On pages 33–35 of my book Socialism, Economic Calculation, and Entrepreneurship, I examine the process by which the division of practical entrepreneurial knowledge deepens "vertically" and expands "horizontally," a process that permits (and at the same time requires) an increase in population, fosters prosperity and general well-being, and brings about the advancement of civilization. As I indicate there, this process is based on
the specialization of entrepreneurial creativity in increasingly narrow and more specific fields, and in increasing detail and depth;
the recognition of the private-property rights of the creative entrepreneur to the fruits of his creative activity in each of these areas;
the free, voluntary exchange of the fruits of each human being's specialization, an exchange that is always mutually beneficial for all who participate in the market process; and
constant growth in the human population, which makes it possible to entrepreneurially "occupy" and cultivate a rising number of new fields of creative entrepreneurial knowledge, which enriches everyone.
According to this analysis, anything that guarantees the private ownership of what each person creates and contributes to the production process, that defends the peaceful possession of what each person conceives or discovers, and that facilitates (or does not impede) voluntary exchanges (which are always mutually satisfactory in the sense that they mean an improvement for each party) generates prosperity, increases the population, and furthers the quantitative and qualitative advancement of civilization. Likewise, any attack on the peaceful possession of goods and on the property rights that pertain to them, any coercive manipulation of the free process of voluntary exchange, in short, any state intervention in a free market economy always brings about undesired effects, stifles individual initiative, corrupts moral and responsible behavior habits, makes the masses childish and irresponsible, hastens the decline of the social fabric, consumes accumulated wealth, and blocks the expansion of human population and the advancement of civilization, while everywhere increasing poverty.
As an illustration, let us consider the process of decline and disappearance of classical Roman civilization. Though its basic landmarks are easily extrapolated to many circumstances of our contemporary world, unfortunately most people have now forgotten or are completely unaware of that important history lesson; and as a result they fail to see the grave risks now facing our civilization. In fact, as I explain in detail in my classes (and summarize in a video of one of them, on the fall of the Roman Empire [La Caída del Imperio Romano], which to my surprise has already been viewed on the Internet by almost 400,000 people in a little over a year), and according to prior studies by authors like Rostovtzeff (The Social and Economic History of the Roman Empire) and Mises (Human Action), "what brought about the decline of the [Roman] empire and the decay of its civilization was the disintegration of this economic interconnectedness, not the barbarian invasions" (op. cit., p. 767).
To be precise, Rome was the victim of an involution in the specialization and division of the trading process, as authorities systematically hindered or prevented voluntary exchanges at free-market prices, in the midst of rampant growth in subsidies, in public spending on consumption ("panem et circenses"), and in state control of prices. It is easy to grasp the logic behind these events. Chiefly beginning in the 3rd century, the buying of votes and popularity spread food subsidies ("panem") financed by the public treasury via the "annona," as well as the continual organization of the most lavish public games ("circenses"). As a result, not only were Italian farm owners eventually ruined, but the population of Rome did not cease to grow until it stood at nearly 1 million inhabitants. (Why take on the toil of working one's land when its products cannot be sold at profitable prices, since the state distributes them almost for free in Rome?)
The obvious course of action was to leave the Italian countryside and move to the city, to live off the Roman welfare state, the cost of which could not be borne by the public treasury, and could only be covered by reducing the precious-metal content in the currency (that is, inflation). The outcome was inescapable: an uncontrolled drop in the purchasing power of money, i.e., an upward revolution in prices, to which the authorities responded by decreeing that prices were to remain fixed at their prior levels and imposing extremely harsh sentences on offenders. The establishment of these price ceilings led to widespread shortages (since at the low prices set, it was no longer profitable to produce and seek creative solutions to the problem of scarcity, while at the same time consumption and waste were still being artificially encouraged). Cities gradually began to run out of provisions, and the population began to leave and return to the countryside, to live in much poorer conditions in an autarchy, at mere subsistence level, a regime that laid the foundation for what would later be feudalism.
This decivilization process, which arose from the demagogic socialist ideology typical of the welfare state and of government interventionism in the economy, can be illustrated in a simplified, graphic manner by the reverse of the graphic explanation on page 34 of my aforementioned book, Socialism, Economic Calculation, and Entrepreneurship, in which I describe the process by which the division of labor (or rather, the specialization of knowledge) deepens and civilization advances.
Let us begin at the stage represented by the top line in the chart (T1), which reflects the advanced level of development spontaneously achieved by the Roman market process as early as the 1st century, and which, as Peter Temin has shown ("The Economy of the Early Roman Empire," Journal of Economic Perspectives, vol. 20, no. 1, winter 2006, pp. 133–151), was characterized by a remarkable degree of institutional legal respect for private property (Roman law), and by the specialization and spread of exchanges in all sectors and factor markets (particularly the labor market, since, as Temin has demonstrated, the effect of slavery was much more modest that has been believed up to now). As a result, the Roman economy of the period reached a level of prosperity, economic development, urbanization, and culture that would not be seen again in the world until well into the 18th century.
The capital letters under each person in figure 1 indicate the ends each actor specializes in and devotes himself to. He then exchanges the fruits of his entrepreneurial effort and creativity (represented by the bulb that "lights up") for those of other actors, and all benefit from each exchange. However, when state intervention in the economy increases (e.g., via price control), exchanges are hindered and decrease, and people find themselves in the stage depicted by the middle line in the chart. They are obliged to reduce the sphere of their specialization by abandoning, for example, ends G and H and concentrating on ends AB, CD, and EF, all with less division of labor, fewer exchanges, and hence a smaller degree of specialization, which requires greater replication and an excess of effort. The obvious result is a drop in the final production of the entire social process, and thus a rise in poverty.
The maximum point of economic decline and recession occurs in the stage shown by the bottom line in the chart (T3), where, when faced with mounting interventionist pressure from the state, continual tax increases, and stifling regulations, people are forced, in order to survive (even if at a level of poverty previously inconceivable), to almost completely abandon the prior division of labor and the exchange process that constitutes the market, to leave the city and return to the countryside to tend livestock and grow their own food, to tan their own leather and build their own shacks, and each person needlessly duplicates the minimum ends and activities required for survival (which we have marked ABCD in the chart). As is logical, productivity falls sharply, and all sorts of shortages occur that reduce the population due to a lack of resources: thus the process of deurbanization and decivilization reaches completion.
As Mises indicates,
With the system of maximum prices the practice of debasement completely paralyzed both the production and the marketing of the vital foodstuffs and disintegrated society's economic organization.… To avoid starving, people deserted the cities, settled on the countryside, and tried to grow grain, oil, wine, and other necessities for themselves.… The economic function of the cities, of commerce, trade, and urban handicrafts, shrank. Italy and the provinces of the empire returned to a less advanced state of the social division of labor. The highly developed economic structure of ancient civilization retrograded to what is now known as the manorial organization of the Middle Ages.… [The emperors'] counteraction was futile as it did not affect the root of the evil. The compulsion and coercion to which they resorted could not reverse the trend toward social disintegration which, on the contrary, was caused precisely by too much compulsion and coercion [on the part of the state]. No Roman was aware of the fact that the process was induced by the government's interference with prices and by currency debasement. (op. cit., pp. 768–769)
A social order is doomed if the actions which its normal functioning requires are rejected by the standards of morality, are declared illegal by the laws of the country, and are prosecuted as criminal by the courts and the police. The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism and its political corollary, the Fuhrer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity. (op. cit., p. 769, italics added)
Mises's analysis has invariably been confirmed, not only in many specific historical instances (processes of decline and decivilizing involution, e.g., in the north and other parts of Africa; the crisis in Portugal following the "Carnation Revolution"; the chronic social illness that affects Argentina, which became one of the richest countries in the world before World War II, but which today, instead of receiving immigrants, loses population continually; similar processes that are ravaging Venezuela and other populist regimes in Latin America, etc.), but also, and above all, by the experiment of real socialism, which until the fall of the Berlin Wall steeped hundreds of millions of people in suffering and despair.
Also, today, in a fully globalized world market, the decivilizing forces of the welfare state, of syndicalism, of central banks' financial and monetary manipulation, of economic interventionism, of the increasing tax burden and regulations, and of the lack of control in the public accounts threaten even those economies that until now had been considered the most prosperous (the United States and Europe). Now at a historic crossroads, these economies are struggling to rid themselves of the decivilizing forces of political demagogy and union power, as they attempt to return to the path of monetary rigor, budget control, tax reduction, and the dismantling of the tangled web of subsidies, intervention, and regulations that choke the entrepreneurial spirit and infantilize and demoralize the masses. Their success or failure in this endeavor will determine their future destiny, and specifically, whether or not they will continue to lead the advance of civilization as they have until now, or whether, in the case of failure, they will leave the leadership of civilization to other societies that, like the Sino-Asian society, fervently and unapologetically seek to become the key players in the new globalized world market.
It is obvious that Roman civilization did not fall as a result of the barbarian invasions: rather, the barbarians easily capitalized on a social process that was already, for purely endogenous reasons, in marked decline and breaking down.
Mises expresses it this way:
The alien aggressors merely took advantage of an opportunity which the internal weakness of the empire offered to them. From a military point of view the tribes which invaded the empire in the fourth and fifth centuries were not more formidable than the armies which the legions had easily defeated in earlier times. But the empire had changed. Its economic and social structure was already medieval. (op. cit., pp. 767–768)
Furthermore, the empire's degree of regulation, statism, and tax pressure became so great that Roman citizens themselves often submitted to the barbarian invaders as a lesser evil, when they did not actually receive these invaders with open arms. Lactantius, in his treatise, On the Deaths of the Persecutors, written in the year 314-315 AD, states,
There began to be fewer men who paid taxes than there were who received wages; so that the means of the husbandmen being exhausted by enormous impositions, the farms were abandoned, cultivated grounds became woodland … And many presidents and a multitude of inferior officers lay heavy on each territory, and almost on each city. There were also many stewards of different degrees, and deputies of presidents. Very few civil causes came before them: but there were condemnations daily, and forfeitures frequently inflicted; taxes on numberless commodities, and those not only often repeated, but perpetual, and, in exacting them, intolerable wrongs. (cited by Antonio Aparicio Pérez, La Fiscalidad en la Historia de España: Época Antigua, años 753 a.C. a 476 d.C., Madrid: Instituto de Estudios Fiscales, 2008, p. 313)
Clearly, this situation closely parallels the current one in many ways, and a legion of writers have already shown that the present level of subsidies and regulations places a demoralizing, intolerable burden on the increasingly harassed productive sector of society. In fact, a few authors, like Alberto Recarte, have had the courage to call for a reduction in "the number of public employees, particularly those whose job it is to regulate, oversee, and inspect all economic activity by imposing costly and extremely interventionist legal requirements" (El Desmoronamiento de España, Madrid: La Esfera de los Libros, 2010, p. 126). We must remember that we all depend on the output of private economic activity.
In De Gubernatione Dei (IV, VI, 30), Salvian of Marseilles writes,
Meanwhile the poor are being robbed, widows groan, orphans are trodden down, so that many, even persons of good birth, who have enjoyed a liberal education, seek refuge with the enemy to escape death under the trials of the general persecution. They seek among the barbarians the Roman mercy, since they cannot endure the barbarous mercilessness they find among the Romans. Although these men differ in customs and language from those with whom they have taken refuge, and are unaccustomed too, if I may say so, to the nauseous odor of the bodies and clothing of the barbarians, yet they prefer the strange life they find there to the injustice rife among the Romans. So you find men passing over everywhere, now to the Goths, now to the Bagaudae, or whatever other barbarians have established their power anywhere, and they do not repent of their expatriation, for they would rather live as free men, though in seeming captivity, than as captives in seeming liberty. (cited in ibid., pp. 314–315)
Finally, in his Seven Books against the Pagans (Madrid: Gredos, VII, 41-7), the historian Orosiusconcludes,
The barbarians came to detest their swords, betook themselves to the plough, and are affectionately treating the rest of the Romans as comrades and friends, so that now among them there may be found some Romans who, living with the barbarians, prefer freedom with poverty to tribute-paying with anxiety among their own people. (italics added)
We do not know whether in the future Western civilization, which until now has thrived, will be replaced by that of another people whom even today we might consider "barbarians." However, we must be certain of two things: first, in the midst of the severest recession to ravage the Western world since the Great Depression of 1929, if we fail to apply the essential measures, i.e., deregulation, especially in the labor market, a reduction in taxes and economic interventionism, and control of public spending and the elimination of subsidies, we risk much more than, for instance, the mere preservation of the euro (or for Americans, of the dollar as an international currency); and second, if we lose the battle of competitiveness in the globalized world market once and for all, and we fall into marked and chronic decline, it will, without a doubt, not be due to exogenous factors, but to our own errors, faults, and moral deficiencies.
Despite the above, I would like to end on an optimistic note. Recessions are painful, and they are often used as a pretext for criticizing the free-market system and increasing regulation and interventionism, thus making matters even worse. Nevertheless, recessions are also the phase in which society gets back on a sound footing, the errors committed are revealed, and everyone is put in his proper place. Recessions are the stage in which the foundation is laid for recovery and an unavoidable return is made to the essential principles that permit society to advance.
It is true that we face many challenges, and that we could very easily become disheartened, and that freedom's foes lurk everywhere. But it is no less true that, in contrast with the culture of subsidies, irresponsibility, the lack of morals, and dependence on the state for everything, there is, surging from the ashes among many young people (and also among some of us who are no longer so young) the culture of entrepreneurial freedom, of creativity and risk taking, of behavior based on moral principles, and, in short, of maturity and responsibility (as opposed to the infantilism our authorities and politicians would restrict us to in order to make us increasingly servile and dependent). To me it is clear who has the best intellectual and moral weapons, and hence, who holds the future. That is why I am an optimist.
 The social process cannot survive or develop without an institutional framework that disciplines and restricts politicians, unions, and privileged interest groups. Though certainly our authorities were unaware of what they were getting into when they advanced the creation of the euro, under the current circumstances, the euro is fortunately playing that "disciplining" role, at least in Europe's periphery countries, which for the first time in their history, are now forced to take structural measures of economic liberalization in an environment in which the infeasibility and deception that lie at the base of the present welfare state have become evident. In the United States the situation is more dubious. Although sporadic efforts are made to limit the public deficit by movements like the Tea Party and others, the nature of the dollar as the international reserve currency leaves a lot of room for the extravagance of politicians and for unbridled spending.