The Welfare State as a Zero-Sum Game; J. Douglas

Jack D. Douglas around the world. Almost none of them know that this century of wasteful warfare (which I think should be called the First World War and our most recent one the Third) and its culmination in the catastrophe of the French Revolu tion and Bonapartism was highly ((rational" from the standpoint of the political economic theories domi nant among European rulers. But how could such a vast waste of human life, of accumulated wealth cast into guns and shot instead of industrial investment, and of human creativity be ((rational"? It's frighteningly simple when you un derstand the fundamental premises of Mercantilism, the political economic theory which dominated the thinking of rulers and most ((practical" men. 403 404 THE FREEMAN July Mercantilist theory took the commonsense view of wealth and applied it to the national level. The key idea is that the precious metals, gold and silver, constitute the real wealth of a nation, so the nation should maximize its possession of gold and silver. The mercantilists also assumed that the primary way by which this could be done (in all nations without gold and silver mines) was by maximizing exports and minimizing imports. They would thus receive more payments of pre cious metals than were paid out.

And, fatefully, they also assumed that the most efficient means of doing this is by controlling the foreign markets which buy one's ex ports. These assumptions led them to the logical conclusions that they should maximize their political (mil itary) power to control colonies abroad (or, at least, markets) and, most fatefully, that they could only become more wealthy by decreasing the wealth of other nations by using such power. One's Gain, Another's Loss The mercantilist ideas thus led the rulers to look at their relations with other nations in a ((beggar thy neighbor" way, or what economists call a zero-sum game: if you gain, I necessarily lose; if I gain, you neces sarily lose.. The only rational thing to do, if you wanted to be richer, or simply avoid getting poorer, was to seize foreign markets and precious metals. Since everyone looked at it the same way-War. All of those assumptions were wrong, as all economic history since then has shown, yet almost all of the brightest people, from goatherds to prime ministers and kings, believed those things implicitly. The genius of classical economics, especially of David Hume's theories of money and international trade, of Adam Smith's theory of economic growth or wealth, and of Ricardo's theory of comparative costs, consisted in showing how they were wrong and how all nations could get richer at the same time and at vastly acceler ated rates by an international sys tem of cooperative competition.

In vastly oversimplified terms, they showed that money is merely an aggregate symbolic representa tion of the exchange value of real goods, so that an increase in the quantity of money of any form will in time only produce higher prices (unless the real goods have in creased); that this works interna tionally as well as within a nation; that all increases in real wealth come only from increased efficiency and investment; and, fatefully, that two of the major ingredients of efficiency are (1) task specialization, which allows those most skilled to produce goods at lowest cost and, thus, price, and (2) competition, which not only spurs people to greater effort to be 1980 THE WELFARE STATE AS A ZERO-SUM GAME 405 efficient, but also allows the natural selection of the most efficient and the subsequent redirection of the casualties into more efficient pro duction. The general implications were exactly the opposite of Mercan tilism. A nation that only increases its money only increases its prices.

(This is what Spain did by seizing the gold and silver of the Aztecs and Incas. The resulting inflation pre vented the rise of industrial produc tion because it was cheaper to buy from abroad, due to long time lags in the spread of the inflation, and pro duced a basic movement away from efficient investment. The most suc cessful of all mercantilists was the biggest disaster.) Free Trade A nation that directs its wealth to the military destruction of wealth decreases its wealth. A nation that insists on buying its own goods when it could import them more cheaply because foreign task specialists are more efficient in those goods gets poorer, not richer. The general implication was that all nations should stop wasting wealth in war, concentrate on saving and investing and becoming more effi cient, and compete peacefully (cooperatively) with complete free dom of economic competition among and within the nations.

These· classic ideas of classic liberalism (the opposite of American ((liberalism" today) became the dom inant ideas of the ruling elite in the first three quarters of the nineteenth century. Laissez faire ideas in international trade and politics were never completely applied even in England, but on bal ance they were distinctly dominant. This was an era of almost unbroken peace in Europe, a rare thing in European history, an era of explod ing wealth, and an era without major internal economic civil war (class warfare). That era began to end in 1870 with the Franco-Prussian war. That war owed much to the old bitterness between the two nations, especially the Prussian resentment of the de feat by Napoleon. But it is also very important that the German political economists had turned strongly to ward a form of neo-Mercantilism embodied in the ideas eventually of the institutional economists, List and Sombart. (Germany never re ally accepted the liberal theories very much. The. so-called classicists held sway until the institutional theorists entered the scene.) The insti tutional economists ar gued strongly, even bitterly, that institutions, especially political ones, are the ultimate determinant of wealth. Most ominously of all, they argued that international free trade was rigged in favor of the rich and already efficient and, thus, was 406 THE FREEMAN July against the interest of unindustri alized Germany. They insisted on protective tariffs to protect their in dustries from cCunfairforeign compe tition." The defeat of France led to an immediate flip-flop of the French social analysts (especially the lions of Paris, Renan and Taine) from internationalism to nationalism.

A great, decade-long economic de pression hit the West in 1873. Na tions everywhere' began building tariff walls to protect their indus tries from bankruptcy. The political voices of neo-Mercantilism became dominant even in England in the great new surge of imperialism in the late nineteenth century. The zero-sum game returned with vigor as nations tried to build their ex ports and minimize the costs of im ports by controlling colonies. The armies grew, the navies grew. By the early twentieth century Europe was a cctinder-box" armed to the teeth, living breathlessly through one military-political incident after another, lulled by the century of peace and wealth produced by ideas now rejected as absurd, waiting un knowingly for the random match of Sarajevo. Zero-sum thinking pro duced the inevitable conflict. The Growth of Socialism The imperialist and protectionist theories were joined in the late nineteenth century by a far more rhetorically powerful zero-sum theory-the melange of ideas known as Socialism. Socialism rejected all the ideas of the liberals and re instated in somewhat different (and certainly in a hidden or CCcleanedup"

form) the ideas of the Mercantilists. Above all, they insisted that one man could only get wealthy at the expense of another: if one man hired another and got money from his ef forts, then the hired man was ccexploited," or lost, even though they both got richer by the transac tion. Only complete equality, an end to the competition that gave the more efficient an advantage over the less efficient, and an end to the interest advantage of saving could lead to wealth for everyone. Other wise, the zero-sum process would inevitably lead to greater concentra tion of wealth in fewer hands and the deprivation of more and more. The conclusion: class warfare within and across nations is inevitable and glorious-War! All Western history has proven the socialist myth false. But myths are created and accepted because they appeal to deep feelings, espe cially those like envy, resentment, fear and aggression. These particu lar zero-sum myths could not be ac cepted by many educated people be cause they were so clearly wrong.

But their emotional appeal led in ventive people to find a new way the Keynesian revolution. Keynes himself did not agree with 1980 THE WELFARE STATE AS A ZERO-SUM GAME 407 many of the ideas of the socialist zero~sum game, though he was emo tionally committed to the working class cause before he developed his theory. "Overs8ving" The high unetnploytnent rates of Britain during the 1920s (as much as 10 per cent) can be explained by classical economists as due to the deflation caused by Britain's return to the gold standard (at parity value) in the 1920s; higher taxes forcing capital abroad; an inefficient (thus more costly) work force at home, because of union monopoly powers granted politically in 1906, leading to the same capital flight; the growing taxes used to pay for the new unemployment benefits causing further flight; and the increasing incentives of the unemployment benefits to avoid work-to be un employed.

Keynes decided, without consider ing this kind of argument, that there was an inevitable tendency of a sort· even Marx had not seen-an Uinevitable" tendency of advanced capitalist societies to ttoversave," or save relatively more than they in vested, so you inevitably get unem ployment. The remedy was to have the government intervene by using its borrowing and taxation powers to ttgive" money to consumers and, thus, increase demand, which would then increase incentives to invest, and eventually· decrease unemploy ment. The Keynesian Revolution con sisted not only of this idea, but its combination with the old ideas of the socialist zero-sum theory. This started in Britain as early as the 1890s, becatne dotninant there in the 1930s, and became dominant in the United States only in the 1960s. It now dominates the thinking of the great mass of our Western rulers and educated people. Everyone knows the ideas. Equality is the only way to maximize real wealth for everyone. Competition is the source of poverty, not wealth. Effi ciency is repression. And, according to Keynes, we should emphasize consumption and decrease saving (oversaving) .

Most fatefully of all, the instru ment of all of this is the central power of government: government is to use its physically enforced powers of taxation to increase equality through redistribution of income and, most especially, by providing uservices" to the ttdisadvantaged." (The implicit assumption, of course, is that under the laissez faire system the higher incomes of the few was due to their being unfairly Had vantaged" by the system, not due to their greater efficiency in saving and investment and work-because it is always the case that one man's loss is another man's gain and vice versa-life is a zero-sum game!) 408 THE FREEMAN July This melange of Keynesian ideas and neo-socialist zero-sum ideas is what we know as the Welfare State theory. The Redistributive State The theory itself teaches, even in sists bitterly, that life is a zero-sum game. In order for the less well off to get better off, something must be taken away from others. (Soci ologists who share these views, which is most of them by far, call this a Hconflict theory." Fateful name.) But, even if the state and the intellectuals did not teach people this, they would probably under stand it or believe it. (The zero-sum game is really the most ancient way of thinking, found in all primitive societies and highly exaggerated in peasant mentality.) In any event, they all come to act in accord with the theory in the Welfare State dominated by that theory. That is, they all act as if they know and believe with all their hearts that someone else getting more means they are going to get less, and that the crucial thing is to get more than someone else-maximize your in take of government services, money and rights, and minimize your out flow of taxes and duties. The conclu sion is now apparent to those with memories and eyes-War!

In our pluralistic societies of pres sure group politics, in which there are many massive groups and in which political decisions are made by coalitions of these groups, the warfare is primarily between mas sive groups; but it also becomes more and more individual, as the individual comes more and more to play the same zero-sum game against the members of his own group. The overall effect is to pit each big group, and then individ uals, against the others in an increas ingly bitter struggle for the dis tribution of the pie-the rights, ser vices, benefits, monies of the body politic-the spoils of victory. In the societies that are relatively homogeneous, like Japan and Swe den, the war of all against all pro duced by the zero-sum assumptions of the welfare state comes much later and at a higher level of redistribu tion than in the highly pluralistic societies. The United States is unique among the Western nations (and very like Russia) in having a massive number of pressure groups and no dominant group. These groups, especially the ethnic and ra cial groups, already envied and re sented each other, precisely as the nations of Europe did over the cen turies. By greatly amplifying the zero-sum warfare games in our na tion, the Welfare State Revolution has pushed us far along the road toward Hobbes' state of nature, that nasty and brutal war of all against all.

A nation that had little sense of 1980 THE WELFARE STATE AS A ZERO-SUM GAME 409 historical community, and was pasted together with shallow patrio tism and deep shared self-interest in making the whole nation richer by the pursuit of capitalistic growth for all, has been ripped and torn in every seam of its national life. Ev erything has become politicized work, sex, parent and child rela tions, life itself. The most ignorant mugger in the big cities now mouths the zero-sum theories of our ~~lib eral" (socialist) politicians. But we have only begun down the road to that great calamity of civil war, the war of all against all. Peace and Prosperity The zero-sum game of internal war· will inevitably slow our economic growth to zero and possi bly begin the final stages of deprivation-disinvestment of the British sort. When the pie becomes stagnant (the glorious goal of zero growth, at last!) these human beings turned into wolves will hurl them selves on each other in all their fury, unless their fury is directed against a common foe in the time-honored way of tyrants-foreign war! Or un less we use the solution the Russian socialist zero-summers know so well-tyranny. i IDEAS ON LIBERTY WORLD leadership requires that we constantly defend the principles of individual liberty and free enterprise. At every opportunity we should call out to the world that only competitive private enterprise can lead to peace and prosperity. We have a glorious history of individual freedom and safety of property-the absence of nationalization and confiscation by an omnipotent state. Our recent excursions toward the Welfare State endanger our record-and ourselves. But if we will correct that trend, then with pride we can demonstrate to the warring world that individ ualliberty is the only durable foundation for peace and prosperity.

If our way is freedom, then other nations on their disastrous roads may someday listen to reason and follow us as all civilized nations followed Great Britain during the nineteenth century. Law, order, and peace may then return once again to a battered world suffering from an absence of individual freedom and free enterprise. HANS F. SENNHOLZ, Welfare States at War --------@)""""'"'~ . @O.~ THE · P. Dean Russell ~ GOOD ..PEOPLE ~~ I) SYNDROME Do you remember when we Ameri cans thought of the Ayatollah Kho meini as a good man trying to help his people who were suffering under a dictatorial government? He was in exile in France, and he was getting a great deal of favorable publicity on international television as he taped his revolutionary messages and smuggled them back into Iran. His obviously sincere and deeply reli gious lifestyle-along with his promise of freedom and justice to his oppressed countrymen-won him the support of the overwhelming majority of the Iranian people. In addition, he soon gained the best wishes of good people all around the world, including millions of Ameri cans.