Tuesday, February 19, 2008

Slaves, shopkeepers and markets.

Here is a riddle for you. Imagine the world where slavery was commonplace. Why did the slaves work to benefit the slave owner? Was it because slaves, on a whole, loved laboring for the benefit of others? Was it a sense of a duty on their part? Was it because the slave master provided them with some water, some food, some shelter and protected them from others the way a farmer protects his herd from the wolf?

I sincerely doubt that most slaves were motivated by a sense of of obligation or gratitude. What they faced was a regime that was cruel but which promised more cruelity, of a more severe kind, if they didn’t comply with the wishes of the slave master.

Today most of us get up in the morning andlabor in one form or another. Much of what we do also benefits others. In a market economy it is difficult, if not impossible, to labor in a manner that only benefits one’s self. What gives labor value is that others value it, not that you enjoy it. If others want the value which your labor creates they have to enter into free exchange with you. If you didn’t gain value from this exchange you wouldn’t agree to it. If they didn’t gain value from this exchange they wouldn’t enter into it either.

The litmus test for the amount of slavery within a political or economic system is the amount of force required to inspire individuals to work for the benefit of others. What the slavers didn’t understand was that the amount of benefit derived from such an arrangment is smaller than it would be in a system of free exchange. The slave may be “inspired” to work in order to escape the lash but his inspiration is limited. He will work as hard as necessary to avoid punishment but is rarely willing to go beyond that.

In a system of free exchange the worker finds that his ability to satisfy his own wants and desires increases as he becomes more productive. He is inspired, by the added wealth that accrues to himself, to shower more benefits on others through his efforts. The entire sytem becomes more productive and what we call “society” tends to benefit.

One shouldn’t pretend that there were no benefits from slavery. The slave master benefited by the coerced labor of his slaves. But the society was poorer than it otherwise would have been if free exchange dominated. Chances are that slavery didn’t just distribute wealth from the slave to the slaver, but also redistributed wealth from the society in general to the slaver. Society was poorer by the absence of free exchange in order to endow the slaver with a small benefit.

The same thing is happening today in our mixed economy. Our society is a mixture of slavery and free exchange. Most of us work voluntarily, directly or indirectly, to produce goods and services that benefit the society at large. We do so voluntarily because such labor makes us better off. But about half the time to one third of the time we also work involuntarily in order to pay taxes.

The excuse for taxation is that it is necessary to benefit the society as a whole. In reality it benefits the class of individuals who decide how the fruits of your labor will be spent -- the political classes. And just as slavery provided the wrong incentives to slaves, and limited their economic output, taxation provides the wrong incentives to workers, and limits their economic output. The society, as a whole, is actually made poorer that it otherwise would have been in a system of pure free exchange.

But like the slave system there is a class of people who accrue small benefits to themselves through the forced labor of others. The political classes, those elected officials and their unelected bureaucratic lackeys directly benefit from the coerced labor imposed by taxation.

You pay your taxes for the same reason the slave gave the slaver as much labor as necessary to avoid the whip. If you don’t comply the state promises to use force against you. If you pay late they are very quick to send you a letter telling you how they will impose this force upon you and immediately penalize you for your failure to comply in a timely manner.

The idea that this arrangement benefits the society as a whole is an illusion. It is a classic example of Bastiat’s “broken window” fallacy where people see the benefits but not the costs. In Bastiat’s example a shopkeeper has a window broken and is forced to replace it. Those who replace the window benefit. They spend the money in various ways benefiting others as well. The conclusion drawn by the fallacious logic is that the broken window was a net benefit. That is what is seen.

But the shopkeeper lost money that he would have spent in other ways. That is not seen. The tailor who lost the sale of a suit is not counted in the equation because he is not seen. All the broken window did was transfer wealth from the tailor to the glazier. And society was the poorer because of it. The total wealth was down by one suit. The new window only replaced the old window adding no net benefit. Certainly the shopkeeper was worse off. He was out the money and never got the suit he wanted. Now imagine how bad this would be if the glaziers were free to go around breaking windows!

The glazier may try to convince us that society has net gains due to the value “created” by breaking windows. And as long as we only look at the one side of the equation this is true. Only when we take into account the lost benefits, and the lower wealth of the shopkeeper, do we see that these benefits turn in net losses.

Government is like the glazier and the slaver. It benefits from the forced labor of the populace. Just as both those special interests would argue that they were creating net benefits, the political classes do the same. And this remains true --- provided you only look at one side of the equation.

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