In this six-page chapter, Rothbard makes a sweeping economic case against “government in business.”  He begins by noting the power of status quo bias:

People tend to fall into habits and into unquestioned ruts, especially in the field of government. On the market, in society in general, we expect and accommodate rapidly to change, to the unending marvels and improvements of our civilization. New products, new life styles, new ideas are often embraced eagerly. But in the area of government we follow blindly in the path of centuries, content to believe that whatever has been must be right.

Our status quo bias is so strong that “an attack on State financing appears to many people as an attack on the service itself.”  To counter this bias, Rothbard presents his Fable of the Shoes, a short masterpiece of political ridicule:

The libertarian who wants to replace government by private enterprises in the above areas is thus treated in the same way as he would be if the government had, for various reasons, been supplying shoes as a tax-financed monopoly from time immemorial.. [H]ow would most of the public treat the libertarian who now came along to advocate that the government get out of the shoe business and throw it open to private enterprise? He would undoubtedly be treated as follows: people would cry, “How could you? You are opposed to the public, and to poor people, wearing shoes! And who would supply shoes to the public if the government got out of the business? Tell us that! Be constructive! It’s easy to be negative and smart-alecky about government; but tell us who would supply shoes? Which people? How many shoe stores would be available in each city and town? How would the shoe firms be capitalized? How many brands would there be? What material would they use? What lasts? What would be the pricing arrangements for shoes? Wouldn’t regulation of the shoe industry be needed to see to it that the product is sound? And who would supply the poor with shoes? Suppose a poor person didn’t have the money to buy a pair?”

After shaking up the reader’s anti-market prejudices, Rothbard then savages the inefficiencies of the public sector.  For-profit business has strong incentives to please the customer in the cheapest possible way; government doesn’t:

On the free market, in short, the consumer is king, and any business firm that wants to make profits and avoid losses tries its best to serve the consumer as efficiently and at as low a cost as possible. In a government operation, in contrast, everything changes. Inherent in all government operation is a grave and fatal split between service and payment, between the providing of a service and the payment for receiving it.

As a corollary, government is unresponsive to demand shifts:

Thus, if consumer demand should increase for the goods or services of any private business, the private firm is delighted; it woos and welcomes the new business and expands its operations eagerly to fill the new orders.  Government, in contrast, generally meets this situation by sourly urging or even ordering consumers to “buy” less, and allows shortages to develop, along with deterioration in the quality of its service.

Rothbard scoffs at bureaucrats’ “standard response to the mounting complaints of poor and inefficient service: ‘The taxpayers must give us more money!'”

The proper counter-argument to the political demand for more tax money is the question: “How is it that private enterprise doesn’t have these problems?” How is it that hi-fi manufacturers or photocopy companies or computer firms or whatever do not have trouble finding capital to expand their output? Why don’t they issue manifestoes denouncing the investing public for not providing them with more money to serve consumer needs? The answer is that consumers pay for the hi-fi sets or the photocopy machines or the computers, and that investors, as a result, know that they can make money by investing in those businesses. On the private market, firms that successfully serve the public find it easy to obtain capital for expansion; inefficient, unsuccessful firms do not, and eventually have to go out of business. But there is no profit-and-loss mechanism in government to induce investment in efficient operations and to penalize and drive the inefficient or obsolete ones out of business.

What about trying to make government “run like a business”?  Rothbard’s not buying it.  First, since government usually outlaws competition, there is little incentive to give the customer a good deal.  Second, capital markets’ usual checks on inefficiency don’t work if bond-holders know that the central government guarantees their investment.  And finally, Rothbard briefly highlights the Austrian “economic calculation” argument, assuring readers (in 1978!) that, “It is because central planning cannot determine prices and costs with any accuracy that the communist countries of Eastern Europe have been moving rapidly away from socialist planning and toward a free-market economy.”

The chapter ends with a blunt declaration of the libertarian position: “The ultimate libertarian program may be summed up in one phrase: the abolition of the public sector, the conversion of all operations and services performed by the government into activities performed voluntarily by the private-enterprise economy.”  That’s why this should have been chapter 4 – it would have beautifully framed the rest of the book.

Critical Comments
In all honesty, I think that these are the best six pages of economics I’ve ever read.  Every sentence counts, and almost every sentence gleams with truth.  You don’t need to be a libertarian to agree with me: On a good day, I don’t see why Krugman or DeLong couldn’t concede that this is a brilliant, compelling chapter.

Of course, they’d immediately add that chapter 10 ignores every anti-market argument ever made by a serious economist.  Fair enough.  What this chapter shows is that there is a mighty presumption against government that mainstream economists habitually ignore.  Consider: The typical textbook devotes multiple chapters to various kinds of market failures – including many – like adverse selection –  of dubious empirical relevance.  Almost none spends a chapter explaining why government might have higher average costs and lower responsiveness than private enterprise.

Let me add, moreover, that Rothbard’s ridicule of the typical non-economist’s rant against the market is entirely fair.  When I was a teen-ager attacking the inefficiencies of my public high school, I often faced an hysterical list of questions straight out of the Fable of the Shoes.  When you look at actual government operation, moreover, it seems to be guided far more by the public’s anti-market rants than the sophisticated arguments of left-leaning academic economists.

Much as I love this chapter, I would like to close with two caveats:

1. This chapter paints such a bleak picture of government that it really makes you ask yourself: “Why isn’t government ownership even worse?”  The USPS delivers my mail with 99% reliability – and its price seems far below a monopolist’s profit-maximizing level.  As far as I know, its executives don’t earn multi-million dollar bonuses for customer satisfaction.  So what’s going on?

2. A few countries, most notably Singapore, really do run a lot of government enterprises “like businesses.”  They’re profitable even though they face legal competition by the private sector.  They set up strong performance-based incentives for executives and employees.  And if they keep losing money, they go out of business.  You could still object, “What’s the point of government enterprises if all they do is ‘mimic the market?'”  My point is simply that you don’t have to abolish the public sector to make it work a lot better than it does.