The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part One: the Needless State (chapters 2, 3, 4 Are Not Available Online For Copyright Reasons)
• 1: Who Gave Us Order? On Exclusion, Enforcement, and Its Wherewithal *
• 5: Empirical Evidence *
• Part Two: Redistribution (chapter 7 Is Not Available Online For Copyright Reasons)
• 6: A Stocktaking of Perversities *
• 8: Disjunction, Conjunction *
• Part Three: Justice (chapters 10, 11 Are Not Available Online For Copyright Reasons)
• 9: Justice As Something Else *
• 12: Slicing the Cake Nobody Baked *
• Part Four: Socialism
• 13: Ownership, Agency, Socialism *
• 14: Market Socialism: “this Square Circle” *
• Part Five: Freedom
• 15: Right, Wrong, and Economics *
• 16: The Paretian Liberal, His Liberties and His Contracts *
• 17: The Bitter Medicine of Freedom *
• Works Cited

13

Ownership, Agency, Socialism*

The failure of the socialist command economy directs attention to purported alternative mechanisms of resource allocation that would be self-enforcing, simulate certain capitalist processes and outcomes, yet would preserve some socialist values. Tracing the effect of alternative types of ownership, severalty and commonalty, upon systemic behavior, the present paper argues that the principal-agent problem obstructs any self-enforcing efficient solution unless severalty becomes the dominant form of holding property. The latter, however, is inconsistent with other essential socialist goals.

The economies of the greater part of the Eurasian land mass have lost steerage way, and seem to have great difficulty in getting up steam again and setting a course. At the same time socialism as a doctrine of government has exhausted its intellectual credit and, to survive in some version, must seek new theoretical foundations—an endeavor that has not been crowned with much success so far. These two quandaries are of course closely related. Both have their origin in a fudged image of economic and social institutions as they really work, leading to a boundless overestimate of their mutual compatibility and the results they can be asked to deliver. The present paper is aimed at the center of the fudge, the dependence of a particular mechanism of resource allocation on a particular type of property right. It seeks to help clarify the question: are markets intrinsically capitalistic?—or, to put it the other way round, is “market socialism” a contradiction in terms?

1.

Enforcement

Socialism in its undiluted, genuine version implies a command economy. There is nothing pejorative in this term: it is factually descriptive. It means that all significant production and distribution decisions are taken by “social choice” and backed by the sovereign power vested in it.1 They are broken down by central planning into detailed instructions concerning factor inputs, product outputs, incomes, and prices. The instructions are meant to be coherent and capable of being executed by agents of “society” from managers down to workers. Coherence ex ante, if it is achieved, does not secure coherence ex post, because the system is necessarily rigid yet exposed to random shocks, shortfalls, and stoppages. Any variable not subject to a specific instruction or target backed by adequate sanctions, has a natural propensity to follow the line of least resistance and take on the “wrong” value; inputs, prices, wages, and investment expenditures will be too high for given outputs, outputs will be too low for given inputs, labor productivity too low for a given equipment, quality too low for a given price, and so on. This tendency necessitates an ever finer breakdown of targets and constraints, and runs counter to attempts at simplifying and decentralizing the system by one ingenious reform after another. The agents of the political authority owe it obedience, but the more exacting are their orders and the greater is their complexity, the stronger will be the likelihood of laxism in execution and dissimulation of failures. For these and other reasons, the nature of the genuinely socialist economic mechanism demands severe enforcement in order to perform anywhere near as intended—yet severe enforcement is costly. However, the innocent belief that the corresponding “Stalinist” features of socialist systems are merely residual effects of the personal proclivities of the individual of the same name, seems nevertheless ineradicable from much public discourse.

The typical by-products of the genuinely socialist economic steering mechanism are twofold. First, despite the humanitarian strands of the creed, the need for severe enforcement brings into being an authoritarian political system that must make heavy exertions to legitimate itself and leaves little room for democratic trappings. Political relaxation is quickly translated into a worsening economic performance that may degenerate into uncontrolled rout. Second, even under fairly rigorous authoritarian rule, the mechanism lends itself poorly to its intended purpose. The “social choices” it is supposed to put into effect prove in general to be partly or wholly unenforceable.

2.

Efficiency

Unenforceability of its “socially chosen” instructions and targets, and the high moral and material cost of attempted enforcement, are primary weaknesses of genuine socialism. Its secondary weakness—secondary only in the sense that the empirical evidence for it is indirect and not wholly conclusive—is that even if its instructions were wholly coherent and fully enforceable, they would still be inefficient, wasteful by failing to hit upon the factor combinations, techniques, product mixes, and foreign trade patterns that would jointly place the economy on the “socially preferred” (i.e., politically chosen) point on the production possibility function. Even if the steelworks gets built and functions exactly as planned, it would have been more economic to build tourist hotels instead, and import the steel. The reason is presumably that prices in genuine socialism serve essentially recording purposes, but do not generally clear markets, do not reflect relative scarcities, and are not “truthful” signals calling for any particular resource allocation, let alone the “optimal” one. Prices are not formed in a progress of discovering opportunities for profitable exchanges, and once formed do not convey the sort of information that, if acted upon by buyers and sellers, would bring about the best available outcome.

3.

Self-Enforcement

Having made a diagnosis along these lines, socialists who for one reason or another put a high value on economic efficiency or political democracy, and of course those who think the two are Siamese twins and come and go together, are intellectually ripe for abandoning direction by command; they typically suggest recourse to the market as the remedy. (Whether buying efficiency and democracy at this price would really be in socialism’s best interests, is a moot point that we will leave on one side.) Reliance on the disciplines of the market makes input-output instructions redundant; at the most, limited intervention should suffice to make production and distribution respond to “needs” as well as to demand, when the two are deemed to diverge too blatantly. If there are few or no instructions to obey, there is little or no need for their enforcement. The market is a mechanism with a built-in allocation of rewards and punishments that generally make it preferable for all participants to act as they should if it was to fulfil its purpose. Briefly, it is self-enforcing.

Where there is no enforcement in the above sense, there can be democratic decision-rules; where there is a quasi-automatic feedback mechanism for sorting out waste and seeking out the most economical solutions, there can be a reasonable approximation to efficiency. For all this, there must be no capitalism. These three conditions form the hopeful crux of “market socialism.”

4.

Equality at the “Starting Gate”

There must be no capitalism because, in the first place, socialism seeks its own renewal and would rather not make away with itself. In the second place, it derives such legitimacy as is left to it, from a conspicuous commitment to equality and what it is pleased to call “distributive justice.” It is part of its creed that capitalism is actively destroying these pre- and post-capitalist values. Therefore the cohabitation of inconsistent systems must not be tried; capitalism must be abolished, not mitigated. The social democratic or “American liberal” compromise, whereby capitalism is allowed to produce wealth, whose spontaneous distribution is then forcibly rearranged by the institutions of the welfare state, is not ambitious enough for the emerging “market socialist” program. For under the welfare state compromise, capitalism keeps creating unacceptable inequality and injustice which “social choice” must keep correcting and redressing. The desired end-result must be continuously enforced, and as one unjust head is chopped off, two grow in its stead. Under market socialism, on the contrary, the basic institutions themselves must be such that no unjust end-results are created in the first place, the very system being self-enforcing with regard to both of its intended outcomes, economic efficiency and social justice.

While the former is to be achieved by “reliance on the market,” the latter is to come about as the spontaneous product of “equality at the starting gate.” Private property of productive assets, even if equally distributed in some imaginary initial position, tends over time to cluster unevenly as a combined result of random chances and systematic processes, with winners winning even more and losers eventually losing all. Hence people’s capitalism is an illusion; at best, it is transitory. Productive property under market socialism must therefore be “socially owned,” both to preserve “starting-gate equality” from the accumulation of private property, and for numerous other reasons that seem to me secondary to the program’s main objective.

5.

Severalty

“Social ownership” is market socialism’s secret weapon, in that its exact nature is kept behind a veil of verbiage, leaving it to the imagination of each to discern through its opacity particular charms, a particular potency. Trying to identify it by working back from other market socialist theses (employee ownership is not socialism but workers’ capitalism; decentralized ownership creates conflicts of interest among particular sets of owners, and between each such set and society or the superset), one would have to conclude that “social ownership” is merely a coy euphemism for state property. However, most market socialists vigorously deny this without saying plainly what is meant by it. They variously allude to distinctions between private and public, individual and collective, exclusive and inclusive, selfish and unselfish, conflictual and cooperative, as elements of the definition of “social ownership.” Manifestly, however, these allusions only help to make the notion woollier still. Since “social ownership” must mean something if it is to be discussed at all, some minimal definition of it should be agreed. Here, we will proceed by first identifying its polar opposite, severalty.

When property is held in severalty, each individual member in an owner-set has rights to a quantified part of the whole by virtue of original occupation (“finding”), contract or bequest. In the absence of specific contractual provision or custom resting on good reason to the contrary, each individual owner can exercise the rights pertaining to his part of the property at his discretion. In the limiting case, the owner-set is simply one natural person, the sole owner, whose discretion to exercise his rights is complete. In the general case, the owner set can of course have any real positive number of individual members, from one to many. A good reason for limited discretion in the exercise of property rights by members of a multi-person set of owners is that the property is indivisible or would lose value in division. It is not feasible to cut a ship in two so that its two owners may each sail away with half the hull. Less obviously, it is not always feasible or at least not convenient to let one part-holder of an usufruct to exercise it one way, the other another way. Thus corporations distribute the same dividend to each share of a given class of stock even if one shareholder prefers high dividends, the other a high ploughback. However, under severalty the limited discretion in the exercise of property rights, due to physical indivisibility or high cost of division, is to a substantial extent overcome by potential value-divisibility. The owner of half a ship cannot cut off his half nor use it in ways the owner of the other half objects to, but he can claim half the income it yields and half the residual value when it is sold. He can, in turn, alienate a part or the whole of these claims,2 a right that renders income and capital both divisible and convertible into one another. Likewise, the shareholder who disagrees with a corporation’s profit reinvestment policy can supplement his low dividend by selling each year such fraction of his shareholding as will keep his investment constant while that of the corporation as a whole increases; in fact, subject only to tax considerations, he can decide his saving or dissaving at his discretion in complete independence from his fellow owners in the corporation.

The principle of severalty, greatly aided by value-divisibility, does not eliminate every possible externality arising from multi-person ownership of undivided chunks of property, but in its purely economic effects comes close enough to sole ownership; in the limit, it is sole ownership. It is quintessentially capitalist in that each benefits from his ownership in proportion to his equity in the property, rather than in proportion to the work he contributed, or his deserts, his needs, his age, or some other criterion. It is the form of property right where, despite indivisibilities and potential externalities, costs and yields are internalized to the greatest practicable extent.

6.

Commonalty

Commonalty is almost the obverse of severalty. Under commonalty, a property has a single owner who, however, is always an abstract holistic entity whose individual members, unlike members of partnerships, joint stock companies, or other owners in severalty, have no definite shares in the property by virtue of contract or bequest. Such rights as they have individually are derived from their “belonging” by virtue of residence, place of work, admission, or citizenship—a quality that may be acquired at little or no cost by simple entry and lost by exit, and that is in many cases as loosely defined as the benefits to which it entitles the member.

There is little doubt that commonalty is a very old form of property right, probably older than severalty in general though not older than the special limiting case of severalty, i.e., single individual (or family) ownership. Historically, commonalty declined pari passu with the economic role played by the tribe and the clan. An instance of commonalty that has survived is the village owning the “common.” While all have certain access rights, no individual villager owns a definite fraction of it, or of any right pertaining to it. There may be a presumption that everybody has the same right to it as everybody else, but this is not translated into quantitative limitations of use or equity; what it really means is that the members’ property rights are quantitatively indeterminate. Any villager can free-ride on his fellow villagers by overgrazing. Costs and yields are to a large extent externalities. Hence, contrary to severalty, economically optimal solutions (e.g., as to the number of cattle to be grazed) are not self-enforcing (in technical language, “coordination games” involve conflicts), and the avoidance of waste may need specific enforcement if it can be done at all. Physical indivisibility and its attendant inconvenience and cost cannot be evaded by recourse to value-divisibility. Hence an individual seeking, for instance, a change of use or a change in the time-profile of the income stream, can only obtain it if the owner entity as a whole has the corresponding right and decides to exercise it—a requirement that, failing unanimity, raises all the problems of collective choice, notably the choice of a choice rule, cyclical preferences, the status of minority rights, dictatorship, and so forth.

As the villager is to the common, so is the club member to the golf course, the syndicalist to the worker-owned “self-managed” enterprise, and the citizen to state property. The latter is in practice the overwhelmingly most important form of commonalty. We do not know which of these property forms socialists really have in mind when they call for “social ownership.” They do not seem to have thought out their own position on the question. The mainstream view used to be, and perhaps in a latent fashion still is, that the state must own all productive property over a certain size. Other proposals would allow workers’ collectives and non-profit institutions to own restricted rights in them, the rights of alienation and change of use being reserved for the state. All “market socialists” would, however, exclude any right that gave individuals a precisely quantified negotiable equity in a property, permitting the “exploitation” of labor and “unearned income.” Their rejection of capitalist property rights implies, however, that whichever abstract entity is the rightful “social owner,” it holds its property in commonalty, with consequences for the resulting economic system that may not be immediately obvious.

7.

Simulation

How would market socialism “rely on the market” under commonalty? How, for that matter, does it know that there would be a market to rely on, and that if some kind of market did emerge, it would be efficient in some sense and hence worth relying on?

Since exchange needs at least two contract parties and a market a plurality of them, there can of course be no market in producers’ goods if they are all owned by the same “social owner,” the state. A market is difficult to conceive of even if there are many “social owners” of use rights, but these rights are not value-divisible and negotiable. The state may put shadow prices on capital goods and may set interest rates in order to calculate the “costs” of consumer goods, but these would not be market prices and rates in the proper sense, and would not benefit from the presumption of truthfulness about relative scarcity. However, if there is no true market in producers’ goods, there cannot be one in the consumer goods they serve to produce, nor of course (for these and other reasons) true factor markets. The more intelligent kind of market socialists have been aware of this at least since the start of the “socialist calculation debate,”3 and have proposed a series of alternative solutions involving some method of simulation of the process by which prices, corresponding to efficient resource allocation, are determined in a competitive market.

The oldest is the computing solution, first envisaged and rejected by Pareto (Pareto, 1909, 233–34) because it would require solving an astronomical number of simultaneous equations incorporating an astronomical quantity of information, much of it difficult to extract. Three generations after Pareto, this objection looks less decisive, for data storage, retrieval, and processing are well on the way to tackling problems of astronomical complexity. The true obstacle to the mathematical solution is not the technical one of gathering and manipulating too much information, which an imminent science-fiction civilization might presumably overcome. It is the more fundamental fact, rightly stressed by Hayek and Kirzner, that some market participants do not act on pre-existing information, but discover it, so to speak, for the first time; it is their search for innovative, “economic” solutions to problems posed by competition that generates the knowledge in the first place about prices, costs, techniques, etc., and it is this information that is needed for efficient resource allocation.

Many half-way solutions between command and market socialism have been proposed, and some have been tested by the many abortive “market-oriented” reforms of the late planned economies, especially in Hungary, Poland, and the Soviet Union. Common to each were the ambitions to decentralize, to direct the economy by setting broad parameters rather than giving detailed instructions, to allow a measure of price flexibility and accounting and managerial autonomy in state enterprises. Probably the strongest single reason for their failure was that they tried artificially to transplant and insert into the “socially owned” economy a number of features that characterize market economies and that grow out of decentralized capitalist property rights. In the absence of the reward-and-penalty structures that arise out of ownership in severalty, they are like plants with their roots up in thin air. A “socially owned” enterprise is autonomous and independent in the sense that a weightlessly levitating object is autonomous and independent. There is no reason why it should “economize” and tend to move in any particular direction, let alone as it ought to in order for competitive markets to come into being and perform their optimizing function.

To overcome levitation and indeterminacy in enterprise behavior, theoretical models of market socialism postulate various types of conduct to be mimicked. In one version, the enterprise is instructed to adjust output and price until, by trial and error, it just clears its market. However, the enterprise can clear its own market with a suboptimal output at a price above marginal cost, and may well prefer to do so. In a tighter version, it may be instructed to expand output until price equals short- or long-period marginal cost, i.e., to simulate some ideal type of profit-maximization. Once again, it has no evident interest to do so, may prefer to maximize peace and quiet, or conversely size and influence, or perhaps the managers’ popularity among the employees. The instruction to maximize profit would in any event have to be enforced—the simulated market mechanism would not be self-enforcing—but enforcement might well prove to be impossible because the enterprise could, within reason, simulate to have whatever level of marginal cost suited its own purposes. It might choose to innovate and “economize” in a wide sense, but more probably it would not, and there is nothing much anyone from the outside could do to make it.

If ownerless enterprises, held “in commonalty,” cannot with any certitude be made to simulate some acceptably profit-maximizing behavior, they have to be given incentives to make it worth their while. The corresponding version of market socialism might be called “motivated simulation.” It is of course not the enterprise as a legal person, but the natural persons influencing its conduct who need to be motivated. They can be promised bonuses depending on their own performance, or that of their department, line, or function according to orthodox business school teachings, with the top man’s or men’s bonus directly tied to some measure of total profit. Provided it is a linear function of the latter, the bonus of the ultimate decision-taker is then the tail that should wag the dog, i.e., make the enterprise adopt the profit-maximizing output and price.

8.

When Agents Have No Principals

Can the “socially owned” enterprise’s top manager be made to act like a capitalist without first becoming a capitalist? The problem is the notoriously intractable one of agency. The last-resort impossibility of simulating an efficient market under socialism resides in the peculiar nature of the principal-agent conflict when property is held in commonalty. In general, the agent responsible for the management of property reports to another agent, responsible to its owner or to yet another agent who, in turn, is responsible to the owner; no matter how indirect the responsibility and how long the chain of agency, it must end somewhere.

Under capitalism, the end of the chain is held by a natural person aiming to maximize the value of his equity, or an aggregate of such persons. Profits and losses are their profits and losses: they are principals. How the principal obtains that the agent should put his interests first, or (less naively) how a mutually acceptable solution is found to the obvious, albeit partial, conflict of interest between them, is a long story that continues to be told, mostly on the financial pages of newspapers. In the modern large corporation with a multitude of owners, many of whom hold their stakes through institutional intermediaries, the solution, such as it is, is provided by the latent possibility of the takeover bid that threatens the tenure of the managing agents who, whatever their excuses, fail to maximize the owners’ equity as valued in the market. The solution is a self-enforcing market sanction, blunted as it may be by legislation that can be turned to entrench the sitting management. It may not be a perfect solution—no agency problem can have one4 —but at least it has a logical structure.

Under “social ownership,” however, property is ultimately held by an abstract entity which cannot but be represented by an agent, an agent’s agent, or an agent of the agent’s agent. There is no principal at the end of the chain, for whom the discounted value of all future income from his equity in the property would be a sensible, rational maximand. At best, an individual “owner” in commonalty, if the term “owner” can be employed at all, would seek to maximize the value of the rights he held or that benefited him personally. The villager, subject to how he expected his fellow villagers to act or react, would put as many cows on the common pasture and cut as much timber from the common wood as he could. The member of a worker collective would lobby for the greatest possible capital-intensity (machines per worker) in his enterprise, and for having as few fellow-workers as possible provided his cousins and nephews were co-opted into the happy few. The ordinary citizen, holder in commonalty of all state property, would probably be just indifferent to the fact and not bother about who maximizes what.

When there are no principals, the question of solving agency problems through overt or latent bargains between principals and agents cannot even arise. Property may still be managed, but it will be managed as if it belonged to nobody.

9.

When Simulated Capitalism Becomes Real

Now a principal-less agent will have no constraint, except perhaps public opinion, to stop him from maximizing the variable, or bundle of variables, that he prefers. He might put various values on various combinations of the income, non-pecuniary agreement, and safety of his managerial tenure. Having said this, we have said next to nothing, for almost any managerial behavior can be alleged to be consistent with such vague unquantified objectives. In other words, the principal-less agent is largely unpredictable. There are nevertheless a few things we can safely say he will not do if he is rational, i.e., fits means to ends. He will not maximize profit if only part of his income from his post is a bonus geared directly to profit while the rest depends on other variables that are not co-variant with profit. He will not maximize profit if his evaluation of risk is different from what it would be if it was his own equity that profited or lost from unpredictable outcomes. (Not risking his own money may, of course, as easily lead to undue aggressiveness as to timid passivity.) Finally, he will not maximize profit if his own tenure is finite for any reason: because he is mortal, must retire, cannot bequeath or sell his job, or may lose it upon a turn of the political wheel. With finite non-negotiable tenure, his rational maximand is not the market value of his equity, but only the discounted value of profit over some limited, perhaps brief, period—a very different objective dictating a different policy for investment in facilities, research, quality, reputation, and goodwill.

Once the conditions are stated under which the heads of “socially owned” enterprises, if they are rationally pursuing what is best for them, will not manage their business in such a way that outputs and prices should fairly closely simulate those that capitalist enterprises would adopt in a competitive market, a simple conclusion becomes blindingly obvious. Before there is any hope for “market socialism” to perform as expected, these conditions must be removed though their removal, while necessary, may not be sufficient. Removal of the anti-efficiency conditions, however, would effectively transform the agent-manager into a principal, a capitalist with a negotiable and heritable part-ownership in the enterprise. Of all the market-socialist versions of simulation—by giant computer, by instruction to clear the market, to equate marginal cost to price, and by “motivated simulation”—this is the only one that is not logically condemned to fail, basically because this is the only one that does not simulate capitalism, but admits it and resigns itself to its domination.

Though this conclusion will not seem original to the common-sense reader who “knew” all along that socialism “cannot work,” it is perhaps a comfort to his worldly wisdom to find that one can also be guided to the same result by the disciplines of deductive reasoning.

Under this version, where socialist simulation flips over into real capitalism, the head of each enterprise and perhaps his close subordinates, would be owning a perhaps minor stake in its equity in severalty, the “social owner”—the state, the municipality, the “work collective”—the remaining stake in commonalty. The capitalist tail would well and truly be wagging the socialist dog. In important respects, the effect would be much the same as if the managers had taken over the economy in a gigantic avalanche of leveraged buy-outs, leaving the “social owner” with an ill-defined interest that is, rather like “junk” bonds, neither really a prior charge nor really equity; it is neither the wellspring of incentives nor a basis for influence. The individual “social owners,” if they can be said to exist as such, would in such a situation be very much at the mercy of the owner-managers, for even if they could muster the collective will to do so, they could neither remove nor buy out the latter without defeating the object of the exercise. “Social ownership” could not regain the upper hand without actually liquidating market socialism and going back to the genuine command version of socialism. Once more, this is perhaps unsurprising once it is argued and stated, but seems worth stating all the same.

10.

When the Starting Gate Is at the Finishing Post

Can anything at all be saved from the socialist program, or must the establishment of a self-enforcing and efficient market mechanism crowd out the socialist norms of equality and “distributive justice”—unless they are squeezed back in by the system-alien compromises of a hybrid “social democracy”?

Market socialists would hardly admit to this stark alternative. The belief that in fashioning society one can have it both ways, is fundamental to their intellectual constitution. If some system of social organization does not achieve all they hold dear, there must be another that does, and all they need is to design it by informed thought. A secondary reason for their confidence is that to my knowledge no market socialist is on record as realizing that property in commonalty is inconsistent with the efficiency they think their system must have in order to be accepted. They have never come to terms with the thesis that, as was shown in Sections 6–9, “social ownership” must be superseded by capitalist ownership for their program to succeed. Should they, however, come round to this recognition, they might still not give up hope and renounce certain normative demands. They might fall back on the prima facie plausible case that the ethical features they want society to have, ought to and can be secured by a form of equality of opportunity. If that is achieved, any type of property rights, even capitalist ones, and even the market processes such rights generate, can be consistent with social justice. “Equality at the starting gate” would, according to this fallback position, mean that even unequal results at the finishing post would be ethically acceptable; for acceptance of the outcome of just initial conditions and of due process is, after all, the essence of the American liberal idea of “procedural justice.”

Equality at the starting gate needs careful definition before it has any meaning worth serious discussion. Here, let us merely note that since the “race” (the market economy) is a continuous process without a beginning where all start to run and an end where all stop, any arbitrarily chosen “finishing post” where we assess results to date, doubles as the “starting gate” for the rest of the race that is still ahead. Unless the runners have all passed the finishing post marking the end of any given lap in a dead heat, they have ceased to be (if they ever were) in a position of “starting-gate equality” for the next lap. The market solution implies that some of the “runners” gain advantages as they run, and get to keep them, for if they did not, they would not race but only simulate. One can have a real race, or “fix” the result, but not both. This is by no means a compelling argument for having real races which upset equality, rather than phoney ones whose results are “fixed” in advance to uphold equality. It is merely a statement of the mutually exclusive alternatives that each kind of race implies.

Refusing to choose between “market” and “equality,” proclaiming that one need only ask to have the best of both worlds, is self-delusion or self-contradiction; it is nonetheless the position market socialism is now adopting. On the long retreat from the original doctrine, past one humiliating accommodation after another, it can no doubt accommodate itself to that, too.

[* ]Reprinted with permission from Government: Servant or Master?, edited by Gerald Radnitzky and Hardy Bouillon (Amsterdam; Atlanta: Rodopi, 1993), 125–37.

[1. ]I use “social choice” in the ethically neutral legal-positivist sense, to mean any decision reached in conformity with the “constitution,” rules, and procedures, whose observance entails that the decision will be enforced by the power of the state. “Social choice” corresponds to a broad class of decisions, including not only laws passed by elected legislatures and decrees issued under such enabling laws, but also the commands of a dictator or of a totalitarian party exercising effective sovereignty. “Social choice” does not imply that it has been arrived at by following any particular decision rule. “Democracy is a form of government, and in all governments acts of state are determined by an exertion of will. But in what sense can a multitude exercise volition?” (Maine 1885, 104). The only answer that does not sanctify social choice by imparting ethical value to it is a legal-positivist one.

[2. ]The latter right presupposes freedom of contract and bequest—freedoms which the present writer would consider as being entailed by ownership. Many others, however, view ownership as a loose bundle having “variable geometry,” that may contain some property rights but not necessarily all, e.g., the right to rent out residential property to any tenant at any rent he will pay is not considered by everyone nor by every jurisdiction as an integral part of the ownership “bundle.” In this view, ownership consists in distinct rights which are detachable from each other. The question is a vast one and cannot be gone into here.

[3. ]The basic literature is in Hayek (1935), Lange (1936), Lange (1937), Bergson (1948), and Bergson (1967). For a survey, see the “Introduction” by Vaughn (1949).

[4. ]A perfect solution of an agency problem is one whose result is the same as the result that would be obtained if the principal acted directly rather than through an agent, but this trivializes the premiss that there is an agent.