The State and Moral Chaos
by Michael S. Rozeff
by Michael S. Rozeff
The State manufactures many façades of order: stately Capitols, bound volumes of laws, robed justices, columned halls and columns of soldiers, lawyerly deliberations, testimony of polite, well-dressed and articulate experts, ceremonies, and Social Security cards and checks. Behind these trappings of order, the State creates social disorder and chaos. This disorder is usually invisible, but nonetheless it is very damaging. Despite its first-order importance, socialists either do not understand it or disregard it. States and voters routinely ignore it.
My thesis in this article is that we do not all have to be economists to understand how this chaos is produced, even if we can't always predict the ultimate consequences of socialist acts of State. We need to understand that the chaos is what I call moral chaos.
Free individuals in free markets reach agreements, understandings, arrangements, and contracts with one another. These stipulations create duties and responsibilities on both sides. They are at a moral level. Free market exchanges are built upon a foundation of what has been called a contractual or private property order. It is a moral order. Every such agreement creates a preferred ordering of events within this moral order which typically has physical counterparts affecting matter in space and time. The State's socialist activities disrupt this moral order and thus the economic order, creating hidden moral and economic chaos.
To be absolutely clear about this, for the benefit of those critics and e-mailers who think that when libertarians refer to free markets they mean the existing socialist or mercantilistic political economies, I do not consider any regime, any State, or any economy in the world as now having free markets. Nor do I think that when a politician extols freedom or free markets and then signs a trade agreement or makes a World Bank loan that we are seeing free markets in action. I don't think States are necessary to define property or enforce contracts or property rights, and I do not identify capitalism with States. For the sake of clarity, I state categorically that the actions of States are and must be in opposition to free markets. It cannot be otherwise since State actions invariably coerce individuals and move them away from their preferred agreements with one another.
Unfortunately, as Bastiat long ago observed, there is "what is seen and what is not seen." He writes: "In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them."
Social and economic effects are mixed in with each other in complex ways. We do not easily discern what a State has caused to happen. If cars are less safe because the State has mandated mileage limits, socialists can blame the manufacturer. If prices are rising because the Federal Reserve (or any central bank) has printed lots of fiat currency, the State can blame businessmen. Furthermore, the chaos that socialism produces is usually hidden and not obvious. We do not typically see or hear it reported graphically as we would a mine cave-in or a murder spree. Still less are its roots in State actions reported and understood. Yet the chaos is very real and significant.
Another problem is that the State via its socialistic actions is not the only source of social chaos that human beings produce. For example, armed actions by sects and gangs to control resources, or to create and control States, or to achieve many other goals also produce chaos. Some acts may be deliberately aimed at producing chaos. In Iraq chaos is highly visible. We read of gas lines. We read that electricity services often fail. There is rubble and blood. Travel is dangerous. Bombs explode. The daily death toll is absolutely stunning. Iraq exemplifies a high level of chaos with several roots. They include the actions of both domestic and foreign States. They include the actions of rival groups and, at present, it is hard to know precisely who is doing what to whom and why.
Whatever are the other human causes of chaos, when socialism occurs, it invariably causes moral and economic chaos. Even if we can't see obvious economic effects, we know that the State's coercions disrupt agreements. They disrupt the moral order. This is an undeniable fact. The link between State action and chaos is necessary and it is so tight that when we observe chaos in society, the first suspected cause is or should be an action that the State has engaged in. If people are lined up for gasoline, the first suspect is State price controls. If young men are being drafted and sent to fight in distant foreign lands, the first suspect is blunders of State diplomacy or alliances dreamed up by irresponsible leaders. If peasants are slaughtered or Jews hauled off to concentration camps, the first suspect is the State. If the roof of a newly-built tunnel collapses, the State is the first suspect. If expensive television sets equipped with useless devices suddenly crowd out cheaper versions, suspect a State mandate. If citizens are murdered and victims of crime ignored while criminals are turned loose to make room for drug offenders in prisons, blame the State. Chaos and disorder come in all shapes and sizes courtesy of socialism and the State.
People fight back
As one disruption leads to another, chaos leads to more chaos. It is well known that when a State's actions create problems, the State uses those problems as an excuse for further interventions. These in turn create more chaos.
But there are countervailing moral forces. Since value is being destroyed by States, there is a tendency for those affected to resist the incursions of the State. Quite often they find ways to ameliorate chaotic situations, in order to recreate the possibility of value creation and moral order. They bribe officials, which is a way of restoring their ability to make agreements. They smuggle. They break and ignore unjust or unworkable laws. Bureaucrats and police often do not enforce laws. People demonstrate in the streets to push their officials to rescind actions. They buy and sell in black markets. They arm themselves and fight. Suppressed peoples are after a restoration of the moral order. They wish to restore that area of private action and private property in which they can make voluntary agreements that create value. When people do these things, we know that the State has produced moral chaos and in doing so that it has disrupted the creation of value.
Unfortunately, the processes of dulling and nullifying the State's burdensome initiatives are often costly, slow, and irregular. They are not always effective. In the meantime people lose out. In places like Iraq, they die or are killed. In places like America, they die for lack of drugs they might have had or they die in automobiles made less safe because of the State's regulations. In other places they die of malaria because their States have banned DDT.
Libertarians on chaos
Libertarian writers agree that socialism creates chaos, and they are correct. It is a major generalization concerning socialism. That socialism creates chaos characterizes socialism as much as the equally important idea that socialism destroys value. As a matter of fact, the two processes are closely connected. The State's actions directly disrupt current and future value creation while causing chaos.
It's helpful to collect a few libertarian mentions of chaos. In Man, Economy, and State, Murray Rothbard repeatedly mentions chaos. He writes that "...any governmental operation introduces a point of chaos into the economy..." He prophetically observes that if the right of eminent domain were made general, "then chaos would truly ensue," because the State or other men could compel a man to sell the property they wished to buy. Private property would give way to mutual plunder. He observes that "Any society of force — whether ruled by criminal bands or by an organized State — fundamentally means the rule of the jungle, or economic chaos." Regarding a statist rule of providing public goods, Hans-Hermann Hoppe writes "It does not need much comment to show that chaos would result from implementing this rule, as it amounts to saying that everyone can aggress against everyone else whenever he feels like it." Ludwig von Mises contrasts hegemony with contract and writes "The choice is between capitalism and chaos." Andrew Napolitano has a book titled Constitutional Chaos that details the consequences of the State breaking constitutional and other laws. Lew Rockwell observes "Economic chaos nearly always precedes civil and social chaos, and economic chaos is in turn a consequence of bad ideas."
The classic analyses of Mises and Rothbard focus on calculational chaos. The idea is that any government enterprise does not have access to the prices and costs that are necessary in order to allocate factors or funds in such a way as to maximize welfare. States can't operate on a business-like basis, even if they try. For those who are not economists, it is easier to understand that the State works its evil at a moral level whenever it disrupts, interferes, and meddles with the contractual order or more generally the order of agreement that human beings participate in.
Chaos via Regulation NMS
The unseen chaos due to regulatory interventional socialism is huge. Regulation of fiat money by central banks has huge costs, for example. This section provides an example of the difficulties of seeing the unseen in the regulatory sphere of human action.
The interventionist variety of socialism in which the State does not take title to the means of production or hire factors of production results in chaos. In this instance, the State partially controls various aspects of the market via regulation and taxation, but every such interference distorts the interface between consumer and producer. Regulation wrecks free markets and industries as surely as nationalization does.
For example, the Securities and Exchange Commission is about to implement Regulation NMS (National Market System) for security prices and executions. Such regulations are instituted after the SEC solicits public comment. Industry members then write fawning letters in which they obsequiously express their pleasure with the SEC's magnificent openness to dialogue before subtly voicing any objections they might have. Their letters often mention competitive markets as if this were something that the industry members and the SEC were joining together to create, a benefit they sincerely aim and wish for.
Actually, this is total hypocrisy. We have here a pseudo-order or a false order of seeming agreement. It is a façade for preventing customers from reaching agreement with producers in a free market. Involving as it does the State's powers, it is a façade for compulsion. It breaks the moral order. It creates moral chaos.
The result of Regulation NMS will be the furthest thing possible from a free market in which security exchanges compete for the services of customers. It is the hegemonic order noted by Mises. One part of this regulation, the trade-through rule, says that no exchange could execute an order at a price inferior to a price displayed in another market. This is like saying that Walgreen can't sell Crest toothpaste for $1.90 if Wal-Mart is selling it for $1.79. It is truly amazing in what is supposed to be a free country with free capital markets that an agency of the State has the power to dictate product prices. Of course, this goes on every day in many other industries that also do not have free markets. Those enamored of the Constitution will have a difficult time finding its justification in that all-but-shredded document.
The trade-through rule cartelizes the industry (or further cartelizes it) by making price the main criterion of a trade. NASDAQ opposes this as being anti-competitive and as raising costs to investors. It also "believes that no government decision maker, no matter how well-intentioned, is equipped to make the minute, technical judgments that are now handled by technology and competition in routing and executing millions of trades and billions of shares every day."
When customers trade stocks, the execution price is only one part of the "product" or service they are buying. There are other dimensions of trades. They include the size of the trade, the bid-asked spread, speed of execution, certainty of execution, anonymity, location, market versus limit orders, etc. There are traders who want to trade off market prices to gain size or speed or to remain anonymous. There are traders who wish to use market orders and sacrifice price. Some traders will prefer not to expose limit orders. These preferences and others will be hampered in finding expression under Regulation NMS.
Price data that is proprietary to a market will no longer occur. The incentives for improving executions will diminish. Non-price competition will alter. Liquidity will diminish and spreads may alter. Innovation and entry will alter. Some market providers may exit the industry because of the costs of engaging the electronic capabilities. Some analysts think the result will be harmful to the New York Stock Exchange and companies that do block trades while helping electronic exchanges.
Only after all this is pointed out do the economic consequences even begin to come clear, and I make no claim either that I know what they all are or even know the directions of those I have mentioned. I have not studied these matters in detail. I do make the claim that the SEC has always created chaos and is still creating chaos.
The SEC surely is creating moral chaos via regulation NMS. It is not letting the markets decide a host of matters that revolve around buying and selling stocks in markets. There is room for all sorts of exchanges and markets serving all sorts of customers along a variety of dimensions, in the same way that there exist a host of pizza delivery systems for a host of pizzas, from supermarkets to gas stations to pizza parlors to holes in the walls. If the State refuses to have a free stock market, the centerpiece of capitalism, we can hardly expect it to keep from regulating every other market under the sun.
Superiority and moral chaos
The State and socialists in general argue that they are superior beings who know what's good for other people. They are Übermenschen and we are Üntermenchsen. State action is therefore justified. What they do not understand is that State action is a recipe for total chaos.
It is certainly true that there are people who know a lot better than I do how to do many things. If I find someone who knows how to buy stocks better than the ones that I choose, I can always contract with him to do just that. This lies within the moral order of agreement. A stock broker does not simply take my money without my permission and use it as he sees fit as the State does.
If we allow such a rule of interference, if we say that such takings are generally permissible, we will produce total chaos in view of basic notions that humans hold of fair play, agreement, and justice. It will be discovered, if we are reasonably clever, that no other moral rule except self-responsibility is operable or practicable. Many of us are not that clever. We think we can defy what I am saying is a law of human nature, an absolute law. If we try to put the statist rule of interference into operation, it cannot work at all. It simply leads to the breakdown of value creation and moral chaos.
I will explain why. It is a principle of human action that I cannot achieve a value that I am attempting to achieve if I am forced to do something else. And if I am forced to do something else that I did not choose to do, then it must have been lower on my scale of values. Forcing an action upon me lowers value or destroys value by my estimate of value. This occurs ex ante, that is, before I act.
Now suppose a fantastic stock broker will choose stock S for me that makes me a million dollars, whereas I would have chosen stock A and lost money. He coerces me into this investment. Afterwards, or ex post, won't I be much happier? Suppose I do not value freedom of choice per se. Suppose that only money matters. Then, indeed, I am happier. The Übermensch made me happier. Doesn't this logic justify a State filled with Übermenschen who make our decisions for us and make us all happier?
Here's what's wrong with this picture. Here is why chaos will result. All such decisions are matters of judgment. All take place in time, first the action and then the consequences. There is a difference between ex ante and ex post. All actions involve uncertainties. The Übermensch does not know what I want and, even if he does, he does not know whether his action will pay off for me or not. Suppose he knows what I want. But suppose the stock broker is wrong, and his stock goes down. Even an Übermensch can be wrong. If the stock purchase does not work out, who will be held responsible? Will S be willing to absorb the losses if they occur? The losses do not fall on S but on A when S is a State. Won't the coercer want to shirk this responsibility since he has the power to do so?
There are only two possible ways to handle losses. First, if S and A made an agreement about losses at the outset, this problem would be avoided. But such an agreement lies within the moral order, not the immoral order of socialism that we are evaluating. So this course is ruled out. Second, when there is coercion, A might expect to be compensated if S coerces A and things do not work out, but there is no ex ante mechanism for this to happen. There is no such agreement. If A cannot expect to be compensated, that is, if S can take his money and lose it without penalty, then we are dealing with outright plunder. But this is chaos.
Furthermore, what if S's action leads to a chain of bad events for A? Suppose A's loss leads him to suicide. Do his children have a case against S? Who is to judge and affix responsibility for complex chains of events that involve coercion? What if more than one person coerces A at the same time? Who can tell who's responsible for what?
Where coercion is involved, the duties and responsibilities that are prevalent in the moral order disappear. Money is taken as an old age tax, but who is responsible if a future Congress alters the benefits? Who is responsible if the money is spent to bomb an Afghanistan village or is mailed to an Iowa farmer?
And in all of this, I have assumed that A did not value free choice per se and that S knew what A wanted. Failure of these conditions to hold again imply moral chaos arising from coercion.
If some people know more than others, which is always the case, the only practicable way of creating value from these differences is by a moral order of agreement. Socialism, the State, coercion — they all dissolve responsibility. They all create moral chaos. They all destroy value.
The State engages in a great deception. It creates the illusion of order by fiat or control. Its laws are by fiat. They create an illusion of order. Laws against crimes are sensible, even if being forced to seek redress from the State as the only provider of redress is not. Even in this basic case, the State's laws create too many crimes and the justice system operates badly. But following prescribed rules and laws under threat of force is not order when that force is directed at human actions that involve no crimes. It is disorder. And the vast majority of the State's laws are of that variety.
The State's laws do not constitute a moral order of agreement. The State creates chaos despite its trappings of legality just as surely as if an individual S simply knocks person A over the head. A citizen wakes up one day and buys a car that top to bottom reflects various arbitrary judgments made by bureaucrats, or cannot buy a service because a company isn't allowed to offer it, or finds himself drafted into an army, or is told to submit to a search. He finds corn syrup replacing sugar and does not know why. He finds that his choice of air conditioners is restricted because several companies have gone out of business that couldn't meet certain requirements. He finds traffic congestion and doesn't know why, or streets with potholes because of cheap surfacing that has been mandated. He finds effective insecticides have vanished from the shelves. He finds that he can't locate a doctor who'll pay any attention to him. He finds that the money he saved yesterday is not worth as much tomorrow. He finds that he can't paint his house pink because of a zoning regulation or worse, that the State is seizing his house. He finds that he can't build a house on less than an acre of land.
In the social and political sphere, it is the greatest of paradoxes that the State is lawless immorality. The State is moral chaos.
July 21, 2006
Michael S. Rozeff [send him mail] is the Louis M. Jacobs Professor of Finance at University at Buffalo.
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