Topics: Economic Systems - 5. Classical Economics

5. Classical economics

Classical economics is widely regarded as the first modern school of economic thought. It is associated with the idea that free markets can regulate themselves. Its major developers include Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill. Sometimes the definition of classical economics is expanded to include William Petty and Johann Heinrich von Thünen.

Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics. The school was active into the mid 19th century and was followed by neoclassical economics in Britain beginning around 1870.

They produced their "magnificent dynamics" during a period in which capitalism was emerging from a past feudal society and in which the industrial revolution was leading to vast changes in society. These changes also raised the question of how a society could be organized around a system in which every individual sought his or her own (monetary) gain.

Classical economists and their immediate predecessor reoriented economics away from an analysis of the ruler's personal interests to broader national interests. Physiocrat Francois Quesnay and Adam Smith, for example, identified the wealth of a nation with the yearly national income, instead of the king's treasury. Smith saw this income as produced by labor, land, and capital equipment. With property rights to land and capital by individuals, the national income is divided up between laborers, landlords, and capitalists in the form of wages, rent, and interest or profits.

Central Concepts

Value Theory

Classical economists developed a theory of value, or price, to investigate economic dynamics. Petty introduced a fundamental distinction between market price and natural price to facilitate the portrayal of regularities in prices. Market prices are jostled by many transient influences that are difficult to theorize about at any abstract level. Natural prices, according to Petty, Smith, and Ricardo, for example, capture systematic and persistent forces operating at a point in time. Market prices always tend toward natural prices in a process that Smith described as somewhat similar to gravitational attraction.

The theory of what determined natural prices varied within the Classical school. Petty tried to develop a par between land and labor and had what might be called a land-and-labor theory of value. Smith confined the labor theory of value to a mythical pre-capitalist past. He stated that natural prices were the sum of natural rates of wages, profits (including interest on capital and wages of superintendence) and rent. Ricardo also had what might be described as a cost of production theory of value. He criticized Smith for describing rent as price-determining, instead of price-determined, and saw the labor theory of value as a good approximation.

Some historians of economic thought, in particular, Sraffian economists, see the classical theory of prices as determined from three givens:

1. The level of outputs at the level of Smith's "effectual demand",

2. technology, and

3. wages.

From these givens, one can rigorously derive a theory of value. But neither Ricardo nor Marx, the most rigorous investigators of the theory of value during the Classical period, developed this theory fully. Those who reconstruct the theory of value in this manner see the determinants of natural prices as being explained by the Classical economists from within the theory of economics, albeit at a lower level of abstraction. For example, the theory of wages was closely connected to the theory of population. The Classical economists took the theory of the determinants of the level and growth of population as part of Political Economy. Since then, the theory of population has been seen as part of some other discipline than economics. In contrast to the Classical theory, the determinants of the neoclassical theory value:

1. tastes

2. technology, and

3. endowments

are seen as exogenous to neoclassical economics.

Classical economics tended to stress the benefits of trade. Its theory of value was largely displaced by marginalist schools of thought which sees "use value" as deriving from the marginal utility that consumers finds in a good, and "exchange value" (i.e. natural price) as determined by the marginal opportunity- or disutility-cost of the inputs that make up the product. Ironically, considering the attachment of many classical economists to the free market, the largest school of economic thought that still adheres to classical form is the Marxian school.

Monetary Theory

British classical economists in the 19th century had a well-developed controversy between the Banking and the Currency school. This parallels recent debates between proponents of the theory of endogeneous money, such as Nicholas Kaldor, and monetarists, such as Milton Friedman. Monetarists and members of the currency school argued that banks can and should control the supply of money. According to their theories, inflation is caused by banks issuing an excessive supply of money. According to proponents of the theory of endogenous money, the supply of money automatically adjusts to the demand, and banks can only control the terms (e.g., the rate of interest) on which loans are made.

Debates on the definition of Classical Economics

The theory of value is currently a contested subject. One issue is whether classical economics is a forerunner of neoclassical economics or a school of thought that had a distinct theory of value, distribution, and growth.

Sraffians, who emphasize the discontinuity thesis, see classical economics as extending from Willam Petty's work in the 17th century to the break-up of the Ricardian system around 1830. The period between 1830 and the 1870s would then be dominated by "vulgar political economy", as Karl Marx characterized it. Sraffians argue that: the wages fund theory; Senior's abstinence theory of interest, which puts the return to capital on the same level as returns to land and labor; the explanation of equilibrium prices by well-behaved supply and demand functions; and Say's law, are not necessary or essential elements of the classical theory of value and distribution.

Perhaps Schumpeter's view that John Stuart Mill put forth a half-way house between classical and neoclassical economics is consistent with this view.

Sraffians generally see Marx as having rediscovered and restated the logic of classical economics, albeit for his own purposes. Others, such as Schumpeter, think of Marx as a follower of Ricardo. Even Samuel Hollander has recently explained that there is a textual basis in the classical economists for Marx's reading, although he does argue that it is an extremely narrow set of texts.

The first position is that neoclassical economics is essentially continuous with classical economics. To scholars promoting this view, there is no hard and fast line between classical and neoclassical economics. There may be shifts of emphasis, such as between the long run and the short run and between supply and demand, but the neoclassical concepts are to be found confused or in embryo in classical economics. To these economists, there is only one theory of value and distribution. Alfred Marshall is a well-known promoter of this view. Samuel Hollander is probably its best current proponent.

A second position sees two threads simultaneously being developed in classical economics. In this view, neoclassical economics is a development of certain exoteric (popular) views in Adam Smith. Ricardo was a sport, developing certain esoteric (known by only the select) views in Adam Smith. This view can be found in W. Stanley Jevons, who referred to Ricardo as something like "that able, but wrong-headed man" who put economics on the "wrong track". One can also find this view in Maurice Dobb's Theories of Value and Distribution Since Adam Smith: Ideology and Economic Theory (1973), as well as in Karl Marx's Theories of Surplus Value.

The above does not exhaust the possibilities. John Maynard Keynes thought of classical economics as starting with Ricardo and being ended by the publication of Keynes' General Theory of Employment Interest and Money. The defining criterion of classical economics, on this view, is Say's law.

One difficulty in these debates is that the participants are frequently arguing about whether there is a non-neoclassical theories that should be reconstructed and applied today to describe capitalist economies. Some, such as Terry Peach, see classical economics as of antiquarian interest.


Classical economists were referred to as a group for the first time by Karl Marx, who admired their scientific rigor. One unifying part of their theories was the labour theory of value, contrasting to value deriving from a general equilibrium of supply and demand. These economists had seen the first economic and social transformation brought by the Industrial Revolution: rural depopulation, precariousness, poverty, apparition of a working class. They wondered about the population growth, because the demographic transition had begun in Great Britain at that time. They also asked many fundamental questions, about the source of value, the causes of economic growth and the role of money in the economy. They supported a free-market economy, arguing it was a natural system based upon freedom and property. However, these economists were divided and did not make up a unified current of thought.

Jeremy Bentham

Jeremy Bentham (1748-1832) believed in "the greatest good for the greatest number". He was perhaps the most radical thinker of his time, and developed the concept of utilitarianism. Bentham was an atheist, a prison reformer, animal rights activist, believer in universal suffrage, free speech, free trade and health insurance at a time when few dared to argue for any. He was schooled rigorously from an early age, finishing university and being called to the bar at 18. His first book, Fragment of Government (1776) published anonymously was a trenchant critique of William Blackstone's Commentaries of the laws of England. This gained wide success until it was found that the young Bentham, and not a revered Professor had penned it. In The Principles of Morals and Legislation (1791) Bentham set out his theory of utility.

The aim of legal policy must be to decrease misery and suffering so far as possible while producing the greatest happiness for the greatest number. Bentham even designed a comprehensive methodology for the calculation of aggregate happiness in society that a particular law produced, a felicific calculus. Society, argued Bentham, is nothing more than the total of individuals, so that if one aims to produce net social good then one need only to ensure that more pleasure is experienced across the board than pain, regardless of numbers. For example, a law is proposed to make every bus in the city wheel chair accessible, but slower moving as a result than its predecessors because of the new design. Millions of bus users will therefore experience a small amount of displeasure (or "pain") in increased traffic and journey times, but a minority of people using wheel chairs will experience a huge amount of pleasure at being able to catch public transport, which outweighs the aggregate displeasure of other users. Interpersonal comparisons of utility were allowed by Bentham, the idea that one person's vast pleasure can count more than many others' pain. Much criticism later showed how this could be twisted, for instance, would the felicific calculus allow a vastly happy dictator to outweigh the dredging misery of his exploited populus? Despite Bentham's methodology there were severe obstacles in measuring people's happiness.

Jean-Baptiste Say

Say's law, that supply always equals demand, was unchallenged until the 20th century.

Jean-Baptiste Say (1767-1832) was a Frenchman, born in Lyon who helped to popularise Adam Smith's work in France. His book, A Treatise on Political Economy (1803) contained a brief passage, which later became orthodoxy in political economics until the Great Depression and known as Say's Law of markets. Say argued that there could never be a general deficiency of demand or a general glut of commodities in the whole economy. People produce things, said Say, to fulfill their own wants, rather than those of others. Production is therefore not a question of supply, but an indication of producers demanding goods. Say agreed that a part of the income is saved by the households, but in the long term, savings are invested. Investment and consumption are the two elements of demand, so that production is demand, so it is impossible for production to outrun demand, or for there to be a "general glut" of supply. Say also argued that money was neutral, because its sole role is to facilitate exchanges: therefore, people demand money only to buy commodities. Say said that "money is a veil". To sum up these two ideas, Say said "products are exchanged for products". At most, there will be different economic sectors whose demands are not fulfilled. But over time supplies will shift, businesses will retool for different production and the market will correct itself. An example of a "general glut" could be unemployment, in other words, too great a supply of workers, and too few jobs. Say's Law advocates would suggest that this necessarily means there is an excess demand for other products that will correct itself. This remained a foundation of economic theory until the 1930s. Say's Law was first put forward by James Mill (1773-1836) in English, and was advocated by David Ricardo, Henry Thornton and John Stuart Mill. However two political economists, Thomas Malthus and Sismondi, were unconvinced.

Thomas Malthus

Thomas Malthus (1766-1834) was a Tory minister in the United Kingdom Parliament who, contrasting to Bentham, believed in strict government abstention from social ills. Malthus devoted the last chapter of his book Principles of Political Economy (1820) to rebutting Say's law, and argued that the economy could stagnate with a lack of "effectual demand". In other words, wages if less than the total costs of production cannot purchase the total output of industry and that this would cause prices to fall. Price falls decrease incentives to invest, and the spiral could continue indefinitely. Malthus is more notorious however for his earlier work, An Essay on the Principle of Population. This argued that intervention was impossible because of two factors. "Food is necessary to the existence of man," wrote Malthus. "The passion between the sexes is necessary and will remain nearly in its present state," he added, meaning that the "power of the population is infinitely greater than the power in the Earth to produce subsistence for man." Nevertheless growth in population is checked by "misery and vice". Any increase in wages for the masses would cause only a temporary growth in population, which given the constraints in the supply of the Earth's produce would lead to misery, vice and a corresponding readjustment to the original population. However more labour could mean more economic growth, either one of which was able to be produced by an accumulation of capital.

David Ricardo

Ricardo is renowned for his law of comparative advantage.

David Ricardo (1772-1823) was born in London. By the age of 26, he had become a wealthy stock market trader and bought himself a constituency seat in Ireland to gain a platform in the British parliament's House of Commons. Ricardo's best known work is his Principles of Political Economy and Taxation, which contains his critique of barriers to international trade and a description of the manner the income is distributed in the population. Ricardo made a distinction between the workers, who received a wage fixed to a level at which they can survive, the landowners, who earn a rent, and capitalists, who own capital and receive a profit, a residual part of the income. If population grows, it becomes necessary to cultivate additional land, whose fertility is lower than that of already cultivated fields, because of the law of decreasing productivity. Therefore, the cost of the production of the wheat increases, as well as the price of the wheat: The rents increase also, the wages, indexed to inflation (because they must allow workers to survive) too. Profits decrease, until the capitalists can no longer invest. The economy, Ricardo concluded, is bound to tend towards a steady state.

To postpone the steady state, Ricardo advocates to promote international trade to import wheat at a low price to fight landowners. The Corn Laws of the UK had been passed in 1815, setting a fluctuating system of tariffs to stabilise the price of wheat in the domestic market. Ricardo argued that raising tariffs, despite being intended to benefit the incomes of farmers, would merely produce a rise in the prices of rents that went into the pockets of landowners. Furthermore, extra labour would be employed leading to an increase in the cost of wages across the board, and therefore reducing exports and profits coming from overseas business. Economics for Ricardo was all about the relationship between the three "factors of production": land, labour and capital. Ricardo demonstrated mathematically that the gains from trade could outweigh the perceived advantages of protectionist policy. The idea of comparative advantage suggests that even if one country is inferior at producing all of its goods than another, it may still benefit from opening its borders since the inflow of goods produced more cheaply than at home, produces a gain for domestic consumers. According then to Ricardo, this concept would lead to a shift in prices, so that eventually England would be producing goods in which its comparative advantages were the highest.

John Stuart Mill

Mill, weaned on the philosophy of Jeremy Bentham, wrote the most authoritative economics text of his time.

John Stuart Mill (1806-1873) was the dominant figure of political economic thought of his time, as well as being a Member of Parliament for the seat of Westminster, and a leading political philosopher. Mill was a child prodigy, reading Ancient Greek from the age of 3, and being vigorously schooled by his father James Mill. Jeremy Bentham was a close mentor and family friend, and Mill was heavily influenced by David Ricardo. Mill's textbook, first published in 1848 and titled Principles of Political Economy was essentially a summary of the economic wisdom of the mid nineteenth century. It was used as the standard texts by most universities well into the beginning of the twentieth century. On the question of economic growth Mill tried to find a middle ground between Adam Smith's view of ever expanding opportunities for trade and technological innovation and Thomas Malthus' view of the inherent limits of population. In his fourth book Mill set out a number of possible future outcomes, rather than predicting one in particular. The first followed the Malthusian line that population grew quicker than supplies, leading to falling wages and rising profits. The second, per Smith, said if capital accumulated faster than population grew then real wages would rise. Third, echoing David Ricardo, should capital accumulate and population increase at the same rate, yet technology stay stable, there would be no change in real wages because supply and demand for labour would be the same. However growing populations would require more land use, increasing food production costs and therefore decreasing profits. The fourth alternative was that technology advanced faster than population and capital stock increased. The result would be a prospering economy. Mill felt the third scenario most likely, and he assumed technology advanced would have to end at some point. But on the prospect of continuing economic growth, Mill was more ambivalent.

"I confess I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other's heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress."

Mill is also credited with being the first person to speak of supply and demand as a relationship rather than mere quantities of goods on markets, the concept of opportunity cost and the rejection of the wage fund doctrine.




Before advancing to the more exciting field of analyzing diverse policy schemes from the standpoint of economic theory and political philosophy, it is essential to introduce and explain the basic concepts used throughout the following study. Indeed, the concepts explained in this chapter-the concepts of property, contract, aggression, capitalism and socialism-are so basic, so fundamental, that one cannot even avoid making use of them, if at times only implicitly. Unfortunately, though, the very fact that in analyzing any kind of human action and/or any kind of interpersonal relationship one must make use of these concepts does not imply that everyone has a precise understanding of them. It seems instead to be the other way around.

Because the concept of property, for instance, is so basic that everyone seems to have some immediate understanding of it, most people never think about it carefully and can, as a consequence, produce at best a very vague definition. But starting from imprecisely stated or assumed definitions and building a complex network of thought upon them can lead only to intellectual disaster. For the original imprecisions and loopholes will then pervade and distort everything derived from them. To avoid this the concept of property must first be clarified. Next to the concept of action, property is the most basic category in the social sciences. As a matter of fact, all other concepts to be introduced in this chapter-aggression, contract, capitalism and socialism-are definable in terms of property: aggression being aggression against property, contract being a nonaggressive relationship between property owners, socialism being an institutionalized policy of aggression against property, and capitalism being an institutionalized policy of the recognition of property and contractual ism.

Let us start with an elucidation of the precondition necessary for the concept of property to emerge.1 For a concept of property to arise, there must be a scarcity of goods. Should there be no scarcity, and should all goods be so-called "free goods" whose use by any one person for any one purpose would not in any way exclude (or interfere with or restrict) its use by any other person or for any other purpose, then there would be no need for property. If, let us say, due to some paradisiac superabundance of bananas, my present consumption of bananas does not in any way reduce my own future supply (possible consumption) of bananas, nor the present or the future supply of bananas for any other person, then the assignment of property rights, here with respect to bananas, would be superfluous. To develop the concept of property, it is necessary for goods to be scarce, so that conflicts over the use of these goods can possibly arise. It is the function of property rights to avoid such possible clashes over the use of scarce resources by assigning rights of exclusive ownership. Property is thus a normative concept: a concept designed to make a conflict-free interaction possible by stipulating mutually binding rules of conduct (norms) regarding scarce resources.2 It does not need much comment to see that there is indeed scarcity of goods, of all sorts of goods, everywhere, and the need for property rights is thus evident. As a matter of fact, even if we were to assume that we lived in the Garden of Eden, where there was a superabundance of everything needed not only to sustain one's life but to indulge in every possible comfort by simply stretching out one's hand, the concept of property would necessarily have to evolve. For even under these "ideal" circumstances, every person's physical body would still be a scarce resource and thus the need for the establishment of property rules, i.e., rules regarding people's bodies, would exist. One is not used to thinking of one's own body in terms of a scarce good, but in imagining the most ideal situation one could ever hope for, the Garden of Eden, it becomes possible to realize that one's body is indeed the prototype of a scarce good for the use of which property rights, i.e., rights of exclusive ownership, somehow have to be established, in order to avoid clashes.

As a matter of fact, as long as a person acts,3 i.e., as long as a person intentionally tries to change a state of affairs that is subjectively perceived and evaluated as less satisfactory into a state that appears more rewarding, this action necessarily involves a choice regarding the use of this person's body. And choosing, preferring one thing or state over another, evidently implies that not everything, not all possible pleasures or satisfactions, can be had at one and the same time, but rather that something considered less valuable must be given up in order to attain something else considered to be more valuable.4 Thus choosing always implies the incurrence of costs: foregoing possible enjoyments because the means needed to attain them are scarce and are bound up in some alternative use which promises returns valued more highly than the opportunities forfeited.5 Even in the Garden of Eden I could not simultaneously eat an apple, smoke a cigarette, have a drink, climb up a tree, read a book, build a house, play with my cat, drive a car, etc. I would have to make choices and could do things only sequentially. And this would be so because there is only one body that I can use to do these things and enjoy the satisfaction derived from doing them. I do not have a superabundance of bodies which would allow me to enjoy all possible satisfactions simultaneously, in one single bliss. And I would be restrained by scarcity in another respect as well: as long as this scarce resource "body" is not indestructible and is not equipped with eternal health and energy, but rather is an organism with only a limited life span, time is scarce, too. The time used up in pursuing goal A reduces the time left to pursue other goals. And the longer it takes to reach a desired result, the higher the costs involved in waiting will be, and the higher the expected satisfaction must be in order to justify these costs.

Thus, because of the scarcity of body and time, even in the Garden of Eden property regulations would have to be established. Without them, and assuming now that more than one person exists, that their range of action overlaps, and that there is no preestablished harmony and synchronization of interests among these persons, conflicts over the use of one's own body would be unavoidable. I might, for instance, want to use my body to enjoy drinking a cup of tea, while someone else might want to start a love affair with it, thus preventing me from having my tea and also reducing the time left to pursue my own goals by means of this body. In order to avoid such possible clashes, rules of exclusive ownership must be formulated. In fact, so long as there is action, there is a necessity for the establ ishment of property norms.

To keep things simple and free of distracting details let us continue to assume, for another stretch of analysis, that we indeed inhabit a Garden of Eden, where exclusively one's body, its standing room, and time are scarce resources. What can the prototype of a scarce good, a person's body, tell us about property and its conceptual derivatives? While even in a world with only one type of scarce resource all sorts of norms regulating exclusive ownership with respect to scarce means are conceivable in principle (for example, a rule such as "On Mondays I determine to which uses our bodies can be put, on Tuesdays you determine their use," etc.), it is certain that not all of them would in fact have the same chance of being proposed and accepted. It then seems to be best to start one's analysis with the property norm, which would most likely be accepted by the inhabitants of Eden as the "natural position" regarding the assignment of rights of exclusive ownership in bodies. To be sure, at this stage of the argument we are not yet concerned with ethics, with the problem of the moral justification of norms. Thus, while it can well be admitted from the very outset that I am indeed going to argue later on that the natural position  is the only morally defendable one, and while I am also convinced that it is the natural one because it is morally defendable, at this stage, natural does not imply any moral connotation. It is simply meant to be a sociopsychological category used to indicate that this position would probably find the most support in public opinion.6 Indeed, its naturalness is reflected by the very fact that in talking about bodies, it is almost impossible to avoid using possessive (possession-indicating) expressions as well.

A body is normally referred to as a specific person's body: my body, yours, his, etc. (and, incidentally, the same is done whenever one speaks of actions!); and one does not have the slightest problem distinguishing what is mine, yours, etc.; clearly, in doing so, one is assigning property-titles and distinguishing between proper owners of scarce resources.

What, then, is the natural position regarding property implicit in one's natural way of speaking about bodies? Every person has the exclusive right of ownership of his body within the boundaries of its surface. Every person can put his body to those uses that he thinks best for his immediate or longrun interest, well-being, or satisfaction, as long as he does not interfere with another person's rights to control the use of his/her respective body. This "ownership" of one's own body implies one's right to invite (agree to) another person's doing something with (to) one's own body: my right to do with my body whatever I want, that is, includes the right to ask and let someone else use my body, love it, examine it, inject medicines or drugs into it, change its physical appearance and even beat, damage, or kill it, if that should be what I like and agree to. Interpersonal relationships of this sort are and will be called contractual exchanges. They are characterized by the fact that an agreement on the use of scarce resources is reached, which is based on mutual respect and recognition of each and all of the exchanging partners' domain of exclusive control over their respective bodies. By definition, such contractual exchanges, while not necessarily advantageous for each and all of the exchanging partners in retrospect (I might not like my looks afterwards, even though the surgeon did exactly what I told him to do to my face), are always, and necessarily so, mutually advantageous for every participant ex ante, otherwise the exchange simply would not take place.

If, on the other hand, an action is performed that uninvitedly invades or changes the physical integrity of another person's body and puts this body to a use that is not to this very person's own liking, this action, according to the natural position regarding property, is called aggression.7 It would be aggression if a person tried to satisfy his sexual or sadistic desires by raping or beating another person's body without having this person's explicit consent. And it would be aggression as well, if a person were physically stopped from performing certain actions with his body which might not be to someone else's liking, such as wearing pink socks or curly hair, or getting drunk everyday, or first sleeping and then philosophizing instead of doing it the other way around, but which, if indeed performed, would not in itself cause a change in the physical integrity of any other person's body.8 By definition, then, an aggressive act always and necessarily implies that a person, by performing it, increases his/her satisfaction at the expense of a decrease in the satisfaction of another person.

What is the underlying rationale of this natural position regarding property? At the bottom of the natural property theory lies the idea of basing the assignment of an exclusive ownership right on the existence of an objective, intersubjectively ascertainable link between owner and the property owned and, mutatis mutandis, of calling all property claims that can only invoke purely subjective evidence in their favor aggressive. While I can cite in favor of my property claim regarding my body the objective fact that I was the body's first occupant-its first user-anyone else who claims to have the right to control this body can cite nothing of the sort. No one could call my body a product of his will, as I could claim it to be the product of mine; such a claim to the right to determine the use of the scarce resource "my body" would be a claim of nonusers, of nonproducers, and would be based exclusively on subjective opinion, i.e., on a merely verbal declaration that things should be this or that way. Of course, such verbal claims could (and very likely always will) point to certain facts, too ("I am bigger, I am smarter, I am poorer or I am very special, etc.!"), and could thereby try to legitimize themselves. But facts such as these do not (and cannot) establish any objective link between a given scarce resource and any particular person(s).

Everyone's ownership of every particular resource can equally well be established or excluded on such grounds. It is such property claims, derived from thin air, with purely verbal links between owners and things owned, which, according to the natural theory of property, are called aggressive. As compared with this, my property claim regarding my body can point to a determinate natural link; and it can do so because my body has been produced, and everything produced (as contrasted with things "given"), logically, has a determinate connection with some definite individual producer(s); it has been produced by me. To avoid any misunderstanding, 'to produce" is not to say "to create out of nothing" (after all, my body is also a naturally given thing); it means to change a naturally given thing according to a plan, to transform nature. It is also not to say 'to transform each and every part of it" (after all, my body has lots of parts with respect to which I never did anything!); it means instead to transform a thing within (including/ excluding) borders, or, even more precisely, to produce borderlines for things. And finally, "to produce" also is not to say that the process of production must go on indefinitely (after all, I am sleeping sometimes, and my body is certainly not a product of my actions right then!), it simply means that it was produced in the past and can be recognized as such. It is such property claims, then, which can be derived from past, embordering productive efforts and which can be tied to specific individuals as producers, which are called "natural" or "nonaggressive."9 The ideas of capitalism and socialism should be almost clear at this point. But before leaving the Garden of Eden once and for all, a look at the consequences of the introduction of elements of aggressively founded ownership into paradise should be taken, as this will help elucidate, purely and simply, the central economic and social problem of every type of real socialism, i.e., of socialism in a world of all-around scarcity, the detailed analysis of which then is the concern of the following chapters.

Even in the land of milk and honey, people evidently could choose different lifestyles, set different goals for themselves, have different standards as to what kind of personality they want to develop and what achievements to strive for. True, one would not need to work in order to make a living as there would be a superabundance of everything. But, put drastically, one could still choose to become a drunk or a philosopher, which is to say, more technically, one could choose to put one's body to uses that would be more or less immediately rewarding from the point of view of the acting person, or one could put one's body to such uses which would only bear fruit in a more or less distant future. Decisions of the afore-mentioned type might be called "consumption decisions." Decisions, on the other hand, to put one's body to a use that only pays later, i.e., choices induced by some reward or satisfaction anticipated in a more or less distant future requiring the actor to overcome disutility of waiting (time is scarce!), might be called "investment" decisions-decisions, that is, to invest in "human capital," in the capital embodied in one's own physical body.10 Now assume that aggressively founded ownership is introduced. Whereas before every person was the exclusive owner of his body and could decide on his own whether to become

a drunk or a philosopher, now a system is established in which a person's right to determine how to use his body is curtailed or completely eliminated, and instead, this right is partly or fully delegated to another per son who is not naturally linked to the respective body as its producer. What would be the consequence of this? The abolition of private ownership of one's body can be far-reaching: the nonproducers can have the right to determine all of the uses of "my" body all of the time, or their right to do so can be restricted with respect to time and/or domains, and these restrictions

again can be flexible (with the nonproducers having the right to change the restrictive definitions according to their own taste) or fixed once and for all, and so the effects can, of course, be more or less drastic! But whatever the degree, socialization of ownership always, and necessarily so, produces two types of effects. The first effect, "economic" in the narrower sense of the term, is a reduction in the amount of investment in human capital as defined above. The natural owner of a body cannot help but make decisions regarding that body as long as he does not commit suicide and decides to stay alive, however restricted his ownership rights might be. But since he can no longer decide on his own, undisturbed by others, to what uses to put his body, the value attached to it by him is now lower; the want satisfaction, the psychic income, that is to say, which he can derive from his body by putting it to certain uses is reduced because the range of options available to him has been limited. But then, with every action necessarily implying costs (as explained above), and with a given inclination to overcome costs in exchange for expected rewards or profits, the natural owner is faced with a situation in which the costs of action must be reduced in order to bring them back in line with the reduced expected income. In the Garden of Eden, there is only one way left to do this: by shortening the waiting time, reducing the disutility of waiting, and choosing a course of action that promises earlier returns. Thus, the introduction of aggressively founded ownership leads to a tendency to reduce investment decisions and favors consumption decisions. Put drastically, it leads to a tendency to turn philosophers into drunks. This tendency is permanent and more pronounced when the threat of intervention with the natural owner's rights is permanent, and it is less so to the degree that the threat is restricted to certain times or domains. In any case, though, the rate of investment in human capital is lower than it would be with the right of exclusive control of natural owners over their bodies being untouched and absolute.

The second effect might be called social. The introduction of elements of aggressively founded ownership implies a change in the social structure, a change in the composition of society with respect to personality or character types. Abandoning the natural theory of property evidently implies a redistribution of income. The psychic income of persons in their capacity as users of their "own" natural body, as persons expressing themselves in this body and deriving satisfaction from doing so, is reduced at the expense of an increase in the psychic income of persons in their capacity as invaders of other peoples' bodies. It has become relatively more difficult and costly to derive satisfaction from using one's body without invading that of others,

and relatively less difficult and costly to gain satisfaction by using other peoples' bodies for one's own purposes. This fact alone does not imply any social change, but once a single empirical assumption is made, it does: Assuming that the desire to gain satisfaction at the expense of a loss in satisfaction available to others by instrumentalizing another person's body exists as a human desire, that it may not be instilled in everybody and to the same extent, but that it exists in some people sometimes to some degree and so conceivably can be suppressed or encouraged and favored by some given institutional arrangement, consequences are imminent. And surely, this assumption is true. Then, the redistribution of chances for income acquisition must result in more people using aggression to gain personal satisfaction and/or more people becoming more aggressive, i.e., shifting increasingly

from nonaggressive to aggressive roles, and slowly changing their personality as a  consequence of this; and this change in the character structure, in the moral  composition of society, in turn leads to another reduction in the level of investment in human capital.

In short, with these two effects we have already pinpointed the most fundamental reasons for socialism's being an economically inferior system of property arrangements. Indeed, both effects will reappear again and again in the course of the following analyses of socialist policy schemes. All that is left now is to explain the natural theory of property as regards the real world of all around scarcity, for this is the point of departure for all forms of real socialism.

Notwithstanding some evident differences between bodies and all other scarce resources, all conceptual distinctions can be made and applied again without difficulties: Unlike bodies, which are never "unowned" but always have a natural owner, all other scarce resources can indeed be unowned. This is the case as long as they remain in their natural state, unused by anyone. They only become someone's property once they are treated as scarce means, that is, as soon as they are occupied in some objective borders and put to some specific use by someone. This act of acquiring previously unowned resources is called "original appropriation."11 Once unowned resources are appropriated it becomes an aggression to uninvitedly change their physical characteristics or to restrict the owner's range of uses to which he can put these resources, as long as a particular use does not affect the physical characteristics of anyone else's property-just as in the case of bodies. Only in the course of a contractual relationship, i.e., when the natural owner of a scarce means explicitly agrees, is it possible for someone else to utilize and change previously acquired things. And only if the original or previous owner deliberately transfers his property title to someone else, either in exchange for something or as a free gift, can this other person himself become the owner of such things. Unlike bodies, though, which for the same "natural" reason can never be unowned and also can never be parted with by the natural owner completely but only be "lent out" as long as the owners' agreement lasts, naturally all other scarce resource can be "alienated" and a property title for them can be relinquished once and for all.12

A social system based on this natural position regarding the assignment of property rights is, and will from now on be called pure capitalist. And since its ideas can also be discerned as the dominating ideas of private law, i.e., of the norms regulating relations between private persons, it might also be termed a pure private law system.13 This system is based on the idea that to be nonaggressive, claims to property must be backed by the "objective" fact of an act of original appropriation, of previous ownership, or by a mutually beneficial contractual relationship. This relationship can either be a deliberate cooperation between property owners or the deliberate transfer of property titles from one owner to another. If this system is altered and instead a policy is instituted that assigns rights of exclusive control over scarce means, however partial, to persons or groups of persons that can point neither to an act of previous usership of the things concerned, nor to a contractual relation with some previous user- owner, then this will be called (partial) socialism.

It will be the task of the next four chapters to explain how different ways of deviating from a pure capitalist system, different ways of redistributing property titles away from natural owners of things (i.e., from people who have put some particular resources to a specific use and so are naturally linked to them, and onto people who have not yet done anything with the resources but who have simply made a verbal, declarative claim regarding them) lowers investment and increases consumption, and in addition causes a change in the composition of the population by favoring nonproductive over productive people.


1. Cf. D. Hume, A Treatise of Human Nature (ed. Selby- Bigge), Oxford, 1968, esp. 3, 2, p.484; and, "Enquiry Concerning the Principles of Morals," in: Hume, Enquiries (ed. Selby-Bigge), Oxford, 1970; cf. also: L Robbins, Political Economy: Past and Present, London, 1977, esp. pp.29-33.

2. Incidentally, the normative character of the concept of property also makes the sufficient precondition for its emergence as a concept clear: Besides scarcity "rationality of agents" must exist, i.e., the agents must be capable of communicating, discussing, arguing, and in particular, they must be able to engage in an argumentation of normative problems. If there were no such capability of communication, normative concepts simply would not be of any use. We do not, for instance, try to avoid clashes over the use of a given scarce resource with, let us say, an elephant, by defining property rights, for we cannot argue with the elephant and hence arrive at an agreement on rights of ownership. The avoidance of future clashes in such a case is exclusively a technical (as opposed to a normative) problem.

3. It should be noted that a person cannot intentionally not act, as even the attempt not to act, i.e., one's decision not to do anything and instead remain in some previously occupied position or state would itself qualify as an action, thus rendering this statement aprioristically true, i.e., a statement that cannot be challenged by experience, as anyone who would try to disprove it thereby would have to choose and put his body willy-nilly to some specific use.

4. Cf. L v. Mises, Human Action, Chicago, 1966, esp. part 1; M. N. Rothbard, Man, Economy and State, Los Angeles, 1970; also: L Robbins, Nature and Significance of Economic Science, London, 1935.

5. On the concept of cost cf. in particular, M. Buchanan, Cost and Choice, Chicago, 1969; LS.E. Essays on Cost (ed. Buchanan and Thirlby), Indianapolis, 1981.

6. It is worth mentioning here that the validity of all of what follows, of course, in no way depends on the correctness of the description of the natural position as "natural." Even if someone would only be willing to grant the so-called natural position the status of an arbitrary starting point, our NOTES TO CHAPTER 2 213 analysis assumes validity. Terms don't matter; what counts is what the natural position really is and implies as such. The following analyses are concerned exclusively with this problem.

7. Note again that the term "aggression" is used here without evaluative connotations. Only later in this treatise will I demonstrate that aggression as defined above is indeed morally indefensible. Names are empty; what alone is important is what It really is that is called aggression.

8. When I discuss the problem of moral justification in Chapter 7,1 will return to the importance of the distinction just made of aggression as an invasion of the physical integrity of someone and, on the other hand, an invasion of the integrity of someone's value system, which is not classified as aggression. Here it suffices to notice that it is some sort of technical necessity for any theory of property (not just the natural position described here) that the delimitation of the property rights of one person against those of another be formulated in physical, objective, intersubjectively ascertainable terms. Otherwise it would be impossible for an actor to determine ex ante if any particular action of his were an aggression or not, and so the social function of property norms (any property norms), i.e., to make a conflict-free interaction possible, could not be fulfilled simply for technical reasons.

9. It is worth mentioning that the ownership right stemming from production finds its natural limitation only when, as in the case of children, the thing produced is itself another actor- producer. According to the natural theory of property, a child, once born, is just as much the owner of his own body as anyone else. Hence, not only can a child expect not to be physically aggressed against but as the owner of his body a child has the right, in particular, to abandon his parents once he is physically able to run away from them and say "no" to their possible attempts to recapture him. Parents only have special rights regarding their child-stemming from their unique status as the child's producers-insofar as they (and no one else) can rightfully claim to be the child's trustee as long as the child is physically unable to run away and say "no."

10. On the disutility of work and waiting cf. the theory of time-preference as espoused by L v. Mises, Human Action, Chicago, 1966, chapters 5,18, 21; the same, Socialism, Indianapolis, 1981, chapter 8; M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, chapters 6, 9; also: E. v. Boehm-Bawerk, Kapital und Kapitalzins. Positive Theory des Kapitals, Meisenheim, 1967; F. Fetter, Capital, Interest and Rent, Kansas City, 1976. On a critical assessment of the term "human capital," in particular of the 214 A Theory of Socialism and Capitalism: Economics, Politics, and Ethics absurd treatment that this concept has had at the hands of some Chicagoeconomists (notably G. Becker, Human Capital, New York, 1975), cf. A. Rubner, The Three Sacred Cows of Economics, New York, 1970.

11. On the theory of original appropriation cf. J. Locke, Two Treatises of Government (ed. Laslett), Cambridge, 1960, esp. 2, 5.

12. On the distinction, flowing naturally from the unique character of a person's body as contrasted with all other scarce goods, between "inalienable" and "alienable" property titles cf. W. Evers, 'Toward a Reformation of a Law of Contracts," in: Journal of Libertarian Studies, 1977.

13. The superimposition of public on private law has tainted and compromised the latter to some extent everywhere. Nonetheless, it is not difficult to disentangle existing private law systems and find what is here called the natural position as constituting its central elements-a fact which once again underlines the "naturalness" of this property theory. Cf. also Chapter 8, n. 13.

Source: Hoppe, Hans-Hermann. A Theory of Socialism and Capitalism - Economics, Politics and Ethics.

5. Classical economics