In the modern world, we take it for granted that the government should play an essential role in economic and social affairs. The idea that society could ever function smoothly without the apparatus of the state seems preposterous. Indeed, there is good reason to believe this, as mainstream economists today would identify three broad areas of responsibility that the state holds in managing the economy.

The first is to provide the legal and regulatory framework for economic activity to take place. National legislatures are responsible for passing laws and enforcing them across their jurisdiction through the employment of a police force and justice system. This legal structure is essential, for example, in settling disputes, enforcing contracts, and punishing economically detrimental behaviour such as theft or fraud. Regulatory bodies, meanwhile, have a broad array of responsibilities – such as setting guidelines for financial institutions, maintaining competition and ensuring the safety of products for consumption. 

Second, government fiscal policy serves two major purposes in managing the economy. The first is to raise money from taxation and borrowing in order to fund public services and redistribute wealth. The second is to alter the relative levels of taxation and spending to influence aggregate (total) demand in the economy. This tool, in line with Keynesian economic theory, is essential in managing an economy. For example, in a recession, a government may pursue an expansionary fiscal policy – this is where taxes are lowered and government spending is increased. This fiscal stimulus is aimed at increasing aggregate demand, thereby stimulating growth and employment. The costs of this fiscal package can be funded by a rise in taxation and cuts in government spending during a subsequent period of economic prosperity.

Finally, the state also manages the economy by controlling the supply of money through central banks. As theorised by Keynes, central banks should pursue an expansionary policy during a recession, increasing monetary supply to encourage borrowing and spending. Again, this increases aggregate demand and employment, which stimulates economic growth. Central banks have a number of tools at their disposal to achieve this. Lowering interest rates allows people and businesses to borrow more. Lowering the reserve requirement allows banks to lend out a greater proportion of their customers’ deposits. Open market operations (OMO), such as quantitative easing (QE), allow central banks to buy government bonds and inject additional liquidity into the market thereby controlling and managing the economy. These tools can all be used in reverse to reduce the monetary supply if the economy is suffering from excessive inflation but with a detrimental impact on economic growth.

Given these profound and extensive responsibilities, it may come as a surprise to learn that one school of economic thought advocates for the complete abolition of the state. This article explores the ideology of Anarcho-Capitalism; its historical influences, its criticism of Keynesian monetary and fiscal theories and its radical vision for a utopian society.

The roots of Anarcho-Capitalism 

The term ‘Anarcho-Capitalism’, colloquially referred to as ‘An-cap’, was coined by the 20th century American Economist Murray Rothbard – but the intellectual roots of this school of thought go back to the great thinkers of Classical Liberalism, such as John Locke and Adam Smith. The Classical Liberals believed in laissez-faire economics, holding that free markets are always the most efficient way to match the supply of goods to their demand. As such, they advocated for limited government interference in the economy, as well as in people’s lives, more generally, supporting individual freedoms and liberties. 

The economic ideas of Classical Liberalism were later developed further in the 19th and 20th centuries by economists of the Austrian tradition, including Nobel-prize winner Friedrich Hayek. The Austrian School of Economic Thought strictly emphasises the effect that individuals have on the economy, arguing that basic human actions and motivations should be the foundation for all economic theory. One Austrian School concept which has been accepted into mainstream economic orthodox is Friedrich von Wieser’s theory of marginal utility, which solved Adam Smith’s centuries-old ‘diamond-water paradox’. The Austrian argued that when a product is present in abundance, it will be used for a wider array of less beneficial purposes. For example, water’s primary utility is for survival, but its marginal (secondary) utility might be used for things like swimming pools or garden ponds. Thus, he argued, if there is a plentiful supply of a certain product, its value will be perceived based not on its most beneficial utility but on its marginal utility – explaining why diamonds, whose primary utility is insignificant compared to water, are perceived as more valuable. On the other hand, if another individual was placed in a desert with nothing to drink, he would accept a bottle of water over a diamond; for now, the abundant supply of water has been removed, and his motivations have changed – he is concerned more about the primary utility of the water.

Whilst the concept of marginal utility is widely accepted, some theories of the Austrian school are far more controversial. Due to the emphasis they place on the individual, Austrian Economists argue that the macroeconomy is almost incomprehensively complex. It is impossible, after all, to understand the unique desires and motivations of all the billions of humans and millions of companies around the world. Thus, any attempt to model or centrally plan an economy is inherently misguided; resources can only be allocated efficiently when individuals themselves decide what to produce and what to buy on the free market. Whilst this principle is a widely accepted critique of socialist economies, Austrian Economists often extend their attack to Keynesian fiscal and monetary theories, which are also seen as damaging attempts by the state to manage the economy. 

Keynesian Economics and the Welfare State

Classical Liberalism and Austrian Economics, with their shared belief in laissez-faire policies, free markets and government non-interventionism, formed the bedrock of orthodox economic thinking up until the onset of the Great Depression in 1929. However, the most severe economic downturn in modern history dramatically changed government policy forever. The English Economist John Maynard Keynes, in his 1936 book The General Theory of Employment, Interest and Money, argued that the length of the depression was caused by a sustained reduction in aggregate demand. His theory went something like this: if demand for goods and services falls, businesses lay off workers – unemployed workers spend less, so demand falls further. Reduced demand results in disinflation (a slow-down in inflation) or even deflation (falling prices); this only further reduces demand by encouraging saving. Falling revenue caused by lower demand may encourage firms to cut costs and fire employees, further fuelling this damaging cycle. Keynes was referring to what is now known as a deflationary spiral.

According to Keynes, demand could fall indefinitely unless the government intervened to provide fiscal and monetary stimulus. This theory was almost diametrically opposite to the prevailing ideas of the time, which argued that in a recession, the government should actually tighten their belts, reducing spending to make up for reduced tax revenue. The Classical and Austrian schools believed that the economy would eventually recover naturally – as demand for credit fell, banks would be forced to offer more competitive interest rates, at which point borrowing and spending would once again pick up, leading to an increase in aggregate demand. However, the long years of recession in the 1930s offered no end in sight and seemed to affirm the Keynesian theory.

As a result of this financial hardship, many national governments began to adopt Keynes’s ideas. In the U.S., President Roosevelt’s ‘New Deal’ saw massive government spending on public infrastructure and social security programmes, whilst countries such as the UK made efforts to lift constraints on the monetary supply by abandoning the gold standard in 1931. Keynes’s General Theory seemed to receive further affirmation when increased government spending during World War 2 finally brought an end to the depression in the United States. By 1945, Keynesian economics had become firmly entrenched as economic orthodox.

During the worldwide post-war economic boom that lasted from 1945-1973, sometimes referred to as the ‘Golden Age of Capitalism’, the non-interventionist policies of the Classical and Austrian economists were pushed to the sidelines. Many countries in the Western world established a welfare state, whilst Keynes’s ideas went largely unchallenged. This period of prosperity, however, came to an end with the worldwide recession of 1973-75. Unlike in previous economic downturns, the recession of the 1970s was paired with rapid inflation – which peaked in the double digits in 1974. This was a result of immense deficit spending during the Vietnam War, Nixon’s abandonment of the Gold Standard in 1971, and the 1973 Oil Crisis, which sent the US dollar into decline by a third over the course of the decade. This unique combination of economic stagnation and inflation, dubbed ‘stagflation’, challenged previously held assumptions that higher inflation signalled rising demand, increased employment and economic growth, which had been modelled by the Keynesian economist William Phillips.

Figure 1. This graph shows William Phillips’ model, known as the ‘Phillips Curve’. Each data point represents the rate of wage inflation against unemployment for one of the years between 1913-1948. The data seems to show a correlation between higher wage inflation and lower unemployment. Source.

Rothbard’s Critique of Keynesian Monetary Policy

It was in this atmosphere of renewed scepticism surrounding Keynes’s ideas that the American Economist Murray Rothbard, of the Austrian School, published his 1973 book For a New Liberty. 

Rothbard, widely considered to be one of the founders of the Libertarian and Anarcho-Capitalist movements of the 20th Century, pointed to stagflation as a failing of Keynesian monetary theory. In his book, he claims, “This curious phenomenon of a vaunting inflation occurring at the same time as a steep recession was simply not supposed to happen in the Keynesian view of the world.” Based on this observation, Rothbard rejected the concept that inflation was a necessary part of a growing economy, observing that prices were falling for much of the 19th Century and yet the U.S. economy was growing and industrialising. He concluded that “inflation is not ineluctably built into the economy, nor is it a prerequisite for a growing and thriving world.”

This idea remains highly contested. Most central banks continue to aim for inflation levels of two percent, considered low enough to maintain consumer confidence but high enough to prevent deflation. Whilst the idea of falling prices may sound appealing, it is widely agreed that deflation causes people to put off spending and investing, with the expectation that their money will become more valuable over time. It thus has a detrimental effect on economic growth.

Nonetheless, having asserted that inflation is not a requirement for a prosperous economy, Rothbard sets after the cause of inflation. The Keynesian view asserts that a properly-functioning, growing economy will experience ‘demand-pull’ inflation, where rising aggregate demand outpaces supply leading to rising prices. This is considered conducive to economic growth, as the excess demand provides opportunities for businesses to increase the supply of goods and services by employing more people and expanding the size of their operations. However, should demand rise too quickly, or the supply of goods suddenly fall, then inflation can rise too quickly and damage an economy.

Figure 2. Graph showing the Keynesian theory of demand-pull inflation. As aggregate demand (AD) increases, price levels rise faster and faster for ever smaller increases in output. Source.

Rothbard, evidently of the belief that the rate of inflation was indeed too high, argued that demand had been rising excessively since World War 2. Specifically, he argued that Keynesian Economic policy artificially increases demand by allowing expansion of the money supply. In For a New Liberty, Rothbard claims that “If the money in [consumers’] pockets increases by 20 per cent, then the limitation on their demand is relaxed by 20 per cent, and, other things remaining equal, prices will tend to rise by 20 per cent as well”. 

Therefore, Rothbard is highly critical of any method used by governments to increase the money supply. The first and foremost of these, he argues, was seizing control of monetary supply in the first place. According to Rothbard, in the first societies, human beings were free to choose whichever commodity they liked as a tool for trade, but over time, “two commodities have always won out […] gold and silver”. This was simply because both metals are inert, allowing them to be stored but with a low enough melting point to be moulded into ingots and coins. Most crucially, however, both commodities have an objective value determined by market forces.

Over the centuries, Rothbard argues, governments have sought to seize control over the supply of money. This offers an alternative to taxation as a source of state power, “For now, the rulers of the State can simply create their own money and spend it or lend it out to their favourite allies”. The process began with governments granting themselves the exclusive right to mint coins – but, Rothbard argues, this still placed restrictions on the state, as any attempt to issue more coins by reducing their gold/silver content would easily be noticed. An example would be the disastrous debasement of Roman coins during the Crisis of the Third Century, which led to an economic collapse. 

This changed, Rothbard claims, after the invention of paper money, at which point “the State could contrive to change the definition of the “dollar,” the “pound,” the “mark,” etc., from units of weight of gold or silver into simply the names for pieces of paper”. Rothbard argues that this facilitated the expansion of the money supply, as governments could now simply print more pieces of paper when they saw fit. This process continued to the point where governments suspended the gold standard entirely, resulting in fiat currencies whose value was derived purely because the state said that they had value. Indeed, the word ‘fiat’ itself is Latin for ‘let it be done’, used in the sense of a decree or order issued by the government. 

Most mainstream economists today argue that the gold standard is counterproductive, as in a growing economy, rising demand for capital necessitates a growth in the money supply. However, since gold is a finite resource, such growth in the money supply must necessarily come with the devaluation of the currency under a gold standard. Rothbard would disagree, arguing that the ability to easily expand the money supply under a fiat currency only serves to support state power and fuel inflation. Thus, he concluded, “Instead of a gold standard, instead of a money that emerges from and whose supply is determined by the free market, we are living under the fiat paper standard.”

Whilst in centuries past, governments may have expanded the money supply by simply printing more banknotes, modern-day central banks use a more sophisticated – or, as Rothbard might call it, cunning– way of creating money: the fractional-reserve banking system. Under this system, central banks mandate commercial banks to hold a proportion of their customers’ deposits as liquid assets. For example, if the central bank sets the reserve ratio at 10%, and you deposited £10,000 into a savings account, then the commercial bank would hold £1000 in cash whilst lending out £9000. The idea behind this system is to ensure that commercial banks have enough liquidity to cover all their customers’ withdrawals, especially during a bank run, when many depositors attempt to access their money all at once.

Rothbard’s issue with the reserve-banking system is this: when the commercial bank lends out £9000 of your money, you do not lose access to that £9000. You still have £10,000 in your bank account, and you may withdraw the full balance whenever you please; the bank will simply have to find the funds from elsewhere to enable this. In essence, the bank has created money – your £10,000 has facilitated the lending of £9000 of credit, but the money has not been taken out of your account. The modern Keynesian viewpoint argues that this process is essential to help meet the demand for credit in a growing economy, but Rothbard thought that the fractional-reserve system was little more than fraud, which placed massive inflationary pressures on the economy by artificially expanding the money supply.

Rothbard also attacked what is today the most commonly used tool of Keynesian monetary policy: interest rate cuts and hikes. He based his critique on the work of Austrian economist Friedrich Hayek. Since the late 18th Century, Western economies have gone through regular periods of boom and bust – a phenomenon known as the ‘business cycle’. According to Rothbard, “there is no reason to expect this sort of cyclical pattern […] for usually the free market works smoothly and efficiently, and especially with no massive cluster of error such as becomes evident when boom turns suddenly to bust”.

In the 1910-1920s, Hayek developed a theory to explain this strange trend, which became known as the Austrian Business Cycle Theory. In essence, Hayek argued that business cycles are caused when central banks set artificially low-interest rates in an attempt to spur growth, which makes it far easier to borrow. This precipitates a credit-fuelled boom. However, the access to cheap loans results in widespread malinvestment and misallocation of resources, which must eventually result in a corrective recession and credit crunch, at which point the money supply contracts. Proponents of this theory might cite examples such as the Japanese asset bubble of the 1980s when low-interest rates fuelled an uncontrolled rise in the value of Japan’s real estate and stock markets. This ultimately resulted in the crash of 1990-92 and the years of deflation and low economic growth that followed, known in Japan as the ‘lost decades’. Rothbard, therefore, concludes that any central bank strategy to stimulate economic growth by cutting interest rates will create massive inefficiencies and is little more than another doomed attempt to centrally plan/manage the economy.

Unsurprisingly, the Austrian Business Cycle is a highly controversial and contested theory. Keynesians would argue that the cycles of boom and bust are really caused by fluctuations in aggregate demand, whilst many modern economists would reject the concept of the business cycle entirely, holding that intermittent recessions are caused by unique, often random sets of circumstances. However, for Rothbard, the theory justified his belief that central banks should take a hands-off approach to the economy if they have to exist at all.

Rothbard’s Critique of Keynesian Fiscal Policy

Keynesian fiscal theory argues that, in a recession, the government must spend more to make up for a fall in private sector demand. Here too, Rothbard fundamentally disagreed. In order to fund spending in a recession, governments must borrow more as tax revenue declines. This creates massive public sector demand for credit, which in turn drives up interest rates. Rothbard argues that this leads to a ‘crowding out’ of the private sector, as higher interest rates dissuade private sector borrowing and investment. Thus, the overall effect on aggregate demand is negligible or even detrimental, as increased government spending is offset by reduced private sector investment.

Modern mainstream economists would argue that the ‘crowding out’ phenomenon is only truly applicable in an economy at full employment, where demand for credit is high, and increased government spending would indeed drive competition with the private sector. However, in a recession, there are usually surplus funds as private-sector borrowing dries up. Hence Keynes’s argument that the government should intervene to prop up demand.

Even if this is true, however, Rothbard fundamentally argues that governments should not attempt to alleviate the effects of an economic downturn. As we have seen, the Austrian School argues that a period of government-fuelled inflation will ultimately result in a corrective recession. Such a recession is required to rectify inefficiencies in the economy resulting from a period of malinvestment, and thus, “the government must never try to delay the depression process; the depression must be allowed to work itself out”. This means that, for Rothbard, the Keynesian idea of intervening in a recession to provide fiscal stimulus is counterproductive. He argues, for example, that the government “must never bail out or lend money to business firms in trouble” – only by letting inefficient companies collapse can the overall economy be made more efficient. Thus, for Rothbard, the correct government response to a recession is “absolutely nothing. It should stop its own inflating, and then it should maintain a strict hands-off, laissez-faire policy”.

Why Abolish the State Entirely? 

It is all well and good to criticise the Keynesian viewpoint, but that does not necessarily translate into Rothbard’s most radical proposition: the total abolition of the state. Indeed, it would be perfectly possible to return to the laissez-faire economics of Classical Liberalism whilst maintaining national governments.

Rothbard’s viewpoint was founded on his belief that the state was inherently criminal. In his words, “The State habitually commits mass murder, which it calls ‘war,’ […] the State engages in enslavement into its military forces, which it calls ‘conscription’; and it lives and has its being in the practice of forcible theft, which it calls ‘taxation’”. Based on this principle Rothbard was vehemently against the welfare state, which he saw as nothing more than robbery on a grand scale. As he argues in For a New Liberty, “the libertarian position calls for the complete abolition of governmental welfare and reliance on private charitable aid”, in which people would contribute to welfare programmes freely and of their own volition.

Rothbard also argues that every service provided by the government can be delivered “far more cheaply, in greater abundance, and of far higher quality” by the private sector, including everything from health, fire and post to bin collection. Indeed, Rothbard claims that taking services away from the government will help to increase personal liberty, as there will be greater individual choice and freedom. For example, by fully privatising schooling, parents would be able to choose between single-sex or coeducational, religious or secular, vocational or academic, instead of following an arbitrary curriculum imposed by the government. 

Many of Rothbard’s ideas surrounding privatisation were partially implemented by conservative governments such as those of Thatcher and Reagan in the 1980s. One major criticism at the time was that the private sector made no provision for the poor who were unable to afford their services. Rothbard rejects this point, arguing that in a true stateless society, where government regulation has been removed, entrepreneurs will spring up to provide lower-cost services to the less affluent. Critics of Libertarianism, however, might argue that services such as healthcare should be a human right and that all should enjoy the same standard of treatment. This would only be possible under a public sector system.

Rothbard, however, goes further, arguing that even what we consider to be the most fundamental services provided by the state – policing and justice – can be covered by the private sector. Firstly, Rothbard envisions a society governed by only one simple rule: the non-aggression axiom. In For a New Liberty, he describes this principle as follows: “No men or group of men may aggress against the person or property of anyone else”. Under this law, Rothbard argues, personal liberty would be maximised to the fullest possible extent, as scores of ‘victimless crimes’ such as prostitution or assisted suicide would become permissible.

One might ask, though, how this axiom would be enforced without a police and judiciary. Rothbard contends that in a fully stateless society, every piece of land, every building and every street would have a private owner. It would thus be in the interest of each owner to ensure order on their respective properties through the employment of a private security force. These forces, Rothbard claims, would provide a far better service than government-controlled police, who have no rational way of allocating resources (i.e. police officers, cameras, helicopters) in an efficient manner. Under a private system, property owners would pay for whatever protection they saw fit, from surveillance systems to round-the-clock patrols, and they would inform the security companies what specific rules they wanted enforced on their property. The security companies, competing on the free market, would be forced to provide an effective service to their employers whilst treating customers/clients with cordiality and respect. For those who do not own property or for those unable to afford 24-hour protection, insurance companies could provide emergency security services.

But what about the courts? Surely, the judicial service is one area where there must be a single, universally recognised authority? Rothbard starts by clarifying his belief that the courts are just another government monopoly, “subject to the same grievous problems, inefficiencies and contempt for the consumer as any other government operation”. Secondly, Rothbard notes that private arbitration companies already exist, helping people to settle their disputes outside of court. Thus, he concludes, it would be possible for multiple different arbitration companies to compete on the free market, attracting customers through the fairness and speed of their judgement. When two people come into dispute, Rothbard argues, they can take their disagreement before a mutually agreed arbitrator. 

The problem is, under such a system, any decision made by the arbitrator would be entirely voluntary, as there is no police force to execute its judgement. Rothbard’s solution to this problem is somewhat clumsy, suggesting that those who refuse to abide by the decision should be socially ostracised and that the arbitration companies could act to ensure that the offending person could never employ their services again. But surely this is not a satisfactory response for crimes such as murder? Imagine if a defendant is found guilty; could he then go to another arbitration company where he is found innocent? Rothbard rather optimistically assumes that the two companies would then turn to a mutually agreed upon third party to pass a final judgment, but again, in this world, there is no single police force associated with the courts – so how exactly would the defendant be forced to comply with this final judgement? Couldn’t he simply hire a security company to protect him and his property, preventing himself from suffering any consequences?

Rothbard’s anti-statist theory seems to break down further on issues of national defence. In For a New Liberty, he suggests that all global conflicts throughout history have been between nation-states. Thus, he concludes, abolish the nation state and you abolish war. In reality, one might argue, there is nothing to stop one group of people banding together to use force against their neighbours in a bid to seize land and resources. In this case, the only appropriate response would be for their neighbours to form groups to defend themselves, and very quickly, lines are drawn across the map, and nations have been born.

Conclusion

The Anarcho-Capitalist ideology represents an extreme fringe viewpoint, even within the Libertarian movement. Most Libertarians, for the reasons just outlined, would conclude that the complete abolition of the state is unfeasible and instead advocate for a minimalist or ‘minarchist’ state. However, Rothbard’s economic ideas – his criticism of Keynesian monetary and fiscal theories and of government intervention more generally, are more widely accepted within the Libertarian and Neoliberal movements. As such, they represent one of the largest heterodox economic theories in the modern world and offer some of the most compelling critiques of the Keynesian system, which, in the West, continues to dominate government policy to this day.