State or Individual?

Jul 19, 2018·Alasdair Macleod

The most important question faced by the human race is almost never addressed in modern times: which should be the master, the state over the individual or the individual over the state? It is particularly relevant today, bearing in mind President Trump is demolishing the established order both domestically and within America’s wider sphere of influence. The blowback he is getting from all the vested interests that have wormed their way into the processes and assumptions that drive government policy is considerable. It is very much relevant to the UK’s Brexit process, where the establishment is trying to scupper the freely expressed will of the people in a referendum.

The debate over this fundamental question has its roots in the earliest recorded philosophies of both ancient Greece and China. Plato took the side of the state, and his Aristotle took the side of the individual. Aristotle’s student, Alexander the Great went in a compromise direction, being proto-mercantilist. In China, the Legalists sided with Plato, the Taoists with Aristotle, and the Confucians were somewhere in between. The relevance to modern China is Mao was a legalist and his successors can be described as Confucian.

Labels used to describe schools of philosophy always lack precision, particularly when comparing philosophy in one culture with that in another, and across different times in history. But that is not the point. Throughout the history of philosophy there has been a continuing debate over the basic question posed in the title of this article. That is until recent decades, when the debate has now more or less ceased and been replaced by a general assumption that the state is master of the individual.

The purpose of this article is to challenge this assumption. In order to do so we must first state in which subset of philosophy the debate lies, and also consider the validity of mercantilism, a sort of middle way between the black and white of state versus individual.

At the time of the ancient philosophers, economics, in which our topic obviously lies, was not a separate subject. It is an economic question because we can only discuss the relative improvement of the human condition over time in economic terms. Economics only really became an identifiable subset of philosophy in the eighteenth century, though the use and status of money has been debated from earliest times. Economics proper was born in the Scottish enlightenment in the eighteenth century, identified particularly with David Hume and Adam Smith, though individuals such as Richard Cantillon (who was John Law’s banker in Paris in 1710) also made some important economic observations. Having achieved significant progress in understanding the case for the individual in the light of the British industrial revolution, Karl Marx kicked back by constructing a case for the state, at least as austere as that of Plato and the Chinese Legalists.

Constructing a case is the appropriate phrase. Marx’s communism developed into a self-serving justification as to why there should be a global revolution by destroying all private wealth. A new super-state would be constructed with him as its dictator and Engels his general. It was bad philosophy and for this reason ignored until long after his death, when it became the glue that held together the Soviet Union after the 1917 revolution, and for the China of Mao Zedong after the Second World War.

Following the Russian revolution, the pendulum now swung in favour of the state. Instead of personal freedom and free markets, various forms of socialism gained credence. The choice was no longer between state or individual, but what type of state should control the individual; Marxist, Trotskyist, or national socialism. They all involved a dictator directing others to do his bidding. They all involved the suppression of the individual, by force and even elimination. They all involved putting the state above the law, and the law being used solely for the furtherance of the state. The individual was not only subservient, but a dispensable tool.

Formally free market economies sought a compromise, an accommodation with the believers in communist socialism. In much of Europe and Britain the compromise was in the name of peace and social stability. In Germany, Italy and Spain it was one form of socialism struggling for supremacy over another, national socialism over communism. The communists eventually won by virtue of the defeat of national socialism in the Second World War, aided by the free marketeers who took the communist side.[i]

America understood the communist threat to her free markets and attacked it with McCarthyism, banishing communism and communists from American politics and public influence. But in recent decades, the personal freedom synonymous with free markets has been dramatically eroded by an encroaching state. Britain had compromised between the wars, until the Atlee government was elected in 1945 when it began pursuing the communist ideal of nationalising industry. The compromising continued under successive governments, accelerating towards a political and economic crisis in the late seventies. Influential economists such as Keynes, always establishment men, in the post-war monetary reset first declared money should be a state monopoly shorn of its barbaric relic, and then rubbed out the classical economics which demonstrated the superiority of free markets.

Our question, state or individual, was resolved by the Austrian economists in favour of individual freedom but dismissed by the statists. In America, politics under President Obama eventually reached a crisis point, leading to the election of President Trump, who is undermining the post-war socialistic status quo. In Britain, the people are at the same time faced with a choice between retaining some semblance of democratic control over their elected representatives or losing it altogether into the EU super-state.

The clock must be wound back to reopen the case for state versus individual, socialism versus free markets. We must also address the half-way house of mercantilism, to see if by incorporating statism with individualism there can be an option to the black and white alternatives of one or the other. We shall take a modern definition of mercantilism to mean any policy emanating from the state designed to achieve full employment and a favourable position in foreign trade.[ii]

The statist case

Modern statism has its origins in Marxism, which is statism in its most complete form. According to Marx, individual thought was to be banished, and there were to be no individual choices. Everything is to be decided by a global super-state.

Marx was a student of Hegel and based his philosophical analysis on Hegelian dialectic.[iii] Hegel concluded we all take our cue from our social and cultural surroundings and circumstances, and that they in turn are set by historical events. This became the basis for Marx’s extreme philosophy of class structure, which, in common with that of Hegel, denied any role to the independence of human thought.

Marx’s philosophical stance was comprehensively set out in his book, A Contribution to the Critique of Political Economy, published in 1859. The fundamental principle behind Marxism is stated early in the preface, where he defines his deduction from the Hegelian dialectic: “It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness.” In other words, social organisation takes precedence over the individual, and it therefore follows that the individual is subordinate to the social organisation.

At the heart of Marx’s conclusion was his cost of labour theory of prices. Believe that, combine it with Ricardo’s theory of profits (whereby wages must be suppressed for the businessman to maximise profits) and you can embark on credible accusations of exploitation of the working classes. It wasn’t until Carl Menger, the most important contributor to the marginal revolution of the 1870s, clearly established that prices were subjectively decided by the buyer and not the businessman, that an argument against state supremacy could be proved beyond all doubt.

The statists didn’t like it, and it took the genius of the contemporary inheritors of the Mengerian tradition, particularly Ludwig von Mises and Friedrich Hayek, to explain why it was impossible for statism to replace the superiority of the individual acting in his own interest. They showed why a socialist dictator and subordinate bureaucrats could never allocate economic resources efficiently. The state lacks the knowledge to evaluate the allocation of capital, which can only be calculated by independent businessmen successfully seeking to satisfy future consumption.

Put another way, all cost theories of prices that might give the state certainty of pricing were simply wrongheaded. To have any validity required the consumer to be forced to buy goods against his will. To this day, all state-owned or state-controlled enterprises rely on monopolistic behaviour to force consumers to accept their cost pricing basis, and they still rack up losses. And the abject failure of this approach was also dramatically demonstrated when the fall of the Iron Curtain exposed the complete bankruptcy of the Soviet system.[iv]

Socialists and other statists still argue their case nonetheless, despite all empirical evidence and despite aprioristic reasoning establishing that it is the consumer that sets prices. If the cost theory of prices had any validity, then an economy could be planned to a significant degree, given the mathematical certainties that would follow. This is the foundation behind the statist approach to economic modelling and why price theory is central to our debate.

Economists on the side of the state duck all fundamental truths to arrive at a position they deem tenable. In modern times it started with the state theory of money proposed by Georg Knapp, founder of the Chartalist School in Germany, who published his State Theory of Money in 1905. He lived to see the results of his errors, dying in 1926 three years after his state money collapsed into worthlessness. Despite this setback, statist economists continued to advocate state monopoly of money under the assumption the state knows better than free markets how to achieve a desired economic result. The fact that today’s mainstream economic opinion wavers from one position to another is all the evidence needed that it is built on the quicksand of ephemeral beliefs and properly reasoned theory has been jettisoned.

Jettison sound theory by deliberately misstating it and you can promote a role for the state. This is what Keynes did with Say’s Law, which effectively excludes the state from intervening.[v] Having dispensed with Say’s law, the state was then able to intervene in free markets to impose solutions to problems it alleged are created by the shortcomings of capitalism. Von Mises and Hayek demonstrated that the business cycle, the excuse for state intervention, was not a consequence of free markets, but the inevitable outcome of monetary and interest rate manipulation by the state and its licensed banks. Despite this knowledge being available to the world for the last ninety years, it has been suppressed by governments, while their favoured statist beliefs were promoted instead.

Very few of us notice this subterfuge and its consequences. The state has acquired for itself a monopoly on money, which it dishes out to supporters of statism, those who are increasingly persuaded that the state is superior to the individual. The corruption of money allows the state to distort anything and everything, silencing critics who are unable to link cause and effect between government interventions and subsequent disasters. This wrongheadedness is institutionalised to the point where those that point out the errors in economic and monetary policy are simply ignored.

The case for free markets

Free markets are simply an expression for the freedom accorded to everyone to choose to spend their earnings, profits and savings as they see fit. In these conditions it is the function of businessmen and entrepreneurs to respond to the collective wishes of individuals for the goods and services they desire from time to time. If they fail in this quest they will lose their capital and ultimately go out of business. If they succeed, they make profits. The consumer is king, exercising his right of choice continually, despite any attempts to influence him through the advertising and branding a businessman deploys. The consumer decides the demand for what goods and services he desires, setting their prices. In free markets the businessman has to accept this reality. He has to evolve his products and his pricing to stay in business. He has to compete.

Everyone who spends has to earn the wherewithal to do so, so he is both producer and consumer. Those who don’t or are unable to earn are subsidised by others who do. Each has to produce the things he is good at producing and leave the production of other things to specialists. This division of labour is fundamental to human progress, giving us everything we want and can afford, allowing us to improve our condition and comfort. It is the basis of man’s social cooperation. It is expressed in Say’s law, which stated simply, is that we produce in order to consume.

A free market is constantly changing. What consumers desired yesterday differs from today and can be expected to be different tomorrow. It is a businessman’s ambition to successfully anticipate tomorrow’s demand by improving his products and by inventing new ones. If, as consumers, we seek to benefit from this incremental progress, we must also adapt our employment accordingly. We cannot have better products without accepting that we ourselves must change our employment if called upon to suit the demands of others.

Free markets are simple. They work to their maximum potential if people’s earnings are fully deployed in their own choice of consumption and savings. Savings provide future security for the individual and are the source of monetary capital for the businessman investing in production. It follows that if an outside agent, such as the state or criminals, sequester part of every individual’s earnings, as the state does with taxes and criminals do with protection money and theft, the benefits of the division of labour lessen.

Statists argue that free markets are heartless, and disadvantage the weak, the disabled and the sick. This argument has its origins in the Marxist doctrine that everyone is created equal. It ignores the freedom of individuals to choose for themselves to put aside some of their earnings and profits to help those who need it. It also disallows the vested interest of producers to maximise the use of labour, and to employ all but the thoroughly incapable.[vi]

In free markets, by dividing their labour buyers and sellers of goods and services will naturally agree between them the money that acts as the temporary storage of their production. Over the millennia, various forms of money were tried in different parts of the world, but free markets settled on pure gold and silver. The favourable characteristics that emerged were their incorruptibility, durability, stability of supply and ubiquitous acceptance.

In practice, the state in one form or the other is a burden on free markets, and it should be apparent that mixing the two, as Confucius would recommend, reduces the potential of an economy to progress our standard of living. We must now address the errors of believing in another middle way, statism mixed with free markets in mercantilist form.

The mercantilist myth

There is a common belief among entrepreneurs and businessmen that a more business-like approach to state management of the economy will achieve a better outcome than socialism or free markets. This is undoubtedly the approach being taken by President Trump, who in accordance with a modern definition of mercantilism seeks full employment and favourable terms of trade. The economic management of China under President Xi shares much in common with this approach.

Co-opting an economy to support a common objective decided by a king, emperor or president is as old as the existence of organised communities. Mercantilism to a greater or lesser extent is imposed by force. There is a story by Saint Augustine (circa 400AD) of Alexander the Great which neatly illustrates the point:

Indeed, that was an apt and true reply which was given to Alexander the Great by a pirate who had been seized. For when that king had asked the man what he meant by keeping hostile possession of the sea, he answered with bold pride, "What do you mean by seizing the whole earth; because I do it with a petty ship, I am called a robber, while you who does it with a great fleet are styled emperor".[vii]

Alexander died a relatively young man before his thirty-third birthday, having assembled the largest empire in the known world at that time. It may be a stretch for some to say he was a mercantilist, because his ambitions were overtly military. But military ambition is inexorably tied up with the acquisition of wealth for a dictator and his supporters, the common objective of mercantilism.

His empire died shortly after he did, which illustrates the problem with all forms of mercantilism: its lack of permanence. Even if a dictator has the acuity to minimise the economic damage from his own actions and to advance his nation relative to others, his successor is unlikely to share the necessary qualities, because it takes an exceptional leader to dictate successfully. The few successful dictators who manage without imprisoning or executing opponents, like the pirate executed by Alexander, makes for a very short list.

A more modern variation of mercantilism is corporate, best illustrated by the success of the East India Company. It was originally granted a royal charter in 1600 by Elizabeth I “to trade into the East Indies”. By some accounts at its peak influence it accounted for almost half the world’s trade. Its army and navies were even larger than Britain’s, and from the late eighteenth century it ruled India, until the Mutiny in 1857, after which the British Crown assumed control. The most successful mercantilist operation in modern history lasted in India almost a century, probably because it didn’t corrupt the money.

The relevance today is this corporate mercantilist model has much in common with China’s economic strategy. Instead of relying on an Alexander, President Xi is backed by a committee. The difference with the East India Company, which was a monopolist for profit, is China is riding a wave of economic catch-up for its people to fund geopolitical objectives. All experience tells us that unless the Chinese government in the future reduces the coercion of its people to pursue government objectives in favour of genuine free markets, further improvements in standards of living will be impaired and political stability will be increasingly difficult to maintain.

There can be little doubt that President Trump views himself as being in the mercantilist mould. He sees the failure of socialist state policies and reckons as an experienced businessman he can do better. So far, he has successfully exposed the degree of economic corruption, whereby the US Government pays for things that should not be the government’s business. He is also determined to increase domestic manufacturing and to address unfair trade practices, in accordance with our modern definition of mercantilism. However, reducing the role of the state does not so far appear to be on his agenda. Nor is he tackling the debasement of the currency. As a businessman, he almost certainly thinks that costs determine prices, so fails to grasp the single most important reason for the state to rescind its intervention in the economy.

Our knowledge gained by addressing the question as to whether the state or the people are more important, tells us that unless Trump properly addresses this basic question, he will be fatally undermined by economic failure.

The choice of state or individual is posed here in black and white terms, but the reality is that while in theory communities can get on perfectly well without the state, people exercising their own free will are conditioned to want a superior authority. There will always be leaders and followers, and there will always be government.

The secret of successful government is not to follow the Marxist route of deliberately destroying personal wealth. The electorate must be appraised of the benefits of sound money, of saving for their own future needs and not relying on the state to provide. The state must minimise its burdens. Ensuring the individual has primacy over the state and the state has no obligations to the individual is the most effective route to maximising long-term prosperity and stability.

[iii] By remaining neutral in WW2, Spain held out with national socialism until Franco’s death in 1975.

[ii] See The Quarterly Journal of Economics, Volume 66, Issue 4, November 1952, Pages 465-501, The liberal elements in English Mercantilism by William Gampp for a modern definition of statism.

[iii] Hegel, as did Marx, reasoned from a thesis, then a negation of the thesis, and then a negation of the negation. This was meant to be irrefutable proof of a surviving conclusion. But if the historical and ordinary facts and any assumptions are wrong at the outset, the whole thesis obviously fails.

[iv] It was interesting to observe that the US authorities were taken by surprise by the Soviet economic collapse, thinking the Soviet economy was actually strong. Besides showing a lack of effective intelligence gathering, this error confirms that officials in the USG itself didn’t understand basic principles of price theory and therefore why communism was bound to fail.

[v] Keynes definition of Say’s law is that supply creates its own demand, an example of the sort of loose definition that allowed Keynes to bend economics into anything he wished. It allowed him to argue for the additional supply that does not emanate from the division of labour to be provided by the state. His erroneous definition persists in neo-Keynesian economics to this day.

[vi] Minimum wage legislation prevents this, and as such amounts to a deliberate government policy of creating unemployment among the low-skilled and disabled.

[vii] City of God Book IV: “How like kingdoms without justice are to robberies”

The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.