The Austrian School, the State, the Market, and Compulsion

Economics Political Theory
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1

As somebody interested in the relationship between personal liberty and social and economic equity, I’m attracted to the Austrian School as a group of thinkers that seem to take these issues seriously and place them at the centre of their thought. However, I’m continually disturbed by what seems to be polemic fixation on the state as the sole source of curtailment of personal freedom, reflected in the tendency to see social interaction as divided into two entirely separable domains: a political domain (the state) characterized solely by compulsion, and an economic domain (the market) characterized solely by freedom (of choice).

Am I alone in finding this approach superficial and simplistic? For example:

Genetically and actually these two domains are not separate. It seems historically obvious that the existence of a state is a necessary condition for the creation and continued existence of even the most rudimentary market economy. Surely taxation, and not exchange, is the genetic origin of money - and surely money (required to meet the demands of taxation) is the sufficient and necessary condition for the creation of a market economy? Is it not ultimately state compulsion that allows money to command a generally recognized value and form the basis of a market economy.

The power of compulsion is in no sense restricted to a political domain, and is surely inherent in the most fundamental economic interactions of a developed market economy. Large-scale economic activity relies upon the coordination of the activities of many individuals, and this is surely impossible without a compulsion made possible by the individual command of resources (ownership of capital). Recognition of this ownership being guaranteed, and ultimately compelled, by the state.

I understand that many of the writings of this school were polemically directed at the perceived socialist tendencies of their time - but I’m having trouble finding these issues properly addressed anywhere in their writings.

Is there anybody who could point me to writings somehow connected with the Austrian School that address this kind of issue seriously?

2

First of all, it is not at at all historical obvious that the existence of a state is a prerequisite for any human activity, including mutual exchange usually called the market.

The writings of the austrians where not “polemically” directed to the “perceived” socialist tendencies at the time, but founded on the basis of classical liberalism.

I have no idea, what you consider seriously, but I would recommend to read Murray Rothbards for a new liberty which can be found here or “Man Economy and State” Rothbards magnum opus, also available to download at mises.org

Have a great time.

3

I always raise an eyebrow when I see the use of “they/their”. Specifically, whose writings have you examined? To say “the Austrian School” is very vague. Have you read Mises? Rothbard? Hayek? If so, which articles or books?

4

Money arose due to a lack of a double coincidence of wants. Taxation is irrelevant. The market does not require a state - only enforcement of property rights. Roderick Long is one Austrian concerned with other forms of power, that is, other than the state (a lot of which still originates from it, given how many of its activities disrupt the market.) That said there is nothing “simplistic” about any of their writings, and the “polemics” were perfectly pertinent considering the idiocy they were up against.

-Jon

5

Replying to Jon, nhaag and liberty student together:

First, thanks for the literature tips.

I’d be the first to admit that my knowledge of the writings of the AS is far from encyclopedic - hence my original question. It’s also fair to point out that expressed opinions always vary between individuals and even works. I had in mind the kind of economic arguments found in von Mises’ Human Action/Nationaloekonomie and the more or less social/political arguments for individual liberty found in Hayek’s work.

I guess my point was that I find an a lot of what these gentlemen have to say is very persuasive regarding the importance of the distribution of decision-making to the individuals actually affected by the choices made, but that I felt that there was a tendency to fixate on the state as an obstacle to this process, and to ignore the fact that the state provides a framework of compulsion that actually makes economic decision making possible in the first place. This obviously raises some paradoxes regarding individual liberty and effective social or economic organization, and I’d be interested in hearing about any works by AS authors that address this issue directly.

As an aside: I have to say that the ‘indirect exchange’ theory of the origin of money seems to me more like an ahistorical fairy-tale than a credible explanation. Surely the whole point of money (even commodity money) is its universal acceptance as a means of exchange - otherwise it would merely be a commodity like any other. How could the universal acceptance of such a privileged commodity arise, if not from the universal compulsion to deliver that commodity as taxation (or tribute, or some other equivalent)? I believe that there is a fair amount of sound historical evidence to back up this theory, which I can try and summarize if anybody is interested. But I brought this question up as an example of where the state and compulsion arguably provide an unrecognized foundation for free economic decision-making.

Best Regards,

M.

6

Why must it be coercively imposed? Don’t just dismiss the idea because it sounds like an “ahistorical fairytale” to you. Gold/silver are simply characterized by such features (divisibility, portability, high marketability, high value relative to size, fungibility &c.) that, they are so widely desired as a commodity that they gradually come to become media of exchange. This status further propels them towards becoming money, i.e. the universal medium of exchange used in any given market. It’s a self-reinforcing process. Money cannot simply be imposed by fiat - it must evolve out of a commodity standard (hence Mises’s regression theorem, which solves a significant problem with regard to the formation of money.) As for the other issue you mentioned, Rothbard’s and Hoppe’s writings address the issue of the state vis-a-vis property rights (For a New Liberty and Democracy - the God that failed respectively), amongst other works (e.g. The Market for Liberty.)

-Jon

7

Hello Jon,

In a nutshell: Because I haven’t come across any substantial historical evidence of a money system developing in the way you describe, but I have come across plenty of historical evidence of a money system arising as an integral and sustaining part of a system of coercion that develops into a state.

I recognize that these are difficult and profound questions, and that the exchange-based theory you describe can’t be glibly dismissed in a single sentence. But I think that the points I’ve tried to raise are at least arguable, and raise some questions that interest me.

M.

8

Right, and when one of those theories actually deals with the problem of circularity in trying to explain the emergence of money by any other way than through its original use as a commodity and then a medium of exchange, I’ll consider them. It isn’t antithetical to Mises’s theory to have states impose a currency on ever wider circles of populations, once it has arised as a medium of exchange, BTW, so if that is what you mean, it isn’t a controversial point. The suppression of silver as a currency and increased use of gold as one, for instance, was the work of the state. But that is different to saying money arises by fiat.

-Jon

9

As I understand von Mises’ Regression Theorem he supposes (commodity) money to form a chain of value over time, the value of money today being a function of the value of money yesterday, and so on. If we follow this chain of value backwards we come to an historical threshold where the commodity loses its state privileged monetary status and we find merely a non-monetary favoured commodity for exchange. This commodity being favoured firstly because of its practical usefulness and secondly because of its suitability in exchange transactions for the kind of reasons you describe in a previous posting.

Importantly, I believe von Mises implicitly claims to describe a real historical process. He implies the existence of a real historical situation where practical considerations, and free consensus between participants, create a kind of proto-monetary system based upon a favoured commodity, and that this system is then simply anointed and recognized by the state.

Putting it very crudely: I claim (at least in general) that there is no substantial evidence that such an historical situation ever widely existed. I claim that there is surprisingly little evidence of anything resembling a developed exchange-based economy prior to the existence of developed political structures. I claim rather that at the start of this historical process we find evidence of political structures based upon coercion, protection and tribute - the tribute extorted being a form of proto-taxation. I claim that there is substantial evidence that historical monetary systems have developed rather out of such tribute systems. The tribute may well have been in the form of a favoured commodity, but the reasons for favouring it would have been different. Interestingly, proto-monetary systems were typically based upon cattle, grain, metals for weapon production or prestige goods (including gold).

It might be argued that, true or not, this was all ‘Once upon a time’ and of no relevance to our current situation. But I would contend that von Mises’ implied historical account is a kind of ‘creation myth’ (untainted by the ‘original sin’ of state coercion or involvement) that reflects his beliefs regarding the nature of economic processes and the role of the state. Namely, that the state is merely the guardian of economic activities and processes that are in principle independent of it, and that this has certain practical and even moral implications regarding the role of the state in economic activity. I’d also contend that if von Mises’ account could be brought into question - and I claim that it reasonably can - this would have implications for the applicability of von Mises’ thought to our current situation. Hence my interest.

M.

10

What do you make of cigarette money in prisons?

11

Good question!

Talking completely off the top of my head (I’m glad to say that I’ve never been imprisoned): I imagine prison is a pretty coercive environment - even amongst the inmates. Did (Jon’s theory) the system arise from a free exchange of commodities for ‘services rendered’ between inmates? Or (my theory) is there some ‘Mr. Big’ down the aisle demanding a packet of Marlboro a week, or else you’d better watch out next time you’re in the shower block?

Joking aside… if it doesn’t already exist, it might actually merit some real research! Although I have to say that you may have reached the limits of my curiosity.

M.

12

Putting it very crudely: Mises is solving a huge problem that has plagued monetary theorists regarding the formation of money, i.e. a circularity in their explanation of the formation of monetary prices. He uses the regression theorem to untangle this problem. They do not have any means of explaining them, and so simply tack on monetary economics to barter economics. Why the commodity is widely valued is immaterial! All that matters is that it is. You make a lot of claims. Now, I suggest you familiarize yourself with von Mises’s theory, and then proceed to examine it. Whatever the history of money, the difficulties in barter will force its adoption. Don’t believe me? Try living in a barter economy…

-Jon

13

And my point is that I’m still not convinced by von Mises argument on this point, exactly because of the problems with a barter economy you mention. Mises argument is implicitly based upon the existence of a more or less developed barter economy that then crosses an historical threshold to become a monetary economy of sorts. I simply don’t see the evidence of such a developed pre-monetary barter economy having ever really existed.

I don’t deny that developed barter economies have existed and do exist, but from the evidence I am aware of they arise usually:

  1. On the margins of monetary economies, and ultimately dependent upon them.

  2. After the collapse of the monetary system of a developed economy where a society simply can’t function without the exchange of goods, and barter simply has to be adopted for want of another alternative. This phase is always short and temporary - even if necessary ended by the adoption of a foreign currency - precisely because barter is such an horrifically inefficient and unwieldy means of exchange.

  3. Possibly some ‘Socialist’ economies, which are an interesting special case, but always evolve from a monetary economy.

I promise to read von Mises harder, in any case.

M.

14

But in the process of its development multiple media of exchange will float around, e.g. cattle, weapons, seashells &c. The way you phrase it, you make it sound as though monetary economies arise de novo. How though? Even demanding tribute/payments simply makes a given good more marketable, and thus widely exchangable. The transition from barter to money isn’t an abrupt quantum leap, but gradual, and will involve initially multiple media of exchange. All the presence of a state might influence is which commodity is chosen.

-Jon

15

What about Indians trading Wampum?

16

There are many examples of ‘money’ springing up from the trade between two independent groups of people, no taxation, coercion or fiat involved.

You’re a grain farmer and want to buy a bag of magic beans from another tribe but the person who wants your grain doesn’t have the magic beans but only smoked salmon and the person who does have the magic beans doesn’t want either grain or salmon.

Repeat for almost every cross group trade (I’m sure there would develop merchants who would accept many different commodities to trade against each other in the absence of ‘money’) and this could put a serious damper on the whole trading scheme. Now the problem is which group is going to be able to force the other to use their fiat currency as to your theory of how money comes into being.

Two choices really, either the traders accept a commodity with high trading value in relation with other commodities in both tribes and this becomes ‘money’ or the two tribes go to war so that the winner can establish a compulsary fiat currency to solve the double coincidence of wants problem.

Keep in mind that good trading partners usually don’t war with each other historically speaking.

Doesn’t your whole argument hinge on assuming there was no economic activity pre-fiat anyway? Why would they need to develop currency if there were no good to trade in the first place?

17

You are going in the right direction.

Human interaction is in fact divided into two entirely seperate domains: Peaceful cooperation( economic means), and exploitive coercion (political means).

This analysis was created by Franz Oppenheimer.

“There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. These are work and robbery, one’s own labor and the forcible appropriation of the labor of others. Robbery! Forcible appropriation! These words convey to us ideas of crime and the penitentiary, since we are the contemporaries of a developed civilization, specifically based on the inviolability of property. And this tang is not lost when we are convinced that land and sea robbery is the primitive relation of life, just as the warrior’s trade - which also for a long time is only organized mass robbery - constitutes the most respected of occupations. Both because of this, and also on account of the need of having, in the further development of this study, terse, clear, sharply opposing terms for these very important contrasts, I propose i. the following discussion to call one’s own labor and the equivalent exchange of one’s own labor for the labor of others, the “economic means” for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the “political means.” (pp. 24-25)

The state is not the exclusive practitioner of the political means, any petty thief falls into the same category. But this analysis shows the state for what it is, the most powerful and dangerous band of thugs imaginable.

You are absolutely wrong.

How do you explain the use of money by peoples not subject to taxation? Your explanation can’t so you ignored it.

Is it merely coincidence that gold was demanded by governments in both Europe and Asia? No, it was gold’s market value that caused the seperate governments to demand it.

If money was whatever governments demand then we would have seen numerous forms of government money.

Yet even if governments in Europe and Asia had not both used precious metals as money international trade would have still been possible. Traders would have simply found a commodity valued in both areas with a high value to weight ratio, like Salt .

Money is any commodity used in an indirect exchange.

I don’t follow.

How does a person owning capital amount to compulsion? A person can choose to work for the capitalist, or they can choose to be self employed. The capitalist may offer wages in an attempt to persuade others to work for him but this is not a form of compulsion.

Many states do not guarantee ownership(except its own) which makes this a false definition.

But an individual defending his own property is not a form of compulsion. No person is compelled to act.

18

And after all that even, there’s still the question of just how money arises, as if it can be created by decree. It either arises out of barter and then may be co-opted by a state, or it doesn’t arise at all,

-Jon

19

It’s verging on a strawman, and yes: you’re probably alone.

Mmmhmm.

Just like it’s historically obvious that there is a god, and it is historically inevitable for the New Soviet Man to triumph!

Seriously: you know better.

Ok…

And for that to be true, taxation had to create money. Yet the taxes had to be paid with…some form of money which already existed.

So you’ve stood reality upon its head.

No.

No.

No one ever said it was. However, the MONOPOLY on compulsion IS restricted to the political domain.

20

Tally sticks didn’t work out too well as a generally accepted medium of exchange in England, traded at a discount to specie.