MAIN IDEA:

This small book presents a number of diagrams with high explanatory power for Austrian economic theory.

DETAILS:

Introduction

This is the diagrammatic representation of ideas of Austrian view of macroeconomic relationships.

The Primary characteristics:

1. The capital stock made of heterogeneous capital
2. The size of capital stock is treated as variable
3. It is not full-employment model even if it assume that process starts with full employment
4. The analysis in Austrian model is dynamic and time dependent
5. The Austrian theory is theory of coordination: how production process coordinates with tastes of individuals, their time and liquidity preferences.

MY TAKE ON IT:

This is a great set of diagrams clearly demonstrating logic of Austrian theory of business cycle:

1. The new credit expands money supply that first goes mainly into hands of capitalists creating incorrect assumption on their part that individual preferences changed to higher level of savings.
2. As result capitalists increase investments in long-term projects with time horizon beyond real level of individual preferences.
3. When credit increase hit the limit, the gap between consumption demand and investment starves these projects of additional monetary resources causing their suspension or liquidation and economy goes into depression.
4. After clean up process completed and failed projects closed, the economy starts growing again.

I mainly agree with this understanding of business cycle with one big caveat: I do not think that money supply is susceptible to control. Neither government nor exclusive use of hard money such as gold could conceivably limit money supply as long as humans can use credit and barter. Eventually money supply is subject to human passions and herd instincts that rise and fall unpredictably so money supply could increase / decrease due to credit expansion / contraction without any change in underlying stock of money either it is gold or accounting entries.

I would also note that individual tie preferences are not constant and could change any time so even if if at the initial planning and investment stage capitalist correctly estimates time preferences at the time, there is no way to correctly estimate future preferences which are clearly unknown.

That means that business cycle will always be with us as long as humans are in control of demand and supply of goods and services.

MAIN IDEA:

This book is based on notion of evolution of political organization of society as direct continuation of human biological evolution. The main idea is to link together human biology, institutions of society, political organization derived from them, and then use historical evidence not only from typical point of view of Western history, but on the wider scale, including history of China, India, and Eastern Europe.

The point is made that humans are social creatures who always existed within the group and they always used political organization formal or not to maintain existence and cohesiveness of these groups. The political organization of society depends on size and method of production of society, developing from tribal organization to chiefdom, and to the state. Each level of organization provides for more effective military capabilities and therefore for success in competition with other societies for resources.

However the size and complexity of political organization creates some internal tensions. This could lead to decay and destruction of society either from within or from without. The main source of tension is human nature to help one’s kin, friends, and tribe at the expense of more distant members of society. The analysis of these internal tensions is concentrated on relative strength of central authority versus aristocracy, legitimacy of authority in the view of members of society, accountability of rulers, and rule of law as method of achieving legitimacy and accountability.

DETAILS:

PREFACE

This book is about historical origins of political institutions and process of decay of these institutions. The period covered is from origin of humanity to French Revolution.

PART ONE – Before the State

1 – THE NECESSITY OF POLITICS: The third wave of democratization and contemporary anxieties about the future of contemporary liberal democracy; how both the Left and the Right entertain fantasies about the abolition of government; how contemporary developing countries represent the fulfillment of these fantasies; how we take institutions for granted but in fact have no idea where they come from.

POLITICAL ANXIETIES: To many in recently democratized world hopes for economic prosperity and political security associated with Western world just did not happen despite elections and multiparty systems. Unable to accommodate to newly discovered insecurity and volatility of capitalism some countries fall back to traditional authoritarian rulers like Putin and Hugo Chaves.

POLITICAL DECAY: The important part of this recession is political decay of American democracy – the oldest and most powerful example of results of such form of government. Despite being relatively mild this decay led to growth of unproductive elite, bloated state, financial insolvency, and economic stagnation.

FANTASIES OF STATELESSNESS: The fantasies of left and right about disappearance of state are meaningless, because a state is required to provide security, assure property rights, infrastructure, and other public goods.

GETTING TO DENMARK: In this context Denmark is a mythical rich democratic country which is capable to provide 3 necessary ingredients for prosperous society:

1. The State
2. The Rule of law
3. Government accountability.

This book is an attempt to use history to provide answer to a question why contemporary political entities are the way they are.

CHINA FIRST: Since China is country with the oldest and the best-documented political history, it makes sense to start there.

TURTLES ALL THE WAY DOWN: This is just a metaphor for an attempt to explain world by using circular thinking: “the world is on the turtle and turtle on another turtle all the way down”.

2 – THE STATE OF NATURE: Philosophical discussions of the state of nature; how the contemporary life sciences shed light on human nature and hence on the biological foundations of politics; politics among chimpanzees and other primates; what aspects of human nature undergird politics; when different parts of the world were first settled.

CHIMPANZEE POLITICS AND ITS RELEVANCE: This is review of evidence developed from research of chimps and their group dynamics.

TO HUMAN POLITICAL DEVELOPMENT: This is a short analysis of differences with humans being much more capable of high-level organization and complex communication due to development of language.

SPECIFICALLY HUMAN THE BEAST WITH RED CHEEKS: This is analysis of human emotions as highly important part of social interactions in the group.

THE STRUGGLE FOR RECOGNITION: This is review of need for recognition as another part necessary for construction of social system.

FOUNDATIONS OF POLITICAL DEVELOPMENT: This is a compilation of human traits conductive for building political system:

• Inclusive fitness of the group and kin selection
• Ability for mental modeling of causality
• Emotional foundation for establishing and following norms
• Need for recognition that generates legitimacy that in turn creates foundation for political authority

EVOLUTION AND MIGRATION: This is a very short recount of human expansion from origin in Africa throughout the globe.

 

3 – THE TYRANNY OF COUSINS: Disputes over the fact and nature of human social evolution; family- or band-level social organization, and the transition to tribalism; an introduction to lineages, agnation, and other basic anthropological concepts

STAGES OF PREHISTORY: This is a review of history of anthropological definitions for development stages of human society. Author decided on use of four-level taxonomy: bands, tribes, chiefdoms, and states

FAMILY- AND BAND-LEVEL ORGANIZATION: This is review of family as a primitive organization of hunter-gatherers with no private property and no individualism. The person is nothing more then a part of a group with need for immediate consumption leading to extensive sharing. Hierarchy is based on personal qualities such as strength and is fluid as it is with chimps.

FROM BAND TO TRIBE: Tribes are growing out of bands and are built on common ancestry and usually parental lineage. It allows much higher level of organization with expansion by just drawing lineage to the more ancient ancestor. Tribes often contain segments, which could continuously ally or fight with each other.

ANCESTORS AND RELIGION: The same logic of common ancestors is normally used in development of religion with ancestors morphing into gods over time.

RELIGION AND POWER: Being much more powerful military then bands and more cohesive due to common ideology, tribes expand at the expense of bands either incorporating or annihilating them.

4 – TRIBAL SOCIETIES: PROPERTY, JUSTICE, WAR: How kinship is related to the development of property fights; the nature of justice in a tribal society; tribal societies as military organizations; strengths and weaknesses of tribal organization

KINSHIP AND PRIVATE PROPERTY: The earliest private property rights held not by individuals, but by lineage groups or tribes. The use of property avoided tragedy of commons by clearly defined rules and tribes cohesiveness.

LAW AND JUSTICE: Tribes have very weak formal authority if any, but it has traditions and prevalent attitudes that warranties use of violence against rule breakers as long as enough people support it. In this environment Leader cannot just command, he had to be more of an arbitrator between various groups. This arrangement made tribes relatively more vulnerable to dissolution than other forms.

WARFARE AND MILITARY ORGANIZATION: With discovery of agriculture warfare became highly efficient way to obtain resources such as land, food, or slaves. Correspondingly ability to conduct effective warfare becomes main factor in evolutionary selection between different forms of societies. On the later stages of tribe development the application of violence becomes more professional with leaders forming professional teams of warriors. However nature of relationship between leader and warrior is much more built on reciprocity and communality then in societies at more advanced stages. When successful societies started moving from tribes to states, it was an organic transformation with states being build on the top of tribal societies restricting, but not eliminating tribal relationships and loyalties.

FROM TRIBALISM TO PATRONS, CLIENTS, AND POLITICAL MACHINES: The movement from tribe to state also included evolution in structure of tribe that become more inclusive by incorporation genetically non-related people as clients. From this background came contemporary democratic political machines and patronage networks.

5 – THE COMING OF THE LEVIATHAN: How state-level societies differ from tribal ones; “pristine” versus competitive state formation; different theories of state formation, including some dead ends like irrigation, leading to an explanation of why states emerged early on in some parts of the world and not in others

THEORIES OF STATE FORMATION:

1. The State as a The Voluntary Social Contract
2. The State as The Engineering Project
3. The State as The Result of Population Density
4. The State as The Product of Violence and Compulsion
5. The State as The Product of Charismatic Authority

WHY WEREN’T STATES UNIVERSAL? The answer provided based on known non-state societies in Africa, Australia, and elsewhere is that geography, type of agriculture, and ease of travel and trade could prevent society from developing into the state.

 PART TWO – State Building

6 – CHINESE TRIBALISM: The origins of Chinese civilization; organization of tribal society in ancient China; characteristics of Chinese family and kinship; spread of feudalism under the Zhou and the nature of political authority. The review of Chinese civilization going from 5000BC archeological settlements Yangzhou until Qin dynasty 221BC

TRIBAL CHINA: This is a short review of expansion and eventual mingling, competition, and wars of China’s tribes on their way to formation of the state.

CHINESE FAMILY AND KINSHIP: The case made here is that China never really got over its family lineages structure developed by tribes and keeps it just below superstructure of unified state.

CHINA’S “FEUDAL” PERIOD: China got to the level of bunch of chiefdoms by the time of Zhou (1200 BC) becoming a series of lords and their kin groups.

 7 – WAR AND THE RISE OF THE CHINESE STATE: How the Chinese state arose out of military, competition; Shang Yang’s modernizing reforms; the doctrine of Legalism and its critique of Confucian familism; why political development was not accompanied by economic or social development

WAR AND STATE BUILDING: As in Europe, formation of state in China occurred via continuing warring between different entities for 294 years all counting 468 wars with very high levels of mobilization to up to 20% of total population.

INSTITUTIONAL INNOVATIONS BROUGHT ON BY CONSTANT WARFARE: As consequence of this warfare a number of institutions were developed to meet military mobilization needs:

• Meritocratic advancement of military commanders
• Taxation and Population Registration
• Bureaucracy
• Military and Civilian technology
• Ideological upheaval that produced Confucius and formation of Chinese culture with its superior literature and tradition so powerful that future conquerors like Mongol would be assimilated into it rather then impose their own alternatives.

SHANG YANG’S CAMPAIGN AGAINST THE FAMILY: These reforms in Qin period where directed into development of protocapitalist society with individual ownership of land, nuclear family, universal system of measurements and such, but with state being superior by far to individual and imposing whatever it deem needed by cruelest measures possible.

CONFUCIANISM VS. LEGALISM: These reforms developed into ideological concept of Legalism. Consequently it produced ideological struggle with Confucianism so pretty much all Chinese history could be viewed in the light of this ideological struggle. Legalism promoting direct relationship from individual to state with its supremacy continuously collided with Confucianism promoting extended family with strive to find harmonious relationships between families across individuals and time, with state and emperor being just a top decision making mechanism for family of families.

WHY CHINA’S DEVELOPMENT PATH DIFFERED FROM EUROPE’S: The final result of Chinese warring period was creation of one unified state contrary to Europe where nobody was able to complete unification so it still remains a conglomerate of states competing between themselves. The reasons here identified as geography – more difficult in Europe, Culture – much higher diversity in Europe, and human factor – leadership.

MANY MODERNIZATIONS: Historically Qin went through multiple modernizations with tribal relationships undermined by the state with high levels of violence resulting in reversal as soon as pressure of the state diminished, preventing development of individualistic voluntary cooperation. In Europe, on other hand, move away from tribe was from bottom up via development of Christianity making it slower, but much organic process with higher level of staying power.

8 – THE GREAT HAN SYSTEM: The first Qin emperor and why the dynasty he founded collapsed so quickly; how the Han Dynasty, restored Confucian institutions but retained Legalist principles; how China was governed under the Qin and Han

THE QIN STATE AND ITS DEMISE: The first Qin emperor (259-210 BC) rejected Confucianism and moved to legalism with extreme cruelty and prejudice. It resulted in multiple revolts eventually leading Qin to demise returning in 202 BC to Confucian bureaucracy of family with emperor being morally responsible for wellbeing of population. This period is known as Han dynasty.

THE NATURE OF HAN GOVERNMENT: The much better balance between state power and family/tribe power was achieved with basically modern bureaucratic machine, including nepotism and reasonable levels of corruption. Also educational system was developed to supply bureaucrats for all parts of the system. Interestingly enough military was pushed at the subordinate level to bureaucracy. Build on compromise Han dynasty proved to be pretty stable lasting from 202BC to 220 AD

 9 – POLITICAL DECAY AND THE RETURN OF PATRIMONIAL GOVERNMENT: Why the four-hundred-year-old Han Dynasty, collapsed; significance of the growth of latifundia and inequality in a Malthusian society; how great families captured the government and weakened the state; the Chinese sense of nation

THE RICH GET RICHER: One of the main reasons of Han destruction was expansion of big land estate with the same level of technology causing Malthusian trap with deprivations for majority. With military busy at outpost there was not enough forces to maintain internal order.

CHINA DISINTEGRATES AND PATRIMONIALISM RETURNS: Han collapsed in 220 AD. This event was followed by struggle between its parts for dominance. Significant part was played fight between aristocracy based on land ownership and bureaucracy based on its traditional strong position in control of the state.

THE STRONG CHINESE STATE: The unified Chinese state was restored in new form only in 580 with short Sui dynasty that was substituted by Tang dynasty in 617. It lasted until X century. Author poses the question why China reunified while Roman Empire dissolved for good. The answers he provides are two sided: strength of Chinese state and unified culture.

 10 – THE INDIAN DETOUR: How India’s early development diverged from China’s due to the rise of Brahmanic religion; varnas and jatis; tribal society in early India; peculiarities of Indian kinship; the Indian detour on the road to statehood. In short, the difference between India and China is defined by main engine of society: State and bureaucracy in China, Religion and priests in India. The review of Indian development includes: INDIAN TRIBAL SOCIETY, INDIAN FAMILY AND KINSHIP; TRANSITION TO STATEHOOD; AND THE DETOUR: The deviation of India development was due to the fact that India did not go through 500 years of was with eventual unification as China did. Author seems to believe that this was result of religious development in India, which made the law and order sourced not directly from government, but rather from superior source, establishing highly stable caste system with priests at the top. The influence of this development is lasting up to the present day, making it difficult for India to establish an effective state.

 11 – VARNAS AND JATIS: Economics versus religion as a source of social change; how Indian social life becomes comprehensible in light of religious ideas; implications of Indian religion for political power

THE RATIONALITY OF INDIAN RELIGION: It is an interesting take on dispute between economics and religion as primary engine of society. Indian religion achieved a fantastic feat of stabilizing society practically forever by successfully moving opportunity for achievement out of human life span.

IDEAS AND THEIR POLITICAL CONSEQUENCES: Varna system however had not only stabilizing influence on society, but also weakening effect. By subordinating warriors to priest it clearly decreases military abilities of society overall leading to higher level of vulnerability to external threats.

12 – WEAKNESSES OF INDIAN POLITIES: How the Mauryas were the first and most successful indigenous rulers of India; the nature of the Indian state under the Mauryas; the character of Ashoka; decline, disunity, and revival under the Guptas; why India subsequently fell to foreign conquerors. The main point here is that India developed strong society that prevented development of strong state.

THE MAURYAN EMPIRE: WHAT KIND OF STATE? Ashoka Empire was different from Chinese Qin in absence of strong meritocratic administrative system. Its administration was based on caste and lineage. It did not go through such wars as in China and as result losing aristocratic groups stayed around. Buddhism had serious impact making empire weaker.

THE VICTORY OF SOCIETY OVER POLITICS: The following empire of Gupta was also relatively weak for the same reasons.

NATION BUILDING BY FOREIGNERS: Eventually development of India into one united country was mainly conducted by foreign powers. First it was Muslim conquerors and later British colonizers.

CHINA VERSUS INDIA: The key difference is strong state and weak society in China and weak state and strong society in India.

 13 – SLAVERY AND THE MUSLIM EXIT FROM TRIBALISM: The Ottoman institution of military slavery; how tribalism was the main obstacle to political development among the Arabs; how military slavery first arose under the Abbasid dynasty; why tribesmen make good conquerors but poor administrators; Plato’s solution to the problem of patrimonialism

CREATION OF A MUSLIM STATE: This part is about origin of Islam and its original military expansion under 3 caliphs: Abu Bakr (632-634), Umar (634-644), and Uthman (644-656). By 711 Islam expanded throughout Middle East and conquered Spain until it was stopped in France in 732. Islam states never fully rid of tribal groups that continue to have impact to this day.

THE ORIGINS OF MILITARY SLAVERY: Islam came up with a unique way to control nepotism and promote meritocracy while preventing successful meritocrats from establishing dynasty of mediocrities. It was military slavery that was able to meet such contradictory requirements for a very long period.

 14 – THE MAMLUKS SAVE ISLAM. MAMLUK DECAY. STATES AS ORGANIZED CRIMINALS: How the Mamluks came to power in Egypt; the curious fact that power in the Arab Middle East was in the hands of Turkish slaves; how the Mamluks saved Islam from the Crusaders and Mongols; defects in the Mamluks implementation of military slavery that led to the regime’s ultimate decline

MAMLUK DECAY: The decay eventually came from two sources: lack of political institutions that made selection of sultan to be at the top of hierarchy of problems due to dysfunctional process without clear rules. The second problem was lack of overarching political authority. All these problems led to a high level of internal fights at the expense of ability to mobilize against external threads.

STATES AS ORGANIZED CRIMINALS: This is an interesting part of discussion because it reviews notion of state, using Mamluk’s history, as criminal organization trying to separate immature states in which predation is unlimited from mature states in which predation is limited by elite intention to leave something for investment and development in hope to increase opportunities for bigger take from robbery in the future. Eventual substitution of Mamluks by Ottomans came after leaders successfully moved to heritability of their positions leading to increase of struggle between lineages and weakening of the system.

15 – THE FUNCTIONING AND DECLINE OF THE OTTOMAN STATE: How the Ottomans centralized power in a way that eluded European monarchs; how the Ottomans perfected the system of military slavery; instability of the Turkish state and its reliance on continued foreign expansion; caused decay of the Ottoman system; military slavery as a developmental dead end. Here is the main difference between Islamic and European states defined based on the level of top down control strong at the East and weakened by aristocracy at the West.

A ONE-GENERATION ARISTOCRACY: Ottoman system was pretty much based on military patterns so aristocrat was not linked to the land as much as lord in Europe, but rather sent to different positions within hierarchy as needed. With regular military service adding long absences from family and estate, such aristocrat would not have power base to challenge superiors or piers. These positions were not heritable so children returned to civil population.

MILITARY SLAVERY PERFECTED: This is description of military slavery structure and procedures.

THE OTTOMAN STATE AS A GOVERNING INSTITUTION: As institution Ottoman state was a mature institution based on idea that moderate robbery is conductive for resource multiplication leading to better robbery opportunities in the future.

REPATRIMONIALIZATION AND DECAY: Author sees decay of Ottomans as result of two factors: end of opportunities for territorial expansion that was necessary because the state was structured around military expansion; another factor also related to militarism was use of firearms which significantly degraded value of Ottoman’s cavalry and exposed intellectual and technological deficiencies of this society.

THE OTTOMAN LEGACY: By far the most successful Islamic state Ottomans demonstrated potential of administrative society with top of society being without blood links to each other. It also demoed potential of external to the state lawmaking organization in this case religious establishment.

 16 – CHRISTIANITY UNDERMINES THE FAMILY: How the European exit from kinship was due to religion, rather than politics; common misunderstandings about the nature of the European family; how the Catholic church destroyed extended kinship groups; how English individualism was extreme even in a European context

EUROPEAN EXCEPTIONALISM: The striking difference between Europe and East was structure of the family. Kinship for regular people mattered a lot less and even more important, the decision-making was at the level of individual rather then clan.

MARX’S MISTAKE: Marks assigned reasons for these specifics to development of capitalism in Europe, when in reality these features existed well before capitalism developed in Europe.

STATUS TO CONTRACT: Marriage, control over property, and other decision-making areas in Europe were controlled by contract rather then status at in Eastern empires and timing of establishment of this pattern was consistently moving back with expansion of historical knowledge

THE SOCIAL BACKGROUND TO STATE BUILDING IN EUROPE: Another exceptional feature of Europe is that transition out of kinship structure occurred in social and cultural sphere rather then in political. Author believes that it was caused by religious influence of Christianity and Catholic Church.

PART THREE – The Rule of Law

17- THE ORIGINS OF THE RULE OF LAW: European exceptionalism evident in the role of law in early state formation; definitions and disagreements about the rule of law; Hayek’s theories about the priority of law over legislation; how English Common Law was based on royal power, and how that bolstered the legitimacy of the English state. Law here is defined as set of abstract rules that keeps community together. The rule of law could exist only if previous body of low is sovereign over legislation.

CONTEMPORARY CONFUSIONS CONCERNING THE RULE OF LAW: This is mainly discussion about relations between rule of low and economic development. Author’s position is that even if rule of law in contracts and property rights is clearly related to economic development it is not necessary to be absolute. If there is “good enough” rule of law it could be sufficient for economic success as it is now in China. He also discusses development of property rights in Western world where it occurred at first at the aristocratic top of society and only slowly moved down to commoners.

HAYEK’S THEORY THAT LAW IS PRIOR TO LEGISLATION: Hayek’s point is that common rules precede the law and consequently that ideas of constructionists that law should be created as needed is a cause of huge damage of French and Russian revolutions.

FROM CUSTOMARY TO COMMON LAW: Here author discusses transition from customary law typical for tribal society. The main difference is that customary law enforcement based on group self-help, while common law enforced by power of the state.

 18 – THE CHURCH BECOMES A STATE: How the Catholic church was critical to the establishment of the rule of law in Europe; the investiture conflict and its consequences; how the church itself acquired statelike characteristics; the emergence of a domain of secular rule; how contemporary role of law is rooted in these developments

THE CATHOLIC CHURCH DECLARES INDEPENDENCE: In 11th century Catholic Church took over control over appointment of bishops and other church officials from kings. It also established celibacy as tool to keep land in hands of church preventing lineages from dividing land and power. However it was too weak military to subjugate kings, as result leading to separation of church and state with church slowly being pushed our of secular politics, while kings ceasing control over spiritual and ideological lives of their people.

THE REAPPEARANCE OF ROMAN LAW: Another result of such separation was revival of Roman law. Professional lawyers took over from church control over legal system, which become somewhat independent part of state not fully under control of either church or king.

LAW AND THE RISE OF THE MODERN STATE: Consequently the modern western state was formed not only by pure violence of strongmen of the moment, but also by need of these strongmen to obtain legitimacy from religious authority from the church and legal authority from the lawyers.

HOW THE MEDIEVAL CHURCH SET PRECEDENTS FOR CONTEMPORARY RULE OF LAW: After reforms of 11^th and 12^th centuries Catholic Church appeared as supranational bureaucracy working on higher scale then small bureaucracies of European kingdoms and having significant impact on laws and everyday lives of population. Eventually it opened road to separation of power between multiple entities: legal, legislative, executive, and ideological. It was a specific characteristic of Western Catholic form of Christianity. Eastern Christianity remained under control of kings with no separation of power between church and state and no independent legal power.

 19 – THE STATE BECOMES A CHURCH: How the rule of law developed in India and the Middle East but not in China; how authority was effectively split between secular and religious authorities in the Middle East; how premodern Middle Eastern regimes observed property rights; why the Muslim ulama were never able to check state power in the manner of the Christian church; why no rule of law exists in the contemporary Arab world; the modem rules of law compared.

The opposite of Eastern Christianity development occurred in India where it was religion – Brahmins managed to get control over military power of state Kshatriyas, but only at ideological level without any bureaucratic organization of Brahmins.

RULE OF LAW IN THE MIDDLE EAST: Islamic countries developed one more solution when both religion and state merged into one in the person of caliph, but still was sourced from written law of sharia. The issue of complexity of control over wide territories was resolved by delegation of caliph’s power down to whoever was in actual control of local territory.

SEPARATION OF MOSQUE AND STATE: Some separation did exist in Islam in form of caliph being able to create laws outside of sharia formally subordinated to it, but mostly covering issue outside of it. The important thing about Islam is that individual property rights did not exist. In Ottoman Empire everything formally belonged to the state, but actual owners could pass it as inheritance and do whatever they wanted.

HOW THE RULE OF LAW FAILED TO SURVIVE CONTACT WITH THE WEST IN BOTH INDIA AND ISLAM: Both Eastern systems India and Islam failed to maintain their traditional structure of legitimacy and law after direct encounter with the West. Destroyed first by Western colonization they where substituted by week corrupted pro-socialistic democracy in India and by authoritarian regimes in Islamic countries. With demise of socialism its ideas lost attraction and gave push to powerful wish to go back to old time when Islam was pure and not corrupted by the West. Interestingly enough it turned into totalitarian terrorist movements that define themselves through war against the West and infidels. The most significant result to date is Iranian revolution, which so far failed to build effective self-sustained state.

WHY THE RULE OF LAW WAS STRONGER IN WESTERN EUROPE? Author’s answer: Codification, Legal Specialization, and Institutional autonomy.

20 – ORIENTAL DESPOTISM: How a modem state was reconsolidated in China after the Tang Dynasty; the usurpation of the empress Wu and what it tells us about the Chinese political system; what the Mandate of Heaven was and how political legitimacy was established in dynastic China

CHINA’S MODERNITY AFTER THE TANG-SONG TRANSITION: This is review of China’s development for next 1000 years from Tang (618) to Qing (1644). During this time China established modern bureaucratic system with meritocracy through examination system.

THE EVIL EMPRESS WU: This is story of revolt against bureaucracy by the populist despot who successfully cleansed out elite using terror with support of population.

THE MANDATE OF HEAVEN: This is discussion of Chinese legitimacy of ruler issue: Mandate of Heaven. It is just a set of understandings about duties of ruler toward masses common in Chinese culture.

21 – STATIONARY BANDITS: Whether all states are predatory, and whether the Chinese state in Ming times deserved to be called that; examples of arbitrary rule drawn from later periods in Chinese history; whether good government can be maintained in a state without checks on executive authority

GOOD GOVERNMENT, BAD GOVERNMENT: Author seems to be associating good government with efficient meritocratic bureaucracy and “bad government” with emperor at the top of hierarchy who’ve got there without climbing a ladder of bureaucratic hierarchy.

THE “BAD EMPEROR” PROBLEM: Here is where Chinese problems are coming in. Neither Emperor of old nor current Emperor of Chinese communist party is limited by rule of law and/or political accountability. As result they can and do going bad causing a lot of pain for population

INSTITUTIONS AREN’T ENOUGH: The point here is that China possesses pretty good institutions, but its people had a wrong attitude of extreme self-satisfaction that led to stagnation. With this attitude gone China is doing very well at present.

 PART FOUR – An Accountable Government

22 – THE RISE OF POLITICAL ACCOUNTABILITY: What political accountability” is; how the lateness of European state building was the source of subsequent liberty; what is wrong with “Whig history” and how political development cannot be understood except by comparing countries; five different European outcomes

EUROPE’S LATE STATE BUILDING: European kings started state building rather late and consequently encountered much more resistance from aristocracy and commoners than Chinese and Muslims. As result they failed achieve complete control except for Russia. This became source of political liberties in Europe.

THE MARCH OF EQUALITY: This is a very short review of democratic political waves that formed contemporary world.

HE WHO KNOWS ONLY ONE COUNTRY KNOWS NO COUNTRIES

EUROPE’S EASTERN ZHOU PERIOD: This is about similarity of Europe in 1100 AD with Zhou dynasty in China 770 BC with multiple feudal forces fighting for dominance.

THE ROLE OF LAW IN EUROPEAN DEVELOPMENT: Contrary to China the existing laws outside of kings’ control prevented creation of mass armies and consequently unification in Europe as it happened in China.

A FRAMEWORK FOR STATE BUILDING: This is classification of political development in Europe as:

1. Weak absolutism (French, Spanish)
2. Successful absolutism (Russia)
3. Failed oligarchy (Hungary, Poland)
4. Accountable government (England, Denmark)

23 – RENTE SEEKERS: How fiscal crisis led to the rise of patrimonial government in France; the intendants and the growth of centralized government; how the French elite understood liberty as privilege, and how they were prevented from achieving collective action; the French government’s ultimate weakness and inability, to tax or control its own elites.

This chapter is mainly about French history and it covers: THE BEGINNINGS OF PATRIMONIAL ABSOLUTISM; THE INTENDANTS AND CENTRALIZATION; THE LIMITS OF CENTRALIZED POWER AND THE IMPOSSIBILITY OF REFORM; THE FAILURE OF RESISTANCE TO ABSOLUTISM IN FRANCE;

RENT-SEEKING SOCIETIES: The last part contains general inferences about rent-seeking societies based on French history. The most important is idea that rule of law and property rights extended to elite only creates growing and irremediable inequality that eventually leads to explosion.

 24 – PATRIMONIALISM CROSSES THE ATLANTIC: Why government in Latin America has characteristic features not found in other parts of the world; early modern Spain and how it developed patrimonial absolutism very similar to that of France; Spanish institutions and their transmission to colonies in the New World.

This is specific example of political development resulted from conquest and interracial interactions. The chapter covers: THE BANKRUPT SPANISH STATE; TAXATION AND NO REPRESENTATION; TRANSFER OF INSTITUTIONS TO THE NEW WORLD; and THE IRON LAW OF LATIFUNDIA: In Latin America despite similar to France rent seeking, the explosion did not occur or it rather was channeled into revolutions for independence. The new elite resumed rent seeking in multiple forms often using financial methods such as nationalization, inflation, and state bankruptcy not easily understood by population and therefore allowing continuation of patrimonial society so far.

 25 – EAST OF THE ELBE: Why Hungary is of interest as an alternative route to failed accountability; how serfdom was imposed in Eastern Europe just as it was being abolished in the West; the emergence of constitutionalism and noble dominance in Hungary; why it is important to have a strong central state as well as constraints on that state if liberty, is to flourish.

This is detailed review of Hungarian state and its development. It is opposite to Russia and/or France case when fight between king and nobles was won by nobles with resulting decline of state without strong unifying force.

LORDSHIP AND BONDAGE: The development of relationship between serfs and nobles reviewed mainly on the example of Eastern Europe and Russia. In contrast to West where lords were restricted by strong kings in East lords were more powerful resulting in much higher loss of freedom by serfs.

CONSTITUTIONALISM AND DECLINE IN HUNGARY: This is about Hungary developing very strong society institution at the expense of state leading to military and eventually total decline of the country.

FREEDOM AND OLIGARCHY: This is an additional discussion of necessity of balance between societies and state without which either state becomes too weak and could fall or society becomes too weak to prevent despotism.

 26 – TOWARD A MORE PERFECT ABSOLUTISM: The emergence of the Muscovite state and peculiarities of Russian political development; how the gradual enslavement of Russian peasants was the result of the monarchy’s dependence on the aristocracy; why absolutism triumphed more completely in Russia than in other parts of Europe.

The issues reviewed: SOURCES OF RUSSIAN ABSOLUTISM; FREE ALTERNATIVES; THE PEASANT-OWNING CARTEL; AFTER PETER; ABSOLUTISM ACHIEVED;

 27 – TAXATION AND REPRESENTATION: How the preceding cases of failed accountability set a context for understanding the development of parliamentary institutions in England; sources of political solidarity and their roots in pre-Norman England; the role of law in legitimizing English institutions; what the Glorious Revolution actually accomplished.

THE ROOTS OF ENGLISH POLITICAL SOLIDARITY: Three components:

1. English solidarity was more political as represented by local governments than social from the beginning.
2. Common law and legal system supported individual property rights
3. Religion supported Parliament in its contest with king

FREE CITIES AND THE BOURGEOISIE: The bourgeois cities developed as independent force countering lord and attracting serfs. The specific of Europe was that cities were given charters and protection by king as counterweight against lords. It was not necessary in the East Europe were lords were dominant or in Russia were king was dominant, but in England relative equivalence of power prompted king to support cities as supplemental power. This created opportunity for development of city based relatively free market economic system.

THE STRUGGLE OVER TAXATION: This is a story of XVII century fight over taxation between king and parliament with particular outcome of lower level of corruption than elsewhere developed as specific English feature.

THE GLORIOUS REVOLUTION: The main achievement of Glorious revolution was achievement of compromise that legitimized taxation making it dependent on consent of taxpayers.

TO THE AMERICAN AND FRENCH REVOLUTIONS: This volume does not stop before American and French revolution. This part briefly reviews status of political systems at this point.

 28 – WHY ACCOUNTABILITY? WHY ABSOLUTISM? The previous cases compared; why England’s path to representative government was not the only one possible; getting to Denmark; how the historical discussion is relevant to democratic struggles in the present

STRONG ABSOLUTISM: The case of strong absolutism reviewed in Russia.

WHY DIDN’T ENGLAND END UP LIKE HUNGARY? The reasons provided: the first is high mobility of society with tradition of grassroots political participation. The second reason was the state strong enough to suppress aristocracy when needed.

GETTING TO DENMARK: Another interesting case represented by Denmark where parliament was defeated by king and strong state, but monarch freed serfs to use as counterweight to landed aristocracy. Danish way to democracy was complicated and dependent on many contingencies, but it just proves that there are multiple roads to Denmark as example of prosperous democratic state.

 PART FIVE – Toward a Theory of Political Development

29 – POLITICAL DEVELOPMENT AND POLITICAL DECAY: The biological foundations of politics; mechanisms by which political order evolves; what politics is and how it differs from economics; a definition of institutions; sources of political decay; the state, rule of law, accountability, and how they are related; how the conditions for political development have changed over time

THE BIOLOGICAL FOUNDATIONS OF POLITICS:

Humans always existed as part of social group and human sociability built around kin selection and reciprocal altruism.

Humans have innate propensity for creating and following norms and rules.

Humans have a natural propensity for violence.

Humans naturally desire not only material goods, but also recognition.

IDEAS AS CAUSE: Human Ideas are fundamental causes of why societies are different and follow different development paths.

Humans create mental models of reality that often take form of religions that facilitate collective actions and establish rules of moral behavior.

Religions are not purely spiritual constructs; they also define to large extent division of labor and resource distribution in society by providing legitimacy to political order.

THE GENERAL MECHANISM OF POLITICAL DEVELOPMENT: Political order develops from band – tribal level to state level by suppressing kin-lineage relationships and expanding political and material relationships not related to kin, family, and tribe. Political development is Darwinian process with inheritance, variation, and selection. The specifics are:

• Units of selection are rules and institutions that embody these rules
• Variation is not random, but rather result of deliberate ideological development of interacting humans
• Inheritance occur culturally, rather then genetically
• The competition most often occurred in the form of wars and conquest

SPANDRELS EVERYWHERE: As in biological evolution political evolution produces innumerable spandrels

INSTITUTIONS: Institutions here defined as stable, valued, and recurring patterns of behavior. The main institution discussed is state not only as monopoly on violence on specific territory, but also as subject to division of labor. Characteristics of this institution define on the axis Adaptability – Rigidity; Complexity – Simplicity; Autonomy – Subordination; and Coherence – Disunity.

POLITICAL DECAY: Political decay occurs when society’s institutions functionality declines and they could not fulfill their missions any more. The second form of political decay is repatrimonialization when patron-client relationship when subset of society hijack control over state and successfully obtains rent at the expense of members of society outside of this group.

VIOLENCE AND THE DYSFUNCTIONAL EQUILIBRIUM: Rent seeking groups can and do establish dysfunctional equilibrium when groups get disproportionally high share of continuously shrinking pool of resources. The pool is shrinking because everybody is busy in increase share of their group and efforts to expand resources in the pool meaningless for producers. The typical way out of this is violence either external – conquest by society with better functioning military, or internal violence of revolution when individual in groups who get disproportionally small share revolt against groups who get disproportionally high share.

 30 – POLITICAL DEVELOPMENT, THEN AND NOW THOMAS MALTHUS: How the conditions for political development have changed dramatically since the eighteenth century; the political, economic, and social dimensions of development, and how they interacted in a Malthusian world; how these dimensions interact now; anticipations of the contemporary world

THOMAS MALTHUS: Before 1800 humans lived in Malthusian world where resources grow slowly if at all and number of people quickly outgrows available resources and is regularly trimmed by war, starvation, and diseases. However in reality humans grew in 10,000 years from a small group of a few millions to a billion or so worldwide by 1800 mainly through territorial expansion including expansion at the expense of less fitted groups.

POLITICS IN A MALTHUSIAN WORLD: In the zero-sum world the best way to survive and expand was to achieve military superiority over neighbors that would provide for ability to defend own resources and take resources from others. It was achieved via social mobilization based on legitimacy that was in turn supported rule of law and state building all of which were connected via feedback loops.

DEVELOPMENT UNDER CONTEMPORARY CONDITIONS: The same process took much more efficient form in contemporary world where social mobilization creates not only military power, but high level of economic growth and innovation taking humanity out of Malthusian trap and making territorial expansion and conquest comparatively inefficient way to obtain resources.

THE MODERN DEVELOPMENT PARADIGM: Here author reviews the contemporary development paradigm by using example of South Korea that went from poor autocracy to prospering democracy in just a few decades.

WHAT HAS CHANGED: The main change is globalization and integration of societies around the world. After the end of Cold War only two societal model are standing: Democratic liberal capitalism with welfare state as represented by America and Western Europe; and autocratic state controlled capitalism as represented by China and Russia. Author seems to believe that western concept of individual dignity and recognition would lead to victory of democratic model.

ACCOUNTABILITY TODAY: However the victory of democracy is not inevitable mainly because western democracy now is in crisis of typical political decay with multiple organized groups professional, racial or religious managed to establish rent flow to them at the expense of society as the whole leading to economic stagnation and political deadlock.

WHAT COMES NEXT: The China model while still rising economically still did not prove its economic and innovation viability because so far it was catching up using western capital, know how, and markets. Would it be able to stand on its own when increase of income and quality of life slow down? Would it be able to produce innovation without individual freedom for its people?

On other hand would Western society find its way out of doldrums of welfare state, moral decline, and political gridlock? Would it be able to restart its economic growth and move to the next level of prosperity or its current malaise is not curable? The answers to these questions will come in the future in due order.

MY TAKE ON IT:

I generally agreed with ideas presented in this book. The only point that I would like to make is that the unit of evolution mainly used here – society as whole could not provide level of resolution necessary for deep analysis of situation and prediction of future development. I think that the unit of evolution is always at the level of individual and it is clash of ideas in the heads of individuals and clash of individuals with different dominant ideas in their heads that defines condition and dynamic of change for every society. I understand that it is too much to ask for analysis based on history because of lack of sufficient data, but explanatory power at such high level as society is just not enough to achieve reasonable level of predictive power, which, I believe, is final objective of such analysis.

MAIN IDEA:

This book is detailed depiction of development of economic ideas over last 2.5 centuries, implementation of these ideas in real life, and results of such implementations. This description and analysis pretty convincingly demonstrates that ideas of state control over economy failed everywhere where it was tried. The result was always misery, but extent of it was different from relatively benign misery of American implementation to outright murderous result of Russian implementation.

DETAILS:

Introduction

This book is focused on policy related parts of economic theory and empirical work. In this introduction author gives a very nice preview of each chapter. An important part of author’s view is the statement that economic ideas do have real life consequences, even if they are not direct. Authors describe the process of influence as following: on early stage academic economists come up with idea which them picked up by journalists and popular writers who disseminate it to general population which internalizes them and pushes politicians to implement it in legislative and executive actions.

As to content of opposing economic ideas they mainly relate to two choices:

• Governments versus Markets
• Socialism versus Capitalism

The second choice is pretty much made by whole world selecting Capitalism after disintegration of Soviet Union and China’s move to mainly market economy. The first one is still pretty much in play mainly at the level of gradation of how much economy and how much government should be used.

1. The Turn Away from Laissez-Faire

This chapter sets the stage, describing economic thought on the verge of the First World War. It introduces two figures that will reappear throughout the book, the English economist John Maynard Keynes and the Austrian economist Friedrich A. Hayek. Each subsequent chapter begins with a major economic problem that triggered or revived debate among economists, or a policy experiment to which economists contributed.

The main idea expressed by Keynes is need to end of absolutely free market as result of its failure to avoid depressions and necessity of government intervention to fix various “market failures”. Correspondingly the main idea expressed by Hayek was necessity of free market not only for economic prosperity, but also to maintain human freedom with any government intervention into market being harmful for economy and push of humanity to serfdom.

 2. The Bolshevik Revolution and the Socialist Calculation Debate

Chapter 2 examines the issue of central economic planning versus the market price system, starkly posed by the Bolshevik Revolution of 1917 which then developed into the crucial “socialist calculation debate.”

At the beginning it reviews nearly perfect experiment of implementing pure socialism in a big country: Bolsheviks taking over Russian empire and creating Soviet Union. The results were perfectly disastrous providing tremendous amount of data and absolute prove of Mises theory of impossibility of planning and valid economic calculations in socialist economy. Here also reviewed case of Oskar Lange who came up with proposal of socialist economy that would emulate market pricing and performance. This idea just plainly did not work and he did not even try to implement it when he becomes high-level communist economic functionary in Poland.

 3. The Roaring Twenties and Austrian Business Cycle Theory

Chapter 3 examines pre-Keynesian business cycle theory, in particular the theory developed by Hayek and other Austrian economists, in light of the boom of the Roaring Twenties that ended in the crash of 1929. The New Deal policy experiment of the early 1930s followed in the United States.

Mises/Hayek cycle theory is based on credit expansion caused by low interest rates and government push for cheap money. This causes misallocation of resources to projects that could not be profitable. Eventually this overinvestment creates lots of capital goods without corresponding amount of consumer goods. Excess of money paid for creation of capital goods over availability of consumer goods causes inflation, but more important, at some point investors realize that expected returns on the project will not occur. The cancellation of projects initiates run away from investment and bust. The graphic representation is diagram of value added process that is becoming longer during boom, but contracts when it exceeds public’s savings term. In short, it is cycle caused by variance between savings and investment beyond public’s tolerance. 

4. The New Deal and Institutionalist Economics

Chapter 4 traces origins of New Deal to the Institutionalist school of economics, especially as represented by the economist Rexford G. Tugwell.

It is notable and important to what extent New Dealers including Roosevelt where in awe before fascist regime in Italy and Mussolini because economically this regime and later German Nazis were very close to their ideas of Government control over cartelized economy. Tugwell was a student of Simon Patten who brought in America German economic ideas of controlling Government as developed and implemented in practice by Bismarck. On demand side Thorstein Veblen author of “The Theory of Leisure Class” introduced notion of “Conspicuous consumption” and believed that Economic Engineers should define reasonable level of consumption and managed economic machine to efficiently satisfy it. The economic institutionalism was lead through second half of XX century by John Galbraith. 

5 The Great Depression and Keynes’s General Theory

Chapter 5 relates how Keynes’s 1936 book The General Theory of Employment, Interest, and Money fomented a revolution in economic thinking about the causes of ups and downs in the economy as a whole.

Keynes really did not cared what caused recessions or depressions. His believe was that market just failed from time to time to maintain equilibrium and fall into “vicious cycle” when low demand led to decrease in production pushing labor out of work and thus decreasing demand even more. The obvious way out was for government to create artificial demand by pumping money into economy to increase earnings and decrease unemployment. Instead of Hayek’s intertemporal triangle Keynes proposed diagram of circular flows of resources between businesses, households, and government insisting that the levels of flow could be changed by government actions within productive capacity of the system. The main difference Keynes model is summarization of current consumption and investment, while Hayek’s is trade off between today’s consumption and investment as future consumption. Another big difference is interest rates. For Hayek it is driven by market mechanism to clear preference between loanable savings (supply) and investment (demand). Keynes denied validity of such mechanism.

Keynes pretty much denied Say’s law that “ Supply creates its own demand”. It is important to note often used misunderstanding of this law when supply and demand are considered as of the same type. In reality supply of one thing create demand for another. Economy grow if shoemaker’s production grew because taxes decreased and more productive people have money to buy shoes so he can make more shoes because he expects higher marginal profit which would allow him to increase demand for whatever he wants to consume let’s say meat. The same reasoning would apply to butcher. As result it will be more shoes and more meat produced and cleared at the market. However if it is demand side and government instead of decreasing taxes just give a pooper money to buy some shoes overall supply of shoes or meat is not going to increase because neither shoemaker nor butcher will expect to get more and therefore will not increase their effort. The only outcome would be increase in pooper’s consumption at the expense of shoemaker and butcher because of inflation.

There is a very interesting point on reasons why Keynes became so popular despite intellectual deficiency of his theory. It is its optimism and insistence on human ability to control economic events that turn people in mass to support it. Too bad it did not really worked out.

6. The Second World War and Hayek’s Road to Serfdom

Chapter 6 focuses on a very different book, Hayek’s Road to Serfdom of 1944, which grew out of his concern about the dangers of continuing the central planning policies pursued during the Second World War. In the immediate postwar period, very different economic policy paths were taken by different nations.

This chapter also includes an interesting review of Nazi economic policies: Strict currency exchange control; Centralized agricultural policy with import quotes; large public works to provide full employment. As always these policies caused shortages of goods and rationing.

Western intelligentsia also was completely smitten by ideas of economic planning and state control. In Hayek’s view these measures would directly lead to totalitarism. Hayek dedicated his book to socialists of all parties to warn them that their economic push could lead to political result they would hate. The reality of after WWII mass movement to economic socialism in Britain and other countries of the West do not support Hayek’s assertion, but just barely. Rather then stay on the way to totalitarism these countries’ democracies were strong enough at the moment to prevent it. 

7. Postwar British Socialism and the Fabian Society

Chapter 7 chronicles the nationalizations undertaken by the Labor Party in Great Britain and traces those policies to the socialist ideas that the Fabian Society had tirelessly developed and advocated in the previous six decades.

Implementation of Fabian socialism in Britain plentifully demonstrated that it does not work as economic model, but it succeeded in putting quite a few shackles on British economy so people are still suffering from it.   

8. The Mont Pelerin Society and the Rebirth of Smithian Economics

Chapter 8 tells the story of a society with a strongly contrasting policy outlook, the Mont Pelerin Society, which Hayek founded after the war to rally the intellectual opponents of socialism. It is mostly intellectual history of rebirth of Adam Smith’s free market ideas that created foundation for next step when economic socialism failed in the West. 

9. The Postwar German “Wonder Economy” and Ordoliberalism

Chapters 9 and l0 offer case studies of two countries that headed in very different directions and had very different results over the next thirty years. With important input from some Mont Pelerin Society economists, Germany moved in a market-friendly direction and prospered. 

1. Indian Planning and Development Economics

With important input from Fabian thinkers, India adopted nationalization and quasi-Soviet Five-Year Plans and did not prosper. 

1. Breton Woods and International Monetary

Chapter 11 tells the story of the 1944 Bretton Woods conference, how and why Keynes and other economists there hashed out an international monetary system that reduced the role of gold and allowed greater scope for discretionary national monetary policies. The Bretton Woods system collapsed in 1971, for reasons that economists have debated. Its collapse coincided with the onset of a period of high inflation. 

2. The Great Inflation and Monetarism

This chapter recounts collapse of monetary system served as the seedbed for the revival and development of “monetarist” ideas by Milton Friedman and others, who challenged the dominance of Keynesian thinking. 

3. The Growth of Government: Public Goods and Public Choice

Chapter 13 notes the growth of government in the postwar era and contrasts two leading economic theories that see the growth of government through very different lenses: the optimistic-about-government theory of public goods and the cynical-about-government theory of public choice. 

4. Free Trade

Chapter 14 is discussion of the long-running debate between free traders and protectionists. 

5. From Pleasant Deficits to Unpleasant Sovereign Debt Crisis

Chapter 15 examines the clash between Keynesian and “new classical “economists over the benefits and costs of government budget deficits and debt.

MY TAKE ON IT:

In my opinion, based on history of last century there is no intellectual justification for support for big government control over economy. However struggle is far from over, because lots of individuals are highly dependent on government for their wellbeing. These include rich crony capitalists who obtained their wealth through connection with politicians and bureaucrats of government; pseudo intellectuals in education, science, and culture who are highly dependent on grants from government bureaucrats, masses of poor who live in misery of welfare, but afraid of freedom of the market because they have no idea how they would survive it. Last, but far from least it is bureaucracy members themself, mainly at the higher level who know in their hearts, that they would not be able to achieve the same level of control over resources and ability to use them outside of government.

The losers in this system are always individuals who provide real goods and services because huge share of these goods and services going to individuals who do not produce anything of value at all and, more often then not, actually impede production of anything of value. The way out in my opinion is not easy but possible by:

• Pushing through equal, unalienable, and marketable rights on natural resources so everybody would have something to sell on the market regardless of inheritance, abilities, and luck; therefore providing better access to resources then welfare state does

• Educating young people and convincing them that they would be by far much better off not only materially, but even, more important, in life satisfaction in environment of free market then in environment of rigid government hierarchy

• Convincing productive individuals that it is worthwhile to allocate some of their time to support fight against crony capitalism, corruption, and other forms of government intervention because it would bring better return on investment especially initially, than their regular productive activities.

If these measures succeed the political resistance to free market would become extremely week because only well established bureaucrats, politicians, and crony capitalists are really benefit from socialism in all its forms.

MAIN IDEA:

Old Liberalism was a great intellectual break through in history of humanity, which brought in free markets, expanded division of labor, provided economic support for political freedoms, and dramatically improved quality of life for everybody.

Unfortunately intellectual forces of Socialism and Etatism, which lulled masses into believe that they could be much better off with big government, defeated Old Liberalism. This book is a very detailed analysis of Germany’s case when Etatism in form of National Socialism took over society as whole and brought it into unwinnable war against whole world.

The Germany is only one case of many when Etatism takes society over and proceeds by destroying wealth, freedom, overall quality of live, and often lots of lives. The future is bleak because masses do not have intellectual capacity to understand economics and readily buy into cheap Etatist solutions to they problems even if these solutions do not work. There is nothing inevitable in this development and the fate of humanity still can turn out to be better, but only if masses become enlightened enough to through away all forms of Etatism and Socialism and embrace free markets and Capitalism.

DETAILS:

Introduction

It starts with characteristic of German Nazi party and its program as Labor imperialism based on Marxist ideology. The idea is that resources, especially lands are limited and nations had to fight for them. The winner (which obviously should be German nation) will control more land and use losers as slaves to work on it. This and many other similar ideas come from movement of people away from free market and capitalist economy to Etatism when government more and more takes over economy. Such intervention means expansion of violent resource transfer between individuals within country which substitutes free resource exchange. Correspondingly when extended outside of country, it means violent resource transfer between nations = war of conquest. That is exactly what Germany did during WWII.

PART I: The Collapse of German Liberalism

CHAPTER I. German Liberalism

1. The Ancient Regime and Liberalism

Germany was late in transfer from Ancient regime of King to liberal regime of people, human rights and parliaments. Germany produced idealistic philosophy, represented in writings of Schiller, and German intellectuals mainly accepted ideas of enlightenment and liberalism.  

2. The Weakness of German Liberalism

However the German liberalism was adapted only by the part of population. The significant numbers of people came from eastern areas, were less educated, and more prone to obey orders. As result revolution of 1848 was crashed and German liberalism was defeated by nationalism and socialism.

   3. The Prussian Army

Prussian Army from XVIII century to XIX underwent dramatic evolution. It started from point where both soldiers and officers had been randomly pressed into long term services and drilled to become mildness to such extent that army was not able to act at night or in small units due to the fear of desertion. Than it developed into army based on compulsory short-term service of all men with ideological conditioning similar to French revolutionary and later Napoleonic army with high levels of loyalty to the leader. It was expanded and the Royal guard was created to assure availability of loyal force. Eventually by 1860 army became a bulwark against liberalism.

   4. The Constitutional Conflict in Prussia

German liberals who called themselves progressives did everything possible to prevent revolution and civil war in hope to enlighten layers population that supported king, but failed, and eventually retreated during constitutional crisis giving way to Bismarck and his program of Etatism.

5. The “Little German” Program

The episodes of territorial struggle against France and Denmark opened way to strengthening Prussian army and eventual unification of Germany not under united liberal government, but under King of Prussia and his Prime Minister Bismarck.

6. The Lassalle Episode

Lassalle – leader of socialists played a substantial role at this point by pushing labor against liberals (progressives) with ideas of socialism and class war. In process he build clandestine alliance with Bismarck since both of them where fighting against capitalism and free market represented by liberals.

 

CHAPTER II. The Triumph of Militarism

1. The Prussian Army in the New German Empire

The specificity of Prussian Army was that it was build not within, but above civil administration. It was meritocratic institution and fully reliable tool of supreme warlord – Kaiser. 

2. German Militarism

The core of this system was the position of army, which was supreme factor of political life. This was a system of disguised absolutism with powerless parliament and Army leaders such as Moltke being courtiers. This system actually failed in the WWI, but it did it in such way that it was not absolutely clear for the people. 

3. The Liberals and Militarism

Prussian parliament had universal, but unequal franchise divided into 3 equal groups each elected by majority of taxpayers paying together 1/3 of taxes. This way richest group included a lot less people voting then poorest group. As result liberals had majority, but due to militarism they did not have control. Without control they failed to prove their ideas, but took blame for whatever went wrong. Consequently it opened the majority of wage earners to socialist agitation and destroyed ideology of liberalism. 

4. The Current Explanation of the Success of Militarism

Mises poses the question why capitalists and intellectuals did not resist militarism and why army that was build from lower classes who often supported socialism did not reject semi hidden absolutism? He rejects Marxists explanation of imperialism as stage of capitalism. 

PART II: Nationalism

CHAPTER III. Etatism

1. The New Mentality

The new mentality of Etatism in form of socialism and interventionism replaced Liberalism in the minds of Europeans during XIX and beginning of XX century. It came to Germany from West Europe and firmly established itself with growth of Social Democratic movement that found a pretty nice accommodation with social kingdom of Hohenzollerns with its social security and labor legislation. It fed back philosophy of Etatism to England in France through work of intellectuals from Show and Wells to Fabians. 

2. The State

This is a short review of notion of state as coercive organization in control of territory and its population. The only difference from a regular criminal gang is that it has no competition within its territory. Mises accepts necessity of the state because only coercion can prevent coercion, but he sees it not as benevolent godlike entity, but for what it is – a violent organization that should be limited as much as possible. 

3. The Political and Social Doctrines of Liberalism

The essence of Liberalism’s believes are private property on means of production and market as method of cooperation and division of labor. Coercive machinery of state is necessary, but only to defend property and prevent coercion by non-state actors. The control over state should be democratic because legitimacy of state’s coercion depends on voluntary acceptance of state’s rule. The validity of such voluntary acceptance is not possible to define without democratic process. 

4. Socialism

Socialism is the system of public ownership of means of production that is total state control over economy. Many people believe in compatibility of socialism and democracy, but it failed the check by reality of socialism implementation in multiple countries. This statement follows by demonstration of economic logic of why socialism could not work as advertised. 

5. Socialism in Russia and in Germany

This part is a review of actual and very sad experience of real socialism as it was implemented in Russia in form of Communism and in Germany in form of Nazism. 

6. Interventionism

This is a bit softer form of coercive intervention when state does not take over economy, but just interfere preventing it from proper working. This piece includes multiple examples of government intervention, how it normally achieves results directly opposite to advertised, and economic logic for reasons of such wonderfully consistent failures. 

7. Etatism and Protectionism

This is review of Etatism expressed as Protectionism. Obviously coercion is necessary to force people to buy something produced internally at higher price than could be obtained externally at lower. Eventually it comes down to some people getting more as producers while other paying more as consumers. 

8. Economic Nationalism and Domestic Monopoly Prices

This is description of another method of Etatism interference into economy: via monopoly pricing and inevitable negative results. 

9. Autarky

Finally it comes to extreme case of country isolated from international market. Obviously it dramatically increases costs of everything that is not produced most efficiently in this country and there is no such country that would have all quantities and qualities of resources that whole world has, it is the most destructive economic intervention short of socialization of means of production. 

1. German Protectionism

The specific German case included formation of cartels supported by government that charge high domestic prices in closed market and exported their product at much lower prices to compete on world markets. This allowed Germany conduct highly pro-labor policies supported by high prices. For some 60 years Germany was ahead of other countries, but eventually retaliation did occurred decreasing quality of life for everybody and pushing Germany to seek another method to obtain resources externally, more traditional than capitalism – war of conquest. 

CHAPTER IV. Etatism and Nationalism

1. The Principle of Nationality

This is review of the process of formation of nationalities in Europe as coercive process that included wide range of measures including education and suppression of traditional culture of minorities. 

2. The Linguistic Group

Principle of nationality generally requires formation of separate state for every linguistic group, however countries with relatively liberal systems handle perfectly well population with multiple languages without big problems. The notion of race was a latecomer and become prominent well after European states were formed. 

3. Liberalism and the Principle of Nationality

If Liberalism triumphs, the principle of nationality, separate states, and frontiers become redundant. If personal freedom both political and economic respected throughout the space, it does not matter if person born in country A, speaks in language B, and supports set of ideas C. Such person would be comfortable everywhere and will go to the place where his/her effort would be the post productive for consumers of his/her product as defined by the best return on investment of this person’s labor and capital. 

4. Aggressive Nationalism

Completely different situation is in environment of Etatism. Now returns are not defined by consumers, but by coercive power of the state. So to get the best access to resources person should join the group more powerful in control of the state. Obviously any minority will be disadvantaged causing it to fight for independence breaking states in smaller and smaller pieces with opposite process of war of conquest bringing these pieces together, but on unequal basis. 

5. Colonial Imperialism

This is review of colonial expansion of XIX century. It makes a very interesting point that contrary to Marxist interpretation it was not a result of next phase of capitalism. Capitalism does not need territorial expansion because whatever it needs could be bought on the international market and whatever they sell, they can sell at the same place. Colonialism is rather product of Etatism when government bureaucrats civil and military see territorial expansion as source of increase in amount of resources under their control and correspondingly increase in their power. 

6. Foreign Investment and Foreign Loans

This part discusses international movements of capital and is mainly about movement of Western capital to less developed countries. As usual it generated hate, resentment, and confiscations. The result is decrease of profitability of foreign investment and cessation of such investment making everybody poorer. 

7. Total War

The old wars of small armies and aristocracies are gone. The new total war between people is the feature of XX century and it makes war much more damaging then it ever been. Etatism removes free exchange creating economic disasters that result in decrease in quality of life for masses that depend on employment for their living. This normally blamed on lack of resources and generates hope to obtain resources from others via victorious war. The only real measure that could prevent war is liberalism that would provide everybody opportunity on the world wide free market. 

8. Socialism and War

Socialists claim that wars caused by capitalism. It is BS. The reality is opposite. Capitalism creates opportunity for cooperation and prompts everybody to try to meet other people’s needs. Socialism is coercion that completely separates resources available to person from results of this person’s efforts. Consequently the logical way to obtain more resources for all members of society is to get them from other people by winning in the war. 

CHAPTER V. Refutation of Some Fallacious Explanations

1. The Shortcomings of Current Explanations

The fallacy of explanation of nationalism is coming from failure to understand that Etatism is source nationalism. Without state taking from one people and giving to people of preferred nationality, the nationalism has no meaning whatsoever. 

2. The Alleged Irrationality of Nationalism

This fallacy relates to explanation of nationalisms as irrational. Nazis and other nationalists always promise to take from other nations something of value and give it to their own people. Humanity has a huge experience of this kind of resource acquisition working, so it is quite rational to expect it continue to work. 

3. The Aristocratic Doctrine

This is a nice description of revolt against masses when intellectuals and bureaucrats revolt against democracy as inefficient and harmful method of society organization and strife to substitute it with rule of “wise kings” selected through formal meritocratic process of tests and best universities. In reality only capitalism with real democracy when people compete on free market of goods, services, and ideas demonstrated superior ability to create wealth for everybody. 

4. Misapprehended Darwinism

This is a short and nice debunking of Social Darwinism as doctrine of aristocratic intelligentsia that has nothing to do with real philosophy of Darwin and Evolution. 

5. The Role of Chauvinism

This is explanation of logic and nature of Chauvinism as different from Nationalism. The Chauvinism is just a disposition of character and mind not involving action, while nationalism is all about action and policies. Both despise others and believe in their own superiority, but Chauvinist does business as usual with other, while nationalist uses violence against other. 

6. The Role of Myths

This is an analysis of myths as fictitious narratives and doctrines that play important role in history as something people actually believe. Socialism, Etatism, and Nationalism are valid doctrines in the minds of their supporters because of acceptance of myths presented in these doctrines, despite their fallaciousness. 

PART III: German Nazism

CHAPTER VI. The Peculiar Characteristics of German Nationalism

1. The Awakening

The German nationalism became qualitatively different from other nationalisms in 1880s. It formed notions of Germans as superior warriors and producers who are young, energetic, and deprived of access to needed resources by existing world order established by old, degrading, and corrupt western democracies. That was result of disunity of Germany and it will be fixed by unification of Germany that should be dominant power in the world. 

2. The Ascendancy of Pan-Germanism

Contrary to prevailing narrative neither Junkers of old Aristocracy, nor bankers, nor capitalists and middle class pushed Pan-Germanism. These groups were perfectly happy with existing order and growing ability of compete in free market – activity that brought them wealth and influence. The real engines of Pan Germanism were intellectuals who promoted it via education, books, and other forms of culture. 

3. German Nationalism within an Etatist World

Germans did not invent nationalism, but rather used it as everybody else. The key notion here is that nationalism makes sense only in conjunction with Etatism because if state controls resources individuals within or without this state can obtain these resources only by the grace of this state’s bureaucracy or via violence either plain robbery or military conquest (the same only bigger and bloodier). Only free market provides opportunity to obtain whatever one wants or needs without violence, but it practically leaves bureaucracy, politicians, and intelligentsia out of business. 

4. A Critique of German Nationalism

The critic provided includes two main points: one is the unrealistic complex superiority that made German nationalists and later Nazis to believe that they can fight the whole world and win; and another one: complete immorality of ideology that deemed moral anything that would benefit German state and nation. Obviously the great leaders should define what exactly benefit German state and nation. 

5. Nazism and German Philosophy

This is critic of idea that Nazism is logical outcome of German Idealistic philosophy. 

6. Polylogism

This animal came from Marxists who, after failing to refute by logical methods “bourgeois” economics, came up with Polylogism that states that thought and logic is defined by the social class, therefore since any thinker belongs some class, both logic and facts could be contested based on personality of individual who present them. Marxists claim to represent proletarian logic, class, and science. Nazis pick it up and created their own Aryan logic, facts, and even science. 

7.Pan-Germanism and Nazism

Pan Germanism had naturally grown into Nazism. Unfortunately other people in Europe just fail to understand that Nazi is not a small group of weirdoes, but rather true representatives of German people who, while fighting each other on details and methods were united in their understanding of goals – expansion and enrichment of Germany via military conquest. 

CHAPTER VII. The Social Democrats in Imperial Germany

1. The Legend

There are two legends about German social democrats. The first one is that they were fighting against militarism supported by bourgeoisie who was in search of armaments profits. The second one is that they were fighting against Hitler, agent of big capital. Both are untrue. 

2. Marxism and the Labor Movement

This is about intellectual history of Marxism. Marx started as interventionist, but reading of British economic authors convinced him that interventionism does not work so he moved to complete Hegelian negation of capitalism. Labor movement was not really Marxian, but rather interventionist demanding government intervention on behalf of workers. German Social Democrats managed to build organization on duality of theoretical Marxism and practicality of labor movement. 

3. The German Workers and the German State

The labor movement’s main weapon in any confrontation with employer was strike. The strike is meaningless if employer can freely use his property and just hire other people if demands of striker exceed market price for labor. The key for success therefore is to deny employer control over his property that could be done only using coercion. In 1870 German government moved to the side of labor and practically stop enforcing property laws in case of strikes. It is an interesting fact that union’s came from above: Bismarck and government. The seemingly anti-socialist laws were just a sham under which socialist movement grew tremendously supported from above by intellectuals and bureaucrats and from below by labor. 

4. The Social Democrats within the German Caste System

One important service Social Democrat provided to wage earners was creation for them social environment within German caste system that legitimized wage labor as important part of this system. 

5. The Social Democrats and War

Social Democrats as good Marxists supported civil war between classes and despised imperialistic war between countries in theory. In reality all of them supported their nations. Only when war causes suffering to lower classes the socialist starts agitate against it and tries to use it to take over government power. 

CHAPTER VIII. Anti-Semitism and Racism

1. The Role of Racism

An interesting point is made here that as meaningless as race in reality is it was used to create a notion of Germans as nation of noblemen by race regardless to actual social standing and in contrast to ignoble Jews. It was partially result of German aristocracy proving itself useless in all areas of achievement including military during WWI. 

2. The Struggle against the Jewish Mind

While fighting “Jewish Mind”, Nazis actually failed to define what it is and what specific characteristics it has. They also tolerate Christianity, which is a product of Jewish mind if there is one. Obviously socialism is also to significant extent product of this mind and is foundation of both Nazi and Soviet regimes. However Nazis ridiculously claim that only these parts of it that they reject such as internationalism are Jewish product.   

3.Interventionism and Legal Discrimination against Jews

This is a list of Nazi government action against Jews. Obviously because the book was written before Holocaust become a known event, it is a relatively benign list of discriminations and indignities against Jews. 

4. The “Stab in the Back”

The failure of WWI winners to assert reality of German defeat created an opportunity for legend of “Stab in the Back” of victorious German Army committed by Jews. This legend was not forcefully destroyed and as result it created German illusion of superiority that eventually led to WWII and final defeat with unconditional surrender. 

5.Anti-Semitism as a Factor in International Politics

The interesting dynamics reviewed here led to initial defeat of France and Britain in the beginning of WWII. This dynamic had two sides: in Britain it was growing of popularity of socialism and its international pacifistic logic putting the break on rearmament in the face of Nazi military build up; in France it was Anti-Semitism of Nazi that converted Anti-German French nationalists into force somewhat supportive to Germany based on commonality of their hate for the Jews. 

CHAPTER IX. The Weimar Republic and Its Collapse

1. The Weimar Constitution

The beginning of this period was characterized by socialist revolution in which contrary to Russian pattern the winners were not communist who wanted to eliminate hostile classes, but Social Democrats who still tried to maintain some image of democracy. In defeating communist they had to ally with vast majority of Germans who did not want to repeat Russian experience. The military power to defeat communists came from remnants of the army led by nationalists. So the democratic Weimar republic was basically created by alliance of anti-democratic forces of socialism and nationalism. 

2. The Abortive Socialization

This is a description of Social democratic attempt to socialization. It started with creating committee of professors, which amazingly failed to achieve anything.   

3. The Armed Parties

Here are details of inherent weakness of Weimar republic that led to creation of paramilitary forces by just about every political group. In this brawl Hitler came on the top because this gangs consisted of young people dedicated to fight and not burdened by jobs and families. He also managed extract financial support from business mainly because owners preferred Nazi form of socialist when they remained formally in control to Communists form of socialism when they would be liquidated. 

4. The Treaty of Versailles

The treaty is defined as failure, but not for usual reasons. Contrary to common wisdom Misses believed that treaty was not too tough on Germany. On contrary, he is pretty convincing in showing that neither territorial changes nor reparations were overwhelming. The failure rather was inability of Britain and France to stick to the treaty and fight for it both ideologically and military when needed. Without such fight the treaty become just an ideological feeder for German nationalism. 

5. The Economic Depression

The great German inflation was result of monetary policies of socialists of the chair. Mises predicted it in 1912. Depression was created by social democrats and victims went to Nazis because they believed that Nazis could help. 

6. Nazism and German Labor

The question of why masses of workers who were Social Democrats and Catholics allowed Nazis came to power is invalid. These people were not ideological. They cared about their lives ad believed that Nazis would do better for them. 

7. The Foreign Critics of Nazism

Nazis won in Germany because they never encountered any adequate intellectual resistance. This is quite understandable because the fundamental tenets of Nazi ideology do not differ from generally accepted social and economic ideologies:

1. Capitalism is an unfair system of exploitation
2. The foremost duty of government is to substitute management of capitalists with government control
3. Price ceilings and minimum wages are adequate method to improve lives of workers and consumers
4. Easy money make country more prosperous
5. Everybody who does not agree with statements above is evil and had to be suppressed.
6. Export is good, import is bad for economy

These common tenets of ideology prevented any serious foreign critic of Nazism. 

CHAPTER X. Nazism as a World Problem

1. The Scope and Limitations of History

This is a small philosophical discussion about inevitability of historical explanation of event to encounter limitation of individual makers of history. 

2. The Fallacy of the Concept of “National Character”

Attempts to explain Nazism by German national character are meaningless because there is no such thing as a character prevailing in all individuals of the same nationality. It is uniqueness of historical situation in combination with uniqueness of psychological and ideological status of multiple individuals that is continuously changing over time that defines historical events. 

3. Germany’s Rubicon

The Nazism is not unique, but rather a consequence of move to autarky. The Germany just got there first and under considerable pressure of consequences of WWI. The Germany’s Rubicon on the way to Nazism was rejection of fee trade in late 18xx. 

4. The Alternative

The issue in struggle between Nazis and the rest of the world whether world consists of one linguistic group of German masters and everybody else as slaves or it will be world of heterogeneous society embracing all human beings. There is no neutrality or conscientious objectors in this struggle. One either fights Nazis or supports them actively or passively. 

PART IV: The Future of Western Civilization

CHAPTER XI. The Delusions of World Planning

1. The Term “Planning”

Some people start using “Planning” as substitute of devalued term “Socialism”. It really does not make any difference because compulsory cartel instead of free competition is pretty much the same. In terms of “world planning” it means world socialism under unitary management. 

2. The Dictatorship Complex

The funny thing about people supporting dictatorship is that they always believe in dictatorship when and if dictator does what they want. As soon as dictator does something they do not like, they are firmly against this form of rule. 

3. A World Government

The World government is not possible unless everywhere in the world established capitalism with free enterprise, free trade, and free movement of people. In this case government would be minimalistic. Currently governments use violence to provide more resources to some people at the expense of others, with expansion of this process to more groups it would become unmanageable. 

4. Planned Production

The economic system is too complex and dynamic for planners to be able control it in any meaningful way. 

5. Foreign Trade Agreements

All agreements restricting free trade are economically harmful. The world bodies based on balance of restrictions would lead to incessant haggles between representatives of countries trying to get some advantage at the expense of each other. 

6. Monetary Planning

Moving away from gold to feat money at the worldwide scale would cause inflation and severe boom bust cycles hurting middle classes. 

7. Planning International Capital Transactions

As usual with planning the attempt to use some international body to control capital flows bound to fail due to huge diversity of constituencies and their interests that could be reconciled only via free movement of capital. 

CHAPTER XII. Peace Schemes

This part is pretty much outdated, but the bottom line is still correct: only truly free market, capitalism, and individual freedom can remove wars and violence between countries and peoples. The schemes reviewed:

1. Armament Control
2. A Critique of Some Other Schemes Proposed
3. The Union of the Western Democracies
4. Peace in Eastern Europe
5. The Problems of Asia
6. The Role of the League of Nations 

Conclusion

Original Liberals believed in perfectibility of humans. They developed economic theories of free market and free trade that provided for tremendous growth of wealth. Nobody was able disprove these theories and when socialism become popular Original Liberals proved impossibility of effective socialist planning that nobody was able to disprove. They proved in free market economic theories and real life capitalist practice that it is possible to cooperate without conflict of interest. However they failed because intellectual abilities of vast majority of people are insufficient to comprehend advantages of capitalism. The world is hopeless at least in the near future. However despite original Liberals failure, the currently winning alternative of socialism cannot bring anything but wars, dictatorships, and overall misery. The humanity will be able move on to the better life only when majority become enlightened enough to understand those important points:

• Durable peace is possible only under condition of perfect capitalism when all resource transfers and exchanges occur voluntary without coercion because that would eliminate any economic causes for wars
• Free movement of labor would lead to equalization of labor rates throughout the world removing any over/under population problems.
• Government interference with economy decreases productivity, increases costs, and, most important, generates hate between economic winners and losers because both know that outcome is not fair.
• Socialism as system of effective organized and planned production is not possible because planners could not possibly calculate proper resource allocation in dynamic system of human demand for goods and services.
• Etatism could not bring equality because decision making from the top of hierarchical system always creates conflict of interest that could not be resolved without violence. 

The future Mises expect as result of poisoning of population by socialist ideas is bleak. Etatism would divide world into prosperous industrialized West and miserable others who would start wars to take over resources from western minorities making it necessary for westerners to become highly militarized, suppress traditional freedoms, and dramatically decrease quality of live. 

This catastrophe is not inevitable, but highly probable, as Mises saw it at the time of writing.  

MY TAKE ON IT:

As usual I mainly agree with Mises on all economic issues. I also think that only free market could support freedom and prosperity and socialism or any other form of Etatism including welfare state is inevitably lead to decrease in quality of life, war, violence, and over all misery. 

In addition to detailed description and analysis of history of National Socialism in Mises’ land of birth Germany I could add my experience of similarly disgusting form of Etatism: International Socialism in country of my birth Soviet Union. 

However I completely disagree with is evaluation of Socialism power as result of insufficient enlightenment of masses. I think that many supporters of Old Liberalism and overall Capitalism are missing dynamics of this system when, while being beneficial for everybody at the long run, it is often detrimental to individuals over period of their one and only one specific life. 

The individual who is at the bottom of society hierarchy, has no property, and has nothing significant to offer on the labor market cannot obtain satisfactory level of resources to accept the system. Such individuals are bound to fight it and if Socialism, Welfare state, or any other form of Etatism promised them more resources, they would support it either with their votes or with their guns. It would be only rational for them to do it. 

The key for bringing this majority to the side of free market is to grant these people something that would immediately assure acquisition of at least the same amount of resources available them now and free them to search for additional application of their talent on the free market with plentiful educational opportunities. I believe that the way to do it is to establish equal, unalienable, and marketable rights for natural resources so individuals who use more than average had to buy these rights from individuals who use less. 

The same is not necessarily applies to intellectuals who are not always stupid despite spending lots of time in brain damaging educational establishments. Many of them understand quite clearly that socialism does not work, while free market does. However they also understand that they would never be able to achieve the same level of resource acquisition on the free market, as they are able to achieve as reliable cogs in some hierarchical system of the state. No amount of enlightenment will change minds of these people. 

It would not be possible to bring older and well-established intellectuals on the side of free market, but it should be possible to move to this side young intellectuals. By the same pattern as with masses without marketable skills, if granted equal rights for natural resources they would be set free to seek whatever application they want for their talents either for additional resource acquisition on the free markets, or just a personal life satisfaction. As a way to enjoy life, it would beat the hack out of being even well paid bureaucrat.

 The bottom line is that tremendous improvement and prosperity is right around the corner, if we can manage to handle property rights in society well enough.