Amsterdam, the Bank of England, and John Law and the Banque Royale of
France, had been regional curiosities which ended quickly in financial
disasters, such as the collapse of the Dutch "Tulip Mania" in 1637, and
the "Mississippi Bubble" and the "South Sea Bubble" in 1720. As hard as
they tried, monarchical rulers did not succeed in establishing
monopolies of pure fiat currencies, i.e., of irredeemable government
paper monies, which can be created virtually out of thin air, at
practically no cost.
It
was only under conditions of all-around democratic republicanism, after
1918, that this feat was accomplished. During WWI, as during earlier
wars, belligerent governments went off the gold standard. Unlike earlier
wars, however, WWI did not conclude with a return to the gold standard.
Instead, from the mid-1920s until 1971, and interrupted by a series of
international monetary crises, a pseudo-gold standard — the
gold-exchange standard — was implemented. In 1971, the last remnant of
the international gold standard was abolished. Since then, and for the
first time in history, the entire world has adopted a pure fiat-money
system of freely fluctuating government paper currencies.[18]
As a result, a seemingly permanent secular tendency toward inflation and currency depreciation has come into existence.
During
the monarchical age, with a commodity money largely outside of
government control, the "level" of prices had generally fallen and the
purchasing power of money increased, except during times of war or new
gold discoveries. Various price indices for Britain, for instance,
indicate that prices were substantially lower in 1760 than they had been
a hundred years earlier; and in 1860 they were lower than they had been
in 1760.[19] Connected by an international gold standard, the development in other countries was similar.[20]
In
sharp contrast, during the democratic-republican age, with the world
financial center shifted from Britain to the United States, a very
different pattern emerged. For instance, shortly after WWI, in 1921, the
US wholesale-commodity price index stood at 113.[21]
After WWII, in 1948, it had risen to 185. In 1971 it was 255, by 1981
it reached 658, and in 1991 it was near 1,000. During only two decades
of irredeemable fiat money, the consumer price index in the United
States rose from 40 in 1971 to 136 in 1991, in the United Kingdom it
climbed from 24 to 157, in France from 30 to 137, and in Germany from 56
to 116.[22]
Similarly,
during more than 70 years, from 1845 until the end of WWI in 1918, the
British money supply had increased about 6-fold.[23] In distinct contrast, during the 73 years from 1918 until 1991, the US money supply increased more than 64-fold.[24]
In
addition to taxation and inflation, a government can resort to debt in
order to finance its current expenditures. As with taxation and
inflation, there is no doubt that government debt increased in the
course of the monarchical age. However, as predicted theoretically, in
this field monarchs also showed considerably more moderation and
farsightedness than democratic-republican caretakers.
Throughout
the monarchical age, government debts were essentially war debts. While
the total debt thereby tended to increase over time, during peacetime
at least monarchs characteristically reduced their debts. The
British example is fairly representative. In the course of the 18th and
19th centuries, government debt increased. It was 76 million pounds
after the Spanish War in 1748, 127 million after the Seven Years' War in
1763, 232 million after the American War of Independence in 1783, and
900 million after the Napoleonic Wars in 1815. Yet during each peacetime
period — from 1727—1739, from 1748—1756, and from 1762—1775, total debt
actually decreased. From 1815 until 1914, the British national debt
fell from a total of 900 to below 700 million pounds.
In striking contrast, since the onset of the democratic-republican age British debt only increased, in war and
in peace. In 1920 it was 7.9 billion pounds, in 1938, 8.3 billion, in
1945, 22.4 billion, in 1970, 34 billion, and since then it has
skyrocketed to more than 190 billion pounds in 1987.[25]
Likewise,
US government debt has increased through war and peace. Federal
government debt after WWI, in 1919, was about 25 billion dollars. In
1940 it was 43 billion, and after WWII, in 1946, it stood at about 270
billion. By 1970 it had risen to 370 billion, and since 1971, under a
pure fiat-money regime, it has exploded. In 1979 it was about 840
billion, and in 1985 more than 1.8 trillion. In 1988 it reached almost
2.5 trillion, and by 1992 it exceeded 3 trillion dollars.[26]
Finally, the same tendency toward increased exploitation and present-orientation emerges upon examination of government legislation and regulation.
During the monarchical age, with a clear-cut distinction between the
ruler and the ruled, the king and his parliament were held to be under the law. They applied preexisting law as judge or jury.
They did not make law. Writes Bertrand de Jouvenel,
The monarch was looked on only as judge and not as legislator. He made subjective rights respected and respected them himself; he found these rights in being and did not dispute that they were anterior to his authority.… Subjective rights were not held on the precarious tenure of grant but were freehold possessions. The sovereign's right also was a freehold. It was a subjective right as much as the other rights, though of a more elevated dignity, but it could not take the other rights away.[27]
To be
sure, the monopolization of law administration led to higher prices
and/or lower product quality than those that would have prevailed under
competitive conditions, and in the course of time kings employed their
monopoly increasingly to their own advantage. But as late as the
beginning of the 20th century, A.V. Dicey could still maintain that as
for Great Britain, for instance, legislative law — public law — as
distinct from preexisting law — private law — did not exist.[28]
In
striking contrast, under democracy, with the exercise of power shrouded
in anonymity, presidents and parliaments quickly came to rise above the law. They became not only judge but legislator, the creator of "new" law.[29] Today, notes Jouvenel,
we are used to having our rights modified by the sovereign decisions of legislators. A landlord no longer feels surprised at being compelled to keep a tenant; an employer is no less used to having to raise the wages of his employees in virtue of the decrees of Power. Nowadays it is understood that our subjective rights are precarious and at the good pleasure of authority.[30]
In a
development similar to the democratization of money — the substitution
of government paper money for private commodity money and the resulting
inflation and increased financial uncertainty — the democratization of
law and law administration has led to a steadily growing flood of
legislation. Presently, the number of legislative acts and regulations
passed by parliaments in the course of a single year is in the tens of
thousands, filling hundreds of thousands of pages, affecting all aspects
of civil and commercial life, and resulting in a steady depreciation of
all law and heightened legal uncertainty.
As a typical example, the 1994 edition of the Code of Federal Regulations
(CFR), the annual compendium of all US Federal Government regulations
currently in effect, consists of a total of 201 books, occupying about
26 feet of library shelf space. The Code's index alone is 754 pages. The
Code contains regulations concerning the production and distribution of
almost everything imaginable: from celery, mushrooms, watermelons,
watchbands, the labeling of incandescent light bulbs, hosiery, iron and
steel manufacturing, and onion rings made out of diced onions, revealing
the almost-totalitarian power of a democratic government.[31]
III.2. Indicators of Present-Orientedness
The
phenomenon of social time preference is somewhat more elusive than that
of expropriation and exploitation, and it is more complicated to
identify suitable indicators of present-orientation. Moreover, some
indicators are less direct — "softer" — than those of exploitation. But
all of them point in the same direction and together provide as clear an
illustration of the second theoretical prediction: that democratic rule
also promotes shortsightedness (present-orientation) within civil
society.[32]
The most direct indicator of social time preference is the rate of interest.
The interest rate is the ratio of the valuation of present goods as
compared to future goods. More specifically, it indicates the premium at
which present money is traded against future money. A high interest
rate implies more "present-orientedness" and a low rate of interest
implies more "future-orientation."
Under
normal conditions — that is, under the assumption of increasing
standards of living and real-money incomes — the interest rate can be
expected to fall and ultimately approach, yet never quite reach, zero.
With rising real incomes, the marginal utility of present money falls
relative to that of future money, and hence under the ceteris paribus
assumption of a given time preference schedule, the interest rate must fall. Consequently, savings and investment will increase, future real incomes will be still higher, and so on.
In
fact, a tendency toward falling interest rates characterizes mankind's
suprasecular trend of development. Minimum interest rates on "normal
safe loans" were around 16 percent at the beginning of Greek financial
history in the 6th century BC, and fell to 6 percent during the
Hellenistic period. In Rome, minimum interest rates fell from more than 8
percent during the earliest period of the Republic to 4 percent during
the first century of the Empire. In 13th-century Europe, the lowest
interest rates on 'safe' loans were 8 percent. In the 14th century they
came down to about 5 percent. In the 15th century they fell to 4
percent. In the 17th century they went down to 3 percent. And at the end
of the 19th century, minimum interest rates had further declined to
less than 2.5 percent.[33]
This
trend was by no means smooth. It was frequently interrupted by periods,
sometimes as long as centuries, of rising interest rates. However, such
periods were associated with major wars and revolutions.
Furthermore,
whereas high or rising minimum interest rates indicate periods of
generally low or declining living standards, the overriding opposite
tendency toward low and falling interest rates reflects mankind's
overall progress — its advance from barbarism to civilization.
Specifically, the trend toward lower interest rates reflects the rise of
the Western World, its peoples' increasing prosperity, farsightedness,
intelligence, and moral strength, and the unparalleled height of
19th-century European civilization.
Before
this historical backdrop and in accordance with economic theory, then,
it should be expected that 20th-century interest rates would have to be
still lower than 19th-century rates. Indeed, only two possible explanations exist why this is not
so. The first possibility is that 20th-century real incomes did not
exceed, or even fell below, 19th-century incomes. However, this
explanation can be ruled out on empirical grounds, for it seems fairly
uncontroversial that 20th-century incomes are in fact higher.
Then
only the second explanation remains. If real incomes are higher but
interest rates are not lower, then the ceteris paribus clause can no
longer be assumed true. Rather, the social time preference schedule
must have shifted upward. That is, the character of the population must
have changed. People on the average must have lost in moral and
intellectual strength and have become more present-oriented. Indeed,
this appears to be the case.
From
1815 onward, throughout Europe and the Western World, minimum interest
rates steadily declined to an historic low of, on the average, well
below 3 percent at the turn of the century. With the onset of the
democratic-republican age, this earlier tendency came to a halt and
seems to have changed direction, revealing 20th-century Europe and the
United States as declining civilizations.
An
inspection of the lowest decennial average interest rates for Britain,
France, the Netherlands, Belgium, Germany, Sweden, Switzerland, and the
United States, for instance, shows that during the entire post-WWI era
interest rates in Europe were never as low or lower than they had been
during the second half of the 19th century. Only in the United States,
in the 1950s, did interest rates ever fall below late 19th-century
rates. This was only a short-lived phenomenon, and US interest rates
even then were not lower than they had been in Britain during the second
half of the 19th century.
Instead, 20th-century rates were universally higher than 19th-century rates, and if anything they have exhibited a rising tendency.[34]
This conclusion does not substantially change, even when it is taken
into account that modern interest rates, in particular since the 1970s,
include a systematic inflation premium. After adjusting recent nominal
interest rates for inflation in order to yield an estimate of real interest rates, contemporary interest rates still appear to be significantly higher than they were 100 years ago.
On
the average, minimum long-term interest rates in Europe and the US
nowadays seem to be well above 4 percent and possibly as high as 5
percent — that is, above the interest rates of 17th-century Europe and
as high or higher than 15th-century rates. Likewise, current US savings
rates of around 5 percent of disposable income are no higher than they
were more than 300 years ago in a much poorer 17th-century England.[35]
Parallel
to this development and reflecting a more specific aspect of the same
underlying phenomenon of high or rising social time preferences,
indicators of family disintegration — "dysfunctional families" — have
exhibited a systematic increase.
Until
the end of the 19th century, the bulk of government spending —
typically more than 50 percent — went to financing the military.
Assuming government expenditures to be then about 5 percent of the
national product, this amounted to military expenditures of 2.5 percent
of the national product. The remainder went to government
administration.
Welfare
spending or "public charity" played almost no role. Insurance was
considered to be in the province of individual responsibility, and
poverty relief seen as the task of voluntary charity. In contrast, as a
reflection of the egalitarianism inherent in democracy, from the
beginning of the democratization in the late 19th century onward came
the collectivization of individual responsibility.
Military
expenditures have typically risen to 5—10 percent of the national
product in the course of the 20th century. But with public expenditures
currently making up 50 percent of the national product, military
expenditures now only represent 10—20 percent of total government
spending. The bulk of public spending — typically more than 50 percent
of total expenditures (or 25 percent of the national product) — is now
eaten up by public-welfare spending.[36]
Consequently,
by increasingly relieving individuals of the responsibility of having
to provide for their own health, safety, and old age, the range and
temporal horizon of private provisionary action have been systematically
reduced. In particular, the value of marriage, family, and children
have fallen, because they are needed less as soon as one can fall back
on "public" assistance.
Thus,
since the onset of the democratic-republican age the number of children
has declined, and the size of the endogenous population has stagnated
or even fallen. For centuries, until the end of the 19th century, the
birth rate had been almost constant: somewhere between 30 to 40 per
1,000 population (usually somewhat higher in predominantly Catholic and
lower in Protestant countries).
In
sharp contrast, in the course of the 20th century all over Europe and
the US birthrates have experienced a dramatic decline — down to about 15
to 20 per 1,000.[37]
At the same time, the rates of divorce, illegitimacy, single parenting,
singledom, and abortion have steadily increased, while personal savings
rates have begun to stagnate or even fall rather than rise
proportionally with rising incomes.[38]
Moreover,
as a consequence of the depreciation of law resulting from legislation
and the collectivization of responsibility effected in particular by
social security legislation, the rate of crimes of a serious nature, such as murder, assault, robbery, and theft, has also shown a systematic upward tendency.
In
the "normal" course of events — that is, with rising standards of living
— it can be expected that the protection against social disasters such
as crime will undergo continual improvement, just as one would expect
the protection against natural disasters such as floods, earthquakes and
hurricanes to become progressively better. Indeed, throughout the
Western world this appears to have been the case by and large — until
recently, during second half of the 20th century, when crime rates began
to climb steadily upward.[39]
To be
sure, there are a number of factors other than increased
irresponsibility and shortsightedness brought on by legislation and
welfare that may contribute to crime. Men commit more crimes than women,
the young more than the old, blacks more than whites, and city dwellers
more than villagers. Accordingly, changes in the composition of the
sexes, age groups, races, and the degree of urbanization can be expected
to have a systematic effect on crime.
However,
all of these factors are relatively stable and thus cannot account for
any systematic change in the long-term downward trend of crime rates. As
for European countries, their populations were and are comparatively
homogeneous; and in the United States, the proportion of blacks has
remained roughly stable. The sex composition is largely a biological
constant; and as a result of wars, only the proportion of males has
periodically fallen, thus actually reinforcing the "normal" trend toward
falling crime rates.
Similarly,
the composition of age groups has changed only slowly; and due to
declining birth rates and higher life expectancies the average age of
the population has actually increased, thus helping to depress crime
rates still further. Finally, the degree of urbanization began to
increase dramatically from about 1800 onward. A period of rising crime
rates during the early 19th century can be attributed to this initial
spurt of urbanization.[40]
Yet,
after a period of adjustment to the new phenomenon of urbanization, from
the mid-19th century onward, the countervailing tendency toward falling
crime rates took hold again, despite the fact that the process of rapid
urbanization continued for about another hundred years. And when crime
rates began to move systematically upward, from the mid-20th century
onward, the process of increasing urbanization had actually come to a
halt.
It
thus appears that the phenomenon of rising crime rates cannot be
explained other than with reference to the process of democratization:
by a rising degree of social time preference, an increasing loss of
individual responsibility, intellectually and morally, and a diminished
respect for all law — moral relativism — stimulated by an unabated flood
of legislation. Of course, "high time preference" is by no means
equivalent with "crime." A high time preference can also find expression
in such perfectly lawful activities as recklessness, unreliability,
poor manners, laziness, stupidity or hedonism.
Nonetheless,
a systematic relationship between high time preference and crime
exists, for in order to earn a market income a certain minimum of
planning, patience and sacrifice is required. One must first work for a
while before one gets paid. In contrast, most serious criminal
activities such as murder, assault, rape, robbery, theft, and burglary
require no such discipline. The reward for the aggressor is immediate
and tangible, whereas the sacrifice — possible punishment — lies in the
future and is uncertain. Consequently, if the social degree of time
preference were increased, it would be expected that the frequency in
particular of these forms of aggressive behavior would rise — as they in
fact did.[41]
IV. Conclusion: Monarchy, Democracy, and the Idea of a Natural Order
From
the vantage point of elementary economic theory and in light of
historical evidence, then, a revisionist view of modern history results.
The Whig theory of history, according to which mankind marches
continually forward toward ever higher levels of progress, is incorrect.
From the viewpoint of those who prefer less exploitation over more and
who value farsightedness and individual responsibility above
shortsightedness and irresponsibility, the historic transition from
monarchy to democracy represents not progress but civilizational
decline.
Nor
does this verdict change if more or other indicators are included. Quite
to the contrary. Without question the most important indicator of
exploitation and present-orientedness not discussed above is war. Yet if
this indicator were included the relative performance of
democratic-republican government appears to be even worse, not better.
In addition to increased exploitation and social decay, the transition
from monarchy to democracy has brought a change from limited warfare to
total war, and the 20th century, the age of democracy, must be ranked
also among the most murderous periods in all of history.[42]
Thus,
inevitably two final questions arise. What can we expect? And what can
we do? As for the first question, the answer is brief. At the end of the
20th century, democratic republicanism in the United States and all
across the Western world has apparently exhausted the reserve fund that
was inherited from the past. For decades, real incomes have stagnated or
even fallen.[43] The public debt and the cost of social security systems have brought on the prospect of an imminent economic meltdown.
At
the same time, societal breakdown and social conflict have risen to
dangerous heights. If the tendency toward increased exploitation and
present-orientedness continues on its current path, the Western
democratic welfare states will collapse as the East European socialist
peoples' republics did in the late 1980s. Hence one is left with only
the second question: what can we do in order to prevent the process of
civilizational decline from running its full course to an economic and
social catastrophe?
First,
the idea of democracy and majority rule must be delegitimized.
Ultimately, the course of history is determined by ideas, be they true
or false. Just as kings could not exercise their rule unless a majority
of public opinion accepted such rule as legitimate, so will democratic
rulers not last without ideological support in public opinion.[44]
Likewise, the transition from monarchical to democratic rule must be explained as fundamentally nothing but a change
in public opinion. In fact, until the end of WWI, the overwhelming
majority of the public in Europe accepted monarchical rule as
legitimate.[45] Today, hardly anyone would do so.
On
the contrary, the idea of monarchical government is considered
laughable. Consequently, a return to the "ancien régime" must be
regarded as impossible. The legitimacy of monarchical rule appears to
have been irretrievably lost. Nor would such a return be a genuine
solution. For monarchies, whatever their relative merits, do exploit and
do contribute to present-orientedness as well. Rather, the
idea of democratic-republican rule must be rendered equally if not more
laughable, not in the least by identifying it as the source of the
ongoing process of decivilization.
But secondly, and still more importantly, at the same time a positive alternative to monarchy and
democracy — the idea of a natural order — must be spelled out and
understood. On the one hand, and simply enough, this involves the
recognition that it is not exploitation, either monarchical or
democratic, but private property, production, and voluntary exchange
that are the ultimate source of human civilization.
On
the other hand, psychologically more difficult to accept, it involves
the recognition of a fundamental sociological insight (which
incidentally also helps identify precisely where the historic opposition
to monarchy went wrong): that the maintenance and preservation of a
private-property-based exchange economy requires as its sociological
presupposition the existence of a voluntarily acknowledged "natural"
elite — a nobilitas naturalis.[46]
The
natural outcome of the voluntary transactions between various private
property owners is decidedly nonegalitarian, hierarchical, and elitist.
As the result of widely diverse human talents, in every society of any
degree of complexity a few individuals quickly acquire the status of an
elite. Owing to superior achievements of wealth, wisdom, bravery, or a
combination thereof, some individuals come to possess "natural
authority," and their opinions and judgments enjoy widespread respect.
Moreover,
because of selective mating and marriage and the laws of civil and
genetic inheritance, positions of natural authority are more likely than
not passed on within a few — noble — families. It is to the heads of
these families with long-established records of superior achievement,
farsightedness, and exemplary personal conduct, that men turn with their
conflicts and complaints against each other, and it is these very
leaders of the natural elite who typically act as judges and
peacemakers, often free of charge, out of a sense of obligation required
and expected of a person of authority or even out of a principled
concern for civil justice, as a privately produced "public good."[47]
In fact, the endogenous origin of a monarchy (as opposed to its exogenous origin via conquest)[48]
cannot be understood except before the background of a prior order of
natural elites. The small but decisive step in the transition to
monarchical rule — original sin — consisted precisely in the monopolization
of the function of judge and peacemaker. The step was taken, once a
single member of the voluntarily acknowledged natural elite — the king —
could insist, against the opposition of other members of the social
elite, that all conflicts within a specified territory be brought before
him.
From
this moment on, law and law enforcement became more expensive: instead
of being offered free of charge or for a voluntary payment, they were
financed with the help of a compulsory tax. At the same time, the
quality of law deteriorated: instead of upholding the preexisting law
and applying universal and immutable principles of justice, a
monopolistic judge, who did not have to fear losing clients as a result
of being less than impartial in his judgments, could successively alter
and pervert the existing law to his own advantage.
It
was to a large extent the inflated price of justice and the perversions
of ancient law by the kings which motivated the historical opposition
against monarchy. However, confusion as to the causes of this phenomenon
prevailed. There were those who recognized correctly that the problem
lay with monopoly, not with elites or nobility.[49]
But they were far outnumbered by those who erroneously blamed it on the
elitist character of the ruler instead, and who accordingly advocated
to maintain the monopoly of law and law enforcement and merely replace
the king and the visible royal pomp by the "people" and the presumed
modesty and decency of the "common man." Hence the historic success of
democracy.
Ironically,
the monarchy was then destroyed by the same social forces that kings
had first stimulated when they began to exclude competing natural
authorities from acting as judges. In order to overcome their
resistance, kings typically aligned themselves with the people, the
common man.[50]
Appealing
to the always popular sentiment of envy, kings promised the people
cheaper and better justice in exchange and at the expense of taxing —
cutting down to size — their own betters (that is, the kings'
competitors). When the kings' promises turned out to be empty, as was to
be predicted, the same egalitarian sentiments which they had previously
courted now focused and turned against them.
After
all, the king himself was a member of the nobility, and as a result of
the exclusion of all other judges, his position had become only more
elevated and elitist and his conduct only more arrogant. Accordingly, it
appeared only logical then that kings, too, should be brought down and
that the egalitarian policies, which monarchs had initiated, be carried
through to their ultimate conclusion: the monopolistic control of the
judiciary by the common man.
Predictably,
as explained and illustrated in detail above, the democratization of
law and law enforcement — the substitution of the people for the king —
made matters only worse, however. The price of justice and peace has
risen astronomically, and all the while the quality of law has steadily
deteriorated to the point where the idea of law as a body of universal
and immutable principles of justice has almost disappeared from public
opinion and has been replaced by the idea of law as legislation
(government-made law).
At
the same time, democracy has succeeded where monarchy only made a modest
beginning: in the ultimate destruction of the natural elites. The
fortunes of great families have dissipated, and their tradition of a
culture of economic independence, intellectual farsightedness, and moral
and spiritual leadership has been lost and forgotten. Rich men still
exist today, but more frequently than not they owe their fortune now
directly or indirectly to the state.
Hence,
they are often more dependent on the state's continued favors than
people of far lesser wealth. They are typically no longer the heads of
long-established leading families but "nouveaux riches." Their conduct
is not marked by special virtue, dignity, or taste but is a reflection
of the same proletarian mass-culture of present-orientedness,
opportunism, and hedonism that the rich now share with everyone else;
and consequently, their opinions carry no more weight in public opinion
than anyone else's.
Hence,
when democratic rule has finally exhausted its legitimacy, the problem
faced will be significantly more difficult than when kings lost their
legitimacy. Then, it would have been sufficient by and large to abolish
the king's monopoly of law and law enforcement and replace it with a
natural order of competing jurisdictions, because remnants of natural
elites who could have taken on this task still existed.
Now,
this will no longer be sufficient. If the monopoly of law and law
enforcement of democratic governments is dissolved, there appears to be
no other authority to whom one can turn for justice, and chaos would
seem to be inevitable. Thus, in addition to advocating the abdication of
democracy, it is now of central strategic importance that at the same
time ideological support be given to all decentralizing or even
secessionist social forces; that is, the tendency toward political
centralization that has characterized the Western world for many
centuries, first under monarchical rule and then under democratic
auspices, must be systematically reversed.[51]
Even
if as a result of a secessionist tendency a new government, whether
democratic or not, should spring up, territorially smaller governments
and increased political competition will tend to encourage moderation as
regards exploitation. And in any case, only in small regions,
communities or districts will it be possible again for a few
individuals, based on the popular recognition of their economic
independence, outstanding professional achievement, morally impeccable
personal life, and superior judgment and taste, to rise to the rank of
natural, voluntarily acknowledged authorities and lend legitimacy to the
idea of a natural order of competing judges and overlapping
jurisdictions — an "anarchic" private law society — as the answer to
monarchy and democracy.
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