and How Not to Desocialize
by Murray N. Rothbard
It is generally acknowledged that bureaucrats are obstructing the
process, but confusion abounds among free-market proponents themselves.
Matters are scarcely helped by the fact that Western economists,
to whom the former Eastern bloc is looking for wisdom, have themselves
done virtually nothing to study, let alone solve, this problem during
the sixty years since Stalin established socialism in the Soviet
Union and the half-century since the Soviets imposed it on Eastern
For ever since
the mid-1930s, almost all Western economists have accepted the view
that there is no calculation problem under socialism, and most have
accepted the subsequent notion that the Soviet economy has been
successful and growing, and would shortly overtake that of the United
Not to Desocialize
We may first
clear the way on how to desocialize by examining various paths that
have become popular, and yet are decidedly not the way
to arrive at our presumably common goal.
How not to
go about desocialization may be highlighted by the story of a friend
of mine, who told me recently about a Soviet colleague in his department,
who came to the United States to study diligently the problem of
how to create a futures market in the USSR. He has been stymied
by the fact that he cannot seem to figure out what laws or edicts
the Soviet state should lay down, so as to replicate the futures
market in the United States. In short, he cannot find a way to plan
a futures market.
Here then is
a crucial point: you cannot plan markets. By their very
nature, you can only set people free so that they can interact and
exchange, and thereby develop markets themselves. Similarly, several
of the socialist countries, seeing the importance of the capital
markets in the West, have been trying to develop stock exchanges,
but with little success. First, again, because stock markets cannot
be planned, and, second, because, as we will see further, you cannot
have markets in titles to capital if there are still virtually no
private owners of capital in existence.
Not Phase In
It is, again,
generally accepted that free markets must be arrived at quickly,
and that phasing them in slowly and gradually will only delay the
goal indefinitely. It is well known that the giant socialist bureaucracy
will only seize upon such delay to obstruct the goal altogether.
But there are further important reasons for speed. One, because
the free market is an interconnected web or lattice-work; it is
made of innumerable parts which intricately mesh together through
a network of producers and entrepreneurs exchanging property titles,
motivated by a search for profits and avoidance of losses, and calculating
by means of a free price system.
freeing only a few areas at a time, will only impose continuous
distortions that will cripple the workings of the market and discredit
it in the eyes of an already fearful and suspicious public. But
there is also another vital point: the fact that you cannot plan
markets applies also to planning for phasing them in. Much as they
might delude themselves otherwise, governments and their economic
advisers are not in a position of wise Olympians above the economic
arena, carefully planning to install the market step by measured
step, deciding what to do first, what second, etc. Economists and
bureaucrats are no better at planning phase-ins than they are at
dictating any other aspect of the market.
genuine freedom, the role of government and its advisers must be
confined to setting their subjects free, as fast and as completely
as it takes to unlock their shackles. After that, the proper role
of government and its advisers is to get and keep out of the subjects'
Not Crack Down on Black Markets
One route toward
freedom that former President Gorbachev had adopted was to crack
down on the villains of the black market. We might conclude that
the mindset of the Eastern bloc has a long way to go in understanding
freedom, except that there are precious few Westerners who understand
this problem either. For the black marketeers are not villains;
if they sometimes look and act like villains, it is only because
their entrepreneurial activities have been made illegal. The "black
market" is simply the market, the market which Soviets
claim to be searching for, but which has turned "black" precisely
because it has been declared illegal. It is the market crippled
and distorted, but it is there, in this despised "black" area, that
the Soviets will find the market most readily. Instead of cracking
down, then, the governments should, immediately, set the black market
Not Confiscate the People's Money
Union suffers from the problem of "ruble overhang," that is too
many rubles chasing too few goods. It is generally admitted that
the "overhang" is the result of comprehensive price fixing, by which
the government has set prices far below market-clearing levels.
Over the years, the Soviet government has been rapidly printing
new money to finance its expenditures, and this increased money
supply, coupled with an ever-dwindling supply of goods resulting
from the breakdown of socialist planning, has created aggravated
shortages and an excess supply of money over goods available.
It is commonly
acknowledged that the shortages will be relieved and the overhang
abolished, if prices were set free to move. But the government fears
the wrath of unhappy consumers. Perhaps, but it is scarcely a solution
to do what Gorbachev did, that is, follow the uninspired path of
the Brazilian "free market" President Collor de Mello, who in the
spring of 1990, in an attempt to reverse hyperinflation, arbitrarily
froze 80 percent of all bank accounts. Gorbachev did one better
by suddenly making useless all large-ruble bills, allowing only
a small number to be exchanged for smaller dominations. This is
no way to eliminate an overhang; at best, the cure is much worse
than the disease.
In the first
place, in this supposed strike at black marketers, it has been rather
the savings of the average Soviet that has been destroyed, since
the black marketeers were shrewd enough to have moved already into
precious metals and foreign currency. But even more important: by
this action, the government delivers the second body blow of a one-two
punch at the average citizen, and at the economy. The first punch
was for the government to inflate the money supply so as to engage
in its usual, wasteful expenditures. Then, after the money has been
spent, and prices driven up in either open or repressed fashion
then the government, in its wisdom, begins to exclaim at
the horrors of inflation, blames black marketeers, greedy consumers,
the rich, or whatever, and proceeds to the second monstrous punch
of confiscating the money long after it has come into private ownership.
Whether or not one calls this process "free market," it remains
confiscatory, unjust, statist, and a double set of implicit taxes
and burdens upon the economy.
Not Increase Taxes
one of the "lessons" that many East Europeans have absorbed from
Western economists is the alleged necessity of sharply raising taxes
and making them progressive. Taxes are parasitic and statist; they
cripple energies, savings, and production. Taxes invade and aggress
against the rights of private property. The higher the taxes, the
more the economy becomes socialistic; the lower they are, the closer
the economy approaches true freedom and genuine privatization, which
means a system of complete rights of private property. The Mazowiecki
attempt to achieve privatization and free markets in Poland was
greatly hampered by the imposition of far higher and progressive
As part of
the shift toward freedom and desocialization, then, taxes should
be drastically lowered, not raised.
Firms Owning Each Other is Not Privatization
I owe to Dr.
Yuri Maltsev the information that the much-vaunted Shatalin plan
for the Soviet Union, which was supposed to bring about privatization
and free markets in 500 days, was really not privatization at all.
Apparently, existing government firms in each industry, instead
of being actually privatized that is, owned by private individuals
would have been owned (or 80 percent owned) by other firms
in the same industry. This would mean that giant state monopoly
firms would continue to be state monopoly firms, and be self-perpetuating
oligarchies rather than truly privately owned. Privatization must
mean private property.
points of desocialization must necessarily be written or read sequentially,
but they need not be carried out in that manner: all the following
points could, and should, be instituted immediately and all at once.
the Black Market
The first two
planks are implicit in the previous part of this paper. One, is
to legalize the black market, that is to make all markets free and
legal. That means that the private property of all those engaging
in such markets must, along with everyone else, be made secure from
government depredation, secure as a right of ownership. It means
also that all goods and services hitherto illegal are now to be
legal, whether they are legal in the West or not, and that all transactions
are to be engaged in freely, that is, that prices are to be set
voluntarily by the exchanging parties. Thus, all government price
control is to be abolished forthwith.
If such genuine
prices for real transactions are to be higher than pseudo-"prices"
set by the government for non-existent transactions, then so be
it. Consumer griping should simply be ignored; any consumers who
still prefer the previous regime of fixed prices for non-existent
goods will, of course, be free to boycott the new prices and try
to find cheaper sources of supply elsewhere. My hunch, however,
is that consumers will adjust soon enough to these one-shot changes,
especially since unprecedented abundance of consumer goods will
quickly pour forth onto the markets.
by the way, I mean simply abolishing a previous outlaw status; I
do not propose to engage in semantic exercises trying to distinguish
between "legalizing" and "decriminalizing."
Lower All Taxes
of our previous analysis is that taxation should be cut drastically.
There is, in the literature on taxation, far too much discussion
about which types of taxes are to be imposed, and who is to pay
them and why, and not nearly enough on the height or amount of taxes
to be levied. If the tax rate is low enough, then the form or principles
of tax distribution really makes very little difference.
To put it starkly,
if all tax rates are kept below one percent, then it really does
not matter much economically whether the taxes are on incomes, sales,
excises, property, or capital gains. It is important instead to
focus on how much of the social product is to be siphoned off to
the unproductive maw of government, and to keep that burden ultra-minimal.
While the form
of taxation would not then matter economically, it would still matter
politically. An income tax, for example, however low, would
still maintain an oppressive system of secret police ready and willing
to investigate everyone's income and spending and hence his entire
life. Economists' opinion to the contrary, there is no tax or system
of taxes that could be neutral to the market.
that might exist after desocialization should, however, be as close
to neutral as possible. This would mean, in addition to very low
rates and amounts, that the taxation be as unobtrusive and harmless
as possible, and imitate the market as closely as it can. Such imitation
might include the voluntary sale of goods and services at a price,
or setting a price for participating in voting. The sale of goods
or services by the government would, of course, be drastically limited
in our desocialized system, because of the enormous scope of privatization
of government activities. Privatization will be treated below.
the Government's Ability to Create Money
There are three
parts to any government's ability to generate revenue: taxation,
the creation of new money, and the sale of goods or services.
There can be no genuine free market or desocialization so long as
government is permitted to counterfeit money, that is create
new money, whether it be paper tickets or bank deposits, out of
thin air. Such money creation functions as a hidden and insidious
form of taxation and expropriation of the property and resources
of producers. Ending counterfeiting means getting the government
out of the money business, which in turn implies eliminating both
government paper money and central banking. It also means denationalizing
currency units, such as the ruble, forint, zloty, etc., and returning
them to private market hands.
currency can only be achieved by redefining paper currencies in
terms of units of weight of a market metal, preferably gold. When
the central banks are liquidated, they could disgorge their gold
hoards; as their last act on earth they could redeem all their paper
tickets at the redefined weight in gold coins.
the will to desocialize, this monetary denationalizing process is
not as complex or difficult as it may first seem, it might indeed
take longer than the one day required for the other parts of our
plan. There could then be
transitional steps of a few days' length: that is, the ruble or
forint could be allowed to fluctuate freely and be convertible at
market exchange rates into other currencies.
It would still
be imperative to take the money-creating power out of the hands
of the national government; a possible way of doing that, and a
second transitional step, would be to make the ruble convertible
into harder currencies, such as the dollar, at some fixed rate.
Pending return to a pure gold standard and liquidation of the central
bank, it would also be important to curb the government's power
to create money by freezing permanently all central bank activities
including open market operations, loans, and note issues. It need
hardly be added that a law or edict limiting or freezing the government
itself is not an act of intervention into the economy or
society. Quite the contrary.
Just as black
markets and all private markets would be set free, so too private
credit institutions, for the lending of savings or the channeling
of the savings of others, would be set free to develop.
may have occurred to the reader: If taxation is to be drastically
lowered, and the government is to be deprived of its power to print
or create money, then how is the government going to finance its
expenditures and operations?
is: It wouldn't have to, because there would be precious little
left for government to do. (This will be explained further in the
discussion of privatization below.)
economy is a command economy, staffed and run by a gigantic bureaucracy.
That bureaucracy would immediately be fired, its members set free
at long last to find productive jobs, and develop whatever productive
abilities they might have, in the now rapidly expanding and flourishing
us to a fascinating problem which, while resting long in the hearts
and minds of the oppressed subjects of socialism, has now unexpectedly
become a live political issue. What is to be done with and to the
top Communist party cadre, to the nomenklatura, to the
vast apparatus of the once all-powerful secret police? Should justice
at last be meted out to them by a series of state-crime trials,
followed by proper and condign punishment? Or should bygones be
bygones, a general amnesty be declared, and ex-KGB men hired as
private guards or detectives? I confess an ambivalence on this issue,
in weighing the competing claims of justice and of social peace.
Fortunately, the decision can be left to the peoples of the former
Soviet Union and of Eastern Europe. There is not much that an economist,
even a free-market economist, can say to resolve this issue.
or Abolish Government Operations
us to the final, but scarcely the least important, plank of our
proposed desocialization platform: privatizing government operations.
Since theoretically all, or in practice most, production in socialist
countries has been in the hands of the State, the most important
desideratum, the crucial route for attaining a system of private
property and free market, must be to privatize government operations.
to say "privatize" is not enough. In the first place, there are
many government operations, especially in socialist states, that
we don't want to privatize, but rather to abolish completely. For
example, we would not, as libertarians and desocializers, wish to
privatize concentration camps, or the Gulag, or the KGB. God forbid
that we should ever have an efficient supply of concentration-camp
or secret police "services"!
Here is a point
that needs to be underlined. The basic assumption of national income
and GNP analysis is that all government operations are productive,
that they contribute their expenses to the national output and the
common weal. But if we truly believe in freedom and private property,
we must conclude that many of these operations are not social "services"
at all but disservices to the economy and society, "bads" rather
that desocialization must involve the abolition, not the privatization,
of such operations as (in addition to concentration camps and secret
police facilities) all regulatory commissions, central banks, income
tax bureaus, and, of course, all the bureaus administering those
functions that are going to be privatized.
and services, then, are to be privatized. How is this to be accomplished?
In the first place, private competition with previous government
monopolies is to be free and unhampered. This would legalize not
only the black market, but all competition with existing government
operations. But what about the massive accumulation of government
firms and capital assets themselves? How are they to be privatized?
routes have been suggested, but they can be grouped into three basic
types. One is egalitarian handouts. Every Soviet or Polish citizen
receives in the mail one day an aliquot share of ownership of various
previously state-owned properties. Thus, if the XYZ steel works
is to be privately owned, then, if there are 300 million shares
of XYZ steel company issues, and 300 million inhabitants, each citizen
receives one share, which immediately becomes transferable or exchangeable
at will. That this system would be impossibly unwieldy is evident.
The number of people would be too much and shares too few to allow
every person to have a share, and there would be shares of innumerably
large numbers and varieties that would quickly descend upon the
heads of the average citizen.
Much of this
chaos would be eliminated in the suggestion of Czech finance minister
Vaclav Klaus, who proposes that each citizen receive basic certificates,
which could be exchanged for a certain number or variety of shares
of ownership of various companies on the market. But even under
the Klaus plan, there are grave philosophical problems with this
solution. It would enshrine the principle of government handouts,
and egalitarian handouts at that, to undeserving citizens. Thus
would an unfortunate principle form the very base of a brand new
system of libertarian property rights.
It would be
far better to enshrine the venerable homesteading principle
at the base of the new desocialized property system. Or, to revive
the old Marxist slogan: "all land to the peasants, all factories
to the workers!" This would establish the basic Lockean principle
that ownership of owned property is to be acquired by "mixing one's
labor with the soil" or with other unowned resources.
is a process of depriving the government of its existing "ownership"
or control, and devolving it upon private individuals. In a sense,
abolishing government ownership of assets puts them immediately
and implicitly into an unowned status, out of which previous
homesteading can quickly convert them into private ownership. The
homestead principle asserts that these assets are to devolve, not
upon the general abstract public as in the handout principle, but
upon those who have actually worked upon these resources: that is,
their respective workers, peasants, and managers. Of course, these
rights are to be genuinely private; that is, land to individual
peasants, while capital goods or factories go to workers in the
form of private, negotiable shares. Ownership is not to be granted
to collectives or cooperatives or workers or peasants holistically,
which would only bring back the ills of socialism in a decentralized
and chaotic syndicalist form.
It should go
without saying that these ownership shares, to be truly private
property, must be transferable and exchangeable at will by their
holders. Many current plans in the socialist countries envision
"shares" which must be held by the worker or peasant and, for a
term of years, could only be sold back to the government. This clearly
violates the very point of desocialization. Other suggested plans
impose severe restrictions upon the transfer of ownership to foreigners.
Once again, genuine privatization requires complete private property,
including sale to foreigners.
There is, furthermore,
nothing wrong with "selling the country" to foreigners. In fact,
the more that foreigners purchase "the country" the better, for
it would mean rapid injections of foreign capital, and therefore
more rapid prosperity and economic growth in the impoverished socialist
A problem immediately
arises in granting shares to workers in the factories, a problem
akin to the question what is to be done with the Communist cadres
and the KGB: Should the managing nomenklatura be cut in
on the shares of ownership?
the Soviets in an address in Moscow in early 1990, the economist
Paul Craig Roberts observed that the Soviet people could either
cut the throats of the nomenklatura or cut them in on shares
of ownership; for the sake of social peace and smooth transition
to a free economy, he recommended the latter. As I wrote above,
I would not be that quick to thwart the demands of justice; but
I would like to point out again a third possible route: not doing
either one, and freeing the nomenklatura to find productive jobs
in the private sector. The philosophic point in contention is to
what extent, if at all, the managers' activities in the old Soviet
economy were productive, and therefore participant in homesteading-labor,
and to what extent they were crippling and counter-productive, and
therefore deserving of nothing better than a curt dismissal.
A third commonly
suggested route to privatization deserves to be rejected out of
hand: that the government sell all its assets to the public at auction,
to the highest bidder. One grave flaw in this approach is that since
the government owns virtually all the assets, where would the public
get the money to purchase them, except at a very low price that
would be tantamount to free distribution?
even more important flaw hasn't been sufficiently stressed: why
does the government deserve to own the revenue from the sale of
these assets? After all, one of the main reasons for desocialization
is that the government does not deserve to own the productive assets
of the country. But if it does not deserve to own the assets, why
in the world does it deserve to own their monetary value? And we
do not even consider the question: What is the government supposed
to do with the funds after they have been received?
A fourth principle
of privatization should not be neglected; indeed, it should take
priority. Unfortunately, by the nature of the case this fourth route
cannot be made into a general principle. That would be for the government
to return all stolen, confiscated property to its original owners,
or to their heirs. While this can be done for many parcels of land,
which are fixed in land area, or for particular jewels, in most
cases, especially capital goods, there are no identifiable original
owners to whom to restore property.
In the nature of the case, finding original landowners is easier
in Eastern Europe than in the Soviet Union, since far less time
has elapsed since the original theft. In the case of capital goods
built by the State, there are no owners to identify. The reason
why this principle should take priority wherever it applies is because
property rights imply above all restoring stolen property to original
owners. Or to put it another way: an asset becomes philosophically
unowned, and therefore available to be homesteaded, only where an
original owner, if one had existed, cannot be found.
There is one
nagging remaining problem: How large should the newly private firms
be? Every industry in socialistic countries is generally locked
into a monopoly firm, so that if each firm is privatized into an
equivalent-sized firm, the size of each will be far larger than
the optimum on the free market. A fundamental problem, of course,
is that there is no way for anyone in a socialized economy to figure
out what the optimum size or number of firms is going to be under
In a sense,
of course, mistakes made in the shift to freedom will tend to iron
themselves out after a free market is established, with tendencies
to break up or to consolidate in the direction of optimum size and
number. On the other hand, we must not make the mistake of blithely
assuming that the costs or inefficiencies of this process may be
disregarded. It would be preferable to come as close as possible
to the optimum in the initial privatization.
plant, or each group of plants in an area, may be initially privatized
as a separate firm. It goes without saying that a very important
aspect of a free market and of this optimizing process is to allow
the market complete freedom to work: e.g., to merge, combine, or
dissolve firms as it proves profitable.
of the proffered Rothbard Plan for desocialization should now be
and drastic reductions in taxes, government employment, and government
privatization of government assets: where possible to return them
to the original expropriated owners or their heirs; failing that,
granting shares to productive workers and peasants who had worked
on these assets.
complete and secure property rights for all owners of private
property. Since full property rights imply the complete freedom
to make exchanges and transfer property, there must be no government
interference in such exchanges.
the government of the power to create new money, best done by
a fundamental reform that at one and the same time liquidates
the central bank and uses its gold to redeem its notes and deposits
at a newly defined unit of gold weight of existing currencies.
All this could
and should be done in one day, although the monetary reform could
be done in steps taking a few days.
on DVD: $19
rid of the socialist state requires that state to perform one
final, swift, glorious act of self-immolation…."
One point we
have not specified: precisely how low should taxes or government
employment or spending be set, and how complete should be the privatization?
The best answer is that of the great Jean-Baptiste Say, who should
be known for many other things than Say's Law: "The best scheme
of [public] finance is, to spend as little as possible; and the
best tax is always the lightest."
In short, that government is best that spends and taxes and employs
the least, and privatizes the most.
A final point:
I have been criticized by libertarian colleagues for proposals of
this sort because they involve action by government. Isn't it inconsistent
and statist for a libertarian to advocate any government action
whatever? This seems to me a silly argument. If a thief has stolen
someone's property, it is scarcely upholding "robber-action'' to
advocate that the robber disgorge his stolen property and return
it to its owners. In a socialist state, the government has arrogated
to itself virtually all property and power of the country. Desocialization,
and a move to a free society, necessarily involves the action of
that government's surrendering its property to its private subjects,
and freeing those individuals from the government's network of controls.
In a deep sense, getting rid of the socialist state requires that
state to perform one final, swift, glorious act of self-immolation,
after which it vanishes from the scene. This is an act which can
be applauded by any lover of freedom, act of government though it
appeared in The
Review of Austrian Economics 6:1 (1992). It is available
An earlier version was delivered at the annual meeting of the Southwestern
Social Science Association, at a panel on "The Downfall of Communism,"
at San Antonio, Texas, in March, 1991.
Murray N. Rothbard, "Ludwig von Mises and the Collapse of Socialism,"
delivered at the annual meeting of the Allied Social Science Association,
at Washington, D.C., 1990, and published as "The End of Socialism
and the Calculation Debate Revisited," Review of Austrian Economics,
5, no. 2 (1991): 51–76.
As Maltsev writes: "When the Soviets say privatization, however,
they don't mean what we do by the term. The [Shatalin] plan would
mandate that 80 percent of the stock of any enterprise be owned
by other enterprises in the same field, not the public. To use a
US analogy, it would be as if General Motors owned 80 percent of
Ford's stock and vice versa, and it were illegal to have it otherwise."
Maltsev notes that Stanislav Shatalin, and the original author of
his plan for the Russian Republic, Grigory Yavlinsky, "are both
econometricians whose … lives have been spent in mathematizing
the delusions of Marxism-Leninism. They are both long-time central
planners who became disillusioned with full-blown socialism." Yuri
N. Maltsev, "A 600-Day Failure?" The Free Market 8 (November
See Murray N. Rothbard, "The Myth of Neutral Taxation," Cato
Journal 1 (Fall 1981): 519–64.
A fourth form of revenue, borrowing from the public, is strictly
dependent on the other three sources.
See Yuri N. Maltsev, "A One Day Plan for the Soviet Union," Antithesis
2 (January/February 1991): 4, and in the earlier account, "The Maltsev
One-Day Plan," The Free Market (November 1990): 7.
It is important to realize that if a government activity is a bad
rather than a good, we would want its exercise, so long as it exists,
to be as inefficient rather than as efficient as possible. One of
the most hated organizations in early modern Europe was the "tax
farmer," who purchased from the king, the right to collect taxes
for a certain term of years. We might consider: would we want income
taxes to be privatized, and collected, fully armed with state power,
by IBM or McDonald's rather then the IRS? The industrialist Charles
F. Kettering is supposed to have cheered up a friend in the hospital,
who was complaining about the accelerated growth of government:
"Cheer up, Jim, thank God we don't get as much government as we
Yuri Maltsev recommends adoption of the homesteading plan, with
the Vaclav Klaus distribution scheme to be adopted in cases where
homesteading would not be feasible. Maltsev, "A One-Day Plan for
the Soviet Union."
One leading argument for the government selling its assets is that
this process would have the anti-inflationary effect of sopping
up the dread "ruble overhang." The fallacy in this egregious argument
is that, unless the government officials propose to have a mass
public bonfire of the rubles, the overhang would not be reduced
at all. The government would spend the rubles, and they would remain
In Hungary, the Smallholders Party was formed to stress priority
in privatization to returning land to the expropriated landholders
of Southern Hungary.
Jean-Baptiste Say, A Treatise on Political Economy, 6th
ed. (Philadelphia: Claxton, Remsen & Haffelfinger,1880), p.
449. Also see Rothbard, "The Myth of Neutral Taxation," pp. 551–554.
N. Rothbard (19261995) was the author of Man,
Economy, and State, Conceived
in Liberty, What
Has Government Done to Our Money, For
a New Liberty, The
Case Against the Fed, and many
other books and articles. He was
also the editor with Lew Rockwell of The
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