One of the tremendous benefits of praxeology is that it highlights not just the dynamic, purposive, and speculative nature of economics, but also the economic nature of all human action. For example, this allows us to analyze all institutions, including the state, from an economic perspective and determine whether they are value-productive or not.
Economic Justification for the State
Say’s Law states that, in a laissez-faire system in which life, liberty, and property rights are protected, the only way that demand can be manifested is by contributing supplies that others want to the market. The various exchange rates (prices) are then determined by the subjective valuations and voluntary actions of individual market actors. A corollary is that the only way to increase one’s demands on production is to increase one’s own production by offering to others additional goods and services they value more highly than what is currently offered on the market. The same is not true of a decrease in demand, since individuals can voluntarily save the non-perishable goods for which they have traded (e.g., by increasing their cash balances).
By confiscating goods in taxation, however, the state, by its very existence, distorts the market’s natural incentive structure and violates property rights. First, the degree of the demand arising from tax revenues is not subject to Say’s Law and is thus independent of that natural limit, viz. that it can, at most, equal the value of the supply contributed according to the subjective valuations of all market participants. This creates a new venue for increasing one’s demands on production, namely, by siphoning off part of said revenue stream.
Indeed, in its independence from consumer sovereignty, this is a far “safer” method of making demands on production than the market-based alternative. Second, as Say’s Law only holds, the protection of life, liberty, and property rights have clearly been violated. But since the rights to neither life nor liberty have been infringed upon, it follows that the violation must necessarily be one of property rights. Third, though allegedly providing a host of “services” (at the very least that of holding and guarding the monopoly on coercion), neither the scope of these “services” nor the “prices” charged are subject to negotiation, and are thus set unilaterally. Moreover, since the state is incapable of funding value-generating processes, this value-destruction cannot be compensated via the services it forces society to accept “in exchange.”
This last point, that the state is incapable of providing value-generating services and is thus purely a value-destroying enterprise, goes along the following lines: We begin by assuming an array of goods and services which the free, unhampered market would produce in the absence of a state, but under the protection of natural rights (life, liberty, and property). By definition, these goods and services, sold at the prices organically discovered and at corresponding quantities, reflect the most efficient satisfaction of consumers’ most highly-ranked wants. Now introduce the state and the taxes necessary for its maintenance. In the best case, it can provide these same goods and services at a higher price, since it must employ at least some resources in the act of taxing and spending. In all other cases—which, by definition, would be suboptimal—it must necessarily provide goods and services that are not the most highly-desired by consumers at the expense of other, more highly-desired goods and services, effectively crowding out the former. (For a practical, historical example, see this point made about the depression of 1920-21).
Adding all this together, as the source of the state’s maintenance is both value-destroying, a violation of one of the basic conditions for the flourishing of civilization, and as its existence cannot be made to serve productive ends, we must conclude that the state lacks any symbiotic saving grace. It is a parasite on the market economy.
Non-Economic Justification for the State
But might there not be some domain other than economics which justifies the existence of a state, such as the law, culture, or religion, and might it then not be possible to decouple that domain from the economy so as to have the two coexist without mutual interference?
Let us entertain the thought of such a situation and consider a hypothetical religion in whose holy texts there was a commandment to maintain an institution holding a monopoly on coercion. In that case, to the extent that adherents of the faith voluntarily chose to follow said commandment, the primary service provided by the state would not be the actual holding of said monopoly, but the fulfilling of the commandment, which would indeed constitute a value-generating service on the free market.
Additionally, given the universal condition of resource scarcity, the pious would have every economic incentive to pay as much as they believed was religiously required, but no more. The priests and maintainers of the state would have exactly the same incentives in setting the voluntary pseudo-tax level as any other legitimate service provider on the free, unhampered market.
The same holds true for a legal code that had enshrined in one of its core documents the existence of a tax-funded monopolist on ultimate decision-making or for a culture that held it to be an absolute necessity of civilizational progress or moral virtue to do so. In all such cases, the state would become purely symbolic and the paying of pseudo-taxes to fund it a voluntary ritual performed for its own sake (i.e., an act of consumption). Such a state is indeed economically harmless and can be so only because everyone understands that it is a state in name only and that its maintenance is purely due to voluntary payments and the voluntary refusal to challenge its monopoly of violence. The essential quality of voluntary payments is that they can be ceased at will, which serves as a safeguard to prevent perverse incentives.
Importantly, because individuals must choose to maintain such a pseudo-state, it does not matter whether some such justification is found in an academic discipline other than economics. To the extent that a state is thereby justified, there is an implicit economic component to the whole arrangement in individuals’ demonstrated preferences to choose the means of a pseudo-state in the attainment of some end. The economic good in question is the pursuit of symbolic ritual and only a nominal monopoly on ultimate decision-making, as opposed to one that is coercively enforced. To the extent that such a pseudo-state grows beyond the confines of its symbolic nature and actually does become a state as conventionally understood, the same economic objections hold as previously discussed, and its existence is unjustified.
Consequently, there can be no justification for the existence of the state in non-economic domains. An interesting consequence of this insight is that it proves that the state is not and has never been a creation of religion, the law, or culture, but necessarily always of economics. Most likely, it has from the very beginning been nothing other than the vehicle of exploitation by the class of those who would live by the exertions of others as described by Comte and Dunoyer.
In conclusion, the existence of a state is neither justified nor necessary, economically speaking. And, to the extent that it finds justification in other domains, it is not really a state, but a value-generating symbol whose existence is maintained voluntarily on the free market. In light of these considerations, we must conclude that the only viable solution to an effective preventive measure against the parasitic aspects of the state is to abolish it completely and, with it, the myriad profit opportunities for political entrepreneurs.
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