The State as a Voluntary Institution: A Critique

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[A selection from “Toward a Reconstruction of Utility and Welfare Economics“]

In the development of economic thought, far more attention has been paid to analysis of free exchange than to State action. Generally, as we have indicated, the State has simply been assumed to be a voluntary institution. The most common assumption is that the State is voluntary because all government must rest on majority consent. If we adhere to the Unanimity Rule, however, it is obvious that a majority is not unanimity, and that therefore economics cannot consider the State as voluntary on this ground. The same comment applies to the majority voting procedures of democracy. The man who votes for the losing candidate, and even more the man who abstains from voting, can hardly be said voluntarily to approve of the action of the government.1

In the last few years, a few economists have begun to realize that the nature of the State needs careful analysis. In particular, they have realized that welfare economics must prove the State to be in some sense voluntary before it can advocate any State action whatever. The most ambitious attempt to designate the State as a “voluntary” institution is the work of Professor Baumol.2 Baumol’s “external economy” thesis may be put succinctly as follows: certain wants are by their nature “collective” rather than “individual.” In these cases, every individual will rank the following alternatives on his value scale: In (A) he would most prefer that everyone but himself be coerced to pay for the satisfaction of the group want (for example, military protection, public parks, dams, and so on). But since this is not practicable, he must choose between alternatives B and C. In (B) no one is forced to pay for the service, in which case the service will probably not be provided since each man will tend to shirk his share; in (C) everyone, including the particular individual himself, is forced to pay for the service. Baumol concludes that people will pick C; hence the State’s activities in providing these services are “really voluntary.” Everyone cheerfully chooses that he be coerced.

This subtle argument can be considered on many levels. In the first place, it is absurd to hold that “voluntary coercion” can be a demonstrated preference. If the decision were truly voluntary, no tax coercion would be necessary — people would voluntarily and publicly agree to pay their share of contributions to the common project. Since they are all supposed to prefer getting the project to not paying for it and not getting it, they are then really willing to pay the tax-price to obtain the project. Therefore, the tax coercion apparatus is not necessary, and all people would bravely, if a bit reluctantly, pay what they are “supposed to” without any coercive tax system.

Second, Baumol’s thesis undoubtedly is true for the majority, since the majority, passively or eagerly, must support a government if it is to survive any length of time. But even if the majority are willing to coerce themselves in order to coerce others (and perhaps tip the balance of coercion against the others), this proves nothing for welfare economics, which must rest its conclusions on unanimity, not majority, rule. Will Baumol contend that everyone has this value ordering? Isn’t there one person in the society who prefers freedom for all to coercion over all? If one such person exists, Baumol can no longer call the State a voluntary institution. On what grounds, a priori or empirical, can anyone contend that no such individual exists?3

But Baumol’s thesis deserves more detailed consideration. For even though he cannot establish the existence of voluntary coercion, if it is really true that certain services simply cannot be obtained on the free market, then this would reveal a serious weakness in the free-market “mechanism.” Do cases exist where only coercion can yield desired services? At first glance, Baumol’s “external economy” grounds for an affirmative answer seem plausible. Such services as military protection, dams, highways, and so on, are important. People desire that they be supplied. Yet wouldn’t each person tend to slacken his payment, hoping that the others would pay? But to employ this as a rationale for State provision of such services is a question-begging example of circular reasoning. For this peculiar condition holds only and precisely because the State, not the market, provides these services! The fact that the State provides a service means that, unlike the market, its provision of the service is completely separated from its collection of payment . Since the service is generally provided free and more or less indiscriminately to the citizens, it naturally follows that every individual — assured of the service — will try to shirk his taxes. For, unlike the market, his individual tax payment brings him nothing directly. And this condition cannot be a justification for State action; for it is only the consequence of the existence of the State action itself.

But perhaps the State must satisfy some wants because these wants are “collective” rather than “individual”? This is Baumol’s second line of attack. In the first place, Molinari has shown that the existence of collective wants does not necessarily imply State action. But, furthermore, the very concept of “collective” wants is a dubious one. For this concept must imply the existence of some existent collective entity who does the wanting! Baumol struggles against conceding this, but he struggles in vain. The necessity for assuming such an entity is made clear in Haavelmo’s discussion of “collective action,” cited favorably by Baumol. Thus, Haavelmo grants that deciding on collective action “requires a way of thinking and a power to act which are outside the functional sphere of any individual group as such.”4

Baumol attempts to deny the necessity for assuming a collective entity by stating that some services can be financed only “jointly,” and will serve many people jointly. Therefore, he argues that individuals on the market cannot provide these services. This is a curious position indeed. For all large-scale businesses are “jointly” financed with huge aggregations of capital, and they also serve many consumers, often jointly. No one maintains that private enterprise cannot supply steel or automobiles or insurance because they are “jointly” financed. As for joint consumption, in one sense no consumption can be joint, for only individuals exist and can satisfy their wants, and therefore everyone must consume separately. In another sense, almost all consumption is “joint.” Baumol, for example, asserts that parks are an example of “collective wants” jointly consumed, since many individuals must consume them. Therefore, the government must supply this service. But going to a theater is even more joint, for all must go at the same time. Must all theaters therefore be nationalized and run by the government? Furthermore, in a broad view, all modern consumption depends on mass production methods for a wide market. There are no grounds by which Baumol can separate certain services and dub them “examples of interdependence” or “external economies.” What individuals could buy steel or automobiles or frozen foods, or almost anything else, if enough other individuals did not exist to demand them and make their mass-production methods worthwhile? Baumollian interdependencies are all around us, and there is no rational way to isolate a few services and call them “collective.”

A common argument related to, though more plausible than, Baumol’s thesis is that certain services are so vital to the very existence of the market that they must be supplied collectively outside the market. These services (protection, transportation, and so on) are so basic, it is alleged, that they permeate market affairs and are a prior necessary condition for its existence. But this argument proves far too much. It was the fallacy of the classical economists that they considered goods in terms of large classes, rather than in terms of marginal units. All actions on the market are marginal, and this is precisely the reason that valuation and imputation of value-productivity to factors can be effected. If we start dealing with whole classes rather than marginal units, we can discover all sorts of activities which are necessary prerequisites of, and vital to, all market activity; land, room, food, clothing, shelter, power, and so on — and even paper! Must all of these be supplied by the State and the State only?

Stripped of its many fallacies, the whole “collective wants” thesis boils down to this: certain people on the market will receive benefits from the action of others without paying for them.5 This is the long and short of the criticism of the market, and this is the only relevant “external economy” problem.6 A and B decide to pay for the building of a dam for their uses; C benefits though he did not pay. A and B educate themselves at their expense and C benefits by being able to deal with educated people, and so on. This is the problem of the Free Rider. Yet it is difficult to understand what the hullabaloo is all about. Am I to be specially taxed because I enjoy the sight of my neighbor’s garden without paying for it? A’s and B’s purchase of a good reveals that they are willing to pay for it; if it indirectly benefits C as well, no one is the loser. If C feels that he would be deprived of the benefit if only A and B paid, then he is free to contribute too. In any case, all the individuals consult their own preferences in the matter.

In fact, we are all free riders on the investment, and the technological development, of our ancestors. Must we wear sackcloth and ashes, or submit ourselves to State dictation, because of this happy fact?

Baumol and others who agree with him are highly inconsistent. On the one hand, action cannot be left up to voluntary individual choice because the wicked free rider might shirk and obtain benefits without payment. On the other hand, individuals are often denounced because people will not do enough to benefit free riders. Thus, Baumol criticizes investors for not violating their own time-preferences and investing more generously. Surely, the sensible course is neither to penalize the free rider nor to grant him special privilege. This would also be the only solution consistent with the Unanimity Rule and demonstrated preference.7

Insofar as the “collective want” thesis is not the problem of the free rider, it is simply an ethical attack on individual valuations, and a desire by the economist (stepping into the role of an ethicist) to substitute his valuations for those of other individuals in deciding the latter’s actions. This becomes clear in the assertion by Suranyi-Unger: “he (an individual) may be led by a niggardly or thoughtless or frivolous evaluation of utility and disutility and by a corresponding low degree or complete absence of group responsibility.”8

Tibor Scitovsky, while engaging in an analysis similar to Baumol’s, also advances another objection to the free market based on what he calls “pecuniary external economies.”9 Briefly, this conception suffers from the common error confusing the general (and unattainable!) equilibrium of the evenly rotating economy with an ethical “ideal” and therefore belaboring such ever-present phenomena as the existence of profits as departures from such an ideal.

Finally, we must mention the very recent attempts of Professor Buchanan to designate the State as a voluntary institution.10 Buchanan’s thesis is based on the curious dialectic that majority rule in a democracy is really unanimity because majorities can and do always shift! The resulting pulling and hauling of the political process, because obviously not irreversible, are therefore supposed to yield a social unanimity. The doctrine that endless political conflict and stalemate really amount to a mysterious social unanimity must be set down as a lapse into a type of Hegelian mysticism.11

  • 1. Schumpeter is properly scornful when he says: “The theory which construes taxes on the analogy of club dues or of purchase of services of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind.” Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper and Brothers, 1942), p. 198. For a realistic analysis see Molinari, The Society of Tomorrow, pp. 87–95.
  • 2. See William J. Baumol, “Economic Theory and the Political Scientist,” World Politics (January 1954): 275–77; and Baumol, Welfare Economics and the Theory of the State.
  • 3. Galbraith, in effect, does make such an assumption, but obviously without adequate basis. See John K. Galbraith, Economics and the Art of Controversy (New Brunswick, N.J.: Rutgers University Press, 1955), pp. 77–78.
  • 4. Haavelmo, “The Notion of Involuntary Economic Decision.” Yves Simon, cited favorably by Rothenberg, is even more explicit, postulating a “public reason” and a “public will” as contrasted to individual reasonings and wills. See Yves Simon, Philosophy of Democratic Government (Chicago: University of Chicago, 1951); Rothenberg, “Conditions,” pp. 402–3.
  • 5. See the critique of a similar position of Spencer’s by “S.R.,” “Spencer As His Own Critic,” Liberty (June 1904).
  • 6. The famous “external diseconomy” problems (noise, smoke nuisance, fishing, and so on) are really in an entirely different category, as Mises has shown. These “problems” are due to insufficient defense of private property against invasion. Rather than a defect of the free market, therefore, they are the results of invasions, of property, invasions which are ruled out of the free market by definition. See Mises, Human Action, pp. 650–56.
  • 7. In a good, though limited, criticism of Baumol, Reder points out that Baumol completely neglects voluntary social organizations formed by individuals, for he assumes the State to be the only social organization. This error may stem partly from Baumol’s peculiar definition of “individualistic” as meaning a situation where no one considers the effects of his actions on anyone else. See Melvin W. Reder, “Review of Baumol’s Welfare Economics and the Theory of the State,” Journal of Political Economy (December 1953): 539.
  • 8. Theo Suranyi-Unger, “Individual and Collective Wants,” Journal of Political Economy (February 1948): 1–22. Suranyi-Unger also employs such meaningless concepts as the “aggregate utility” of the “collectivized want satisfaction.”
  • 9. Tibor Scitovsky, “Two Concepts of External Economies,” Journal of Political Economy (April 1954): 144–51.
  • 10. See James M. Buchanan, “Social Choice, Democracy, and Free Markets,” Journal of Political Economy (April 1954): 114–23; and Buchanan, “Individual Choice in Voting and the Market,” Journal of Political Economy (August 1954): 334–43. In many other respects, Buchanan’s articles are quite good.
  • 11. How flimsy this “unanimity” is, even for Buchanan, is illustrated by the following very sensible passage: “a dollar vote is never overruled; the individual is never placed in the position of being a member of dissenting minority” — as he is in the voting process (Buchanan, “Individual Choice in Voting and the Market,” p. 339). Buchanan’s approach leads him so far as to make a positive virtue out of inconsistency and indecision in political choices.

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