Rothbard argues that economic logic dictates that the king and his courtiers, or the democratic government and its special interest groups, can never constitute more than a small minority of the country’s population—that all States, regardless of their formal organization, must effectively involve oligarchic rule.43 The reasons for this are twofold. First, the fundamentally parasitic nature of the relationship between the rulers and the ruled by itself necessitates that the majority of the population engages in productive activity in order to be able to pay the tribute or taxes extracted by the ruling class while still sustaining its own existence. If the ruling class comprised the majority of the population, economic collapse and systemic breakdown would swiftly ensue as the productive class died out. The majoritarian ruling class itself then would either be forced into productive activity or dissolve into internecine warfare aimed at establishing a new and more stable—that is, oligarchic—relationship between rulers and producers.
The second reason why the ruling class tends to be an oligarchy is related to the law of comparative advantage. In a world where human abilities and skills vary widely, the division of labor and specialization pervades all sectors of the economy as well as society as a whole. Thus, not only is it the case that a relatively small segment of the populace possesses a comparative advantage in developing new software, selling mutual funds, or playing professional football, it is also the case that only a fraction of the population tends to excel at wielding coercive power. Moreover, the law of comparative advantage governs the structure of relationships within as well as between organizations, accounting for the hierarchical structure that we almost invariably observe within individual organizations. Whether we are considering a business enterprise, a chess club, or a criminal gang, an energetic and visionary elite invariably comes to the fore, either formally or informally, to lead and direct the relatively inert majority. This “Iron Law of Oligarchy,” as this internal manifestation of the law of comparative advantage has been dubbed, operates to transform an initially majoritarian democratic government, or even a decentralized republican government, into a tightly centralized State controlled by a ruling elite.44
The foregoing analysis leads Rothbard to conclude that the exercise of political power is inherently an oligarchic enterprise. The small minority that excels in wielding political power will tend to coalesce and devote an extraordinary amount of mental energy and other resources to establishing and maintaining a permanent and lucrative hegemonic bond over the productive majority. Accordingly, since politics is the main source of their income, the policies and actions of the members of this oligarchic ruling class will be driven primarily by economic motives. The exploited producing class, in contrast, will not expend nearly as many resources on politics, and their actions in the political arena will not be motivated by economic gain to the same degree, precisely because they are absorbed in earning their livelihoods in their own chosen areas of specialization on the market. As Rothbard explains:
the ruling class, being small and largely specialized, is motivated to think about its economic interests twenty-four hours a day. The steel manufacturers seeking a tariff, the bankers seeking taxes to repay their government bonds, the rulers seeking a strong state from which to obtain subsidies, the bureaucrats wishing to expand their empire, are all professionals in statism. They are constantly at work trying to preserve and expand their privileges.45
The ruling class, however, confronts one serious and ongoing problem: how to persuade the productive majority, whose tribute or taxes it consumes, that its laws, regulations, and policies are beneficial; that is, that they coincide with “the public interest” or are designed to promote “the common good” or to optimize “social welfare.” Given its minority status, failure to solve this problem exposes the political class to serious consequences. Even passive resistance by a substantial part of the producers, in the form of mass tax resistance, renders the income of the political class and, therefore, its continued existence extremely precarious. More ominously, attempts to suppress such resistance may cause it to spread and intensify and eventually boil over into an active revolution whose likely result is the forcible ousting of the minority exploiting class from its position of political power. Here is where the intellectuals come in. It is their task to convince the public to actively submit to State rule because it is beneficial to do so, or at least to passively endure the State’s depredations because the alternative is anarchy and chaos. In return for fabricating an ideological cover for its exploitation of the masses of subjects or taxpayers, these “court intellectuals” are rewarded with the power, wealth, and prestige of a junior partnership in the ruling elite. Whereas in pre-industrial times these apologists for State rule were associated with the clergy, in modern times—at least since the Progressive Era in the U.S.—they have been drawn increasingly from the academy.46
Politicians, bureaucrats, and those whom they subsidize and privilege within the economy thus routinely trumpet lofty ideological motives for their actions in order to conceal from the exploited and plundered citizenry their true motive of economic gain. In today’s world, these motives are expressed in the rhetoric of “social democracy” in Europe and that of modern—or welfare-state—liberalism in the United States.47 In the past, ruling oligarchies have appealed to the ideologies of royal absolutism, Marxism, Progressivism, Fascism, National Socialism, New Deal liberalism, and so on to camouflage their economic goals in advocating a continual aggrandizement of State power. In devising his theoretical guide, then, Rothbard seeks to provide historians with a means of piercing the shroud of ideological rhetoric and illuminating the true motives underlying the policies and actions of ruling elites throughout history. As Rothbard describes this guide, whenever the would-be or actual proprietors and beneficiaries of the State act,
when they form a State, or a centralizing Constitution, when they go to war or create a Marshall Plan or use and increase State power in any way, their primary motivation is economic: to increase their plunder at the expense of the subject and taxpayer. The ideology that they profess and that is formulated and spread through society by the Court Intellectuals is merely an elaborate rationalization for their venal economic interests. The ideology is the smoke screen for their loot, the fictitious clothes spun by the intellectuals to hide the naked plunder of the Emperor. The task of the historian, then, is to penetrate to the essence of the transaction, to strip the ideological garb from the Emperor State and to reveal the economic motive at the heart of the issue.48
In characterizing the modern democratic State as essentially a means for coercively redistributing income from producers to politicians, bureaucrats, and special interest groups, Rothbard opens himself up to the charge of espousing a conspiracy theory of economic history. But it is his emphasis on the almost universal propensity of those who employ the political means for economic gain to conceal their true motives with ideological cant that makes him especially susceptible to this charge. Indeed, the Chicago School’s theory of economic regulation and the public choice theory of the Virginia School also portray politicians, bureaucrats, and industries regulated by the State as interested almost exclusively in maximizing their utility in the narrow sense, which in many, if not most, cases involves a maximization of pecuniary gain.49 However, economists of both schools are inured against the charge of conspiracy theory because in their applied work they generally eschew a systematic, thymological investigation of the actual motives of those individuals or groups whose actions they are analyzing. Instead, their positivist methodology inclines them to mechanically impute to real actors in concrete historical circumstances a narrowly conceived utility maximization.
James Buchanan, one of the founders of public choice theory, writes, for instance, that economists pursuing this paradigm tend
to bring with them models of man that have been found useful within economic theory, models that have been used to develop empirically testable and empirically corroborated hypotheses. Th
ese models embody the presumption that persons seek to maximize their own utilities, and their own narrowly defined economic well-being is an important component of these utilities.50
George Stigler, who pioneered the theory of economic regulation, argues, “There is, in fact, only one theory of human behavior, and that is the utility-maximizing theory.” But for Stigler, unlike Rothbard or Mises, the exact arguments of the utility function of flesh-and-blood actors are not ascertained by the historical method of specific understanding but by the empirical method. Thus, Stigler argues:
The first purpose of the empirical studies [of regulatory policy] is to identify the purpose of the legislation! The announced goals of a policy are sometimes unrelated or perversely related to its actual effects and the truly intended effects should be deduced from the actual effects. This is not a tautology designed to gloss over a hard problem, but instead a hypothesis on the nature of political life.... If an economic policy has been adopted by many communities, or if it is persistently pursued by a society over a long span of time, it is fruitful to assume that the real effects were known and desired.51
By thus discounting the effect of erroneous ideas about the appropriate means for achieving preferred goals on the choices made by historical actors, Stigler the positivist seeks to free himself from the task of delving into the murky and unmeasurable phenomenon of motives. Without doubt, if the historical outcome of a policy or action is always what was aimed at by an individual or organization—because, according to Stigler, “errors are not what men live by or on”—then there is no need to ever address the question of motive. For Stigler, then, there is no reason for the historian to try to subjectively understand the motive for an action because the actor’s goal is objectively revealed by the observed result. Now, Stigler would probably agree that it is absurd to assume that Hitler was aiming at defeat in World War II by doggedly pursuing his disastrous policy on the Eastern front over an extended period of time. But this assumption only appears absurd to us in light of the thymological insight into Hitler’s mind achieved by examining the records of his actions, policies, utterances, and writings, and those of his associates. This insight leads us to an understanding, which cannot be reasonably doubted by anyone of normal intelligence, that Hitler was fervently seeking victory in the war.
Rothbard insists that the same method of specific understanding that allows the historian to grasp Hitler’s objectives in directing the German military campaign against the Soviet Union also is appropriate when attempting to discern the motives of those who lobby for a tariff or for the creation of a central bank. Accordingly, the guide that Rothbard originates to direct the economic historian first to a search for evidence of an unspoken economic motive in such instances is only a guide. As such, it can never rule out in advance the possibility that an ideological or altruistic goal may serve as the dominant motivation in a specific case. If his research turns up no evidence of a hidden economic motive, then the historian must explore further for ideological or other noneconomic motives that may be operating. Thus, as Rothbard points out, his approach to economic history, whether it is labeled a “conspiracy theory of history” or not, “is really only praxeology applied to human history, in assuming that men have motives on which they act.”52 This approach also respects what Mises has called “historical individuality” by assuming that “[t]he characteristics of individual men, their ideas and judgments of value as well as the actions guided by those ideas and judgments, cannot be traced back to something of which they would be the derivatives.”53 In sharp contrast, the positivist methods of Stigler and Buchanan attempt to force participants in historical events into the Procrustean bed of homo economicus, who ever and unerringly seeks for his own economic gain.
We can more fully appreciate the significance of Rothbard’s methodological innovation by briefly contrasting his explanation of the origins of the Federal Reserve System with the explanation given by Milton Friedman and Anna J. Schwartz in their influential work, A Monetary History of the United States, 1867–1960.54 Since its publication in 1963, this book has served as the standard reference work for all subsequent research in U.S. monetary history. While Friedman and Schwartz cannot exactly be classified as new economic historians, their book is written from a strongly positivist viewpoint and its methods are congenial to those pursuing research in this paradigm.55 For example, in the preface to the book, Friedman and Schwartz write that their aim is “to provide a prologue and a background for a statistical analysis of the secular and cyclical behavior of money in the United States, and to exclude any material not relevant to that purpose.” In particular it is not their ambition to write “a full-scale economic and political history that would be required to record at all comprehensively the role of money in the United States in the past century.”56 Thus, in effect, the behavior of the unmotivated money supply takes center stage in this tome of 808 pages including appendices. Indeed, the opening sentence of the book reads, “This book is about the stock of money in the United States.”57
Now Friedman and Schwartz certainly do not, and would not, deny that movements in the money supply are caused by the purposeful actions of motivated human beings. Rather, the positivist methodology they espouse constrains them to narrowly focus their historical narrative on the observable outcomes of these actions and never to formally address their motivation. For, according to the positivist philosophy of science, it is only observable and quantifiable phenomena that can be assigned the status of “cause” in a scientific investigation, while human motives are intensive qualities lacking a quantifiable dimension. So, if one is to write a monetary history that is scientific in the strictly positivist sense, the title must be construed quite literally as the chronicling of quantitative variations in a selected monetary aggregate and the measurable effects of these variations on other quantifiable economic variables, such as the price level and real output.
However, even Friedman and Schwartz’s Monetary History must occasionally emerge from the bog of statistical analysis and address human motivation in order to explain the economic events, intellectual controversies, social conflicts, and political maneuverings that had an undeniable and fundamental impact on the institutional framework of the money supply. Due to the awkward fit of motives into the positivist framework, however, Friedman and Schwartz’s forays into human history tend to be cursory and unilluminating, when not downright misleading. For example, their two chapters dealing with the crucial period from 1879 to 1914 in U.S. monetary history comprise one hundred pages, only 11 of which are devoted to discussing the political and social factors that culminated in the establishment of the Federal Reserve System.58 In these pages, Friedman and Schwartz suggest that the “money ‘issue’” that consumed American politics in the last three decades of the nineteenth century was precipitated by “the crime of 1873” and was almost exclusively driven by the silver interests in league with the inflationist and agrarian Populist Party. This movement, moreover, was partly expressive of the 1890s, a decade which, according to C. Vann Woodward as quoted by the authors, “had rather more than its share of zaniness and crankiness, and that these qualities were manifested in the higher and middling as well as lower orders of American society.”59 In thus trivializing the “money issue,” the authors completely ignore the calculated and covert drive by the Wall Street banks led by the Morgans and Rockefellers for a cartelization of the entire banking industry, with themselves and their political allies at the helm. This movement, which began in earnest in the 1890s, was also in part a reaction to the proposals of the silverite and agrarian inflationists and was aimed at reserving to the banks the gains forthcoming from monetary inflation.
Friedman and Schwartz thus portray the drive toward a central bank as completely unconnected with the money issue and as only getting under way in reaction to the panic of 1907 and the problem with the “inelasticity of the currency” that was then commonly construed as its cause. The result is that they characterize the Federal
Reserve System as the product of a straightforward, disinterested, bipartisan effort to provide a practical solution to a purely technical problem afflicting the monetary system.60 Nowhere in their discussion of the genesis of the Federal Reserve System do Friedman and Schwartz raise the all-important question of precisely which groups benefitted from this “solution.” Nor do they probe deeply into the motives of the proponents of the Federal Reserve Act. After a brief and superficial account of the events leading up to the enactment of the law, they hasten to return to the main task of their “monetary history” which, as Friedman expresses it in another work, is “to add to our tested knowledge.”61
A History of Money and Banking in the United States: The Colonial Era to World War II Page 3