Entrepreneurship With Fiat Property and Fiat Money
by Hans-Hermann Hoppe: Why
the State Demands Control of Money
is the text of a speech first delivered at the Edelweiss Holdings
Symposion held in Zuerich, Switzerland, on September 17, 2011
Let me begin
with a brief description of what a capitalist-entrepreneur does,
and then explain how the job of the capitalist-entrepreneur is changed
under statist conditions.
What the capitalist
does is this: He saves (or borrows saved funds), hires labor, buys
or rents capital goods and land, and he buys raw materials. Then
he proceeds to produce his product or service, whatever it may be,
and he hopes that he will make a profit.
defined simply as an excess of sales revenue over the costs of production.
The costs of production, however, do not determine the revenue.
Otherwise, if the cost of production would determine price and revenue,
everyone could be a capitalist. No one would ever fail. Rather:
It is anticipated prices and revenues that determine what production
costs the capitalist can possibly afford.
does not know what the future prices will be or what quantity of
his product will be bought at such prices. This depends on the consumers,
and the capitalist has no control over them. The capitalist must
speculate what the future demand for his products will be, and he
can go wrong in his speculation, in which case he does not make
profits but will incur losses instead.
To risk your
own money in anticipation of an uncertain future demand is obviously
a difficult task. Great profits may await you, but also total financial
ruin. Few people are willing to take this risk, and even fewer are
good at it and stay in business for a lengthy time.
In fact, there
is even more to be said about the difficulty of being a capitalist.
stands in permanent competition with every other one for the invariably
limited amounts of money to be spent on their goods and services
by consumers. Every product competes with every other product. Whenever
consumers spend more (or less) on one thing, they must spend less
(or more) on another. Even if a capitalist has produced a successful
product and earned a profit, there is nothing that guarantees that
this will go on. Other businessmen can imitate his product, produce
it more cheaply, underbid his price and outcompete him. To prevent
this, every capitalist must thus continuously strive to lower his
production costs. Yet even trying to produce whatever you produce
ever more cheaply is not enough.
The set of
products offered by various capitalists is in constant flux, and
so is the evaluation of these products by consumers. Continuously
new or improved products are offered on the market and consumer
tastes constantly change. Nothing remains constant. The uncertainty
of the future facing every capitalist never disappears. There is
always the lure of profits but also the threat of losses. Again,
then: it is very difficult to be continuously successful as a businessman
and not to sink back to the rank of an employee.
In all of this
there is only one thing that the businessman can count on and take
for granted, and that is his real, physical property – and even
that is not safe, as we will see.
His real property
comes in two forms. First, there are the physical resources, the
means of production, including labor services, that the capitalist
has bought or rented for some time and that he combines in order
to produce whatever he produces. The value of all of these items
is variable, as already explained. It depends ultimately on consumer
evaluations. What is stable about them is only their physical character
and capability. But without this physical stability of his productive
property the capitalist could not produce what he produces.
his productive property, the capitalist can count on his ownership
of real money. Money is neither a consumer good, nor is it a producer
good. It is the common medium of exchange. As such it is the most
easily and widely sold good. And it is used as the unit of account.
In order to calculate profit and loss, the capitalist needs recourse
to money. The input factors and the output, his products to be produced,
are incommensurable, like apples and oranges. They are made commensurable
only insofar as they can all be expressed in terms of money. Without
money, economic calculation is impossible, as Ludwig von Mises above
all has explained. The value of money, too, is variable, like the
value of everything else. But money, too, has physical characteristics.
It is commodity money, such as gold or silver, and money profits
are reflected in an increase in the supply of this commodity, gold
or silver, at the disposal of the capitalist.
What can be
said, then, about both the capitalist's means of production and
his money, is this: their physical characteristics do not determine
their value, but without their physics, they would have no value
at all, and changes in the physical quality and quantity of his
property do affect the value of his property, whatever other factors
(such as changing consumer evaluations) may affect the value of
his property also.
Now let me
introduce the State and see how it affects the business of the capitalist.
The State is
conventionally defined as an institution that possesses a territorial
monopoly of ultimate decision-making in every case of conflict,
including conflicts involving the state and its agents itself, and,
by implication, the right to tax, i.e., to unilaterally determine
the price that its subjects must pay to perform the task of ultimate
To act under
these constraints – or rather, lack of constraints – is what constitutes
politics and political action, and it should be clear from the outset
that politics, then, by its very nature, always means mischief.
we can make two interrelated predictions as to the effect of a state
on the business of business. First, and most fundamentally, under
statist conditions real property will become what may be called
fiat property. And secondly and more specifically, real money will
be turned into fiat money.
the state being the ultimate arbiter in every case of conflict including
those in which it is involved itself, the state has essentially
become the ultimate owner of all property. In principle, it can
provoke a conflict with a businessman and then decide against him
by expropriating him and making itself (or someone of its liking)
the owner of the businessman's physical property. Or else, if it
doesn't want to go as far, it can pass legislation or regulations
that involve only a partial expropriation. It can restrict the uses
that the businessman can make of his physical property. Certain
things the businessman is no longer permitted to do with his property.
The state cannot increase the quality and quantity of real property.
But it can redistribute it as it sees fit. It can reduce the real
property at the disposal of businessmen or it can limit the range
of control that they are allowed over their property; and it can
thereby increase its own property (or that of its allies) and increase
its own range of control over existing physical things. The businessmen's
property, then, is their property in name only. It is granted to
them by the state, and it exists only as long as the state does
not decide otherwise. Constantly, a Damocles sword is hanging over
the heads of businessmen. The execution of their business plans
is based on their assumption of the existence, at their disposal,
of certain physical resources and their physical capabilities, and
all of their value-speculations are based on this physical basis
being given. But these assumptions about the physical basis can
be rendered incorrect at any time – and their value-calculations
vitiated as well – if only the state decides to change its current
legislation aand regulations.
of a state, then, heightens the uncertainty facing the businessman.
It makes the future less certain than would be the case otherwise.
Realizing this, many people who might otherwise become businessmen
will not become businessmen at all. And many businessmen will see
their business plans spoiled. Not because they did not correctly
anticipate future consumer demand, but because the physical basis,
on which their plan was based, was altered by some unexpected and
unanticipated change in state laws and regulations.
than meddling with a businessman's productive capital through confiscation
and regulation, however, the state prefers to meddle with money.
Because money is the most easily and widely saleable good, it allows
the state operators the greatest freedom to spend their income as
they like. Hence the state's preference for money-taxes, i.e., for
confiscating money income and money profits. Real money becomes
subject to confiscation and changing rates of confiscation. This
is the first sense, in which money becomes fiat money under statist
conditions. People own their money only insofar as the state allows
them to keep it.
But there is
also a second, even more perfidious way, in which money becomes
fiat money under statist conditions.
have discovered an even smoother way of enriching themselves at
the expense of productive people: by monopolizing the production
of money and replacing real, commodity money and commodity credit
with genuine fiat money and fiat or fiduciary credit.
On its territory,
per legislation, only the state is permitted to produce money. But
that is not sufficient. Because as long as money is a real good,
i.e., a commodity that must be costly produced, there is nothing
in it for the state except expenses. More importantly, then, the
state must use its monopoly position in order to lower the production
cost and the quality of money as close as possible to zero. Instead
of costly quality money such as gold or silver, the state must see
to it that worthless pieces of paper, which can be produced at practically
zero cost, will become money.
conditions, i.e., if everyone is free to produce money, a money
that can be produced at zero cost would be produced up to a quantity
where marginal revenue equals marginal cost, and since marginal
cost is zero the marginal revenue, i.e., the purchasing power of
this money, would be zero as well. Hence, the necessity to monopolize
the production of paper money, so as to be able to restrict its
supply, in order to avoid hyperinflationary conditions and the disappearance
of money from the market altogether (and a flight into real
values) and the more so the cheaper the money-commodity.
the production of money and reduced its production cost and quality
to virtually zero, the state has made a marvelous accomplishment.
It costs almost nothing to print money and one can turn around and
buy oneself something really valuable, such as a house or a Mercedes.
What are the
effects of such fiat money, and in particular what are the effects
for the business of business? First and in general: more paper money
does not in the slightest affect the quantity or quality of all
other, non-monetary goods. Rather, what the additional money does
is twofold. On the one hand, money prices will be higher than they
would otherwise be and the purchasing power per unit of money will
be lower. And secondly, with the injection of additional paper money
existing wealth will be redistributed in favor of those receiving
and spending the new money first and at the expense of those receiving
and spending it later or last.
regarding capitalists, then, paper money adds another dose of uncertainty
to his business. If and as long as money is a commodity, such as
gold or silver, it may not be exactly easy to predict
the future supply and purchasing power of money. However, based
on information about current production costs and industry profits
it is very well possible to come up with a realistic estimate. In
any case, the task is not pure guesswork. And while it is conceivable
that with gold or silver as money nominal money profits may not
always equal real profits, it is at least impossible
that a nominal profit should ever amount to nothing at all. There
is always something left: quantities of gold or silver.
contrast: With paper money, the production of which is unconstrained
by any kind of natural (physical) limitations (scarcity) but dependent
solely on subjective whim and will, the prediction of the future
money supply and purchasing power does become guesswork. What will
the money printers do? And it is not just conceivable, but a very
real possibility, that nominal money profits turn out to represent
literally nothing but bundles of worthless paper.
in hand with fiat money comes fiat or fiduciary credit, and this
creates still more uncertainty.
If the state
can create money out of thin air it also can create money credit
out of thin air. And because it can create credit out of thin air,
i.e., without any previous savings on its part, it can offer cheaper
loans than anyone else, at below-market rates of interest, even
at rates as low as zero. The interest rate is thus distorted and
falsified, and the volume of investment will become divorced from
the volume of savings. Systematic mal-investment is thus generated,
i.e., investment un-backed by savings. An unsustainable investment
boom is set in motion, necessarily followed by a bust, revealing
large-scale clusters of entrepreneurial errors.
Last but not
least, under statist conditions, i.e., under a regime of fiat property
and fiat money, the character of businessmen and of doing business
is changed, and this change introduces another hazard into the world.
Absent a state
it is consumers that determine what will be produced, in what quality
and quantity, and who among businessmen will succeed or fail. With
the state, the situation facing businessmen becomes entirely different.
It is now the state and its operators, not consumers, who ultimately
decide who will succeed or fail. The state can keep any businessman
alive in subsidizing him or bailing him out; or else it can ruin
anyone by deciding to investigate him and find him in violation
of state laws and regulations.
state is flush with taxes and fiat money and can spend more money
than anyone else. It can make any businessman rich (or not). And
the state and its operators have a different spending behavior than
normal consumers. They do not spend their own money, but other peoples
money, and in most cases not for their own, personal purposes, but
for those of some anonymous third parties. Accordingly, they are
frivolous and wasteful in their spending. Neither the price nor
the quality of what they buy is of great concern to them.
the state can go into business itself. And because it doesnt
have to make profits and avoid losses, as it can always supplement
its earnings through taxes or made-up money, it can always outcompete
any private producer of the same or similar goods or services.
by virtue of its ability to legislate, to make laws, the state can
grant exclusive privileges to some businesses, insulating or shielding
them from competition, and by the same token partially expropriate
and disadvantage other businesses.
In this environment,
it is imperative for every businessman to pay constant and close
attention to politics. In order to stay alive and possibly prosper,
he must spend time and effort to concern himself with matters that
have nothing to do with satisfying consumers, but with power politics.
And based on his understanding of the nature of the state and of
politics, then, he must make a choice: a moral choice.
He can either
join in and become a part of the vast criminal enterprise that is
the State. He can bribe politicians, political parties or public
officials, whether with cash or in-kind (including promises of future
employment in the private sector as board-members,
advisors or consultants), in order to gain
for himself economic advantages at the expense of other businesses.
That is, he can pay bribes to secure state contracts or subsidies
for himself and at the exclusion of others. Or he can pay bribes
for the passing or maintenance of legislation that secures him and
his business legal privileges and monopoly profits (and capital
gains) while partially expropriating and thus screwing his competitors. Needless to say, countless businessmen have chosen this path.
In particular big banking and big industry have thus become intricately
involved in the state, and many a wealthy businessman has made his
fortune more on account of his political skills than his abilities
as a consumer-serving economic entrepreneur.
Or else: a
businessman can choose the honorable but at the same time also the
most difficult path. This businessman is aware of the nature of
the state. He knows that the state and its operators are out to
get him and bully him, to confiscate his property and money and,
even worse, that they are arrogant, self-righteous, haughty, and
full of themselves. Based on such understanding, this very different
breed of businessman then tries his best to anticipate and adjust
to the states every evil move. But he does not join the gang.
He does not pay bribes to secure contracts or privileges from the
state. Instead, he tries as well as he can to defend whatever is
still left of his property and property rights and make as large
profits as possible in doing so.
Hoppe [send him mail] is distinguished
fellow at the Ludwig von Mises Institute
and founder and president of the Property
and Freedom Society. His books include Democracy:
The God That Failed
Myth of National Defense.
Visit his website.
© 2011 by LewRockwell.com. Permission to reprint in whole or in
part is gladly granted, provided full credit is given.
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