Leithner Letter No. 63
26 March, 2005

Thus the typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyses in a way that he would readily recognise as infantile within the sphere of his real interests. He becomes a primitive again. His thinking becomes associative and affective. And this entails two further consequences of great significance. First, even if there were no political groups trying to influence him, the typical citizen would in political matters tend to yield to extra-rational prejudice and impulse. ... Second, ... the more complete the absence of rational criticism ... the greater the opportunities for groups with an axe to grind.

Joseph Schumpeter
Capitalism, Socialism and Democracy (1947)

AEN: You write in The Trouble with Prosperity that the military represents a kind of “shadow socialism.”

James Grant: It is a distinct form. Look at the city-state collectivism of the aircraft carrier. It has all the inefficiencies of socialism, and all the quirks, complete with black markets on the hangar deck. People are buying and selling government property. Like all socialist systems, it is parasitical on outside markets. The great paradox of the Cold War is that in the name of defending freedom, America sacrificed much of her own freedom, and even became a Garrison State. Regimentation became an important undercurrent in national life, and a destructive one ... the tradition of the Old Right, [in sharp contrast to that of today’s political class, was anti-militarist] because militarism represents a threat to liberty.

The Austrian Economics Newsletter (1996)

On a tape recording made in the Oval Office on June 14, 1971, H. R. Haldeman, Richard Nixon’s chief of staff, can be heard citing Donald Rumsfeld, then a White House aide, on the effect of the Pentagon Papers, news of which had been published on the front page of that morning’s newspaper: “Rumsfeld was making this point this morning,” Haldeman says. “To the ordinary guy, all this is a bunch of gobbledygook. But out of the gobbledygook comes a very clear thing: you can’t trust the government; you can’t believe what they say; and you can’t rely on their judgment. And the implicit infallibility of presidents, which has been an accepted thing in America, is badly hurt by this. ... People do things the president wants to do even though it’s wrong, and the president can be wrong.”

Daniel Ellsberg
The New York Times (28 September 2004)

The Dangerous Absurdity of “National Defence” and “National Security”

To read general business and specialist trade publications, the daily newspaper and so on is occasionally to discern a valuable insight or nugget of information. Accumulating these nuggets, adding them to one’s own ideas and using justifiable principles to sift and subsume them into coherence will – over time – provide a firm basis for decisions. At any given point in time, however, few of the reports, articles, e-mail messages and other ephemera that typically clutter one’s desk should be taken seriously. This is because they routinely confuse normative, analytical and empirical statements; blur and equivocate key concepts and definitions; possess dubious premises (to the limited extent that they offer premises); use invalid patterns of argument (to the even more limited extent that they deign to advance arguments) and permit non sequiturs to abound; do not distinguish causes and their symptoms from causes and their consequences; embrace informal fallacies (including false dilemmas, appeals to emotion, force and pity, prejudicial language and straw men) and generalise improperly. The vast bulk of the stuff that one peruses, in short, is not worth careful reading.

Value investors read widely and critically in order to inform themselves of long-term norms (“base rates”) and disabuse themselves of unrealistic expectations (“case rates”); to identify economic, business and financial principles that pass the tests of logic and historical experience (and eject those that do not); and more generally to identify and inoculate themselves against nonsense. An historically-informed, logically-biased and sceptically-inclined investor is acutely aware, as Richard FitzHerbert has put it, that “the investment world is charged with seductive advertising, glossy brochures and persuasive prose. Theories and fallacies are readily assumed as facts. Irrational analysis is reinforced by fads and fashions. Major blunders are committed by senior people and prestigious institutions. As a protection against incompetence and malpractice, government regulation and licensing has proved to be unreliable. ...” (Blueprint for Investment: An Approach for Serious Long-Term Investors, Wrightbooks, 1994, ISBN: 0947351663).

Armed with valid rules of reasoning, reliable evidence and a disbelieving disposition, the value investor can defend himself against the daily deluge of part-information, misinformation, outright falsehood and mass delusion. Several articles that appeared recently in The Australian provide excellent examples of FitzHerbert’s point. Their subject matter is not economics, finance or investment; yet they vitally affect investors’ present and long-term material well being. These articles and a mass of others invite and sometimes exhort Australians to accept a cluster of points. Governments, whether through their military forces or diplomats or “intelligence analysts” or other agents, are able to protect their subjects against evil, hostile or otherwise undesirable foreigners. Moreover, not only can the Commonwealth protect Australians: nobody except the experts in Canberra have the knowledge and resources required to achieve this essential task. Certainly Australian individuals and businesses cannot possibly hope to defend themselves. For this reason, above and beyond the many others they use to congratulate themselves, Australian governments are competent and legitimate; accordingly, their subjects owe them not just taxes but also confidence. (Why do journalists jump so often and enthusiastically into bed with politicians? See Letter 55.)

Yet this cluster of points – which in Australia has long been a basis of aggressive big government interventionism – is demonstrably absurd. Indeed, the truth is the polar opposite of the myth. Governments are innately incapable of defending their subjects from aggression, and only individuals and private associations of individuals can do so. Further, the many and ever-expanding actions of governments that are ostensibly intended to protect their subjects usually threaten and impoverish them. In short, and just as surely as the sun rises in the morning, governments’ myriad attempts to produce security fail. Accordingly, Australians would be much safer if the Royal Australian Navy, Army and RAAF, the country’s alphabet soup of spy agencies, Department of Foreign Affairs and Trade and all the rest were disbanded, their assets sold (for scrap if necessary) and files thrown into a bonfire, bureaucrats issued pink slips and running shoes and budgets cut now and forevermore to $0. Given the financial black holes (tens of billions of dollars per annum, rising fast and with nothing except waste and lame excuses to show in return) which politicians have created, scrapping these expenditures forthwith would also make Australians measurably richer. That 99.9% or more of Australians uncritically embrace this absurdity and indignantly reject this truth vitiates neither the absurdity nor the truth.

According to the first article, published on 19 January, “the British Government has turned to big business to teach the Royal Navy how to run its fleet more efficiently. Combat training is being supplemented with courses at the London Business School, where officers sit alongside businessmen to learn about quarterly management boards and benchmarking, as well as how to take responsibility for their own marketing, procurement, and recruitment issues whilst at sea. They are also taking classes on how to nurture leadership and boost morale. Officials say other governments are closely monitoring the project. If it is successful, they say, Australian forces could soon embark on a similar scheme.”

The article implies that the RN’s top brass believes that its ships and medium-sized companies possess many similarities; that their similarities outweigh their many differences; that British warships ought to be run as if they were businesses; and that business schools and management consultants can impart the knowledge and skills that will enable captains to act like successful CEO’s. “So forget blue-chip companies – these are the new breed of blue ship companies. Like any other business with limited resources and demanding goals, much lies with the chief executive, his or her board [and] their ability to lead. This means educating them in the right management skills. Business schools are not automatically associated with the armed forces but, along with management consultants, they are quietly forming the building blocks of its future.”

The article profiled a captain who had recently completed a tour of duty at the London Business School. He reported “we were focused on ‘a transition to resource accounting and budgeting’ and the lectures covered both private and public sector practices with case studies looking at two supermarket chains, Tesco and Carefour.” He attended this course, which included presentations from the Treasury and other parts of the civil service, with 17 other senior military officers and civil servants. He concluded “the Navy is [now] much more proactive and forward-looking. ... In the past there has been wastage, like in any other industry. Our shareholders, the public, want to see value for money. We take pride in offering good value.”

The second set of articles, a two-page spread under the bold heading “National Security,” appeared in The Australian on 25 February. One article reported that the bureaucratic report-writers in Canberra are poised with sharpened pencils at the ready. “The Howard government is moving steadily towards embracing the idea of a published national security strategy for Australia. Whilst ministers are yet to decide on a go-ahead, the odds are shortening that a national security strategy document could be commissioned in 2005-2006.” In the U.S., “the national security policy statements produced every few years are an integral part of the government’s strategic policy making machinery.” In Britain, HMG is considering a similar exercise. Because America has one and the Old Country is considering one, Australia apparently should have one too. “A public document setting out Australia’s national security priorities at home and abroad would be the first sustained effort at determining what the global struggle against terrorism means for the government’s medium-term national security planning. Such an exercise would review the massive changes that have taken place in Australia’s counter-terrorist response arrangements since Bali and September 11 at home, as well as attempt to define the future external policy challenges.” You can practically hear Osama shaking in his boots.

Another article, bearing the Prime Minister’s smiling visage and by-line, boasted that Australian governments are spending vast sums of money. “Since September 11 spending on key national security agencies has jumped by $4 billion as state and federal governments have invested heavily in upgraded counter-terrorism capabilities. The core intelligence agencies, ASIO, DSD, DIO and ASIS, have all had massive budget increases and spending on upgraded physical security for government agencies, including $14 million on Parliament House. ASIO’s budget has doubled since 2001 as has [that of] the Australian Federal Police. The Office of National Assessments, the peak intelligence assessment body, will double in size over the next couple of years.” War, including an utterly misguided “war on terror,” is truly a tonic to big government (see also Letter 33 and The Terror Trap).

The PM beseeched his subjects to be alert but not alarmed – and, implicitly, to be grateful to their rulers. “When a car bomb exploded at the front gate of the Australian Embassy in Jakarta in September last year it delivered a chilling reminder that the terrorist threat to Australians remains very real. Australia is very fortunate to have avoided a terrorist attack on our soil, but it is no secret we have been a target since well before the international security landscape changed forever on 11 September 2001. It should also not be forgotten Australians have fallen victim to terrorist attacks in the United States, Saudi Arabia, Iraq, and of course Bali and Jakarta.” The PM also congratulated himself. “One of the best ways to gauge the effectiveness of national security co-ordination processes is [to assess] how they work in response to a terrorist incident. The Jakarta Embassy bombing provided that opportunity. I take pride in reporting that in the aftermath of the appalling attack, the system we have in place worked very well. ... A series of whole-of-government emergency response meetings, called immediately after the bomb blast, served the important purpose of ensuring seamless agency response and timely and accurate sharing of information with the states and territories.”

In the article with his name and picture on it, the PM described the National Security Committee of Cabinet (which he chairs). Supporting the NSC is the Secretaries’ Committee on National Security. It comprises “the heads of agencies engaged in national security issues. At the officials’ level, there are two committees, one co-ordinating counter-terrorism policy across all jurisdictions in Australia and the other co-ordinating policy across Australian government agencies.” And the National Threat Assessment Centre “brings together intelligence analysts from our agencies involved in terrorist threat intelligence, including ASIO, ONA, the AFP, ASIS, DIO, Department of Foreign Affairs and Trade and the Department of Transport and Regional Services.” The message seems to be that no sane terrorist should dream of confronting this phalanx of Canberra’s most formidable committeemen and bureaucratic infighters.

And on and on it goes. In other articles in the two-page spread, the Opposition’s Shadow Minister for Homeland Security and Shadow Minister for Defence described how his party would redraw organisational charts – and thus enact more regulations, hire still more bureaucrats and spend even more money; and a director of a think tank urged politicians to “break down some of the ‘silo mentalities’ that are still to be found in the bureaucracy ... and to encourage even more whole-of-government thinking” and otherwise “think laterally.” Mr Howard was happy to oblige: he described recent reforms to customs and “border security,” an overhaul of “aviation security” and “maritime security” and “the international dimension to security issues.” This overseas aspect “also underlines the importance of a whole-of-government approach ... the need for Australia to be speaking with one voice [presumably Mr Howard’s] is crucial.” The PM concluded “the [terrorist] threat is unpredictable and, for the most part, invisible. It is not one we can counter by traditional means. [Apparently the billions of dollars allocated to guns and gumshoes, committee meetings and reports are “non-traditional.”] Western governments must look for innovative ways to meet this new threat which does not respect borders and which does not employ the weaponry of the nation state. Australia is rising to this new challenge.”

Bloody Hobbes, Locke and Samuelson

Before accepting these articles’ various claims, it is useful to ascertain what grounds and evidence support them. This point, in turn, begs two more general and fundamental questions. First, are governments really able to protect their subjects? And second, why do governments exist in the first place? With respect to the second question, since ancient times a variety of answers have been suggested (for a readable overview, see Abu Ghraib and the Nature of the State by Gene Callahan). According to Plato, the State exists in order to advance the best, i.e., most civilised and sociable, aspects of human nature. (Aristotle agreed but differed sharply with respect to the sort of State that would achieve this goal.) Thomas Hobbes contended that without government people were doomed to chaos, violence and war. John Locke was more optimistic. People might co-operate peaceably in the “state of nature,” but the State would improve it by providing a stable body of law, judges – and physical force overwhelming enough to impose the law and judicial decisions upon any recalcitrants.

Reflecting Locke, the American Declaration of Independence claimed “Governments are instituted among Men” in order to secure “certain unalienable Rights” such as “Life, Liberty and the pursuit of Happiness.” These days, political philosophers such as John Rawls and his many followers agree that the State’s primary purpose is to protect certain of its subjects’ rights, but have dramatically expanded the list of rights to include some minimum level of material and psychological well being. Summarising these points and answering the most general question, it seems that governments exist because they supposedly do things for individuals – in particular, defend them against aggression and thereby secure fundamental rights – that individuals allegedly cannot do for themselves.

Given the gist of more than two millennia of political thought, it is hardly surprising that people presently accept – that is, they hardly think about it and if they do ponder it are utterly convinced – the morality and efficacy of collective security. People disagree about the types of foreign menaces from which the government must protect its subjects; but hardly anybody disputes that the government must be the protector. Government, then, can protect us from foreign devils, and this ability demonstrates that it is competent and indispensable. In particular, Hobbes and the many philosophers, economists and politicians who have followed in his wake contend that in a state of nature (that is, in a world without governments) people would constantly harass, attack, loot, subjugate and kill one another. To use the jargon of contemporary mainstream economics, in a state of nature the underproduction of security would prevail. Each individual, left to his own devices, would devote too few resources to his own defence. According to Hobbes, “in such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish and short.”

Roughly since the 1930s, most mainstream economists have believed that individuals, the private sector and unfettered markets will not provide certain goods (public goods, also known as a collective goods) in the amounts and qualities “really” desired by consumers. National defence is the most-frequently cited example, and Paul Samuelson was the first to attempt a rigorous definition of a public good (“The Pure Theory of Public Expenditure,” Review of Economics and Statistics, November 1954: 387-89). Underproduction of a good occurs when it tends towards non-exclusion of supply and non-rivalry (also known as jointness) of consumption. A supplier has an incentive to supply a good or service to consumers only if he regards the money he receives in return as sufficient to defray his costs. A producer thus has an incentive to produce only to the extent that he can exclude non-payers from the enjoyment of his output. The more a supplier of a good or service can exclude a non-payer, the greater the exclusion that applies to a transaction involving that good. You might, for example, like to eat a Big Mac; and if so then you must pay for one. If you cannot or do not want to pay then McDonald’s can and will prevent you from eating the hamburger.

The more an individual can without any diminution of enjoyment consume a good or service simultaneously with others, the more the characteristic of jointness applies to the consumption of the good. Conversely, the more consumption by many diminishes their enjoyment or assessment of its quality, the more the good’s consumption is characterised as rival. Most people would agree that only one person can eat a particular Big Mac. Only a handful can ride simultaneously in the same motorcar, a few dozen can travel at the same time in a bus and perhaps several hundred at once can cross a particular bridge. In each of these examples, there is a limit to the number who can simultaneously enjoy the good; and as the number rises the enjoyment consumers derive from consumption decreases. As a general rule, the less (more) rival the consumption of a good, the less (more) people will impute economic value to it, the less (more) the law of diminishing marginal utility applies to it – and, other things equal, the less (more) they will have an incentive to produce it and create and maintain property rights over it.

The trouble with the private production of defence, according to the mainstream, is two-fold. Defence is consumed jointly and it is difficult and perhaps impossible to exclude non-payers. If, for example, I am an entrepreneur who builds an anti-ballistic missile system and sells it to you, and if you install it in your back garden, then it is very likely (assuming that it works properly) that the system also protects your neighbours. Indeed, it will protect everybody within a certain radius from missile attack; it will protect others just as well as it protects you; and an increase in the number of people within this radius will not decrease the protection the ABM system affords them. Accordingly, if I request that these people also pay me what you paid me, then it is very likely that I will be rebuffed. Because they receive protection without payment – indeed, they consume “protection” whether or not they seek it – they have a strong incentive to “free ride” rather than pay.

Only if you are willing to pay me an amount sufficient to compensate me for my time and effort – only, in other words, if you are willing to subsidise your neighbours and pay me a considerable sum in lieu of their payments – do I have an incentive to supply the ABM system. In practice, however, it is very doubtful that you will do so: the system is likely to be intolerably expensive and the subsidisation of so many free riders will probably be prohibitively irksome. As a result, nobody will have the incentive to supply the ABM system, and – says the economics mainstream – both the “underprovision” and hence the “underconsumption” of defence will occur. The solution, says the mainstream, is coercion: governments compel their subjects to pay taxes; these taxes finance the desired amount of collective security (the implicit assumption is that, by some unspecified means, politicians somehow know the appropriate amount of defence); and this security generates peace. Like Hobbes, today’s economic mainstream says that governments exist because they and only they are able to do things (such as defend their subjects against attack) that individuals cannot or will not do themselves.

Murray Rothbard (Power and Market: Government and the Economy, Sheed, Andrews & McMeel, 1970, ISBN: 0836207505, and For a New Liberty, Fox & Wilkes, 1973, ISBN: 0930073019) has criticised – and, to my mind, refuted – the Samuelsonian conception of a public good (see also Alexander Shand’s The Capitalist Alternative: An Introduction to Neo-Austrian Economics, New York University Press, 1984, ISBN: 0814778364 and Mark Skousen’s If You Build It – Privately – They Will Come). And in The Private Production of Defence, Hans-Hermann Hoppe identifies and – again, it seems to me – refutes the “Hobbesian myth” of collective security.

To use the simplest possible Hobbesian example, in order to institute peace between them, two individuals (A and B) require a third party (S) to act as peacemaker. (A and B, it is worth noting, do not necessarily appoint S; in principle he can – and historically often does – impose himself upon them.) But S is not just another individual. Rather, he is a Sovereign; and as such he has two unique powers. First, S can and invariably does insist that his subjects seek protection from nobody except S. The Sovereign, in other words, is an exclusive provider of security. More generally, S monopolises the supply of protection to everybody who resides within his territorial domain. Second, S is the sole determinant of how many resources his subjects must allocate to their own security. The Sovereign, then, has the sole power to tax and to decide what percentage of the proceeds will be allocated to “collective security.”

Can S really reduce aggression, provide protection and promote peaceful co-operation among his subjects? The weaknesses of Hobbes’ contention are obvious, and it is a wonder that they did not long ago consign Hobbes to the historical and intellectual backwaters. Most notably, if men are disposed towards plunder and violence, then surely S is also so inclined. Whether he is an hereditary monarch, elected president, dictator, etc., S is still a man; and given Hobbes’ view of human nature, there are no grounds to believe that men who become agents of the state thereby become angels. Quite the contrary: there is every reason to believe that they remain scoundrels. Historically, the fact that S often imposes himself upon his subjects confirms that he is no angel.

Second, is not the relation between S on the one hand and A and B on the other simply an extortion racket? Will not the rogue, S, enforce peace between A and B simply because that arrangement enables him to plunder both of them more profitably? If so, and as Hoppe observes, then S’s privileges protect him from his subjects. (Recall how Mr Howard boasted about the funds used to protect Parliament House from terrorists, and then think about their superannuation and numerous other “entitlements.” Politicians always feather their nests first.) But like night follows day, the more S is protected from his subjects, the less these subjects are protected against S. “Collective security” is thus a particularly dangerous euphemism. It is really a mechanism whereby the security of S is achieved by disarming and then, in effect, subjugating his own subjects.

Hoppe also notes that since the time of Hobbes, and reflecting the influence of Locke, certain proponents of the protective state have contended that S’s powers arise and are strictly limited through a “social” or “constitutional” contract. Everybody, apparently, and whether they like it or not, is bound to this contract. Accordingly, it is a very curious contract that has no counterpart among individuals. The constitutional contract differs diametrically from an individual-level contract in the sense that that one party (namely S) can and does unilaterally decide when the other party (A and B and all other subjects) is violating the contract’s terms. In contrast, at no time can an individual decide that the government is breaching the contract. Further, it is seldom my actions that violate the contract; rather, it is usually the actions of others – most notably at elections when a majority vote themselves to a hefty percentage of my property. But who in his right mind would assent to a contract that allowed one party to determine unilaterally and irrevocably the amount that the other party must pay for protection? Only S would agree to such terms. Given the defining characteristic of government, namely monopoly and the power to tax, any notion that its power can be limited and life and property thereby safeguarded is clearly illusory.

But the difficulties do not end there: indeed, they are just beginning. Let us assume, like Hobbes, that in order to achieve and maintain peace between A and B a third party with coercive and monopoly powers, S, is required. But if more than one state exists (let us call them S1, S2, S3, etc.) then, just as there can allegedly be no peace among A and B without S, there can be no peace among the states S1, S2, S3, etc. as long as they remain in a state of nature vis-à-vis one another. In order to achieve universal peace, political centralisation, unification and the eventual establishment of One Single Big Bloody World Government are presumably necessary. The trouble, of course, is that a bigger government can prey with even greater impunity upon its subjects. Perhaps it is fortunate, then, that people who possess powers of coercion and monopoly (i.e., the various S’s) have no incentive to relinquish their powers to a bigger government. Only angels would do so, and in Hobbes’ world there are no angels.

Each S does, however, have every incentive to expand its powers at the expense of another S. Every protection racket seeks to expand the area over which it exerts its racketeering operations, and it must typically do this at the expense of other rackets. Given humans’ natural aggressiveness, as Hobbes sees it, it is obvious that (other things equal) S will act more aggressively towards foreigners than he does towards his own subjects. To do so is to “externalise” the costs and “internalise” the perceived benefits of his aggression. S, in other words, can increase the support of his subjects if he can redistribute to them some of the booty generated by his aggression against foreigners. The result is that governments purportedly devised to maintain the peace among their own subjects will tend towards constant strife – and wars – with other governments. The relations between two governments, in other words, are usually more bellicose than those of two individuals who live under different governments. But how does this inter-governmental conflict improve individuals’ security? Surely it erodes it. A single individual, after all, can menace only a small number of people. A state, however, can and does threaten many more people over a much wider area much more severely. An Australian resident, for example, is in no position to attack and oppress (say) an individual Iraqi. Alas, a cabinet in Canberra with an interventionist bee in its bonnet is in a much better position to do so.

As Hoppe notes, a state prefers to plunder foreigners rather than its own subjects; but this hardly means that it will leave its own subjects unmolested. Quite the contrary: it will not just tax and otherwise prey upon them, but also implicate them in aggression against foreigners. The existence of a State, in other words, does not just increase the frequency of aggression against individuals: it also changes its character. The existence of states, and especially of democratic states, implies that war will cease to be local and partial and will become total and indiscriminate. As described in Letter 59, Australians would virtually unanimously uphold the principle that it is wrong for one subject (B) to kill another (A). Yet today they concur – often enthusiastically – that it is right and necessary for governments, including “their” government, to avenge the death of A or members of group A by paying its agents to kill B or members of group b – whether or not any Bs killed or had anything to do with the death of any As.

Murray Rothbard (see in particular The Ethics of Liberty, New York University Press, 1982, 1998, ISBN: 0814775063) has demonstrated that governments’ rationalisation of war is predicated upon a logically invalid extension of the analogy of aggression by one individual against another. At the individual level, Smith attacks Jones; local police rush to defend Jones; they use “police action” to stop the aggression and then commence “peacekeeping” to prevent its recurrence. But “police action” is justifiable only at the individual (i.e., Smith-Jones) level: it makes no sense whatever at a collective (S1-S2) level. Hence governments virtually necessarily become aggressors against non-combatants. Indeed, on numerous occasions during the twentieth century, and whatever their initial intentions, they became mass murderers of civilians.

The analogy bastardised by politicians is thus: Smith attacks Jones; the police rush to defend Jones; and whilst trying to apprehend Smith they bombard a city block and fire machine guns into a crowd of innocent bystanders. Clearly, however, any “police” agency that behaved in this manner would itself be a criminal aggressor – and, it is vital to recognise, commit much more aggression than the original Smith who attacked Jones. No Australian policeman would dream of acting like this; and one who ordered or undertook such action would rightly face criminal prosecution. But “national security” and “national defence” employs different rules – and encourages much more pliable morality. As Geoffrey Barker (The Australian Financial Review 28 February) noted, “moral standards applicable to nations, which act to promote their own interests, are different, lower and more limited than they are for individuals.”

There’s No Accounting for “National Security”

Conceptually and logically, then, “national security” and “national defence” are oxymoronic. Governments imperil rather than promote their subjects’ (and foreign individuals’) physical safety. Empirically, too, their “security policies” are inevitably wasteful shambles. Robert Higgs (US National Security: Illusions versus Realities) hits the nail on the head: the illusion is that a government “has the motivation and the capacity to manage effectively the vast resources placed at its disposal in a way that enhances the security [of the country and its people]. “ In the U.S., however, the reality is diametrically different. The Pentagon “is either unable or unwilling to deal seriously with its decades-long engagement in massive waste, fraud, and mismanagement, especially (but not exclusively) in its relations with the big defence contracting companies.”

According to a memorandum signed by the America’s Deputy Assistant Inspector-General for Auditing and dated Feb. 15, 2001, “we identified $1.1 trillion [yes, that is a “t”] in department-level accounting entries to financial data used to prepare DoD component financial statements that were not supported by adequate audit trails or by sufficient evidence to determine their validity. In addition, we also identified $107 billion in department-level accounting entries to financial data used to prepare DoD component financial statements that were improper because the entries were illogical or did not follow accounting principles.” More generally, “DoD did not fully comply with the laws and regulations that had a direct and material effect on its ability to determine financial statement amounts.” The memo concluded: “DoD could not provide sufficient or reliable information for us to evaluate management’s assertions or verify amounts on the FY 2000 DoD Agency-wide Financial Statements.” Little has changed for the better – and, arguably, things have become even worse – in the last few years.

According to Higgs, the military’s own audit agencies also found that the accounts of the armed forces were so deficient that they could not be audited. “The Military Department audit agencies attempted to audit those financial statements and issued disclaimers of opinion.” And the DoD’s inspector general reported “the financial data reported on the FY 2000 financial statements for Army, Navy, and Air Force General Funds; the Army, Navy, and Air Force Working Capital Funds; and the U.S. Army Corps of Engineers’ Civil Works Program were unauditable.” Higgs concludes, “Congress is wasting time holding hearings on the accounting shortcomings of Arthur Andersen and Enron, and the President is threatening to sic the Department of Justice on accounting malefactors such as WorldCom and Xerox – all of which are veritable paragons of accounting probity by comparison with the Pentagon.”

In another article Higgs concluded: “last year, Donald Rumsfeld told Congress, ‘we have an obligation to taxpayers to spend their money wisely. Today, we’re not doing that.’ Talk about an understatement. Not only is the Department wasting money by the shipload, but it hasn’t the foggiest idea of how many trillions of dollars it has squandered, and how it has done so, over the past decade. Yet department officials also have testified that no compliance with the law is in sight. The Pentagon lawbreakers simply expect to go on breaking the law, and to get away with it, as they have been getting away with it for years. When Enron or WorldCom can’t present a proper audit statement, they are ruined. When the Department of Defence cannot put its financial records in shape even to be audited, the department is rewarded with the biggest increase in its budget since Ronald Reagan’s first term as president.”

The same chronic fiasco also exists in Australia. The Australian Financial Review (22 February) editorialised that the inability of the Department of Defence “to balance its multibillion-dollar accounts is a particularly egregious example of public sector incompetence and blame shifting. So it was entirely reasonable for Senators at last week’s estimates hearings to bare their teeth and snarl at the frantic excuses offered by [the Department’s Secretary and the Defence Minister.]”

Explaining the Department’s failure during the past five years to impose a semblance of order upon its accounts, its inability to account for $8.35 billion (which comprises almost half of its budget for the current financial year) and the repeatedly qualified audits by the Australian National Audit Office, the Secretary blamed the onerous demands of accrual accounting, the sheer size of the Department and the complexity of its operations. According to the Secretary, in the past “we were never required to maintain the detail and sorts of records that would support accounts [of the type required by law.]” He added that these various problems will take at least another two years to fix. Yeah, right.

Quite sensibly, The AFR didn’t buy it. Its editorial noted that the private sector long ago came fully to terms with accrual accounting. Further, and no thanks to politicians, private firms have been compelled to divert vast resources in order to implement the GST, meet new global accounting standards and comply with myriad and ever-growing government regulations. It also questioned whether Defence is bigger and its activities more complex than the organisations (such as the ANZ Bank, BHP-Billiton, Coles Myer and Woolworths) with which its Secretary sought to compare it. The Department’s problems may be larger than those of big non-government firms, “but it also has far larger financial and human resources than most private companies – and Defence receives less scrutiny than most private corporations.” Indeed, it “may be unique among large corporations in its capacity for delay and dithering and for failing to act quickly enough to establish adequate chains of financial accountability.”

Predictably, an Australian editorial that began reasonably well proceeded to let the State and its agents wriggle completely off the hook. The AFR stated “the truth of Defence’s financial muddle is simple: it is that the demands of accrual accounting have exposed grave internal inadequacies, including lack of clear responsibility, and even cultural resistance, within the huge department.” If only it would organise its accounts, devise a clear org chart and develop an enlightened “culture,” the editorial seems to imply, all can be put right. Perhaps, it invites the reader to infer, if the insights of business schools and management consultants are brought to bear – and if the Department were run like a business and ships’ captains acted like CEO’s – taxpayers would receive value for the billions they lavish upon the Department. The truth, of course, is that these problems are incurable and the only way to eliminate them is to abolish the Department and dismiss everybody within it.

Two points, one general and one more specific, are important to make. First, because individual, fee-for-service consumers and private, risk-taking entrepreneurs (as opposed to politically well-connected corporations whose mouths are sown to the teats of big government) do not participate in the market for defence, and the “market” is rigged by government, the state’s provision of defence invariably becomes an extravagant débâcle. So forget the babble of the B School academics and the smooth talk of the management consultants: as long as the defining characteristic of “collective security” is the absence of private ownership of factors of production, no reform short of root-and-branch eradication will avail. The idea of a socialist economy, which the military and diplomatic establishment epitomises, is a contradiction in terms; and as Ludwig von Mises demonstrated from first principles almost eighty years ago in Economic Planning in the Socialist Commonwealth (1920) and Socialism (1922), the notion that such an arrangement can achieve its objectives is utterly absurd. Any such attempt will be an exercise in futility. The trouble is that business school academics (those at the University of Dallas and Babson College are an honourable exception) use their impenetrable jargon and arcane mathematics to mask the fact that they do not know – or, at any rate, give a convincing impression that they do not know – the first thing about business and management (see Letter 31, Letter 40 and Gary North’s superb Donald Trump Versus The Mandarins).

What is the first thing to know? Mises demonstrated from first principles that in order to reach one’s material goals one must make monetary calculations (i.e., engage in cost-accounting). Everywhere outside the primitive and self-sufficient single household economy, monetary calculation is the sole basis of rational economic action. Only by being able to compare inputs and outputs in terms of a common medium of exchange – money – can a person determine whether his actions are successful. In sharp contrast, on the aircraft carrier or in the army camp there is no economy – there is no calculation and economising – because under these conditions monetary calculation and cost accounting are impossible. If no private property rights and ownership of the factors of production exist, then no free market prices for these factors exist; and without free market prices (and thus costs, revenues and profits) it is simply impossible to determine whether these factors are employed economically and rationally. Hence the socialism of “national security” and “national defence” is a recipe for inevitable miscalculation and resultant chaos. Any attempt to mock or ignore Mises’ insight, which large numbers of formidably intelligent bureaucrats do every day, will thus be as productive and edifying as a one-legged man in an arse-kicking contest.

A second point follows. Because the government monopolises the production of defence, the resources demanded by the state to produce “protection” must rise and its quality must fall. This is hardly an Austrian insight: turn to any mainstream microeconomics text, study the characteristics of monopoly and the same result will appear (but ignore the bits about “natural monopoly” – only government, not nature, can create a monopoly). Motivated like everybody else by self-interest and the disutility of labour – but with a monopoly and the power to tax – the government’s “national security” policy, stripped of its disingenuous rhetoric, never wavers. It is to spend more and more and to achieve less and less; and its inevitable débâcles, when they become so acute that they come to the public’s attention, will spur calls for yet more enquiries, reports, regulations and expenditures (see also The Anti-Conservatives by Pat Buchanan, Bush’s “Priceless” War by David Isenberg and Iraq’s Liberation Comes With a Ballooning Price Tag by Charles Peña).

This point is as old as economics. More than two hundred years ago, in The Wealth of Nations (1776), Adam Smith observed “it is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense by sumptuary laws. ... [Kings and ministers] are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”

Thomas Bray expressed this fundamental point in more modern terms in The Wall Street Journal (9 July 2002). “When it comes to cooking the books, corporate America has nothing on the public sector. It would be interesting to see the reaction if the White House insisted that federal bookkeepers and executives were held to the same standards as those in the private sector. If, say, a health-care program busts its budget, then clap the Secretary of Health and Human Services in the stocks for a spell. Or bring racketeering charges against Congress for its failure to stick to its budgets. Or fine Alan Greenspan whenever the value of the dollar fluctuates by 10 per cent or more. ... In the private sector, the workings of the marketplace at least exert a crude discipline on failed ideas. Its mechanism for doing so is called bankruptcy. In the public sector, lawmakers often reward failure with a redoubling of effort – and money.”

Some Coping Mechanisms for a Mad World

Richard FitzHerbert’s sage words are worth repeating. “The investment world is charged with seductive advertising, glossy brochures and persuasive prose. Theories and fallacies are readily assumed as facts. Irrational analysis is reinforced by fads and fashions. Major blunders are committed by senior people and prestigious institutions. As protection against incompetence and malpractice, government regulation and licensing has proved to be unreliable . . .” The world that is distinct from but nonetheless impacts significantly upon the investment world is also riddled with follies, fallacies and absurdities. Nowhere is this truer than in Canberra; and in no part of that city of English majors and sociologists is it more applicable than in the Department of Defence.

Collective security, in short, is a dangerous delusion that endangers and impoverishes (see in particular < a href = "" target = "_new" > Why We Fight: A Reminder < /a> by Justin Raimondo). What, then, to do? Conceptually, the answer is crystal clear. “Defence in the free society,” Rothbard concluded in Power and Market, “would therefore have to be supplied by people or firms who (a) gained their revenue voluntarily rather than by coercion and (b) did not – as the State does – arrogate to themselves a compulsory monopoly ... defence firms would have to be as freely competitive and as non-coercive as are all other suppliers of goods and services on the free market. Defence services, like all other services, would be marketable and marketable only.”

But not one in 1,000 Australians would agree, 900 would angrily deplore this conclusion and more than a few would denounce its proponent as a traitor. Whatever the dangers and costs it imposes upon them, very few people question “their” government’s basic legitimacy and competence. Accordingly, a first response is not to cry over spilt milk. In Australia, most individuals can organise their affairs such that their average rate of tax is roughly 30% (as opposed to their marginal rate, which will often approach 50%). They can do so completely legally and without approaching the grey legal and regulatory line (not that politicians set any standard: they routinely flout the laws and regulations they impose upon their subjects). Australians should regard the taxes they pay as money tendered to a protection racket – money, in other words, which is gone, cannot be recouped and is thus best forgotten. If that’s too much spilt milk, consider moving to Hong Kong, the Channel Islands or the UAE. There is no such thing as value for the taxpayer’s dollar because outside the market there exists no means to measure value.

From this response follows another: individuals should have as little to do with government as possible. Avoid “public” schools, hospitals, etc., and wherever possible pay as you go with private providers (or what pass for private providers in a heavily regulated country). Time is money. Hence the time, effort and aggravation you save by avoiding government is peace of mind – and, in effect, money in the bank.

Also, strive to keep your family and friends out of the military. Men in Canberra whom you have never met and who care nothing about you (except when they bribe you with your own money at elections) order certain Australians to occupy a distant land whose wretched people have never harmed a hair on your head. Is this reasonable? Charley Reese, an American returned soldier, puts this point well in Say “No” to Recruiters. “Suppose a travelling salesman came to your door. He said he was representing a foreign country that had a bad government. He would like for your son to volunteer to overthrow that government and possibly get killed in the process. What would you do? I’d slam the door in his face. There is no way I would allow my son or daughter to sacrifice his or her life for the benefit of some foreigners I don’t even know. You should keep that in mind if some military recruiter latches on to your son or daughter. Under the present circumstances, it’s practically a certainty that the young men and women in the armed forces will not be used to defend the United States or Americans. They will be used as mercenaries to advance the interests of other countries and multinational corporations; but unlike the mercenaries in civilian clothes, they will be paid a pittance” (see also Veterans Against the Iraq War and Vietnam Veterans Against the War).

To conclude that collective security is a fraud, and that the Australian politicians who babble incessantly about it are loathsome, is not automatically to attribute these characteristics to bureaucrats (including soldiers, sailors, airmen, etc.). Quite the contrary: most of the government’s employees – particularly the younger ones – are decent, honest and seek genuinely to do well for others. All of us have our faults; alas, a ubiquitous one is the belief that the State possesses a unique ability to achieve some laudable goal. But this belief, however widely and sincerely it is held, is incorrect. The one thing that the State can achieve is the systematic exploitation of the many for the benefit of an élite who claim certain privileges and monopolies. Similarly, to denounce the state and politicians hardly implies that it is only the State’s agents who resort to hypocrisy, profligacy, sharp practice and brutality. Just as many government employees are exemplary individuals, so too there is no shortage of utter bastards in the private sector.

Another important response is to avoid what Harry Browne has called the “group trap.” This is the fallacy that you can accomplish more than you can on your own if you share responsibilities, efforts and rewards with other members of a group. In particular, it is futile to organise in order to persuade the government to do what you want. “The kind of man who wants the government to adopt and enforce his ideas,” said H. L. Mencken, “is always the kind of man whose ideas are idiotic.” You achieve more for yourself when your rewards depend as much as possible upon your own efforts.

So ignore political and other causes. Graham-style value investors, in short and unlike most (particularly major institutional) market participants, are staunch individualists. They work either individually or with one or at most a handful of individually-incentivised partners, and virtually never within large and bureaucratic organisations. To a considerable extent they share the views of American novelist William Faulkner, the Nobel Laureate for Literature in 1949, who in an interview whilst on sabbatical at the University of Virginia in 1958 expressed an admirable opinion about the individual vis-à-vis the group:

Q: Most of your characters are certainly highly individualised human beings. Do you have any particular ideas on the so-called trend towards conformity, the loss of individualisation in our current society?

A: Yes, I have very definite ideas about that ... I’m against belonging to anything.

Q: Why is that?

A: I think that one man may be first-rate but if you get one [such] man and two second-rate men together, then he’s not going to be first-rate any longer, because the voice of that majority will be a second-rate voice, the behaviour of that majority will be second rate. ...

Q: Can you go further and say how you rate people like that – first- and second-rate?

A: Well, sir, ... I would say that a first-rate man ... is a man who did the best he could with what talents he had to make something which wasn’t here yesterday ... that [he] never harmed the weak, practised honesty and courtesy, and tried to be brave ... whether he was always brave or not. I think that a man who held to those tenets wouldn’t get very far if he were involved in a group of people that had relinquished their individualities to some one voice. ...

Yet another defence mechanism against government is to cultivate apathy – which is much cheaper, safer and more effective than any prescription medication. Develop a wholesome indifference towards the forces that you cannot influence. This lack of interest hardly means that you abandon a love of bushwalking, friendly dogs, good books, warm company, thick steaks, cold beer and empty beaches. Quite the contrary: a vast gulf separates those who fret about things they cannot change and those who concentrate upon their family, friends, business associates and customers. To your family, friends and principles you owe allegiance: and to nothing and nobody else. Capitalists, then, should strive to serve their customers, enrich their shareholders and ignore, to the greatest extent feasible, the government. Why should you give the time of day, much less respect, to a harmful group whose actions you cannot influence? Alas, the herd instinct dominates much behaviour: hence teen gangs, football hooligans and war. Nationalism, an irrational psychological attachment to a State that demands your property, obedience and sometimes your life, comes naturally but never reasonably.

For the more fun loving, another response is to enjoy the degeneration. Are Australian politicians undermining the country’s traditions, wealth, safety and morality? Undoubtedly. So relish the outstanding entertainment their destruction generates. Better shows are unavailable – nay, unknown – in cinemas and theatres. If you regard yourself as a disinterested onlooker rather than an interested participant, then deterioration becomes amusement. Read each morning’s headlines to see the latest harmful things occurring in Canberra and the state capitals. Read them as if they were laughable and they become high farce.

To cite just one of the literally thousands of examples: The Australian Financial Review (2 February) reported that the Treasurer proposes to fine and imprison executives who collude to fix prices and markets. “The new legislation, which will help the Australian Competition and Consumer Commission bust cartels, will contain five-year goal sentences and fines of up to $220,000 for executives and employees involved in illicit deals.” But what is a government if it is not a cartel? Apart from arbitrarily fixing prices, corrupting markets, colluding with one another to feather their nests and loot taxpayers, what on earth do politicians do? And if consumers must be protected from executives, then why not protect them from politicians?

Hence a modest proposal: after scrapping the “national defence” apparatus, also apply to a politician any law or regulation that binds a businessman (see in particular Let’s Have Equal Treatment for Political Insiders by Pierre Lemieux). Why not, for example, subject politicians to the sections of the Trade Practices Act that ban misleading and deceptive advertising? Why not insist that Ministers personally guarantee all of their department’s expenditures – and be personally liable in court for any financial maladministration and policy failure? Answer: because if politicians were subjected to the same draconian rules they routinely impose upon businessmen, and if these rules were properly enforced, then most politicians would find themselves where they belong – in striped PJ’s and behind bars. Like the haughty man who appears in front of a crowd unaware that his fly is unzipped, his shirttail protruding and his shoe dragging toilet paper, the Treasurer seemed genuinely unaware of the buffoonish figure he cut during this announcement. Try as he might, the most savage satirist could not concoct such idiocy.

A final – and perhaps the most important – response is to regard the State’s inherent absurdity and inefficiency as a salvation. In his novel 1984, George Orwell described a totalitarian society wherein an omniscient and omnipotent Big Brother controls the most minute details of everybody’s life. But Orwell, it is vital to recognise, knew nothing about economics; and not surprisingly, his novel ignores the principles of human action. Among those principles: the larger the government, the less efficient anything it touches; and government programs do not work as intended – if they work at all. To protest this reality is akin to complaining about the laws of gravity or the periodic table of elements.

So whilst Australian politicians’ fantasies about “collective security” and “national defence” probably include a monitoring device in every room, and they will insist that these devices be designed, manufactured, installed and maintained to the government’s specifications, it’s a safe bet that the silly things (like the country’s destroyers, tanks, submarines and over-the-horizon radar) will be delayed, defective, inappropriate or otherwise inoperative – and thus a threat to nobody except the unfortunate people who try to run them. We remain partly free because our masters cannot manage themselves, let alone their subjects. In that essential respect, Australia always has been and will always remain a wonderful country.

Chris Leithner


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