Unlawful Laws Lower, and Free Market Exchanges Raise, Social Utility

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We are all aware of laws that take wealth from some and give it to others. The U.S. and other nations have a great many such laws. In fact, most laws are of this variety. These laws always have a cheering section of highly vocal supporters who claim they are good for the country (in the public interest) even if they involve pain for some people. I will prove that the opposite is the case. I will prove that any law that compels theft lowers social utility.

I will then prove a very important corollary: Free market exchanges (definitionally involving no theft) always increase social utility, even when innocent third parties experience losses due to the gains made by other parties.

These proofs do not rely on grounds previously used to support free market conclusions. They do not rely on natural law, natural rights, or argumentation and rationalist ethics. They rely on the existing widespread prohibitions against crimes like theft that are observed in most societies.

The basic proof, which is non-mathematical, proceeds in two steps. The first part shows that social utility falls when society has a law against theft and allows a theft to go unpunished. The second step shows that a law against theft is sovereign over a law that demands theft in its doing. It shows that a law that itself requires theft is outlawed by a law against theft and is illegitimate. Therefore, all laws that require theft, since they go unpunished, lower social utility.

To bring out the issue involved here, we may first consider and dispose of an easy case, namely, a voluntary donation made by a richer man to a poorer man who has been left homeless by a flood. If both rich man and poor man are happy with this wealth transfer (ex ante), then social utility goes up (ex ante.) Therefore, the case of donation poses no challenge to the theory that such a wealth transfer increases social utility. The logic of donation suggests that the giver of a donation expects it to increase social utility, even if his expectation is sometimes disappointed. Meanwhile, the recipient who willingly accepts the gift also expects his utility to rise. He cannot expect it to undermine his incentives and thus his utility or else he would refuse the gift, or perhaps he would accept it and then give it away to others.

This leaves another very important case, in fact, the critical case. Let us assume that the rich man is contemplating a gift to the poor man; he wants to make a gift. Let us assume that both men are under the jurisdiction of a society that has a law against theft. Let us assume that the poor man steals the money from the rich man, and let us assume that the annoyance to the rich man from this act of theft is small compared to the benefit to the thief of the money he has stolen. Does social utility increase? According to the reasoning of diminishing marginal utility and also according to the assumptions I have imposed, it seems to (assuming the absence of such other negative side effects as the poor man feeling guilty or teaching his children to be thieves).

The case comes to trial and the thief is acquitted by a judge who lets him off because he was in desperate circumstances and because the loss to the rich man was small compared to the poor man’s gain.

This verdict disturbs many of us, even if the rich man intended to give the money away anyway. Something is out of order, even though this business is between the rich man and the poor man, even though it does not directly affect us as observers, and even though the combined utility of the rich and poor men has risen.

Many of us disapprove of the theft. Certainly all true libertarians will disapprove of it, and my assumption (based upon observed law) is that so will most non-libertarians. (Maybe a cadre of bleeding-heart liberals will approve of the verdict; they simply don’t believe in lawful laws in the first place.) We who disapprove are making a judgment that social utility decreases when such a theft occurs. We prefer the social outcome in which the rich man keeps his money and the poor man does not steal it. Why? Why do we disapprove of the theft? Perhaps we realize that if everyone were allowed to break this law and then let off, society would rapidly break down. No matter what our specific reasoning is, we wish to maintain the general prohibition against theft. That prohibition is a social good, and condoning theft damages that good. The transaction between the rich and poor man, the theft, does not have isolated effects or effects limited to them. The theft impacts the individual utilities of many people who are not directly involved. But how so? There has been no physical aggression on anyone else by the theft. True enough, but their property in the social rule has been damaged. The threat of theft against them in the future has increased; and especially so if the theft is condoned. Each person has expected future benefits from the rule against theft; and the theft if allowed tends to destroy that rule and those benefits. A theft that is allowed raises the chance of a large aggregate loss in utility. It changes a fundamental societal modus operandi. This prospective damage to the social good is large since many possible thefts can occur now and in the future; and the effects of widespread theft on society are to undermine its productive capacity and divert immense resources to protection. Hence, although the utility of the poor man goes up when he steals and although the sum of the rich man’s and poor man’s utility goes up, the social utility actually falls. The aggregate present value of the long-term prospective damages from theft far outweigh the immediate net increase in the combined utility of the rich and poor man.

This discussion does not prove that a law against theft is a good law, although I believe and could argue that it is. It does not even prove that society should punish thieves, for one may argue that society should not have such a law in the first place. It explains why it is that society (the set of existing individuals) has a complaint about condoning theft when all its members are living under a law against theft. It explains why social utility falls when such a law is broken by someone living under it who then is allowed to go unpunished.

Social utility is not simply a compound of individual utilities of ordinary goods such as bread, cheese, and automobiles. It importantly depends, clearly in the case of theft, on the utilities of other goods called social goods, the prohibition against theft being one such good. Social utility depends on society’s rules, laws, norms, and customs. These are factors of production or part of the recipes used in the production of wealth. Condoning a known theft destroys people’s property interests in a social good that all possess.

Instead of a thief stealing from a rich man, consider a law that involves theft (such as a milk producer’s subsidy). We have arrived at a point where we can make an important basic statement about one of the proper boundaries of rules and laws. In particular, if a rule or law itself involves theft, and at the same time, society has a rule against theft, then, by the same reasoning used above, the rule or law involving theft is a factor diminishing social utility. If we can identify the theft involved in the subsidy, which is quite easy to do, that is enough to conclude that social utility is lower because of the law.

This conclusion depends on treating a law that allows theft in the same way that we treat a man who steals. But some may argue that a law that incorporates stealing is not the same as a man who steals, simply because it is a law. To nail closed this escape hatch, we need to prove that the rule against theft has precedence over a rule or law that requires theft. In that case, any laws that involve theft are illegitimate.

The issue under consideration is one of legitimacy. Which law is sovereign, the one against theft or the one that itself demands theft? The law against theft must take precedence. The proof is by contradiction. Assume as the initial premise that the law against theft does not have precedence. Then it implies that legitimate laws can be passed that allow theft. And if that is so, it means that law is a synonym for power. But if law rules only because it is power, then law has become arbitrary. But if law is arbitrary, then it is despotic. This means it has no authority beyond force, or that the authority it imposes cannot be justified and is not accepted. Such a law by definition is illegitimate, which contradicts the initial premise’s first implication that legitimate laws can allow theft. Having arrived at a contradiction, we know that the initial premise must be false. This proves that the law against theft must take precedence. Then, since the law against theft is paramount, any law that involves theft is illegitimate. Such a "law" is unlawful. It is actually not a law at all; it is not a true law.

We conclude that any laws that compel theft are illegitimate. But since all laws that require theft also go unpunished because they are laws, they also lower social utility. We have two concurrent grounds for rejecting laws that demand theft: they are illegitimate and they lower social utility. It becomes important then to understand when it is that a law involves theft (or another unacceptable crime) and when it does not, for in all such cases such laws are illegitimate. They are really not laws, despite being passed, recorded in books, imposed, enforced, adjudicated, and advertised as laws. We might call them edicts, dictates, enactments, or legalities.

Another application of this proof is a law that legalizes the killing of all hunters. There are those people who gain from this law because they dislike hunters. The hunters lose from such a law. If society has a law against murder, which I assume it does, then condoning murder lowers social utility. At the same time, society’s law against murder trumps a law that allows hunters to be murdered. If it did not, then society considers laws allowing murder as allowable. This makes legal murder an exercise of power, essentially arbitrary and unjustifiable, since anyone could be made the subject of murder. This makes legal murder an illegitimate law.

It is evident that the proof extends to any recognized crime that is based upon a proper moral code. Societies worldwide recognize such crimes as theft, murder, rape, kidnaping, larceny, and fraud. I by no means am saying that societies are perfect in their moral foundations of law. Societies (meaning certain organized sets of individuals) are by no means perfect. They make two kinds of errors. A type 1 error is saying something is a crime when it is not, like smoking marijuana. A type 2 error is saying something is not a crime when it is, like abortion.

I have not shown directly that free market exchanges always increase social utility, but we can reach that very important conclusion as follows. I have shown that interferences with free market exchanges that involve theft always decrease social utility. Consider a free market exchange. Suppose persons A and B raise their utility through an exchange involving no theft (which is by definition what a free market exchange is), but person C’s utility is indirectly adversely affected. Then the theorem shows that any interference that involves theft (like taking from the gains of A and B to compensate C’s losses) must reduce social utility. Hence, despite C’s loss, society cannot raise social utility by using force to help C. But since A and B’s exchange raised their utility, this means that free market exchanges always increase social utility (ex ante.) If society wishes to help C and raise social utility still further, the appropriate means is voluntary help.

Part one of the proof says that a law that incorporates theft diminishes social utility in a society that has a law against theft. Most cultures prohibit theft. Part two of the proof says that a law against theft trumps any law that incorporates theft. Together they imply that a law that incorporates theft lowers social utility. Part two of the proof holds whether or not part one of the proof holds.

None of the results depend on the source of the law compelling theft. They hold if the law is voted in by majority rule or if a dictator promulgates it.

The proof raises the question: If laws involving theft diminish social utility, why do societies worldwide have such laws? There are several answers that shed light on this bedeviling question, and I’ve given some of them in other articles. At this juncture, here’s another one. Mankind is still eating the apple. It doesn’t have to. There is a better way.

Rothbard in his reconstruction paper pointed out that when government officials gain utility from an official act that restricts A and B "As economists, we can therefore say nothing about social utility in this case, since some individuals have demonstrably gained and some demonstrably lost in utility from the governmental action." The problem here and elsewhere in the economics of social utility is that when there is not unanimity, the economist is stymied. I have shown that we can say something when a society has a law against theft; and most societies do, even as they break it. By recognizing that a society has a law against theft, we bypass the unanimity problem.

There is no explicit theory of property or self-ownership in this free-market defense. It does not rely on natural law. It does not rely on natural rights. It does not rely on argumentation or rationalist ethics. It relies on the prohibition against theft. Property is implicit in that prohibition.

In this argument, I use morality but not a personal or arbitrary morality. I assume only that society has laws against theft and murder, which is a weak (that is, highly defensible) assumption. These laws are presumably built on or associated with a justifiable or proper moral code. My argument is therefore this: If society rests upon laws against theft and murder and other such recognized crimes that derive from a proper moral code, that foundation renders illegitimate any official statute, act, law, executive order, or edict that violates that code, and it allows us to infer that such a pronouncement lowers social utility.

Balzac wrote: "When law becomes despotic, morals are relaxed, and vice versa." If a law is passed that itself involves and compels theft, such a law is despotic and its passage is a sign that society’s morals are deteriorating. Wealth accumulation and social utility will decline. Conversely, a despotic law that defies morality induces a decline in society’s morals.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

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