That question actually rarely arises at those seminars.  I think most people assume politics begins and ends with government.  I’ve been thinking about this ever since a young colleague sent me a documentary film about people who are living “off the grid” on the mesas of New Mexico.  (HT Alina Dimofte.)  More on that in a moment.

Ayn Rand on Politics

Carl von Clausewitz, the German military theorist, defined politics as “war by other means” because, like war, it is essentially a struggle over who will hold the means of coercion and compulsion.  And I believe it was in her novel Atlas Shrugged that Ayn Rand said, speaking through a character:  “I am interested in politics so that one day I will not have to be interested in politics.”

I interpret Rand to mean that the need (or at least her need) to engage in political struggle will largely disappear once government is limited to the minimum functions she thought proper. Actually, few would argue with this idea, including market anarchists and maximal-state socialists. They also assume politics will disappear when they achieve their objectives.

Would politics disappear?  I don’t think so.

Life “Off the Grid”

The documentary I mentioned is Off the Grid: Life on the Mesa.  It’s fascinating, and if you can spare an hour I think it’s worth taking a look.  A word of warning: It’s got some foul language and “adult content.”  The loose community, all white, is made up of men, women, and children.  They include people who are working class, drop-outs, college-educated, war veterans, drug addicts, and runaways.  All are misfits who prefer the harsh conditions of the desert to life in the mainstream.  One wonders how difficult their lives must have been to give up running water and reliable electricity.

Living off the grid means being effectively outside the law, and their independence is precious to them.  That, and their guns.  I don’t think you will find a group of people who are more individualistic, more hostile to authority, than these folks.

“Cops don’t like to come out here.… [T]his place is built on being left alone by the authorities,” says one, “…[W]e don’t want your government!”  Another says,” There are very few rules that we have out here…. [T]he basic rules are ‘don’t steal from your neighbor’… ‘don’t shoot your neighbor.’”

So they have rules, and many have lived on the mesa for years.  In fact, if you watch the film beyond the first couple of minutes, which tend to play up the giddy gun-toting aspects, you will see that most appear to live contentedly; at least as contentedly as most people “on the grid” appear to live. It’s not the sort of place most would imagine as their ideal, but it’s perhaps a community that in essence an anarchist might approve of (though not necessarily want to live in).

Politics Off the Grid

Toward the middle of the documentary, the community faces a serious problem.  Members of a nearby group of runaway teenagers have been stealing from some others in the group.  The absence of government does not mean that people who want to initiate aggression disappear.  Do the others, this band of rugged individualists, look out only for themselves?  No.

The oldest, most respected , and most experienced members of the community — “the elders” — take charge and discuss what should be done.  First, they organize a meeting with the teens, which doesn’t go well.  Then they decide to send a group of women, “the Mothers,” to talk with them, apparently with more success.

There is no government here, but the community does have an informal structure of leadership that doesn’t claim a monopoly over coercion and that comes into play when conflicts inevitably arise.  These are not settled, as the early scenes might lead one to expect, with violence, but through peaceful discussion, which probably involved some pretty noisy haggling.  (You could argue, however, that behind that debate, perhaps even enabling it, is the understanding that using violence to settle the matter is a viable option.)

So residents of the larger community have to decide who has the authority to speak and negotiate for everyone else, and the teens probably have to do something similar.  And then there has to be a struggle, within agreed-on rules, between the two groups over who has the right to do what with whose property, or perhaps over what even constitutes private property and over the legitimate use of violence.

This is pretty close to politics.  In fact, it is perhaps the essence of politics.

I first read Human Action when I was in high school. At the time I was very much interested in, and influenced by, supply-side economics. One of the supply-siders I was reading (maybe it was George Gilder or Paul Craig Roberts?) referenced Ludwig von Mises’s treatise, which I subsequently picked up.

My first days with the book were tough going, to say the least. I needed a dictionary and an encyclopedia of philosophy by my side to make sense of the first few chapters, which discuss Mises’s method. I made it through the methodological discussion but understood little of it. Fortunately, I didn’t let that stop me from continuing with the book, the rest of which I found somewhat easier to digest.

In the days and weeks that followed I read Human Action with a dedication I’d never applied to a book before. I kept careful notes in the margins and faithfully followed the footnotes. I felt enlightened with every sentence and could hardly wait for the next one to enlighten me further. The sense of intellectual excitement I felt the first time I read the book is a feeling I hope every person experiences in his or her life.

I encountered a few passages I found extremely difficult to understand and more than a few I didn’t understand at all. But what I was picking up struck me as so important and penetrating that I did something I rarely did in those days when I completed a book: I opened up to page one and began reading it again.

Over the next year I read Human Action many times–exactly how many times, I don’t remember. But it got to the point where I could, in a matter of seconds, flip to most any decent-sized passage I sought in the book without looking at the table of contents or index. In the years that followed I read Human Action some more, and then again. As I learned more economics–from Mises’s other works and those of other economists–and learned more in general, I came to better understand those parts of Human Action that I formerly found impenetrable and developed a better grasp of those parts of the book I had understood only weakly before.

As is probably clear from my description, I found, and still find, Human Action an endlessly rewarding and illuminating book. In my opinion it is the most important book on economics of the twentieth century and quite possibly the most important book in economics, period. For this reason I’ve studied it more closely than I’ve studied any other book; and I believe that who I am as an economist and how I approach economics has been shaped more by Human Action than by any other book.

If the number of copies of Human Action in my library is any indication, this is certainly true. My first copy was the blue, soft-cover, third edition. Since then I’ve acquired over a dozen other copies of the book– enough for multiple copies of every edition–including my prized possession: a first edition signed by Mises himself, which was given to me by my mentor, Peter Boettke, when I completed my Ph.D. Perhaps unusually, Human Action was my “gateway book” to Mises’s other works. After Human Action I read Socialism, The Theory of Money and Credit, Liberalism, and then others. I loved and learned much from them all, but none more than Mises’s magnum opus.

Charting an Educational Course

I became so enamored with Mises’s ideas through Human Action that I chose where I would pursue my undergraduate education on the basis of which school would allow me to be closest to these ideas and learn more about them. In this sense Human Action charted my formal educational course.

Hillsdale College, my alma mater, is home to Mises’s personal library. (I spent unhealthy amounts of time sitting at Mises’s desk in the Mises Room in Hillsdale’s library in a failed effort to absorb some of his brilliance.) At the time I was choosing a college, Hillsdale was also home to one of the world’s foremost Mises and Human Action experts, former FEE president Richard Ebeling, who occupied the Ludwig von Mises Chair. Between Mises’s personal library and Professor Ebeling I was sold on Hillsdale. And I was not disappointed. The opportunity to learn more about Mises, Austrian economics, and Human Action in particular, under the mentorship of Richard Ebeling, proved every bit as outstanding as I could have imagined.

In the same way that Hillsdale was the only college that made sense for me, given my passion for Mises and Human Action, so George Mason University’s doctoral program was the only one that made sense for me. George Mason was (and is) home to the man who, together with Israel Kirzner, defines modern Austrian economics and is the leading Austrian economist in the world: Peter Boettke. The chance to further my study of Human Action and Mises’s work more generally under Pete’s tutelage made George Mason’s draw irresistible. And, similar to my experience studying Human Action under Professor Ebeling, my experience studying the book under Pete not only met my wildly optimistic expectations but in fact surpassed them.

I have had the great fortune of teaching Austrian economics at the undergraduate and Ph.D. levels at George Mason. (This academic year I’m visiting at the University of Chicago.) In my undergraduate course Human Action is the only text. Each semester I hope some student will “discover” Mises’s treatise as I did years ago, and that Human Action will have the same life-altering effect for him or her as it has had for me.

My graduate Austrian course focuses on journal articles outside the Austrian literature, but also includes Human Action. Even where the book doesn’t figure explicitly in a given lecture, it looms large indirectly through the influence it has had over my thinking about whatever the discussion may be.

Constant Influence

My career as an economist has only just begun. But it’s no exaggeration to say that the way I got here was through Mises’s Human Action. Every year I read Human Action again, and every year I learn something new. Some of my research explicitly draws on and relates to this book. (See, for instance, “Was Mises Right?” with Pete Boettke in the Review of Social Economy, 2006.) Most of it does not. But this doesn’t mean Human Action isn’t actively influencing this work. Its influence is alive and well in all of my writing in at least two ways.

First, since Human Action permeates my thinking as an economist, in one sense, every paper I write is the result of this book. Second, the particular themes I focus on, most notably private institutions of governance and self-enforcing exchange, are, in my mind, attempts to build on and extend the Austrian research program Mises identifies and elaborates in Human Action. As I’ve written elsewhere, I take the twin themes of spontaneous order and social cooperation under the division of labor as central to Mises’s project in Human Action, and these themes motivate my work.

In Human Action, Mises highlights what he calls the “Ricardian Law of Association,” which is at the core of this motivation. As Mises describes it (Chapter 8, Part 4):

The law of association makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation. We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature.We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants. In order to comprehend why man did not remain solitary, searching like the animals for food and shelter for himself only and at most also for his consort and his helpless infants, we do not need to have recourse to a miraculous interference of the Deity or to the empty hypostasis of an innate urge toward association. Neither are we forced to assume that the isolated individuals or primitive hordes one day pledged themselves by a contract to establish social bonds. The factor that brought about primitive society and daily works toward its progressive intensification is human action that is animated by the insight into the higher productivity of labor achieved under the division of labor.

Taking its inspiration from this central insight, my work investigates the institutional mechanisms that make social cooperation under the division of labor, per the Ricardian Law of Association, a reality. Confronted with obstacles to their realization of mutual benefits of exchange–most notably the absence of exogenously given and enforced rules of social order–what do individuals, whose reason shows them the potential for immense gains from social cooperation, do to make it possible for them to exploit this potential in practice? If we can answer this question posed by Mises’s insight in Human Action, we can advance our understanding not only of how individuals actually achieve social cooperation under the division of labor, but also how they do so without command.

Guiding Light

Human Action thus offers me a kind of guiding light for pursuing economic research. It lays out a pure logic of choice and deploys this logic in the context of alternative institutional arrangements to illuminate the economic consequences of those arrangements and shed light on their emergence. To me, this is what economics is about.

As I look forward to the future I see Human Action figuring as prominently in my life and thinking as it did when I was a teenager. Certainly my passion for it remains undiminished. I have no doubt it will take my mind to new and exciting places, as it has since I discovered it years ago. I eagerly anticipate the new intellectual experiences I’ll have, areas of study I’ll enjoy, thinkers I’ll interact with and learn from, and academic relationships I’ll form. And I’ll owe it all to Ludwig von Mises’s Human Action.

In May, President Obama declared war on Americans who shelter their money in low-tax jurisdictions overseas.

Meanwhile, at the behest of politicians from high-tax nations, international bureaucracies are persecuting these tax havens. The Paris-based Organization for Economic Cooperation and Development (OECD), for instance, blacklisted 41 such jurisdictions as part of its “harmful tax competition” project earlier this decade and is now trying to bully them into changing their attractive policies. The European Commission has several anti-tax-competition schemes, including a “saving tax directive” that seeks to coerce low-tax jurisdictions into helping Europe’s welfare states track—and tax—flight capital. And the United Nations has a Committee of Experts on International Tax Matters whose objective is to impose global rules to hinder the flow of jobs and capital from high-tax nations to low-tax nations. As though this weren’t enough, the G-20 communiqué last spring singled out tax havens for a crackdown.

The common theme of all these efforts is that politicians want to replace tax competition with tax harmonization. Tax competition exists when politicians feel pressure to improve tax policy so the geese that lay the golden eggs will not fly away. Ever since the Reagan and Thatcher tax-rate reductions began the process of tax competition, nations have been racing to lower rates in hopes of attracting—or retaining—jobs and investment. Since 1980 average top personal income tax rates in the developed world have dropped about 26 percentage points and corporate tax rates more than 21 points. And there are now 27 jurisdictions with flat taxes, an amazing development. No wonder the global economy—notwithstanding current turmoil—is so much stronger today than it was in the 1970s.

According to stereotypes, tax havens are little islands in the Caribbean, and indeed that’s true of some of the world’s premiere offshore centers. But to be more accurate, a tax haven is any jurisdiction that satisfies two criteria: First, its tax laws are attractive to global investors and entrepreneurs, and second, it protects its fiscal sovereignty by choosing not to enforce the bad tax laws of other nations, at least when they are trying to tax economic activity outside their borders. This means, of course, that individuals and businesses from high-tax nations have the option of using those jurisdictions as havens against excessive taxation.

Havens Are in The Nationality of The Beholder

So what are the tax havens? Places such as Liechtenstein and the Cayman Islands belong on the list, but so do many “onshore” nations. One of the world’s leading experts on offshore issues, Marshall Langer, wrote in Tax Notes International that “the most important tax haven in the world is . . . Manhattan. . . . [T]he second most important tax haven in the world is London.” The United States and United Kingdom are havens because the law enables foreigners to invest money and not report the income to their tax police. That’s good for the U.S. and U.K. economies, and for foreign taxpayers.

By some counts there are more than 70 tax havens in the world, ranging from big nations like the United States to obscure, tiny jurisdictions such as Melilla, an autonomous part of Spain on the coast of Morocco, and Sark, a tiny British-controlled island off the coast of France. In some cases, such as the United States, the tax-haven policies are designed to attract global capital and are only available to foreigners. In other cases, such as the Bahamas, the beneficial tax rules are open to both residents and nonresidents.

Tax havens are good for the global economy primarily for four reasons. First, they promote good policy around the world by pressuring politicians in high-tax nations to lower tax rates. The pro-growth changes noted earlier have been happening mostly because of tax competition, and tax havens are valuable precisely because politicians are less likely to be greedy when they know taxpayers have escape options. Remarkably, even OECD economists understand that tax competition is a pro-growth force in the world economy. They have admitted that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”

Tax havens have been especially helpful in convincing politicians to reduce the double taxation of income that is saved and invested. Many nations have lowered or eliminated death taxes and wealth taxes because the politicians have finally figured out that oppressive tax laws simply lead taxpayers to move their money to havens such as Luxembourg or Panama. Likewise, nations have reduced double taxation of dividends, interest, and capital gains. The politicians figure it’s better to have a low rate and collect some money rather than to have a high rate and drive investment to Switzerland or Singapore.

From an economic perspective, these lower tax rates are critical because they reduce the tax bias against saving and investment. This encourages people to set aside more of today’s income to finance tomorrow’s growth—and even socialist economists agree that capital formation is the key to long-run prosperity and rising living standards.

Second, tax havens generate high living standards. According to World Bank data, nine of the world’s 13 richest jurisdictions are tax havens. Not surprisingly, academic researchers have confirmed that tax havens grow faster and create more prosperity for people than higher-tax areas. This is especially important in the developing world, where poor nations that become tax havens enjoy big reductions in poverty.

Third, tax havens promote better governance. One of the problems plaguing the developing world is the lack of sound institutions. Property rights, the rule of law, and sound money are the indispensable building blocks for wealth creation and economic growth. Two academics, James Hines and Dhammika Dharmapala, found that the desire to become a tax haven leads nations to improve their institutions for the simple reason that global investors don’t want to place their money in poorly governed jurisdictions. And the World Bank’s governance indicators find that tax havens rank very high. This is something that should be applauded not assaulted.

Fourth, tax havens promote economic activity in high-tax nations. This seems paradoxical, but most countries, even high-tax nations, generally have more favorable tax rules for inbound investment than for their citizens’ economic activities. Politicians figure their own citizens are captive customers who can be overtaxed, but they understand that they have to compete for global investment. Moreover, academic experts have found that citizens in high-tax nations often take advantage of this preference and use a neighboring tax haven as a platform to invest in their own country. This additional investment, which otherwise would not have taken place, increases the prosperity of the high-tax nation.

The case for tax competition also is bolstered by Nobel laureates who recognize that competition between nations is a critical force for better policy. To cite just three examples, James Buchanan wrote that “tax competition among separate units . . . is an objective to be sought in its own right,” and Milton Friedman noted that “Competition among national governments in the public services they provide and in the taxes they impose is every bit as productive as competition among individuals or enterprises in the goods and services they offer for sale and the prices at which they offer them.” Gary Becker, meanwhile, wrote that “competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations.”

Shelter From Persecution

Low-tax jurisdictions also offer a safe haven for people subject to persecution. The vast majority of the world’s population lives in nations where governments fail to provide the basic protections of civilized society. Indeed, in many cases governments are the problem since ruling elites use their power to exploit people. Corruption often is rampant, expropriation common, and crime endemic. There is also widespread persecution. Not surprisingly, people with money are common targets of oppression—particularly if they are members of religious, political, ethnic, racial, or sexual minorities.

Tax havens protect people from venal and incompetent governments by providing a secure place to invest their assets. A Jewish entrepreneur, for instance, would be foolish to keep his money in a local bank when the government is controlled by anti-Semites. Indeed, Switzerland’s admirable, centuries-old human-rights policy of protecting financial privacy was strengthened in the 1930s to protect German Jews who wanted to guard their assets from the Nazis.

Many groups in the world face discrimination and hostility, often from government. The ethnic Chinese in nations such as Indonesia and the Philippines frequently are resented by the local population. The same is true for people of Indian descent in East Africa. When people belong to groups that are unpopular and susceptible to being targeted by the government, it makes sense for them to protect their families’ interests by putting money someplace like Hong Kong, where the politicians from their country have no feasible way to find out about it. The same financial-privacy laws that make tax havens so attractive to French families and Swedish entrepreneurs who want to escape oppressive taxation also protect other people from different forms of persecution.

Tax Hypocrisy, Not Harmonization

It is worth noting that even the international bureaucracies acknowledge the valuable role of tax havens and financial privacy. The UN, for instance, admitted in a 1998 report that “For much of the twentieth century, Governments around the world spied on their citizens to maintain political control. Political freedom can depend on the ability to hide purely personal information from a Government.” The leader of the OECD’s anti-tax-competition campaign, Jeffrey Owens, admitted to the U.K.-based Observer that “tax havens are essential for individuals who live in unstable regimes.”

The campaign against tax havens interferes with the right of jurisdictions to pursue pro-growth policies, which is especially discriminatory against poor nations. Having “no or low taxes” is the main criterion for being listed as a tax haven by the OECD. Yet most OECD nations did not have income taxes during the 1700s and 1800s, when they climbed from agricultural poverty to middle-class prosperity. We should all be offended that such nations now want to deny that same opportunity to poor nations. It is rather unseemly for powerful white-governed nations in Europe, which control the OECD and European Commission, to target less powerful nonwhite jurisdictions in places such as the Caribbean.

Another issue is the OECD’s hypocritical treatment of capital compared to labor. The Paris-based bureaucracy is upset that investment funds are flowing to low-tax jurisdictions, many of which are in the developing world. But OECD nations are big beneficiaries of a “brain drain” from developing nations. This flow of talent is beneficial to “labor-inflow” nations, just as global financial flows are beneficial to “capital-inflow” nations. Yet the OECD is not suggesting that developing nations have the right to tax emigrant income earned in OECD nations. So why should OECD nations be allowed to tax flight capital in non-OECD nations?

Another example of hypocrisy is that the United States, United Kingdom, Austria, Belgium, Switzerland, and Luxembourg are all OECD members and yet were not on the original OECD blacklist even though they are tax havens for foreign investors. (The list was later revised.) Only smaller less-powerful nations were subject to this form of discrimination. And of course the ultimate hypocrisy of all is that the bureaucrats who work at the OECD and UN all get tax-free salaries, yet they run around the world demanding that other nations raise taxes.

Politicians from high-tax nations and their agents at the international bureaucracies often admit that the moral issues are pertinent. But then they say that they are worried that havens enable some of their residents to avoid the tax net. But why is that the fault of jurisdictions with better tax policy? If high-tax nations want better compliance, shouldn’t they fix their tax systems instead of trying to bully other nations into surrendering their fiscal sovereignty and becoming vassal tax collectors? In any event, the notion that there are huge amounts of unpaid tax is just one of several myths disseminated by opponents of tax competition. Let’s have a look at these myths.

Myths of Anti-Competition

Myth 1: Tax havens result in $100 billion of unpaid taxes. President Obama wants to dramatically increase the power of the Internal Revenue Service, claiming that this is the only way to collect the money that supposedly is hiding in low-tax jurisdictions. The number is phony. The IRS—which certainly cannot be considered a fan of tax havens—estimates that the overwhelming share of the so-called tax gap is the result of what happens in the United States. Part of the make-believe $100 billion apparently comes from a former John Kerry staffer, who concocted an estimate of $70 billion in unpaid individual income tax. But when the Congressional Research Service (CRS) asked for the method used to generate the number, the staffer confessed, for all intents and purposes, that he made it up. According to the CRS memo, he “was not able to send us a written discussion of his estimating procedure” and he “indicated that the estimate was an uncertain one.” That’s the understatement of the century.

Myth 2: Cracking down on tax havens is the best way to improve compliance. Politicians from high-tax nations and bureaucrats at the OECD claim that “offshore” jurisdictions deprive politicians of much-needed tax revenue. This assertion is rather strange since tax receipts were at record levels in OECD nations until the current downturn. But how best to improve tax compliance? Academic research strongly indicates that the biggest factor in tax compliance is tax rates. When tax rates are excessive, people are less likely to obey the law. And if they can’t protect their income using tax havens, they’ll use the domestic underground economy. Or they’ll be less productive. The world’s leading expert on the issue, Friedrich Schneider at the Johannes Kepler University in Austria, explains that income and payroll taxes are “the main causes for the existence of the shadow economy” and higher tax rates increase “the incentive . . . to work in the shadow economy.”

Myth 3: Tax Havens Lead to Higher Taxes for ordinary people. One of the worst myths is that low-tax jurisdictions reduce taxes on sneaky people and this causes politicians to raise taxes on others to make up the difference. But if this were true, increasing amounts of money flowing to tax havens should be accompanied by higher tax rates in the outflow countries. Yet, as noted, the opposite has occurred. Politicians are lowering tax rates because of the competition from tax havens. This means that all taxpayers benefit because of the risks taken by those who invest in low-tax jurisdictions.

Myth 4: Tax havens are money-laundering centers. Contrary to this routine smear, all the objective evidence shows that they have the toughest rules against dirty money. Not a single tax haven is on the blacklist of the Financial Action Task Force. A few tax havens are considered money-laundering centers by the CIA, but there are far more non-havens on its list. The State Department says the same thing. It’s also worth noting that every major tax haven has been cleared by the IRS for having good know-your-customer laws to hinder dirty money, and all of the major havens also are members of the Egmont Group, which is open only to jurisdictions that have effective financial intelligence units to fight dirty money. No wonder an Australian academic found it was much easier to launder money in onshore nations than in offshore jurisdictions.

When he was a senator President Obama sponsored legislation designed to persecute tax havens, and his chairman of the National Economic Council, Larry Summers, is a harshly ideological opponent of low-tax jurisdictions. Now Obama has made good on his word. That places the U.S. on the side of countries like France and Germany, giving the OECD’s previously stymied tax-harmonization efforts new life.

Advocates of economic liberty need to resist these efforts. The Center for Freedom and Prosperity, which was founded in 2000 to help protect tax competition, has done an excellent job (I’m a board member, so perhaps I am biased). But preserving tax competition in the new political environment is going to be a major challenge.

Policy debates typically center around the role of markets versus the role of governments. But this is a misleading distinction. Human society always has governance. Private organizations such as corporations and clubs have management, rules, and financial administration similar in function to those of government. The difference is that private governance is voluntary, while state-based government is coercively imposed on the people within some jurisdiction. So a central question is not whether the market or the government can best accomplish some task, but whether the governance shall be voluntary or coercive.

The Market-Failure Doctrine

Most economists would agree that we don’t live in the best of all possible worlds. But the doctrine of market failure found in most economics textbooks fails to distinguish between consensual and coercive governance as correctives. The prevailing theory asserts that while markets might provide private goods efficiently in a competitive economy, markets fail to provide the collective goods that people want. There are two basic reasons offered as to why markets are not sufficient. Markets can easily determine the demand for private goods, but how can we tell how much each individual wants of a collective good? We could ask people how much they are willing to pay, but how do we get a truthful answer? Free riders also are a problem. Once the collective good is provided, folks can use it whether they pay or not, so why pay?

So, the market-failure story goes, markets fail to deliver collective goods. Entrepreneurs lack incentive because they can’t get their customers to pay for the service the way they can get people to pay for individually consumed private goods.

The market-failure argument does have one valid point: governance is required for the provision of typical collective goods. But this argument fails to recognize that governance can be consensual and contractual. Compounding the flaw in the argument is the confusing use of the terms private and public. These have completely different meanings when referring to goods and to the sectors of an economy. A private good is individually consumed in quantity, whether provided by government or by a market. A public good is collectively used, whether provided by the private or the public (government) sector. But in typical economics texts, the public sector and public goods get sewn together, mingled and mangled into one cloth. Perhaps Leviticus 19:19 is a symbolic injunction against such insalubrious combining: thou shalt not sow thy field with mingled seed: neither shall a garment mingled of linen and woolen come upon thee.

Voluntary Governance

Economists who study institutions recognize the importance of private governance. For example, Oliver Williamson’s work on industrial organization concludes that when assets are specific to certain uses, when opportunism is possible, when transactions recur frequently, and when transactions costs would be large with many small units, governance within an institution is more effective than transactions among firms.

An important industry in which these elements make governance play a key role is the development and operation of real estate. Spencer Heath in Citadel, Market and Altar and Spencer MacCallum in The Art of Community both recognized the similarities in functions between hotel and city governance. A hotel provides management, a town square (the lobby), streets (hallways), transportation (elevators and escalators), fire protection, recreation, and many other services. The collective goods are paid for from the rental that the guests pay, while user fees pay for the more individually consumed items such as room service and telephone calls.

Other real estate complexes operate by the same principles. Many developers now build not just homes but also community facilities, which are then operated by an association. Just as cities have councils, associations are governed by elected boards. A key difference is that property owners have a voice, though tenants in some communities also have a vote and are welcomed on the committees that do much of the work and decision-making.

Condominiums, housing cooperatives, residential associations, and land trusts are among the forms such private-sector governance can take. For example, in a typical condominium, a unit such as an apartment is individually controlled, while the common elements such as the grounds, some utilities, security, and exteriors are operated by the association. Each unit owner pays an annual assessment, just as a hotel guest pays a rental. In both cases, the collective goods increase the market rental value of the site, so the collective goods become self-financing. They are paid for out of the increased rent they generate. Proprietary communities, such as shopping centers, marinas, and industrial parks, operate with such economic principles as well; the governance in these cases usually is provided by the owner.

The complexity of real estate relationships, especially for more permanent residency, requires contractual governance with a constitution (master deed and bylaws) and ongoing administration. These associations are voluntary at the constitutional level—when you join, you agree to follow the constitutional rules. Unlike imposed government, the association is a property relationship bound by an explicit contract by legally equal parties.

While the free-rider argument would suggest that voluntary services will be deficient, in practice this depends much on the culture of a community and on social entrepreneurs. The condominium community in Virginia where I once lived was managed professionally, but the board and all the committees were served by volunteers. Most residents did ride free, but there were sufficient volunteers to do the job. Occasional parties provided social glue for the activists; the minor cost was money well spent, reaping dividends in community spirit and volunteer work.

Territory and Rent

The market-failure doctrine, besides not recognizing the possibility and fact of contractual governance, omits a critical component of real-world collective goods: space. Typical community services such as streets, parks, policing, fire protection, and transportation are territorial, impacting a particular area. The services make the territory more desirable, therefore increasing what economists call rents. These rents provide the means to pay for the civic goods. The concept of rent sufficiently paying for collective goods has been termed the Henry George Theory by some economists, after Henry George, who theorized that rent could fund all government.

But while this concept has been recognized, most public-finance economists have not drawn the logical conclusion. The result is not just that the taxation of labor, enterprise, and goods is not economically required, but that rent can also be collected by private, contractual, consensual means, to provide collective goods via the market process. The need to pay rent in order to use territorial goods (either by buying or renting land) further topples the free-rider argument. The need to pay rent implies that there are no free riders for community services.

In contractual communities, rent serves another function besides financing the collective services. Rent is also a measure of whether the services are profitable, and of whether the community is being run efficiently. Wasteful and ineffective management will cause rent to decline. So a profit-making proprietary governance will attempt to keep the rental income high by serving their customers well, and democratically run associations will attempt to keep their property values high with good management and efficient services.

Contrast this with the blight of our cities and the waste in typical governments. Just as firms providing individually consumed goods compete, so too do private communities compete for customers and users. Not just hotels and shopping centers, but also residential associations and developments compete, as recognized by the Tiebout model of public economics. The Austrian economists F. A. Hayek and Ludwig von Mises recognized the importance of market competition and decentralization. Hayek emphasized the decentralized nature of knowledge and Mises expounded the need for capital markets in the efficient allocation of goods. Both of these elements are important parts of the competitive contractual provision of community services.

Can we use these Austrian insights for the reform of the public finances of government? We can, by moving government and its services closer to how contractual communities operate. Consensual communities thus offer a model for tax reform and the reform of government itself. Among the principles for reform are the decentralization and demonopolization of operations, making government more contractual, and the use of market-based rentals and fees rather than arbitrarily imposed taxation. We can turn the market-failure doctrine on its head: not only does the market work well, but it shows how government can be made to work better, both more efficiently and less coercively. We can reform government—both by making it smaller and by bringing government closer to voluntary governance.