Planning for Freedom*
“Planning” and Interventionism
The term ‘planning’ is mostly used as a
synonym for socialism, communism, and authoritarian and totalitarian
economic management. Sometimes only the German pattern of socialism—Zwangswirtschaft*
—is called planning, while the term socialism proper is reserved for
the Russian pattern of outright socialization and bureaucratic operation
of all plants, shops, and farms. At any rate, planning in this sense
means all-around planning by the government and enforcement of these
plans by the police power. Planning in this sense means full government
control of business. It is the antithesis of free enterprise, private
initiative, private ownership of the means of production, market
economy, and the price system. Planning and capitalism are utterly
incompatible. Within a system of planning production is conducted
according to the government’s orders, not according to the plans of
capitalists and entrepreneurs eager to profit by best filling the wants
of the consumers.
But the term planning is also used in a
second sense. Lord Keynes, Sir William Beveridge, Professor Hansen, and
many other eminent men assert that they do not want to substitute
totalitarian slavery for freedom. They declare that they are planning
for a free society. They recommend a third system, which, as they say,
is as far from socialism as it is from capitalism, which, as a third
solution of the problem of society’s economic organization, stands
midway between the two other systems, and while retaining the advantages
of both, avoids the disadvantages inherent in each.
These self-styled progressives are certainly
mistaken when they pretend that their proposals are new and unheard of.
The idea of this third solution is very old indeed, and the French have
long since baptized it with a pertinent name; they call it
interventionism. Hardly anybody can doubt that history will link the
idea of social security, more closely than with the American New Deal
and with Sir William Beveridge, with the memory of Bismarck whom our
fathers did not precisely describe as a liberal. All the essential ideas
of present-day interventionist progressivism were neatly expounded by
the supreme brain-trusters of imperial Germany, Professors Schmoller and
Wagner, who at the same time urged their Kaiser to invade and to
conquer the Americas. Far be it from me to condemn any idea only on
account of its not being new. But as the progressives slander all their
opponents as old-fashioned, orthodox, and reactionary, it is expedient
to observe that it would be more appropriate to speak of the clash of
two orthodoxies; the Bismarck orthodoxy versus the Jefferson orthodoxy.
Interventionism
Before entering into an investigation of the interventionist system of a mixed economy two points must be clarified:
First: If within a society based on private
ownership of the means of production some of these means are owned and
operated by the government or by municipalities, this still does not
make for a mixed system which would combine socialism and private
ownership. As long as only certain individual enterprises are publicly
controlled, the characteristics of the market economy determining
economic activity remain essentially unimpaired. The publicly owned
enterprises, too, as buyers of raw materials, semi-finished goods, and
labor and as sellers of goods and services must fit into the mechanism
of the market economy. They are subject to the law of the market; they
have to strive after profits or, at least, to avoid losses. When it is
attempted to mitigate or to eliminate this dependence by covering the
losses of such enterprises with subsidies out of public funds, the only
result is a shifting of this dependence somewhere else. This is because
the means for the subsidies have to be raised somewhere. They may be
raised by collecting taxes. But the burden of such taxes has its effects
on the public, not on the government collecting the tax. It is the
market, and not the revenue department, which decides upon whom the tax
falls and how it affects production and consumption. The market and its
inescapable law are supreme.
Second: There are two different patterns for
the realization of socialism. The one pattern—we may call it the Marxian
or Russian pattern—is purely bureaucratic. All economic enterprises are
departments of the government just as the administration of the army
and the navy or the postal system. Every single plant, shop, or farm,
stands in the same relation to the superior central organization as does
a post office to the office of the postmaster general. The whole nation
forms one single labor army with compulsory service; the commander of
this army is the chief of state.
The second pattern—we may call it the German or Zwangswirtschaft
system—differs from the first one in that it, seemingly and nominally,
maintains private ownership of the means of production,
entrepreneur-ship, and market exchange. So-called entrepreneurs do the
buying and selling, pay the workers, contract debts, and pay interest
and amortization. But they are no longer entrepreneurs. In Nazi Germany
they were called shop managers or Betriebsführer. The government
tells these seeming entrepreneurs what and how to produce, at what
prices and from whom to buy, at what prices and to whom to sell. The
government decrees at what wages laborers should work and to whom and
under what terms the capitalists should entrust their funds. Market
exchange is but a sham. As all prices, wages, and interest rates are
fixed by the authority, they are prices, wages, and interest rates in
appearance only; in fact they are merely quantitative terms in the
authoritarian orders determining each citizen’s income, consumption, and
standard of living. The authority, not the consumers, directs
production. The central board of production management is supreme; all
citizens are nothing but civil servants. This is socialism, with the
outward appearance of capitalism. Some labels of the capitalistic market
economy are retained, but they signify here something entirely
different from what they mean in the market economy.
It is necessary to point out this fact to
prevent a confusion of socialism and interventionism. The system of
hampered market economy or interventionism differs from socialism by the
very fact that it is still market economy. The authority seeks to
influence the market by the intervention of its coercive power, but it
does not want to eliminate the market altogether. It desires that
production and consumption should develop along lines different from
those prescribed by the unhindered market, and it wants to achieve its
aim by injecting into the working of the market orders, commands, and
prohibitions for whose enforcement the police power and its apparatus of
coercion and compulsion stand ready. But these are isolated
interventions; their authors assert that they do not plan to combine
these measures into a completely integrated system which regulates all
prices, wages, and interest rates, and which thus places full control of
production and consumption in the hands of the authorities.
How to Raise Wages
The fundamental principle of those truly liberal economists who are nowadays generally abused as orthodox, reactionaries, and economic royalists is this: There are no means by which the general standard of living can be raised other than by accelerating the increase of capital as compared with population. All that good government can do to improve the material well-being of the masses is to establish and to preserve an institutional setting in which there are no obstacles to the progressive accumulation of new capital and its utilization for the improvement of technical methods of production. The only means to increase a nation’s welfare is to increase and to improve the output of products. The only means to raise wage rates permanently for all those eager to earn wages is to raise the productivity of labor by increasing the per-head quota of capital invested and improving the methods of production. Hence, the liberals conclude that the economic policy best fitted to serve the interests of all strata of a nation is free trade both in domestic business and in international relations.
The interventionists, on the contrary,
believe that government has the power to improve the masses’ standard of
living partly at the expense of the capitalists and entrepreneurs,
partly at no expense at all. They recommend the restriction of profits
and the equalization of incomes and fortunes by confiscatory taxation,
the lowering of the rate of interest by an easy money policy and credit
expansion, and the raising of the workers’ standard of living by the
enforcement of minimum wage rates. They advocate lavish government
spending. They are, curiously enough, at the same time in favor of low
prices for consumers’ goods and of high prices for agricultural
products.
The liberal economists, that is, those
disparaged as orthodox, do not deny that some of these measures can, in
the short run, improve the lot of some groups of the population. But,
they say, in the long run they must produce effects which, from the
point of view of the government and the supporters of its policies, are
less desirable than the previous state of affairs they wanted to alter.
These measures are, therefore, when judged from the point of view of
their own advocates, contrary to purpose.
Depression, the Aftermath of Credit Expansion
It is true, many people believe that economic policy should not bother at all about long-run consequences. They quote a dictum of Lord Keynes: “In the long run we are all dead.” I do not question the truth of this statement; I even consider it as the only correct declaration of the neo-British Cambridge school. But the conclusions drawn from this truism are entirely fallacious. The exact diagnosis of the economic evils of our age is: we have outlived the short-run and are suffering from the long-run consequences of policies which did not take them into consideration. The interventionists have silenced the warning voices of the economists. But things developed precisely as these much abused orthodox scholars had predicted. Depression is the aftermath of credit expansion; mass unemployment prolonged year after year is the inextricable effect of attempts to keep wage rates above the level which the unhampered market would have fixed. All those evils which the progressives interpret as evidence of the failure of capitalism are the necessary outcome of allegedly social interference with the market. It is true that many authors who advocated these measures and many statesmen and politicians who executed them were impelled by good intentions and wanted to make people more prosperous. But the means chosen for the attainment of the ends aimed at were inappropriate. However good intentions may be, they can never render unsuitable means any more suitable.
It must be emphasized that we are discussing
means and measures, not ends. The matter at issue is not whether the
policies advocated by the self-styled progressives are to be recommended
or condemned from any arbitrary preconceived point of view. The
essential problem is whether such policies can really attain the ends
aimed at.
It is beside the mark to confuse the debate
by referring to accidental and irrelevant matters. It is useless to
divert attention from the main problem by vilifying capitalists and
entrepreneurs and by glorifying the virtues of the common man. Precisely
because the common man is worthy of all consideration, it is necessary
to avoid policies detrimental to his welfare.
The market economy is an integrated system of
intertwined factors that mutually condition and determine one another.
The social apparatus of coercion and compulsion, i.e., the state,
certainly has the might to interfere with the market. The government or
agencies in which the government, either by legal privilege or by
indulgence, has vested the power to apply violent pressure with impunity
are in a position to decree that certain market phenomena are illegal.
But such measures do not bring about the results which the interfering
power wants to attain. They not only render conditions more
unsatisfactory for the interfering authority. They disintegrate the
market system altogether, they paralyze its operation, they bring about
chaos.
If one considers the working of the market
system as unsatisfactory, one must try to substitute another system for
it. This is what the socialists aim at. But socialism is not the subject
matter of this meeting’s discussion. I was invited to deal with
interventionism, i.e., with various measures designed to improve the
operation of the market system, not to abolish it altogether. And what I
contend is that such measures must needs bring about results which from
the point of view of their supporters are more undesirable than the
previous state of affairs they wanted to alter.
Karl Marx on Labour
Karl Marx did not believe that government or trade union interference with the market can attain the beneficial ends expected. Marx and his consistent followers condemned all such measures in their frank language as reformist nonsense, capitalist fraud, and petty-bourgeois idiocy. They called the supporters of such measures reactionaries. Clemenceau was right when he said: “One is always a reactionary in somebody’s opinion.”
Karl Marx declared that under capitalism all
material goods and likewise labor are commodities, and that socialism
will abolish the commodity character both of material goods and of
labor. The notion “commodity character” is peculiar to the Marxian
doctrine; it was not used before. Its meaning is that goods and labor
are negotiated on markets, are sold and bought on the basis of their
value. According to Marx the commodity character of labor is implied in
the very existence of the wages system. It can disappear only at the
“higher stage” of communism as a consequence of the disappearance of the
wages system and of payment of wage rates. Marx would have ridiculed
the endeavors to abolish the commodity character of labor by an
international treaty and the establishment of an International Labor
Office and by national legislation and the allocation of money to
various national bureaus. I mention these things only in order to show
that the progressives are utterly mistaken in referring to Marx and the
doctrine of the commodity character of labor in their fight against the
economists whom they call reactionary.
Wage Rates and Unemployment
What these old orthodox economists said was this: A permanent rise in wage rates for all people eager to earn wages is only possible as far as the per-head quota of capital invested and concomitantly the productivity of labor increases. It does not benefit the people if minimum wage rates are fixed at a level above that which the unhampered market would have fixed. It does not matter whether this tampering with wage rates is done by government decree or by labor union pressure and compulsion. In either case, the outcome is pernicious to the welfare of a great section of the population.
On an unhampered labor market wage rates are
fixed, by the interplay of demand and supply, at a level at which all
those eager to work can finally find jobs. On a free labor market
unemployment is temporary only and never affects more than a small
fraction of the people. There prevails a continuous tendency for
unemployment to disappear. But if wage rates are raised by the
interference of government or unions above this level, things change. As
long as only one part of labor is unionized, the wage rise enforced by
the unions does not lead to unemployment, but to an increased supply of
labor in those branches of business where there are no efficient unions
or no unions at all. The workers who lost their jobs as a consequence of
union policy enter the market of the free branches and cause wages to
drop in these branches. The corollary of the rise in wages for organized
workers is a drop in wages for unorganized workers. But if fixing of
wage rates above the potential market level becomes general, workers
losing their jobs cannot find employment in other branches. They remain
unemployed. Unemployment emerges as a mass phenomenon prolonged year
after year.
Such were the teachings of these orthodox
economists. Nobody succeeded in refuting them. It was much easier to
abuse their authors. Hundreds of treatises, monographs, and pamphlets
sneered at them and called them names. Novelists, playwrights,
politicians joined the chorus. But truth has its own way. It works and
produces effects even if party programs and textbooks refuse to
acknowledge it as truth. Events have proved the correctness of the
predictions of the orthodox economists. The world faces the tremendous
problem of mass unemployment.
It is vain to talk about employment and
unemployment without precise reference to a definite rate of wages. The
inherent tendency of capitalist evolution is to raise real wage rates
steadily. This outcome is the effect of the progressive accumulation of
capital by means of which technological methods of production are
improved. Whenever the accumulation of additional capital stops, this
tendency comes to a standstill. If capital consumption is substituted
for an increase of capital available, real wage rates must drop
temporarily until the checks to a further increase in capital are
removed. The malinvestment, i.e., the squandering of capital that is the
most characteristic feature of credit expansion and the orgy of the
fictitious boom it produces, the confiscation of profits and fortunes,
wars and revolutions are such checks. It is a sad fact that they
temporarily lower the masses’ standard of living. But these sad facts
cannot be brushed away by wishful thinking. There are no other means to
remove them than those recommended by the orthodox economists: a sound
money policy, thrift in public expenditures, international cooperation
for safeguarding durable peace, economic freedom.
The remedies suggested by the unorthodox doctrinaires are futile. Their application makes things worse, not better.
There are well-intentioned men who exhort
union leaders to make only moderate use of their powers. But these
exhortations are in vain because their authors do not realize that the
evils they want to avoid are not due to lack of moderation in the wage
policies of the unions. They are the necessary outcome of the whole
economic philosophy underlying union activities with regard to wage
rates. It is not my task to inquire what good effects unions could
possibly bring about in other fields, for instance in education,
professional training, and so on. I deal only with their wage policies.
The essence of these policies is to prevent the unemployed from finding
jobs by underbidding union rates. This policy splits the whole potential
labor force into two classes: the employed who earn wages higher than
those they would have earned on an unhampered labor market, and the
unemployed who do not earn anything at all. In the early thirties money
wage rates in this country dropped less than the cost of living. Hourly
real wage rates increased in the midst of a catastrophic spread of
unemployment. For many of those employed the depression meant a rise in
the standard of living, while the unemployed were victimized. The
repetition of such conditions can only be avoided by entirely discarding
the idea that union compulsion and coercion can benefit all those eager
to work and to earn wages. What is needed is not lame warnings. One
must convince the workers that the traditional union policies do not
serve the interests of all, but only those of one group. While in
individual bargaining the unemployed virtually have a voice, they are
excluded in collective bargaining. The union officers do not care about
the fate of non-members and especially not about that of beginners eager
to enter their industry.
Union rates are fixed at a level at which a
considerable part of available manpower remains unemployed. Mass
unemployment is not proof of the failure of capitalism, but the proof of
the failure of traditional union methods.
The same considerations apply to the
determination of wage rates by government agencies or by arbitration. If
the decision of the government or the arbitrator fixes wage rates at
the market level, it is superfluous. If it fixes wage rates at a higher
level, it produces mass unemployment.
The fashionable panacea suggested, lavish
public spending, is no less futile. If the government provides the funds
required by taxing the citizens or by borrowing from the public, it
abolishes on the one hand as many jobs as it creates on the other. If
government spending is financed by borrowing from commercial banks, it
means credit expansion and inflation. Then the prices of all commodities
and services must rise, whatever the government does to prevent this
outcome.
If in the course of an inflation the rise in
commodity prices exceeds the rise in nominal wage rates, unemployment
will drop. But what makes unemployment shrink is precisely the fact that
real wage rates are falling. Lord Keynes recommended credit expansion
because he believed that the wage earners will acquiesce in this
outcome; he believed that “a gradual and automatic lowering of real wage
rates as a result of rising prices” would not be so strongly resisted
by labor as an attempt to lower money wage rates. It is very unlikely
that this will happen. Public opinion is fully aware of the changes in
purchasing power and watches with burning interest the movements of the
index of commodity prices and of cost of living. The substance of all
discussions concerning wage rates is real wage rates, not nominal wage
rates. There is no prospect of outsmarting the unions by such tricks.
But even if Lord Keynes’s assumption were
correct, no good could come from such a deception. Great conflicts of
ideas must be solved by straight and frank methods; they cannot be
solved by artifices and make-shifts. What is needed is not to throw dust
into the eyes of the workers, but to convince them. They themselves
must realize that the traditional union methods do not serve their
interests. They themselves must abandon of their own accord policies
that harm both them and all other people.
The Role of Profit and Loss
What those allegedly planning for freedom do not comprehend is that the market with its prices is the steering mechanism of the free enterprise system. Flexibility of commodity prices, wage rates and interest rates is instrumental in adapting production to the changing conditions and needs of the consumers and in discarding backward technological methods. If these adjustments are not brought about by the interplay of the forces operating on the market, they must be enforced by government orders. This means full government control, the Nazi Zwangswirtschaft. There is no middle way. The attempts to keep commodity prices rigid, to raise wage rates and to lower interest rates ad libitum only paralyze the system. They create a state of affairs which does not satisfy anybody. They must be either abandoned by a return to freedom of the market, or they must be completed by pure and undisguised socialism.
The inequality of income and fortunes is
essential in capitalism. The progressives consider profits as
objectionable. The very existence of profits is in their eyes a proof
that wage rates could be raised without harm to anybody else than idle
parasites. They speak of profit without dealing with its corollary,
loss. Profit and loss are the instruments by means of which the
consumers keep a tight rein on all entrepreneurial activities. A
profitable enterprise tends to expand, an unprofitable one tends to
shrink. The elimination of profit renders production rigid and abolishes
the consumers’ sovereignty. This will happen not because the
enterprisers are mean and greedy, and lack these monkish virtues of
self-sacrifice which the planners ascribe to all other people. In the
absence of profits the entrepreneurs would not learn what the wants of
the consumers are, and if they were to guess, they would not have the
means to adjust and to expand their plants accordingly. Profits and
losses withdraw the material factors of production from the hands of the
inefficient and convey them into the hands of the more efficient. It is
their social function to make a man the more influential in the conduct
of business the better he succeeds in producing commodities for which
people scramble.
It is therefore beyond the point to apply to
profits the yardstick of personal merit or happiness. Of course, Mr. X
would probably be as happy with 10 millions as with 100 millions. From a
metaphysical point of view, it is certainly inexplicable why Mr. X
should make 2 millions a year, while the chief justice or the nation’s
foremost philosophers and poets make much less. But the question is not
about Mr. X; it is about the consumers. Would the consumers be better
and more cheaply supplied if the law were to prevent the most efficient
entrepreneurs from expanding the sphere of their activities? The answer
is clearly in the negative. If the present tax rates had been in effect
from the beginning of our century, many who are millionaires today would
live under more modest circumstances. But all those new branches of
industry which supply the masses with articles unheard of before would
operate, if at all, on a much smaller scale, and their products would be
beyond the reach of the common man.
The Market System Serves the Common Man
The market system makes all men in their capacity as producers responsible to the consumer. This dependence is direct with entrepreneurs, capitalists, farmers, and professional men, and indirect with people working for salaries and wages. The economic system of the division of labor, in which everybody provides for his own needs by serving other people, cannot operate if there is no factor adjusting the producers’ efforts to the wishes of those for whom they produce. If the market is not allowed to steer the whole economic apparatus, the government must do it.
The socialist plans are absolutely wrong and
unrealizable. This is another subject. But the socialist writers are at
least clear-sighted enough to see that simply to paralyze the market
system results in nothing but chaos. When they favor such acts of
sabotage and destruction, they do so because they believe that the chaos
brought about will pave the way for socialism. But those who pretend
that they want to preserve freedom, while they are eager to fix prices,
wage rates, and interest rates at a level different from that of the
market, delude themselves. There is no other alternative to totalitarian
slavery than liberty. There is no other planning for freedom and
general welfare than to let the market system work. There is no other
means to attain full employment, rising real wage rates, and a high
standard of living for the common man than private initiative and free
enterprise.
2
Laissez Faire or Dictatorship*
What the “Encyclopaedia of the Social Sciences” Says about Laissez Faire
For more than a hundred years the maxim laissez faire, laissez passer has been a red rag to harbingers of totalitarian despotism. As these zealots see it, this maxim condenses all the shameful principles of capitalism. To unmask its fallacies is therefore tantamount to exploding the ideological foundations of the system of private ownership of the means of production, and implicitly demonstrating the excellence of its antithesis, viz., communism and socialism.
The Encyclopaedia of the Social Sciences
may fairly be considered as representative of the doctrines taught at
American and British universities and colleges. Its ninth volume
contains an article “Laissez Faire” from the pen of the Oxford professor
and author of detective stories, G. D. H. Cole. In the five and a
quarter pages of his contribution Professor Cole freely indulges in the
use of deprecatory epithets. The maxim “cannot stand examination,” it is
only prevalent in “popular economics,” it is “theoretically bankrupt,”
an “anachronism,” it survives only as a “prejudice,” but “as a doctrine
deserving of theoretical respect it is dead.” Resort to these and many
other similar opprobrious appellations fails to disguise the fact that
Professor Cole’s arguments entirely miss the point. Professor Cole is
not qualified to deal with the problems involved because he simply does
not know what the market economy is and how it works. The only correct
affirmation of his article is the truism that those rejecting laissez
faire are Socialists. He is also right in declaring that the refutation
of laissez faire is “as prominent in the national idea of Fascism in
Italy as in Russian Communism.”
The volume which contains Mr. Cole’s article
was published in January 1933. This explains why he did not include Nazi
Germany in the ranks of those nations which have freed themselves from
the spell of the sinister maxim. He merely registers with satisfaction
that the conception rejecting laissez faire is “at the back of many
projects of national planning which, largely under Russian influence, is
now being put forward all over the world.”
Laissez Faire Means Free Market Economy
Learned historians have bestowed much pains upon the question to whom the origin of the maxim laissez faire, laissez passer is to be attributed.* At any rate it is certain that in the second part of the eighteenth century the outstanding French champions of economic freedom— foremost among them Gournay, Quesnay, Turgot, and Mirabeau— compressed their program for popular use into this sentence. Their aim was the establishment of the unhampered market economy. In order to attain this end they advocated the abolition of all statutes preventing the more industrious and more efficient people from outdoing the less industrious and less efficient competitors and restricting the mobility of commodities and of men. It was this that the famous maxim was designed to express.
In occasionally using the words laissez faire, laissez passer,
the eighteenth century economists did not intend to baptize their
social philosophy the laissez-faire doctrine. They concentrated their
efforts upon the elaboration of a new system of social and political
ideas which would benefit mankind. They were not eager to organize a
faction or party and to find a name for it. It was only later, in the
second decade of the nineteenth century, that a term came to signify the
total complex of the political philosophy of freedom, viz., liberalism.
The new word was borrowed from Spain where it designated the friends of
constitutional government and religious freedom. Very soon it was used
all over Europe as a label for the endeavors of those who stood for
representative government, freedom of thought, of speech and of the
press, private ownership of the means of production, and free trade.
The liberal program is an indivisible and
indissoluble whole, not an arbitrarily assembled patchwork of diverse
components. Its various parts condition one another. The idea that
political freedom can be preserved in the absence of economic freedom,
and vice versa, is an illusion. Political freedom is the corollary of
economic freedom. It is no accident that the age of capitalism became
also the age of government by the people. If individuals are not free to
buy and to sell on the market, they turn into virtual slaves dependent
on the good graces of the omnipotent government, whatever the wording of
the constitution may be.
The fathers of socialism and modern
interventionism were fully aware that their own programs were
incompatible with the political postulates of liberalism. The main
target of their passionate attacks was liberalism as a whole. They did
not make a distinction between the political and the economic aspects of
liberalism.
But as the years went on, the Socialists and
interventionists of the Anglo-Saxon countries discovered that it was a
hopeless venture to attack liberalism and the idea of liberty openly.
The prestige of liberal institutions was so overwhelming in the
English-speaking world that no party could risk defying them directly.
Anti-liberalism’s only chance was to camouflage itself as true and
genuine liberalism and to denounce the attitudes of all other parties as
a mere counterfeit liberalism.
The continental Socialists had fanatically
smeared and disparaged liberalism and progressivism, and contemptuously
derogated democracy as “pluto-democracy.” Their Anglo-Saxon imitators,
who at first had adopted the same procedure, after a while reversed
their semantics and arrogated to themselves the appellations liberal,
progressive and democratic. They began flatly to deny that political
freedom is the corollary of economic freedom. They boldly asserted that
democratic institutions can work satisfactorily only where the
government has full control of all production activities and the
individual citizen is bound to obey unconditionally all orders issued by
the central planning board. In their eyes all-round regimentation is
the only means to make people free, and freedom of the press is best
guaranteed by a government monopoly of printing and publishing. They
were not plagued by any scruples when they stole the good old name of
liberalism and began to call their own tenets and policies liberal. In
this country the term “liberalism” is nowadays more often than not used
as a synonym for communism.
The semantic innovation which the Socialists
and interventionists thus inaugurated left the advocates of freedom
without any name. There was no term available to call those who believe
that private ownership of the material factors of production is the
best, in fact, the only means to make the nation and all its individual
citizens as prosperous as possible and to make representative government
work. The Socialists and interventionists believe that such people do
not deserve any name, but are to be referred to only by such insulting
epithets as “economic royalists,” “Wall Street sycophants,”
“reactionaries,” and so on.
This state of affairs explains why the phrase
laissez faire was more and more used to signify the ideas of those who
advocate the free market economy as against government planning and
regimentation.
The Cairnes Argument against Laissez Faire
Today it is no longer difficult for intelligent men to realize that the alternative is market economy or communism. Production can either be directed by buying and abstention from buying on the part of all people, or it can be directed by the orders of the supreme chief of state. Men must choose between these two systems of society’s economic organization. There is no third solution, no middle way.
It is a sad fact that not only politicians
and demagogues have failed to see this essential truth, but that even
some economists have erred in dealing with the problems involved.
There is no need to dwell upon the
unfortunate influence which originated from John Stuart Mill’s confused
treatment of government interference with business. It becomes evident
from Mill’s Autobiography that his change of mind resulting in what he calls “a greater approximation . . . to a qualified socialism”*
was motivated by purely personal feelings and affections and not by
emotionally undisturbed reasoning. It is certainly one of the tasks of
economics to refute the errors which deform the disquisitions of so
eminent a thinker as Mill. But it is unnecessary to argue against the
prepossessions of Mrs. Mill.
A few years after Mill, another outstanding economist, J. E. Cairnes, dealt with the same problem.†
As a philosopher and essayist Mill by far supersedes Cairnes. But as an
economist Cairnes was not second to Mill, and his contributions to the
epistemology of the social sciences are of incomparably greater value
and importance than those of Mill. Yet, Cairnes’s analysis of laissez
faire does not display that brilliant precision of reasoning which is
the distinguishing mark of his other writings.
As Cairnes sees it, the assertion implied in
the doctrine of laissez faire is that “the promptings of self-interest
will lead individuals, in all that range of their conduct which has to
do with their material well-being, spontaneously to follow that course
which is most for their own good and for the good of all.” This
assertion, he says, “involves the two following assumptions: first, that
the interests of human beings are fundamentally the same—that what is
most for my interest is also most for the interest of other people; and,
secondly, that individuals know their interests in the sense in which
they are coincident with the interests of others, and that, in the
absence of coercion, they will in this sense follow them. If these two
propositions be made out, the policy of laissez faire . . . follows with
scientific rigour.”
Cairnes is disposed to accept the first—the
major—premise of the syllogism, that the interests of human beings are
fundamentally the same. But he rejects the second—the minor—premise.*
“Human beings know and follow their interests according to their lights
and dispositions; but not necessarily, nor in practice always, in the
sense in which the interest of the individual is coincident with that of
others and of the whole.Ӡ
Let us for the sake of argument accept the
way in which Cairnes presents the problem and in which he argues. Human
beings are fallible and therefore sometimes fail to learn what their
true interests would require them to do. Furthermore, there are “such
things in the world as passion, prejudice, custom, esprit de corps, class interest, to draw people aside from the pursuit of their interests in the largest and highest sense.”‡
It is very unfortunate that reality is such. But, we must ask, is there
any means available to prevent mankind from being hurt by people’s bad
judgment and malice? Is it not a non sequitur to assume that one could
avoid the disastrous consequences of these human weaknesses by
substituting the government’s discretion for that of the individual
citizens? Are governments endowed with intellectual and moral
perfection? Are the rulers not human too, not themselves subject to
human frailties and deficiencies?
The theocratic doctrine is consistent in
attributing to the head of the government superhuman powers. The French
royalists contend that the solemn consecration at Rheims conveys to the
king of France, anointed with the sacred oil which a dove from Heaven
brought down for the consecration of Clovis, divine dispensation. The
legitimate king cannot err and cannot do wrong, and his royal touch
miraculously cures scrofula. No less consistent was the late German
professor Werner Sombart in declaring that Führertum is a permanent revelation and that the Führer gets his orders directly from God, the supreme Führer of the Universe.*
Once you admit these premises, you can no longer raise any objections
against planning and socialism. Why tolerate the incompetence of clumsy
and ill-intentioned bunglers if you can be made happy and prosperous by
the God-sent authority?
But Cairnes is not prepared to accept “the principle of State control, the doctrine of paternal government.”†
His disquisitions peter out in vague and contradictory talk that leaves
the relevant question unanswered. He does not comprehend that it is
indispensable to choose between the supremacy of individuals and that of
the government. Some agency must determine how the factors of
production should be employed and what should be produced. If it is not
the consumer, by means of buying and abstention from buying on the
market, it must be the government by compulsion.
If one rejects laissez faire on account of
man’s fallibility and moral weakness, one must for the same reasons also
reject every kind of government action. Cairnes’s mode of arguing,
provided it is not integrated into a theocratic philosophy in the manner
of the French royalists or the German Nazis, leads to complete
anarchism and nihilism.
One of the distortions to which the
self-styled “progressives” resort in smearing laissez faire is the
statement that consistent application of laissez faire must result in
anarchy. There is no need to dwell upon this fallacy. It is more
important to stress the fact that Cairnes’s argument against laissez
faire, when consistently carried through to its inevitable logical
consequences, is essentially anarchistic.
“Conscious Planning” versus “Automatic Forces”
As the self-styled “progressives” see things, the alternative is: “automatic forces” or “conscious planning.”* It is obvious, they go on saying, that to rely upon automatic processes is sheer stupidity. No reasonable man can seriously recommend doing nothing and letting things go without any interference through purposive action. A plan, by the very fact that it is a display of conscious action, is incomparably superior to the absence of any planning. Laissez faire means: let evils last and do not try to improve the lot of mankind by reasonable action.
This is utterly fallacious and deceptive
talk. The argument advanced for planning is derived entirely from an
inadmissable interpretation of a metaphor. It has no foundation other
than the connotations implied in the term “automatic,” which is
customarily applied in a metaphorical sense to describe the market
process. Automatic, says the Concise Oxford Dictionary, means “unconscious, unintelligent, merely mechanical.” Automatic, says Webster’s Collegiate Dictionary,
means “not subject to the control of the will . . . performed without
active thought and without conscious intention or direction.” What a
triumph for the champion of planning to play this trump-card!
The truth is that the choice is not between a
dead mechanism and a rigid automatism on the one hand and conscious
planning on the other hand. The alternative is not plan or no plan. The
question is: whose planning? Should each member of society plan for
himself or should the paternal government alone plan for all? The issue
is not automatism versus conscious action; it is spontaneous action of each individual versus the exclusive action of the government. It is freedom versus government omnipotence.
Laissez faire does not mean: let soulless
mechanical forces operate. It means: let individuals choose how they
want to cooperate in the social division of labor and let them determine
what the entrepreneurs should produce. Planning means: let the
government alone choose and enforce its rulings by the apparatus of
coercion and compulsion.
The Satisfaction of Man’s “True” Needs
Under laissez faire, says the planner, the goods produced are not those which people “really” need, but those goods from the sale of which the highest returns are expected. It is the objective of planning to direct production toward the satisfaction of “true” needs. But who should decide what “true” needs are?
Thus, for instance, Professor Harold Laski,
the former chairman of the British Labor Party, determined the objective
of planned direction of investment as “the use of the investor’s
savings will be in housing rather than in cinemas.”*
It does not matter whether or not one agrees with the professor’s
personal view that better houses are more important than moving
pictures. The fact is that consumers, by spending part of their money
for admission to the movies, have made another choice. If the masses of
Great Britain, the same people whose votes swept the Labor Party into
power, were to stop patronizing the moving pictures and to spend more
for comfortable homes and apartments, profit-seeking business would be
forced to invest more in building homes and apartment houses, and less
in the production of swanky pictures. What Professor Laski aimed at is
to defy the wishes of the consumers and to substitute his own will for
theirs. He wanted to do away with the democracy of the market and to
establish the absolute rule of a production czar. He might pretend that
he is right from a “higher” point of view, and that as a superman he is
called upon to impose his own set of valuestatic/s on the masses of
inferior men. But then he should have been frank enough to say so
plainly.
All this passionate praise of the
super-eminence of government action is merely a poor disguise for the
individual interventionist’s self-deification. The Great God State is
great only because it is expected to do exclusively what the individual
advocate of interventionism wants to be achieved. The only true plan is
the one of which the individual planner fully approves. All other plans
are simply counterfeit. What the author of a book on the benefits of
planning has in mind is, of course, always his own plan alone. No
planner was ever shrewd enough to consider the possibility that the plan
which the government will put into practice could differ from his own
plan.
The various planners agree only with regard
to their rejection of laissez faire, i.e., the individual’s discretion
to choose and to act. They disagree entirely on the choice of the unique
plan to be adopted. To every exposure of the manifest and incontestable
defects of interventionist policies the champions of interventionism
always react in the same way. These faults, they say, were the sins of
spurious interventionism; what we are advocating is good interventionism. And, of course, good interventionism is the professor’s own brand only.
“Positive” Policies versus “Negative” Policies
In dealing with the ascent of modern statism, socialism and interventionism, one must not neglect the preponderant role played by the pressure groups and lobbies of civil servants and those university graduates who longed for government jobs. Two associations were paramount in Europe’s progress toward “social reform”: the Fabian Society in England and the Verein für Sozialpolitik in Germany. The Fabian Society had in its earlier days a “wholly disproportionate representation of civil servants.”* With regard to the Verein für Sozialpolitik, one of its founders and most eminent leaders, Professor Lujo Brentano, admitted that at the beginning it called for no other response than from the civil servants.†
It is not surprising that the civil service
mentality was reflected in the semantic practices of the new factions.
Seen from the point of view of the particular group interests of the
bureaucrats, every measure that makes the government’s payroll swell is
progress. Politicians who favor such a measure make a positive contribution to welfare, while those who object are negative.
Very soon this linguistic innovation became general. The
interventionists, in claiming for themselves the appellation “liberal,”
explained that they, of course, were liberals with a positive program as
distinguished from the merely negative program of the “orthodox”
laissez-faire people.
Thus he who advocates tariffs, censorship,
foreign exchange control, price control supports a positive program that
will provide jobs for customs officers, censors, and employees of the
offices for price control and foreign exchange control. But free traders
and advocates of the freedom of the press are bad citizens; they are
negative. Laissez faire is the embodiment of negativism, while
socialism, in converting all people into government employees, is 100
percent positive. The more a former liberal completes his defection from
liberalism and approaches socialism, the more “positive” does he
become.
It is hardly necessary to stress that this is
all nonsense. Whether an idea is enunciated in an affirmative or in a
negative proposition depends entirely on the form which the author
chooses to give it. The “negative” proposition, I am against censorship, is identical with the “positive” proposition, I am in favor of everybody’s right to publicize his opinions.
Laissez faire is not even formally a negative formula; rather it is the
contrary of laissez faire that would sound negative. Essentially, the
maxim asks for private ownership of the means of production. This
implies, of course, that it rejects socialism. The supporters of laissez
faire object to government interference with business not because they
“hate” the “state” or because they are committed to a “negative”
program. They object to it because it is incompatible with their own
positive program, the free market economy.*
Conclusion
Laissez faire means: let the individual citizen, the much talked-about common man, choose and act and do not force him to yield to a dictator.
3
Capital Supply and American Prosperity*
One of the amazing phenomena of the present election campaign is the way in which speakers and writers refer to the state of business and to the economic condition of the nation. They praise the administration for the prosperity and for the high standard of living of the average citizen. “You never had it so good,” they say, and, “Don’t let them take it away.” It is implied that the increase in the quantity and the improvement in the quality of products available for consumption are achievements of a paternal government. The incomes of the individual citizens are viewed as handouts graciously bestowed upon them by a benevolent bureaucracy. The American government is considered as better than that of Italy or of India because it passes into the hands of the citizens more and better products than they do.
Capital Investment Increases Production
It is hardly possible to misrepresent in a more thorough way the fundamental facts of economics. The average standard of living is in this country higher than in any other country of the world, not because the American statesmen and politicians are superior to the foreign statesmen and politicians, but because the per-head quota of capital invested is in America higher than in other countries. Average output per man-hour is in this country higher than in other countries, whether England or India, because the American plants are equipped with more efficient tools and machines. Capital is more plentiful in America than it is in other countries because up to now the institutions and laws of the United States put fewer obstacles in the way of big-scale capital accumulation than did those foreign countries.
It is not true that the economic backwardness
of foreign countries is to be imputed to technological ignorance on the
part of their peoples. Modern technology is by and large no esoteric
doctrine. It is taught at many technological universities in this
country as well as abroad. It is described in many excellent textbooks
and articles of scientific magazines. Hundreds of aliens are every year
graduated from American technological institutes. There are in every
part of the earth many experts perfectly conversant with the most recent
developments of industrial technique. It is not a lack of the
“know-how” that prevents foreign countries from fully adopting American
methods of manufacturing, but the insufficiency of capital available.
Under Capitalism, Individual Responsibility and Thrift Are Appreciated
The climate of opinion in which capitalism could thrive was characterized by the moral approbation of the individual citizen’s eagerness to provide for his own and his family’s future. Thrift was appreciated as a virtue no less beneficial to the individual saver himself than to all other people. If people do not consume their whole incomes, the non-consumed surplus can be invested, it increases the amount of capital goods available and thereby makes it possible to embark upon projects which could not be executed before. Progressive capital accumulation results in perpetual economic betterment. All aspects of every citizen’s life are favorably affected. The continuous tendency toward an expansion of business activities opens an ample field for the display of the energies of the rising generation. Looking backward upon his youth and the conditions in his parent’s home, the average man cannot help realizing that there is progress toward a more satisfactory standard of living.
Such were the conditions in all countries on
the eve of the First World War. Conditions were certainly not everywhere
the same. There were the countries of Western Capitalism on the one
hand, and on the other hand the backward nations which were slow and
reluctant in adopting the ideas and the methods of modern progressive
business. But these backward nations were amply benefited by the
investment of capital provided by the capitalists of the advanced
nations. Foreign capital built their railroads and factories and
developed their natural resources.
The spectacle that the world offers today is
very different. As it was forty years ago, the world is divided into two
camps. There is, on the one hand, the capitalist orbit, considerably
shrunk when compared with its size in 1914. It includes today the United
States and Canada and some of the small nations of Western Europe. The
much greater part of the earth’s population lives in countries strictly
rejecting the methods of private property, initiative, and enterprise.
These countries are either stagnating or faced with a progressive
deterioration of their economic conditions.
United States Living Standards
Let us illustrate this difference by contrasting, as typical of each of the two groups, conditions in this country and those in India.
In the United States, capitalist big business
almost every year supplies the masses with some novelties: either
improved articles to replace similar articles used long since or things
which had been altogether unknown before. The latter—as for instance,
television sets or nylon hosiery—are commonly called luxuries, as people
previously lived rather contented and happy without them. The average
common man enjoys a standard of living which, only fifty years ago, his
parents or grandparents would have considered as fabulous. His home is
equipped with gadgets and facilities which the well-to-do of earlier
ages would have envied. His wife and his daughters dress elegantly and
apply cosmetics. His children, well fed and cared for, have the benefit
of a high school education, many also of a college education. If one
observes him and his family on their weekend outings, one must admit
that he looks prosperous.
There are, of course, also Americans whose
material conditions appear unsatisfactory when compared with those of
the great majority of the nation. Some authors of novels and plays would
have us believe that their gloomy descriptions of the lot of this
unfortunate minority is representative of the fate of the common man
under capitalism. They are mistaken. The plight of these wretched
Americans is rather representative of conditions as they prevailed
everywhere in the precapitalistic ages and still prevail in the
countries which were either not at all or only superficially touched by
capitalism. What is wrong with these people is that they have not yet
been integrated into the frame of capitalist production. Their penury is
a remnant of the past. The progressive accumulation of new capital and
the expansion of big-scale production will eradicate it by the same
methods by means of which it has already improved the standard of living
of the immense majority, viz., by raising the per-head quota of capital
invested and thereby the marginal productivity of labor.
India’s Living Standards
Now let us look at India. Nature has endowed its territory with valuable resources, perhaps more richly than the soil of the United States. On the other hand, climatic conditions make it possible for man to subsist on a lighter diet and to do without many things which in the rough winter of the greater part of the United States are indispensable. Nonetheless, the masses of India are on the verge of starvation, shabbily dressed, crammed into primitive huts, dirty, illiterate. From year to year things are getting worse; for population figures are increasing while the total amount of capital invested does not increase or, even more likely, decreases. At any rate, there is a progressive drop in the per-head quota of capital invested.
Laissez Faire Ideas Brought Industrialization to England
In the middle of the eighteenth century conditions in England were hardly more propitious than they are today in India. The traditional system of production was not fit to provide for the needs of an increasing population. The number of people for whom there was no room left in the rigid system of paternalism and government tutelage of business grew rapidly. Although at that time England’s population was not much more than fifteen percent of what it is today, there were several millions of destitute poor. Neither the ruling aristocracy nor these paupers themselves had any idea about what could be done to improve the material conditions of the masses.
The great change that within a few decades
made England the world’s wealthiest and most powerful nation was
prepared for by a small group of philosophers and economists. They
demolished entirely the pseudo-philosophy that hitherto had been
instrumental in shaping the economic policies of the nations. They
exploded the old fables: (1) that it is unfair and unjust to outdo a
competitor by producing better and cheaper goods; (2) that it is
iniquitous to deviate from traditional methods of production; (3) that
labor-saving machines bring about unemployment and are therefore an
evil; (4) that it is one of the tasks of civil government to prevent
efficient businessmen from getting rich and to protect the less
efficient against the competition of the more efficient; and (5) that to
restrict the freedom and the initiative of entrepreneurs by government
compulsion or by coercion on the part of other powers is an appropriate
means to promote a nation’s well-being. In short: these authors
expounded the doctrine of free trade and laissez faire. They paved the
way for a policy that no longer obstructed the businessman’s effort to
improve and to expand his operations.
What begot modern industrialization and the
unprecedented improvement in material conditions that it brought about
was neither capital previously accumulated nor previously assembled
technological knowledge. In England, as well as in the other Western
countries that followed it on the path of capitalism, the early pioneers
of capitalism started with scanty capital and scanty technological
experience. At the outset of industrialization was the philosophy of
private enterprise and initiative, and the practical application of this
ideology made the capital swell and the technological know-how advance
and ripen.
One must stress this point because its
neglect misleads the statesmen of all backward nations in their plans
for economic improvement. They think that industrialization means
machines and textbooks of technology. In fact, it means economic freedom
that creates both capital and technological knowledge.
India Lacks Capitalist Ideas
Let us look again at India. India lacks capital because it never adopted the pro-capitalist philosophy of the West and therefore did not remove the traditional institutional obstacles to free enterprise and big-scale accumulation. Capitalism came to India as an alien imported ideology that never took root in the minds of the people. Foreign, mostly British, capital built railroads and factories. The natives looked askance not only upon the activities of the alien capitalists but no less upon those of their countrymen who cooperated in the capitalist ventures. Today the situation is this: Thanks to new methods of therapeutics, developed by the capitalist nations and imported to India by the British, the average length of life has been prolonged and the population is rapidly increasing. As the foreign capitalists have either already been virtually expropriated or have to face expropriation in the near future, there can no longer be any question of new investment of foreign capital. On the other hand, the accumulation of domestic capital is prevented by the manifest hostility of the government apparatus and the ruling party.
The Indian government talks a lot about
industrialization. But what it really has in mind is nationalization of
already existing privately owned industries. For the sake of argument,
we may neglect referring to the fact that this will probably result in a
progressive decumulation of the capital invested in these industries as
was the case in most of the countries that have experimented with
nationalization. At any rate, nationalization as such does not add
anything to the already prevailing extent of investment. Mr. Nehru
admits that his government does not have the capital required for the
establishment of new state-owned industries or for the expansion of such
industries already existing. Thus, he solemnly declares that his
government will give to private industries “encouragement in every way.”
And he explains in what this encouragement will consist: we will
promise them, he says, “that we would not touch them for at least ten
years, maybe more.” He adds: “We do not know when we shall nationalize
them.”* But the businessmen know very well that new investments will be nationalized as soon as they begin to yield returns.
Envy Fosters Anti-Capitalism
I have dwelt so long upon the affairs of India because they are representative of what is going on today almost in all parts of Asia and Africa, in great parts of Latin America and even in many European countries. In all these countries the population is increasing. In all these countries foreign investments are expropriated, either openly or surreptitiously by means of foreign exchange control or discriminatory taxation. At the same time, their domestic policies do their best to discourage the formation of domestic capital. There is much poverty in the world today; and the governments, in this regard in full agreement with public opinion, perpetuate and aggravate this poverty by their policies.
As these people see it, their economic
troubles were in some unspecified way caused by the capitalist countries
of the West. This notion included, until a few years ago, also the
advanced nations of Western Europe, especially also the United Kingdom.
With recent economic changes, the number of nations to which it refers
has been more and more restricted; today it means practically only the
United States. The inhabitants of all those countries in which the
average income is considerably lower than in this country look upon the
United States with the same feelings of envy and hatred with which
within the capitalist countries those voting the ticket of the various
communist, socialist and interventionist parties look upon the
entrepreneurs of their own nation. The same slogans that are employed in
our domestic antagonisms—such as Wall Street, big business, monopolies,
merchants of death—are resorted to in speeches and articles by the
anti-American politicians when they are attacking what is called in
Latin America, Yankeeism, and in the other hemisphere, Americanism. In
these effusions there is little difference between the most chauvinistic
nationalists and the most enthusiastic adepts of Marxian
internationalism, between the self-styled conservatives eager to
preserve traditional religious faith and political institutions, and the
revolutionaries aiming at the violent overthrow of all that exists.
The popularity of these ideas is by no means
an effect of the inflammatory propaganda of the Soviets. It is just the
other way round. The communist lies and calumnies get their
persuasiveness, whatever it may be, from the fact that they agree with
the socio-political doctrines taught at most of the universities and
held by the most influential politicians and writers.
Anti-Capitalistic Ideas Are Worldwide
The same ideas dominate the minds in this country and determine the attitude of statesmen with regard to all the problems concerned. People are ashamed of the fact that American capital developed the natural resources in many countries which lacked both the capital and the trained specialists required. When various foreign governments expropriated American investments or repudiated loans granted by the American saver, the public either remained indifferent or even sympathized with the expropriators. With the ideas underlying the programs of the most influential political groups and taught at most of the educational institutions, no other reaction could be expected.
Four years ago there assembled in Amsterdam
the World Council of Churches, an organization of
one-hundred-and-fifty-odd denominations. We read in the report drafted
by this ecumenical body the following statement: “Justice demands that
the inhabitants of Asia and Africa should have the benefits of more
machine production.” This implies that the technological backwardness of
these nations has been caused by an injustice committed by some
individuals, groups of individuals or nations. The culprits are not
specified. But it is understood that the indictment refers to the
capitalists and businessmen of the shrinking number of capitalist
countries, practically to the United States and Canada. Such is the
opinion of very judicious conservative churchmen acting in full
awareness of their responsibilities.
The same doctrine is at the bottom of the
foreign aid and the Point Four policies of the United States. It is
implied that the American taxpayers have the moral obligation to provide
capital for nations that have expropriated foreign investments and are
preventing the accumulation of domestic capital by various schemes.
There is no use indulging in wishful
thinking. Under the present state of international law foreign
investments are unsafe and at the mercy of each sovereign nation’s
government. It is generally agreed that every sovereign government has
the right to decree a fictitious parity of its inflated currency as
against dollars or gold and to try to enforce this arbitrarily fixed
spurious parity by foreign exchange control, that is, by virtually
expropriating foreign investors. As far as some foreign governments
still abstain from such confiscations, they do so because they hope to
talk foreigners into more investments and thus to be later in a position
to expropriate more.
In the ranks of those nations that do all
that can be done to prevent their industries from getting badly needed
capital, we find today also Great Britain, once the cradle of free
enterprise and before 1914 the world’s richest or second richest
country. In exuberant and entirely un-deserved praise of the late Lord
Keynes, a Harvard professor found in his hero but one weakness. Keynes,
he said, “always exalted what was at any moment truth and wisdom for
England into truth and wisdom for all times and places.”*
I heartily disagree. Just at the moment in which it must have become
manifest to every judicious observer that England’s economic distress
was caused by an insufficient supply of capital, Keynes enounced his
notorious doctrine of the alleged dangers of saving and passionately
recommended more spending. Keynes tried to provide a belated and
spurious justification of a policy that Great Britain had adopted in
defiance of the teachings of all its great economists. The essence of
Keynesianism is its complete failure to conceive the role that saving
and capital accumulation play in the improvement of economic conditions.
Importance of Capital Savings
The main problem for this country is: Will the United States follow the course of the economic policies adopted by almost all foreign nations, even by many of those which had been foremost in the evolution of capitalism? Up to now in this country the amount of savings and formation of new capital still exceeds the amount of dissaving and decumulation of capital. Will this last?
To answer such a question one must look upon
the ideas about economic matters held by public opinion. The question
is: Do the American voters know that the unprecedented improvement in
their standard of living that the last hundred years brought was the
result of the steady rise in the per-head quota of capital invested? Do
they realize that every measure leading to capital decumulation
jeopardizes their prosperity? Are they aware of the conditions that make
their wage rates tower above those of other countries?
If we pass in review the speeches of
political leaders, the editorials of newspapers and textbooks of
economics and finance, we cannot help discovering that very little
attention, if at all, is paid to the problems of capital equipment. Most
people take it simply for granted that some mysterious factor is
operative that makes the nation richer from year to year. Government
economists have computed a rate of yearly increase in the national
income for the past fifty years and blithely assume that in the future
the same rate will prevail. They discuss problems of taxation without
even mentioning the fact that our present tax system collects large
funds, which would have been saved by the taxpayer, and employs them for
current expenditure.
A typical instance of this mode of dealing
(or rather, nondealing) with the problem of America’s capital supply may
be cited. A few days ago the American Academy of Political and Social
Science published a new volume of its Annals, entirely devoted to the investigation of vital issues of the nation. The title of the volume is Meaning of the 1952Presidential Election.
To this symposium Professor Harold M. Groves of the University of
Wisconsin contributed an article, “Are Taxes Too High?” The author comes
out “with a largely negative answer.” From our point of view, the most
interesting feature of the article is the fact that it reaches this
conclusion without even mentioning the effects which taxes on income,
corporations, excess profits and estates have upon the maintenance and
formation of capital. What economists have said about these problems
either remained unknown to the author or he does not consider it worthy
of an answer.
One does not misrepresent the economic ideas
determining the course of American policies if one blames them for not
being conscious of the role the supply of new capital plays in improving
and expanding production. An instructive example has been provided by
the conflict between the government and business concerning the adequacy
of depreciation quotas under inflationary conditions. In all the
agitated debates concerning profits, taxes and the height of wage rates
the capital supply is hardly mentioned, if at all. In comparing American
wage rates and standards of living with those of foreign countries,
most authors and politicians fail to stress the differences in the
per-head quotas of capital invested.
In the latest forty years American taxation
more and more adopted methods which considerably slowed down the pace of
capital accumulation. If it continues along this line, it will one day
reach the point at which no further increase in capital will be
possible, or even decumulation will set in. There is only one way open
to stop this evolution in time and to spare this country the fate of
England and France. One must substitute sound economic ideas for fables
and illusions.
Scarcity of Capital
Up to this point I have employed the terms capital shortage and scarcity of capital without further explication and definition. This was quite sufficient as long as I dealt primarily with the conditions of countries whose capital supply appears as inadequate when compared with the supply in more advanced countries, especially in the economically most advanced country, the United States. But in examining American problems, a more searching interpretation of terms is required.
Strictly speaking, capital has always been
scarce and will always be. The available supply of capital goods can
never become so abundant that all projects, the execution of which could
improve the material well-being of people, could be undertaken. If it
were otherwise, mankind would live in the Garden of Eden and would not
have to bother at all about production. Whatever the state of the
capital supply may be, in this real world of ours there will always be
business projects that cannot be launched because the capital they would
require is employed for other enterprises, the products of which are
more urgently asked for by the consumers. In every branch of industry
there are limits beyond which the investment of additional capital does
not pay. It does not pay because the capital goods concerned can find
employment in the production of goods which are in the eyes of the
buying public more valuable. If, other things being equal, the supply of
capital increases, projects which hitherto could not be undertaken
become profitable and are started. There is never a lack of investment
opportunities. If there is lack of opportunities for profitable
investment, the reason is that all the capital goods available have
already been invested in profitable projects.
In speaking of the capital shortage of a
country that is poorer than other countries one does not refer to this
phenomenon of the general and perpetual shortage of capital. One merely
compares the state of affairs in this individual country with that of
other countries in which capital is more abundant. Looking upon India
one may say: Here are a number of artisans producing with a total
capital of ten thousand dollars products with the market value of, let
us say, one million dollars. In an American factory with a capital
equipment of one million dollars the same number of workers turn out
products with the market value of 500 times as many dollars. Indian
businessmen unfortunately lack the capital to make such investments. The
consequence is that productivity per man is lower in India than in
America, that the total amount of goods available for consumption is
smaller and that the average Indian is poor when compared with the
average American.
There is, especially under inflationary
conditions, no reliable standard available that could be applied in
measuring the degree of the scarcity of capital. Where it is impossible
to compare a country’s conditions with those of countries in which the
supply of capital is more plentiful, as is the case with this country,
only comparisons with the hypothetical size of the capital supply (as it
would have been if certain things had not happened) are possible. There
is in such a country no phenomenon that would present itself as capital
scarcity so clearly and manifestly as the capital scarcity presents
itself today to the people of India. All that can be said is: If in our
nation people had saved more in the past, some improvements in
technological methods (and lateral expansion of production by
duplication of equipment of the kind already in existence for which the
capital required is lacking) would have been feasible.
“Soak the Rich” Taxation
It is not easy to explain this state of affairs to people misled by the passionate anti-capitalistic agitation. As the self-styled intellectuals see it, the capitalist system and the greed of the businessmen are to blame for the fact that the total sum of products turned out for consumption is not greater than it actually is. The only way to do away with poverty they know is to take away—by means of progressive taxation—as much as possible from the well-to-do. In their eyes the wealth of the rich is the cause of the poverty of the poor. In accordance with this idea the fiscal policies of all nations and especially also of the United States were in the last decades directed toward confiscating ever-increasing portions of the wealth and income of the higher brackets. The greater part of the funds thus collected would have been employed by the taxpayers for saving and additional capital accumulation. Their investment would have increased productivity per man-hour and would in this way have provided more goods for consumption. It would have raised the average standard of living of the common man. If the government spends them for current expenditure, they are dissipated and capital accumulation is concomitantly slowed down.
Whatever one may think about the
reasonableness of this policy of soaking the rich, it is impossible to
deny the fact that it has already reached its limits. In Great Britain
the Socialist Chancellor of the Exchequer had to admit a few years ago
that even total confiscation of all that has still been left to people
with higher incomes would add only a quite negligible sum to internal
revenue and that there can no longer be any question of improving the
lot of the indigent by taking it away from the rich.
In this country a total confiscation of
incomes above twenty-five thousand dollars would at best yield much less
than one billion dollars, a very small sum indeed when compared with
the size of our present budget and the probable deficit. The main
principle of the financial policies of the self-styled progressives has
been pursued to the point at which it defeats itself and its absurdity
becomes manifest. The progressives are at their wit’s end. Henceforth,
if they want to expand public expenditure further, they will have to tax
more heavily precisely those classes of voters for whose support they
have hitherto canvassed by placing the main burden upon the shoulders of
the minority of wealthier people. (A very embarrassing dilemma indeed
for the next Congress.)
To Raise Wages, Increase Capital Investment
But it is exactly the perplexity of this situation that offers a favorable opportunity for the substitution of sound economic principles for the pernicious errors that prevailed in the last decades. Now is the time to explain to the voters the causes of American prosperity on the one hand, and of the plight of the backward nations on the other hand. They must learn that what makes American wage rates much higher than those in other countries is the size of capital invested and that any further improvement of their standard of living depends on a sufficient accumulation of additional capital. Today only the businessmen worry about the provision of new capital for the expansion and improvement of their plants. The rest of the people are indifferent with regard to this issue, not knowing that their well-being and that of their children is at stake. What is needed is to make the importance of these problems understood by everybody. No party platform is to be considered as satisfactory that does not contain the following point: As the prosperity of the nation and the height of wage rates depend on a continual increase in the capital invested in its plants, mines and farms, it is one of the foremost tasks of good government to remove all obstacles that hinder the accumulation and investment of new capital.
Money, Inflation, and Government
Nothing is inflationary except inflation, i.e., an increase in the quantity of money in circulation and credit subject to check (check-book money). And under present conditions nobody but the government can bring an inflation into being.
—“Wages, Unemployment, and Inflation”
4
Middle-of-the-Road Policy Leads to Socialism*
The Unpopularity of Capitalism
The fundamental dogma of all brands of socialism and communism is that the market economy or capitalism is a system that hurts the vital interests of the immense majority of people for the sole benefit of a small minority of rugged individualists. It condemns the masses to progressing impoverishment. It brings about misery, slavery, oppression, degradation and exploitation of the working men, while it enriches a class of idle and useless parasites.
This doctrine was not the work of Karl Marx.
It had been developed long before Marx entered the scene. Its most
successful propagators were not the Marxian authors, but such men as
Carlyle and Ruskin, the British Fabians, the German professors and the
American Institutionalists. And it is a very significant fact that the
correctness of this dogma was contested only by a few economists who
were very soon silenced and barred from access to the universities, the
press, the leadership of political parties and, first of all, public
office. Public opinion by and large accepted the condemnation of
capitalism without any reservation.
Socialism
But, of course, the practical political conclusions which people drew from this dogma were not uniform. One group declared that there is but one way to wipe out these evils, namely to abolish capitalism entirely. They advocate the substitution of public control of the means of production for private control. They aim at the establishment of what is called socialism, communism, planning, or state capitalism. All these terms signify the same thing. No longer should the consumers, by their buying and abstention from buying, determine what should be produced, in what quantity and of what quality. Henceforth a central authority alone should direct all production activities.
Interventionism
A second group seems to be less radical. They reject socialism no less than capitalism. They recommend a third system, which, as they say, is as far from capitalism as it is from socialism, which as a third system of society’s economic organization stands midway between the two other systems and, while retaining the advantages of both, avoids the disadvantages inherent in each. This third system is known as the system of interventionism. In the terminology of American politics it is often referred to as the middle-of-the-road policy.
What makes this third system popular with
many people is the particular way they choose to look upon the problems
involved. As they see it, two classes, the capitalists and entrepreneurs
on the one hand and the wage earners on the other hand, are arguing
about the distribution of the yield of capital and entrepreneurial
activities. Both parties are claiming the whole cake for themselves.
Now, suggest these mediators, let us make peace by splitting the
disputed value equally between the two classes. The State as an
impartial arbiter should interfere and should curb the greed of the
capitalists and assign a part of the profits to the working classes.
Thus it will be possible to dethrone the moloch capitalism without
enthroning the moloch of totalitarian socialism.
Yet this mode of judging the issue is
entirely fallacious. The antagonism between capitalism and socialism is
not a dispute about the distribution of booty. It is a controversy about
which of two schemes for society’s economic organization, capitalism or
socialism, is conducive to the better attainment of those ends which
all people consider as the ultimate aim of activities commonly called
economic, viz., the best possible supply of useful commodities and
services. Capitalism wants to attain these ends by private enterprise
and initiative, subject to the supremacy of the public’s buying and
abstention from buying on the market. The socialists want to substitute
the unique plan of a central authority for the plans of the various
individuals. They want to put in place of what Marx called the “anarchy
of production” the exclusive monopoly of the government. The antagonism
does not refer to the mode of distributing a fixed amount of amenities.
It refers to the mode of producing all those goods which people want to
enjoy.
The conflict of the two principles is
irreconcilable and does not allow of any compromise. Control is
indivisible. Either the consumers’ demand as manifested on the market
decides for what purposes and how the factors of production should be
employed, or the government takes care of these matters. There is
nothing that could mitigate the opposition between these two
contradictory principles. They preclude each other.
Interventionism is not a golden mean between
capitalism and socialism. It is the design of a third system of
society’s economic organization and must be appreciated as such.
It is not the task of today’s discussion to
raise any questions about the merits either of capitalism or of
socialism. I am dealing today with interventionism alone. And I do not
intend to enter into an arbitrary evaluation of interventionism from any
preconceived point of view. My only concern is to show how
interventionism works and whether or not it can be considered as a
pattern of a permanent system of society’s economic organization.
The interventionists emphasize that they plan
to retain private ownership of the means of production,
entrepreneurship and market exchange. But, they go on to say, it is
peremptory to prevent these capitalist institutions from spreading havoc
and unfairly exploiting the majority of people. It is the duty of
government to restrain, by orders and prohibitions, the greed of the
propertied classes lest their acquisitiveness harms the poorer classes.
Unhampered or laissez-faire capitalism is an evil. But in order to
eliminate its evils, there is no need to abolish capitalism entirely. It
is possible to improve the capitalist system by government interference
with the actions of the capitalists and entrepreneurs. Such government
regulation and regimentation of business is the only method to keep off
totalitarian socialism and to salvage those features of capitalism which
are worth preserving.
On the ground of this philosophy, the
interventionists advocate a galaxy of various measures. Let us pick out
one of them, the very popular scheme of price control.
Price Control
The government believes that the price of a definite commodity, e.g., milk, is too high. It wants to make it possible for the poor to give their children more milk. Thus it resorts to a price ceiling and fixes the price of milk at a lower rate than that prevailing on the free market. The result is that the marginal producers of milk, those producing at the highest cost, now incur losses. As no individual farmer or businessman can go on producing at a loss, these marginal producers stop producing and selling milk on the market. They will use their cows and their skill for other more profitable purposes. They will, for example, produce butter, cheese or meat. There will be less milk available for the consumers, not more. This, of course, is contrary to the intentions of the government. It wanted to make it easier for some people to buy more milk. But, as an outcome of its interference, the supply available drops. The measure proves abortive from the very point of view of the government and the groups it was eager to favor. It brings about a state of affairs, which—again from the point of view of the government—is even less desirable than the previous state of affairs which it was designed to improve.
Now, the government is faced with an
alternative. It can abrogate its decree and refrain from any further
endeavors to control the price of milk. But if it insists upon its
intention to keep the price of milk below the rate the unhampered market
would have determined and wants nonetheless to avoid a drop in the
supply of milk, it must try to eliminate the causes that render the
marginal producers’ business unremunerative. It must add to the first
decree concerning only the price of milk a second decree fixing the
prices of the factors of production necessary for the production of milk
at such a low rate that the marginal producers of milk will no longer
suffer losses and will therefore abstain from restricting output. But
then the same story repeats itself on a remoter plane. The supply of the
factors of production required for the production of milk drops, and
again the government is back where it started. If it does not want to
admit defeat and to abstain from any meddling with prices, it must push
further and fix the prices of those factors of production which are
needed for the production of the factors necessary for the production of
milk. Thus the government is forced to go further and further, fixing
step by step the prices of all consumers’ goods and of all factors of
production—both human, i.e., labor, and material—and to order every
entrepreneur and every worker to continue work at these prices and
wages.
No branch of industry can be omitted from this all-round fixing
of prices and wages and from this obligation to produce those quantities
which the government wants to see produced. If some branches were to be
left free out of regard for the fact that they produce only goods
qualified as non-vital or even as luxuries, capital and labor would tend
to flow into them and the result would be a drop in the supply of those
goods, the prices of which the government has fixed precisely because
it considers them as indispensable for the satisfaction of the needs of
the masses.
But when this state of all-round control of
business is attained, there can no longer be any question of a market
economy. No longer do the citizens by their buying and abstention from
buying determine what should be produced and how. The power to decide
these matters has devolved upon the government. This is no longer
capitalism; it is all-round planning by the government, it is socialism.
Socialism, the German Pattern
It is, of course, true that this type of socialism preserves some of the labels and the outward appearance of capitalism. It maintains, seemingly and nominally, private ownership of the means of production, prices, wages, interest rates, and profits. In fact, however, nothing counts but the government’s unrestricted autocracy. The government tells the entrepreneurs and capitalists what to produce and in what quantity and quality, at what prices to buy and from whom, at what prices to sell and to whom. It decrees at what wages and where the workers must work. Market exchange is but a sham. All the prices, wages and interest rates are determined by the authority. They are prices, wages and interest rates in appearance only; in fact they are merely quantity relations in the government’s orders. The government, not the consumers, directs production. The government determines each citizen’s income, it assigns to everybody the position in which he has to work. This is socialism in the outward guise of capitalism. It is the Zwangswirtschaft of Hitler’s German Reich and the planned economy of Great Britain.
For the scheme of social transformation which
I have depicted is not merely a theoretical construction. It is a
realistic portrayal of the succession of events that brought about
socialism in Germany, in Great Britain and in some other countries.
The Germans, in the First World War, began
with price ceilings for a small group of consumers’ goods considered as
vital necessaries. It was the inevitable failure of these measures that
impelled them to go further and further until, in the second period of
the war, they designed the Hindenburg plan. In the context of the
Hindenburg plan no room whatever was left for a free choice on the part
of the consumers and for initiative action on the part of business. All
economic activities were unconditionally subordinated to the exclusive
jurisdiction of the authorities. The total defeat of the Kaiser swept
the whole imperial apparatus of administration away and with it went
also the grandiose plan. But when in 1931 Chancellor Brüning embarked
anew on a policy of price control and his successors, first of all
Hitler, obstinately clung to it, the same story repeated itself.
Socialism, the British Experience
Great Britain and all the other countries which in the First World War adopted measures of price control had to experience the same failure. They too were pushed further and further in their attempts to make the initial decrees work. But they were still at a rudimentary stage of this development when the victory and the opposition of the public brushed away all schemes for controlling prices.
It was different in the Second World War.
Then Great Britain again resorted to price ceilings for a few vital
commodities and had to run the whole gamut proceeding further and
further until it had substituted all-round planning of the country’s
whole economy for economic freedom. When the war came to an end, Great
Britain was a socialist commonwealth.
It is noteworthy to remember that British
socialism was not an achievement of Mr. Attlee’s Labor government, but
of the war cabinet of Mr. Winston Churchill. What the Labor Party did
was not the establishment of socialism in a free country, but retaining
socialism as it had developed during the war in the postwar period. The
fact has been obscured by the great sensation made about the
nationalization of the Bank of England, the coal mines and other
branches of business. However, Great Britain is to be called a socialist
country not because certain enterprises have been formally expropriated
and nationalized, but because all the economic activities of all
citizens are subject to full control of the government and its agencies.
The authorities direct the allocation of capital and of manpower to the
various branches of business. They determine what should be produced.
Supremacy in all business activities is exclusively vested in the
government. The people are reduced to the status of wards,
unconditionally bound to obey orders. To the businessmen, the former
entrepreneurs, merely ancillary functions are left. All that they are
free to do is to carry into effect, within a neatly circumscribed narrow
field, the decisions of the government departments.
One Intervention Leads to Further Interventions
What we have to realize is that price ceilings affecting only a few commodities fail to attain the ends sought. On the contrary. They produce effects which from the point of view of the government are even worse than the previous state of affairs which the government wanted to alter. If the government, in order to eliminate these inevitable but unwelcome consequences, pursues its course further and further, it finally transforms the system of capitalism and free enterprise into socialism of the Hindenburg pattern.
The same is true of all other types of
meddling with the market phenomena. Minimum wage rates, whether decreed
and enforced by the government or by labor union pressure and violence,
result in mass unemployment prolonged year after year as soon as they
try to raise wage rates above the height of the unhampered market. The
attempts to lower interest rates by credit expansion generate, it is
true, a period of booming business. But the prosperity thus created is
only an artificial hothouse product and must inexorably lead to the
slump and to the depression. People must pay heavily for the easy-money
orgy of a few years of credit expansion and inflation.
The recurrence of periods of depression and
mass unemployment has discredited capitalism in the opinion of
injudicious people. Yet these events are not the outcome of the
operation of the free market. They are on the contrary the result of
well-intentioned but ill-advised government interference with the
market. There are no means by which the height of wage rates and the
general standard of living can be raised other than by accelerating the
increase of capital as compared with population. The only means to raise
wage rates permanently for all those seeking jobs and eager to earn
wages is to raise the productivity of the industrial effort by
increasing the per-head quota of capital invested. What makes American
wage rates by far exceed the wage rates of Europe and Asia is the fact
that the American worker’s toil and trouble is aided by more and better
tools. All that good government can do to improve the material
well-being of the people is to establish and to preserve an
institutional order in which there are no obstacles to the progressing
accumulation of new capital, required for the improvement of
technological methods of production. This is what capitalism did achieve
in the past and will achieve in the future too if not sabotaged by a
bad policy.
Socialism by Intervention or Expropriation
Interventionism cannot be considered as an economic system destined to stay. It is a method for the transformation of capitalism into socialism by a series of successive steps. It is as such different from the endeavors of the communists to bring about socialism at one stroke. The difference does not refer to the ultimate end of the political movement; it refers mainly to the tactics to be resorted to for the attainment of an end that both groups are aiming at.
Karl Marx and Frederick Engels recommended
successively each of these two ways for the realization of socialism. In
1848, in the Communist Manifesto, they outlined a plan for the
step-by-step transformation of capitalism into socialism. The
proletariat should be raised to the position of the ruling class and use
its political supremacy “to wrest, by degrees, all capital from the
bourgeoisie.” This, they declare, “cannot be effected except by means of
despotic inroads on the rights of property and on the conditions of
bourgeois production; by means of measures, therefore, which appear
economically insufficient and untenable, but which in the course of the
movement outstrip themselves, necessitate further inroads upon the old
social order, and are unavoidable as a means of entirely revolutionizing
the mode of production.” In this vein they enumerate by way of example
ten measures.
In later years Marx and Engels changed their minds. In his main treatise, Das Kapital,
first published in 1867, Marx saw things in a different way. Socialism
is bound to come “with the inexorability of a law of nature.” But it
cannot appear before capitalism has reached its full maturity. There is
but one road to the collapse of capitalism, namely the
progressive evolution of capitalism itself. Then only will the great
final revolt of the working class give it the finishing stroke and
inaugurate the everlasting age of abundance.
From the point of view of this later doctrine
Marx and the school of orthodox Marxism reject all policies that
pretend to restrain, to regulate and to improve capitalism. Such
policies, they declare, are not only futile, but outright harmful. For
they rather delay the coming of age of capitalism, its maturity, and
thereby also its collapse. They are therefore not progressive, but
reactionary. It was this idea that led the German Social Democratic
party to vote against Bismarck’s social security legislation and to
frustrate Bismarck’s plan to nationalize the German tobacco industry.
From the point of view of the same doctrine, the communists branded the
American New Deal as a reactionary plot extremely detrimental to the
true interests of the working people.
What we must realize is that the antagonism
between the interventionists and the communists is a manifestation of
the conflict between the two doctrines of the early Marxism and of the
late Marxism. It is the conflict between the Marx of 1848, the author of
the Communist Manifesto, and the Marx of 1867, the author of Das Kapital.
And it is paradoxical indeed that the document in which Marx endorsed
the policies of the present-day self-styled anti-communists is called
the Communist Manifesto.
There are two methods available for the
transformation of capitalism into socialism. One is to expropriate all
farms, plants and shops and to operate them by a bureaucratic apparatus
as departments of the government. The whole of society, says Lenin,
becomes “one office and one factory, with equal work and equal pay,”* the whole economy will be organized “like the postal system.”†
The second method is the method of the Hindenburg plan, the originally
German pattern of the welfare state and of planning. It forces every
firm and every individual to comply strictly with the orders issued by
the government’s central board of production management. Such was the
intention of the National Industrial Recovery Act of 1933 which the
resistance of business frustrated and the Supreme Court declared
unconstitutional. Such is the idea implied in the endeavors to
substitute planning for private enterprise.
Socialism via Foreign Exchange Control
The foremost vehicle for the realization of this second type of socialism is in industrial countries like Germany and Great Britain foreign exchange control. These countries cannot feed and clothe their people out of domestic resources. They must import large quantities of food and raw materials. In order to pay for these badly needed imports, they must export manufactures, most of them produced out of imported raw material. In such countries almost every business transaction directly or indirectly is conditioned either by exporting or importing or by both exporting and importing. Hence the government’s monopoly of buying and selling foreign exchange makes every kind of business activity depend on the discretion of the agency entrusted with foreign exchange control. In this country matters are different. The volume of foreign trade is rather small when compared with the total volume of the nation’s trade. Foreign exchange control would only slightly affect the much greater part of American business. This is the reason why in the schemes of our planners there is hardly any question of foreign exchange control. Their pursuits are directed toward the control of prices, wages and interest rates, toward the control of investment, and the limitation of profits and incomes.
Effects of Progressive Taxation
Looking backward on the evolution of income tax rates from the beginning of the Federal income tax in 1913 until the present day, one can hardly expect that the tax will not one day absorb 100% of all surplus above the income of the average voter. It is this that Marx and Engels had in mind when in the Communist Manifesto they recommended “a heavy progressive or graduated income tax.”
Another of the suggestions of the Communist Manifesto
was “abolition of all right of inheritance.” Now, neither in Great
Britain nor in this country have the laws gone up to this point. But
again, looking backward upon the past history of the estate taxes, we
have to realize that they more and more have approached the goal set by
Marx. Estate taxes of the height they have already attained for the
upper brackets are no longer to be qualified as taxes. They are measures
of expropriation.
The philosophy underlying the system of
progressive taxation is that the income and the wealth of the well-to-do
classes can be freely tapped. What the advocates of these tax rates
fail to realize is that the greater part of the incomes taxed away would
not have been consumed but saved and invested. In fact, this fiscal
policy does not only prevent the further accumulation of new capital. It
brings about capital decumulation. This is certainly today the state of
affairs in Great Britain.
The Trend Toward Socialism
The course of events in the past thirty years shows a continuous although sometimes interrupted progress toward the establishment in this country of socialism of the British and German pattern. The U. S. embarked later than these two other countries upon this decline and is today still farther away from its end. But if the trend of this policy will not change, the final result will only in accidental and negligible points differ from what happened in the England of Attlee and in the Germany of Hitler. The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.
Many people object. They stress the fact that
most of the laws which aim at planning or at expropriation by means of
progressive taxation have left some loopholes which offer to private
enterprise a margin within which it can go on. That such loopholes still
exist and that thanks to them this country is still a free country is
certainly true. But this loopholes capitalism is not a lasting system.
It is a respite. Powerful forces are at work to close these loopholes.
From day to day the field in which private enterprise is free to operate
is narrowed down.
Of course, this outcome is not inevitable.
The trend can be reversed as was the case with many other trends in
history. The Marxian dogma according to which socialism is bound to come
“with the inexorability of a law of nature” is just an arbitrary
surmise devoid of any proof. But the prestige which this vain prognostic
enjoys not only with the Marxians, but with many self-styled
non-Marxians, is the main instrument of the progress of socialism. It
spreads defeatism among those who otherwise would gallantly fight the
socialist menace. The most powerful ally of Soviet Russia is the
doctrine that the “wave of the future” carries us toward socialism and
that it is therefore “progressive” to sympathize with all measures that
restrict more and more the operation of the market economy.
Antidote to Socialism, Laissez Faire Ideology
Even in this country which owes to a century of “rugged individualism” the highest standard of living ever attained by any nation, public opinion condemns laissez-faire. In the last fifty years thousands of books have been published to indict capitalism and to advocate radical interventionism, the welfare state and socialism. The few books which tried to explain adequately the working of the free market economy were hardly noticed by the public. Their authors remained obscure, while such authors as Veblen, Commons, John Dewey and Laski were exuberantly praised. It is a well-known fact that the legitimate stage as well as the Hollywood industry are no less radically critical of free enterprise than are many novels. There are in this country many periodicals which in every issue furiously attack economic freedom. There is hardly any magazine of opinion that would plead for the system that supplied the immense majority of the people with good food and shelter, with cars, refrigerators, radio sets and other things which the subjects of other countries call luxuries.
The impact of this state of affairs is that
practically very little is done to preserve the system of private
enterprise. There are only middle-ofthe-roaders who think they have been
successful when they have delayed for some time an especially ruinous
measure. They are always in retreat. They put up today with measures
which only ten or twenty years ago they would have considered as
undiscussable. They will in a few years acquiesce in other measures
which they today consider as simply out of the question.
What can prevent the coming of totalitarian
socialism is only a thorough change in ideologies. What we need is
neither anti-socialism nor anti-communism but an open positive
endorsement of that system to which we owe all the wealth that
distinguishes our age from the comparatively straitened conditions of
ages gone by.
5
Inflation and Price Control*
Under Socialism, Government Controls; Under Capitalism, the Market Directs
Under socialism production is entirely directed by the orders of the central board of production management. The whole nation is an “industrial army” (a term used by Karl Marx in the Communist Manifesto) and each citizen is bound to obey his superior’s orders. Everybody has to contribute his share to the execution of the overall plan adopted by the Government.
In the free economy no production czar tells a
man what he should do. Everybody plans and acts for himself. The
coordination of the various individuals’ activities, and their
integration into a harmonious system for supplying the consumers with
the goods and services they demand, is brought about by the market
process and the price structure it generates.
The market steers the capitalistic economy.
It directs each individual’s activities into those channels in which he
best serves the wants of his fellow-men. The market alone puts the whole
social system of private ownership of the means of production and free
enterprise in order and provides it with sense and meaning.
There is nothing automatic or mysterious in
the operation of the market. The only forces determining the continually
fluctuating state of the market are the value judgments of the various
individuals and their actions as directed by these value judgments. The
ultimate factor in the market is the striving of each man to satisfy his
needs and wants in the best possible way. Supremacy of the market is
tantamount to the supremacy of the consumers. By their buying, and by
their abstention from buying, the consumers determine not only the price
structure, but no less what should be produced and in what quantity and
quality and by whom. They determine each entrepreneur’s profit or loss,
and thereby who should own the capital and run the plants. They make
poor men rich and rich men poor. The profit system is essentially
production for use, as profits can be earned only by success in
supplying consumers in the best and cheapest way with the commodities
they want to use.
Price Control Leads to Central Planning
From this it becomes clear what government tampering with the price structure of the market means. It diverts production from those channels into which the consumers want to direct it into other lines. Under a market not manipulated by government interference there prevails a tendency to expand the production of each article to the point at which a further expansion would not pay because the price realized would not exceed costs. If the government fixes a maximum price for certain commodities below the level which the unhampered market would have determined for them and makes it illegal to sell at the potential market price, production involves a loss for the marginal producers. Those producing with the highest costs go out of the business and employ their production facilities for the production of other commodities, not affected by price ceilings. The government’s interference with the price of a commodity restricts the supply available for consumption. This outcome is contrary to the intentions which motivated the price ceiling. The government wanted to make it easier for people to obtain the article concerned. But its intervention results in shrinking of the supply produced and offered for sale.
If this unpleasant experience does not teach
the authorities that price control is futile and that the best policy
would be to refrain from any endeavors to control prices, it becomes
necessary to add to the first measure, restricting merely the price of
one or of several consumers’ goods, further measures. It becomes
necessary to fix the prices of the factors of production required for
the production of the consumers’ goods concerned. Then the same story
repeats itself on a remoter plane. The supply of those factors of
production whose prices have been limited shrinks. Then again the
government must expand the sphere of its price ceilings. It must fix the
prices of the secondary factors of production required for the
production of those primary factors. Thus the government must go farther
and farther. It must fix the prices of all consumers’ goods and of all
factors of production, both material factors and labor, and it must
force every entrepreneur and every worker to continue production at
these prices and wage rates. No branch of production must be omitted
from this all-round fixing of prices and wages and this general order to
continue production. If some branches were to be left free, the result
would be a shifting of capital and labor to them and a corresponding
fall in the supply of the goods whose prices the government has fixed.
However, it is precisely these goods which the government considers as
especially important for the satisfaction of the needs of the masses.
But when such a state of all-round control of
business is achieved, the market economy has been replaced by a system
of centralized planning, by socialism. It is no longer the consumers but
the government who decides what should be produced and in what quantity
and quality. The entrepreneurs are no longer entrepreneurs. They have
been reduced to the status of shop managers—or Betriebsführer, as
the Nazis said— and are bound to obey the orders issued by the
government’s central board of production management. The workers are
bound to work in the plants to whom the authorities have assigned them;
their wages are determined by authoritarian decrees. The government is
supreme. It determines each citizen’s income and standard of living. It
is totalitarian.
Price control is contrary to purpose if it is
limited to some commodities only. It cannot work satisfactorily within a
market economy. The endeavors to make it work must needs enlarge the
sphere of the commodities subject to price control until the prices of
all commodities and services are regulated by authoritarian decree and
the market ceases to work.
Either production can be directed by the
prices fixed on the market by the buying or the abstention from buying
on the part of the public; or it can be directed by the government’s
offices. There is no third solution available. Government control of a
part of prices only results in a state of affairs which—without any
exception—everybody considers as absurd and contrary to purpose. Its
inevitable result is chaos and social unrest.
Price Control in Germany
It has been asserted again and again that German experience has proved that price control is feasible and can attain the ends sought by the government resorting to it. Nothing can be more erroneous.
When the First World War broke out, the
German Reich immediately adopted a policy of inflation. To prevent the
inevitable outcome of inflation, a general rise in prices, it resorted
simultaneously to price control. The much-glorified efficiency of the
German police succeeded rather well in enforcing these price ceilings.
There were no black markets. But the supply of the commodities subject
to price control quickly fell. Prices did not rise. But the public was
no longer in a position to purchase food, clothes and shoes. Rationing
was a failure. Although the government reduce more and more the rations
allotted to each individual, only a few people were fortunate enough to
get all that the ration card entitled them to. In their endeavors to
make the price control system work, the authorities expanded step by
step the sphere of the commodities subject to price control. One branch
of business after the other was centralized and put under the management
of a government commissary. The government obtained full control of all
vital branches of production. But even this was not enough as long as
other branches of industry were left free. Thus the government decided
to go still farther. The Hindenburg Program aimed at all-round planning
of all production. The idea was to entrust the direction of all business
activities to the authorities. If the Hindenburg Program had been
executed, it would have transformed Germany into a purely totalitarian
commonwealth. It would have realized the ideal of Othmar Spann, the
champion of “German” socialism, to make Germany a country in which
private property exists only in a formal and legal sense, while in fact
there is public ownership only.
However, the Hindenburg Program had not yet
been completely put into effect when the Reich collapsed. The
disintegration of the imperial bureaucracy brushed away the whole
apparatus of price control and of war socialism. But the nationalist
authors continued to extol the merits of the Zwangswirtschaft,
the compulsory economy. It was, they said, the most perfect method for
the realization of socialism in a predominantly industrial country like
Germany. They triumphed when Chancellor Brüning in 1931 went back to the
essential provisions of the Hindenburg Program and when later the Nazis
enforced these decrees with the utmost brutality.
The Nazis did not, as their foreign admirers
contend, enforce price control within a market economy. With them price
control was only one device within the frame of an all-round system of
central planning. In the Nazi economy there was no question of private
initiative and free enterprise. All production activities were directed
by the Reichswirtschaftsministerium. No enterprise was free to
deviate in the conduct of its operations from the orders issued by the
government. Price control was only a device in the complex of
innumerable decrees and orders regulating the minutest details of every
business activity and precisely fixing every individual’s tasks on the
one hand and his income and standard of living on the other.
What made it difficult for many people to
grasp the very nature of the Nazi economic system was the fact that the
Nazis did not expropriate the entrepreneurs and capitalists openly and
that they did not adopt the principle of income equality which the
Bolshevists espoused in the first years of Soviet rule and discarded
only later. Yet the Nazis removed the bourgeois completely from control.
Those entrepreneurs who were neither Jewish nor suspect of liberal and
pacifist leanings retained their positions in the economic structure.
But they were virtually merely salaried civil servants bound to comply
unconditionally with the orders of their superiors, the bureaucrats of
the Reich and the Nazi party. The capitalists got their (sharply
reduced) dividends. But like other citizens they were not free to spend
more of their incomes than the Party deemed as adequate to their status
and rank in the hierarchy of graduated leadership. The surplus had to be
invested in exact compliance with the orders of the Ministry of
Economic Affairs.
The experience of Nazi Germany certainly did
not disprove the statement that price control is doomed to failure
within an economy not completely socialized. Those advocates of price
control who pretend that they aim at preserving the system of private
initiative and free enterprise are badly mistaken. What they really do
is to paralyze the operation of the steering device of this system. One
does not preserve a system by destroying its vital nerve; one kills it.
Inflation Is Monetary Expansion
Inflation is the process of a great increase in the quantity of money in circulation. Its foremost vehicle in continental Europe is the issue of non-redeemable legal tender banknotes. In this country inflation consists mainly in government borrowing from the commercial banks and also in an increase in the quantity of paper money of various types and of token coins. The government finances its deficit spending by inflation.
Inflation must result in a general tendency
towards rising prices. Those into whose pockets the additional quantity
of currency flows are in a position to expand their demand for vendable
goods and services. An additional demand must, other things being equal,
raise prices. No sophistry and no syllogisms can conjure away this
inevitable consequence of inflation.
The semantic revolution which is one of the
characteristic features of our day has obscured and confused this fact.
The term inflation is used with a new connotation. What people today
call inflation is not inflation, i.e., the increase in the quantity of
money and money substitutes, but the general rise in commodity prices
and wage rates which is the inevitable consequence of inflation. This
semantic innovation is by no means harmless.
First of all there is no longer any term
available to signify what inflation used to signify. It is impossible to
fight an evil which you cannot name. Statesmen and politicians no
longer have the opportunity to resort to a terminology accepted and
understood by the public when they want to describe the financial policy
they are opposed to. They must enter into a detailed analysis and
description of this policy with full particulars and minute accounts
whenever they want to refer to it, and they must repeat this bothersome
procedure in every sentence in which they deal with this subject. As you
cannot name the policy increasing the quantity of the circulating
medium, it goes on luxuriantly.
The second mischief is that those engaged in
futile and hopeless attempts to fight the inevitable consequences of
inflation—the rise in prices—are masquerading their endeavors as a fight
against inflation. While fighting the symptoms, they pretend to fight
the root causes of the evil. And because they do not comprehend the
causal relation between the increase in money in circulation and credit
expansion on the one hand and the rise in prices on the other, they
practically make things worse.
The best example is provided by the
subsidies. As has been pointed out, price ceilings reduce supply because
production involves a loss for the marginal producers. To prevent this
outcome governments often grant subsidies to the farmers operating with
the highest costs. These subsidies are financed out of additional credit
expansion. Thus they result in increasing the inflationary pressure. If
the consumers were to pay higher prices for the products concerned, no
further inflationary effect would emerge. The consumers would have to
use for such surplus payments only money which had been already put into
circulation. Thus the allegedly brilliant idea to fight inflation by
subsidies in fact brings about more inflation.
The Real Dangers of Inflation
There is practically no need today to enter into a discussion of the comparatively slight and harmless inflation that under a gold standard can be brought about by a great increase in gold production. The problems the world must face today are those of runaway inflation. Such an inflation is always the outcome of a deliberate government policy. The government is on the one hand not prepared to restrict its expenditure. On the other hand it does not want to balance its budget by taxes levied or by loans from the public. It chooses inflation because it considers it as the minor evil. It goes on expanding credit and increasing the quantity of money in circulation because it does not see what the inevitable consequences of such a policy must be.
There is no cause to be too much alarmed
about the extent to which inflation has gone already in this country.
Although it has gone very far and has done much harm, it has certainly
not created an irreparable disaster. There is no doubt that the United
States is still free to change its methods of financing and to return to
a sound money policy.
The real danger does not consist in what has
happened already, but in the spurious doctrines from which these events
have sprung. The superstition that it is possible for the government to
eschew the inexorable consequences of inflation by price control is the
main peril. For this doctrine diverts the public’s attention from the
core of the problem. While the authorities are engaged in a useless
fight against the attendant phenomena, only few people are attacking the
source of the evil, the treasury’s methods of providing for the
enormous expenditures. While the bureaus make headlines with their
activities, the statistical figures concerning the increase in the
nation’s currency are relegated to an inconspicuous place in the
newspapers’ financial pages.
Here again the example of Germany may stand
as a warning. The tremendous German inflation which reduced in 1923 the
purchasing power of the mark to one billionth of its prewar value was
not an act of God. It would have been possible to balance Germany’s
postwar budget without resorting to the Reichsbank’s printing press. The
proof is that the Reich’s budget was easily balanced as soon as the
breakdown of the old Reichsbank forced the government to abandon its
inflationary policy. But before this happened, all German would-be
experts stubbornly denied that the rise in commodity prices, wage rates
and foreign exchange rates had anything to do with the government’s
method of reckless spending. In their eyes only profiteering was to
blame. They advocated thoroughgoing enforcement of price control as the
panacea and called those recommending a change in financial methods
“deflationists.”
The German nationalists were defeated in the
two most terrific wars of history. But the economic fallacies which
pushed Germany into its nefarious aggressions unfortunately survive. The
monetary errors developed by German professors such as Lexis and Knapp
and put into effect by Havenstein, the Reichsbank’s president in the
critical years of its great inflation, are today the official doctrine
of France and of many other European countries. There is no need for the
United States to import these absurdities.
6
Economic Aspects of the Pension Problem*
Workers Pay the Cost of Their Pension Benefits Themselves
Whenever a law or labor union pressure burdens the employers with an additional expenditure for the benefit of the employees, people talk of “social gains.” The idea implied is that such benefits confer on the employees a boon beyond the salaries or wages paid to them and that they are receiving a grant which they would have missed in the absence of such a law or such a clause in the contract. It is assumed that the workers are getting something for nothing.
This view is entirely fallacious. What the
employer takes into account in considering the employment of additional
hands or in discharging a number of those already in his service, is
always the value of the services rendered or to be rendered by them. He
asks himself: How much does the employment of the man concerned add to
the output? Is it reasonable to expect that the expenditure caused by
his employment will at least be recovered by the sale of the additional
product produced by his employment? If the answer to the second question
is in the negative, the employment of the man will cause a loss. As no
enterprise can in the long run operate on a loss basis, the man
concerned will be discharged or, respectively, will not be hired.
In resorting to this calculation the employer
takes into account not only the individual’s take-home wages, but all
the costs of employing him. If, e.g., the government—as is the case in
some European countries—collects a percentage of each firm’s total
payroll as a tax which the firm is strictly forbidden to deduct from
wages paid to the workers, the amount that enters into the calculation
is: wages paid out to the worker plus the quota of the tax. If the
employer is bound to provide for pensions, the sum entered into the
calculation is: wages paid out plus an allowance for the pension,
computed according to actuarial methods.
The consequence of this state of affairs is
that the incidence of all alleged “social gains” falls upon the
wage-earner. Their effect does not differ from the effect of any kind of
raise in wage rates.
On a free labor market wage rates tend toward
a height at which all employers ready to pay these rates can find all
the men they need and all the workers ready to work for this rate can
find jobs. There prevails a tendency toward full employment. But as soon
as the laws or the labor unions fix rates at a higher level, this
tendency disappears. Then workers are discharged and there are
job-seekers who cannot find employment. The reason is that at the
artificially raised wage rates only the employment of a smaller number
of hands pays. While on an un-hampered labor market unemployment is only
transitory, it becomes a permanent phenomenon when the governments or
the unions succeed in raising wage rates above the potential market
level. Even Lord Beveridge, about twenty years ago, admitted that the
continuance of a substantial volume of unemployment is in itself the
proof that the price asked for labor as wages is too high for the
conditions of the market. And Lord Keynes, the inaugurator of the
so-called “full employment policy,” implicitly acknowledged the
correctness of this thesis. His main reason for advocating inflation as a
means to do away with unemployment was that he believed that gradual
and automatic lowering of real wages as a result of rising prices would not be so strongly resisted by labor as any attempt to lower money wage rates.
What prevents the government and the unions
from raising wage rates to a steeper height than they actually do is
their reluctance to price out of the labor market too great a number of
people. What the workers are getting in the shape of pensions payable by
the employing corporation reduces the amount of wages that the unions
can ask for without increasing unemployment. The unions in asking
pensions for which the company has to pay without any contribution on
the part of the beneficiaries have made a choice. They have preferred
pensions to an increase in take-home wages. Economically it does not
make any difference whether the workers do contribute or do not to the
fund out of which the pensions will be paid. It is immaterial for the
employer whether the cost of employing workers is raised by an increase
in take-home wages or by the obligation to provide for pensions. For the
worker, on the other hand, the pensions are not a free gift on the part
of the employer. The pension claims they acquire restrict the amount of
wages they could get without calling up the spectre of unemployment.
Correctly computed, the income of a wage
earner entitled to a pension consists of his wages plus the amount of
the premium he would have to pay to an insurance company for the
acquisition of an equivalent claim. Ultimately the granting of pensions
amounts to a restriction of the wage earner’s freedom to use his total
income according to his own designs. He is forced to cut down his
current consumption in order to provide for his old age. We may neglect
dealing with the question whether such a restriction of the individual
worker’s freedom is expedient or not. What is important to emphasize is
merely that the pensions are not a gift on the part of the employer.
They are a disguised wage raise of a peculiar character. The employee is
forced to use the increment for acquiring a pension.
The Same Government That Offers Pensions Reduces Their Purchasing Power
It is obvious that the amount of the pension each man will be entitled to claim one day can only be fixed in terms of money. Hence the value of these claims is inextricably linked with the vicissitudes of the American monetary unit, the dollar.
The present Administration is eager to devise
various schemes for old-age and disability pensions. It is intent upon
extending the number of people included in the government’s social
security system and to increase the benefits under this system. It
openly supports the demands of the unions for pensions to be granted by
the companies without contribution on the part of the beneficiaries. But
at the same time the same administration is firmly committed to a
policy which is bound to lower more and more the purchasing power of the
dollar. It has proclaimed unbalanced budgets and deficit spending as
the first principle of public finance, as a new way of life. While
hypocritically pretending to fight inflation, it has elevated boundless
credit expansion and recklessly increased the amount of money in
circulation to the dignity of an essential postulate of popular
government and economic democracy.
Let nobody be fooled by the lame excuse that
what is intended is not permanent deficits, but only the substitution of
balancing the budget over a period of several years for balancing it
every year. According to this doctrine in years of prosperity budgetary
surpluses are to be accumulated which have to be balanced against the
deficits incurred in years of depression. But what is to be considered
as good business and what as bad business is left to the decision of the
party in power. The Administration itself declared that the fiscal year
1949 was, in spite of a moderate recession near its end, a year of
prosperity. But it did not accumulate a surplus in this year of
prosperity; it produced a considerable deficit. Remember how the
Democrats in the 1932 electoral campaign criticized the Hoover
Administration for its financial shortcomings. But as soon as they came
into office, they inaugurated their notorious schemes of pump-priming,
deficit spending and so on.
What the doctrine of balancing budgets over a
period of many years really means is this: As long as our own party is
in office, we will enhance our popularity by reckless spending. We do
not want to annoy our friends by cutting down expenditures. We want the
voters to feel happy under the artificial short-lived prosperity which
the easy money policy and a rich supply of additional money generate.
Later, when our adversaries will be in office, the inevitable
consequence of our expansionist policy, viz., depression, will appear.
Then we shall blame them for the disaster and assail them for their
failure to balance the budget properly.
It is very unlikely that the practice of
deficit spending will be abandoned in the not too distant future. As a
fiscal policy it is very convenient to inept governments. It is
passionately advocated by hosts of pseudo-economists. It is praised at
the universities as the most beneficial expedient of “unorthodox,”
really “progressive” and “anti-fascist” methods of public finance. A
radical change of ideologies would be required to restore the prestige
of sound fiscal procedures, today de-cried as “orthodox” and
“reactionary.” Such an overthrow of an almost universally accepted
doctrine is unlikely to occur as long as the living generation of
professors and politicians has not passed away. The present writer,
having for more than forty years uncompromisingly fought against all
varieties of credit expansion and inflation, is forced sadly to admit
that the prospects for a speedy return to sound management of monetary
affairs are rather thin. A realistic evaluation of the state of public
opinion, the doctrines taught at the universities and the mentality of
politicians and pressure groups must show us that the inflationist
tendencies will prevail for many years.
The inevitable result of inflationary
policies is a drop in the monetary unit’s purchasing power. Compare the
dollar of 1950 with the dollar of 1940! Compare the money of any
European or American country with its nominal equivalent a dozen
or two dozen years ago! As an inflationary policy works only as long as
the yearly increments in the amount of money in circulation are
increased more and more, the rise in prices and wages and the
corresponding drop in purchasing power will go on at an accelerated
pace. The experience of the French franc may give us a rough image of
the dollar thirty or forty years from today.
Now it is such periods of time that count for
pension plans. The present workers of the United States Steel
Corporation will receive their pensions in twenty, thirty or forty
years. Today a pension of one hundred dollars a month means a rather
substantial allowance. What will it mean in 1980 or 1990? Today, as the
Welfare Commissioner of the City of New York has shown, 52 cents can buy
all the food a person needs to meet the daily caloric and protein
requirements. How much will 52 cents buy in 1980?
Such is the issue. What the workers are
aiming at in striving after social security and pensions is, of course,
security. But their “social gain” withers away with the drop in the
dollar’s purchasing power. In enthusiastically supporting the Fair
Deal’s fiscal policy, the union members are themselves frustrating all
their social security and pension schemes. The pensions they will be
entitled one day to claim will be a mere sham.
No solution can be found for this dilemma. In
an industrial society all deferred payments must be stipulated in terms
of money. They shrink with the shrinking of the money’s purchasing
power. A policy of deficit spending saps the very foundation of all
interpersonal relations and contracts. It frustrates all kinds of
savings, social security benefits and pensions.
Government Spending Is No Substitute for Capital Accumulation
How can it happen that the American workers fail to see that their policies are at cross purposes?
The answer is: they are deluded by the
fallacies of what is called “new economics.” This allegedly new
philosophy ignores the role of capital accumulation. It does not realize
that there is but one means to increase wage rates for all those eager
to get jobs and thereby to improve the standard of living, namely to
accelerate the increase of capital as compared with population. It talks
about technological progress and productivity without being aware that
no technological improvement can be achieved if the capital required is
lacking. Just at the instant in which it became obvious that the most
serious obstacle to any farther economic betterment is, not only in the
backward countries but also in England, the shortage of capital, Lord
Keynes, enthusiastically supported by many American authors, advanced
his doctrine of the evils of saving and capital accumulation. As these
men see it, all that is unsatisfactory is caused by the inability of
private enterprise to cope with the conditions of the “mature” economy.
The remedy they recommend is simple indeed. The state should fill the
gap. They blithely assume that the state has unlimited means at its
disposal. The state can undertake all projects which are too big for
private capital. There is simply nothing that would surpass the
financial power of the government of the United States. The Tennessee
Valley project and the Marshall Plan were just modest beginnings. There
are still many valleys in America left for further action. And then
there are many rivers in other parts of the globe. Only a short time ago
Senator McMahon outlined a gigantic project that dwarfs the Marshall
Plan. Why not? If it is unnecessary to adjust the amount of expenditure
to the means available, there is no limit to the spending of the great
god State.
It is no wonder that the common man falls
prey to the illusions which dim the vision of dignified statesmen and
learned professors. Like the expert advisers of the president, he
entirely neglects to recognize the main problem of American business,
viz., the insufficiency of the accumulation of new capital. He dreams of
abundance while a shortage is threatening. He misinterprets the high
profits which the companies report. He does not perceive that a
considerable part of these profits are illusory, a mere arithmetical
consequence of the fact that the sums laid aside as depreciation quotas
are insufficient. These illusory profits, a phony result of the drop in
the dollar’s purchasing power, will be absorbed by the already risen
costs of replacing the factories’ worn-out equipment. Their ploughing
back is not additional investment, it is merely capital maintenance.
There is much less available for a substantial expansion of investment
and for the improvement of technological methods than the misinformed
public thinks.
Pension Benefits Depend on Capital and Investment
Looking backward fifty or a hundred years we observe a steady progress of America’s ability to produce and thereby to consume. But it is a serious blunder to assume that this trend is bound to continue. This past progress has been effected by a speedy increase of capital accumulation. If the accumulation of new capital is slowed down or entirely ceases, there cannot be any question of further improvements.
Such is the real problem American labor has
to face today. The problems of capital maintenance and the accumulation
of new capital do not concern merely “management.” They are vital for
the wage earner. Exclusively preoccupied with wage rates and pensions,
the unions boast of their Pyrrhic victories. The union members are not
conscious of the fact that their fate is tied up with the flowering of
their employers’ enterprises. As voters they approve of a taxation
system which taxes away and dissipates for current expenditure those
funds which would have been saved and invested as new capital.
What the workers must learn is that the only
reason why wage rates are higher in the United States than in other
countries is that the per head quota of capital invested is higher. The
psychological danger of all kinds of pension plans is to be seen in the
fact that they obscure this point. They give to the workers an unfounded
feeling of security. Now, they think, our future is safe. No need to
worry any longer. The unions will win for us more and more social gains.
An age of plenty is in sight.
Yet, the workers should be worried about the
state of the supply of capital. They should be worried because the
preservation and the further improvement of what is called “the American
way of life” and “an American standard of living” depends on the
maintenance and the further increase of the capital invested in American
business.
A man who is forced to provide of his own
account for his old age must save a part of his income or take out an
insurance policy. This leads him to examine the financial status of the
savings bank or the insurance company or the soundness of the bonds he
buys. Such a man is more likely to get an idea of the economic problems
of his country than a man whom a pension scheme seemingly relieves of
all worries. He will get the incentive to read the financial page of his
newspaper and will become interested in articles which thoughtless
people skip. If he is keen enough, he will discover the flaw in the
teachings of the “new economics.” But the man who confides in the
pension stipulated believes that all such issues are “mere theory” and
do not affect him. He does not bother about those things on which his
well-being depends because he ignores this dependence. As citizens such
people are a liability. A nation cannot prosper if its members are not
fully aware of the fact that what alone can improve their conditions is
more and better production. And this can only be brought about by
increased saving and capital accumulation.
7
Wages, Unemployment, and Inflation*
Consumers Guide Production and Determine Prices and Wages
Our economic system—the market economy or capitalism—is a system of consumers’ supremacy. The customer is sovereign; he is, says a popular slogan, “always right.” Businessmen are under the necessity of turning out what the consumers ask for and they must sell their wares at prices which the consumers can afford and are prepared to pay. A business operation is a manifest failure if the proceeds from the sales do not reimburse the businessman for all he has expended in producing the article. Thus the consumers in buying at a definite price determine also the height of the wages that are paid to all those engaged in the industries.
It follows that an employer cannot pay more
to an employee than the equivalent of the value the latter’s work,
according to the judgment of the buying public, adds to the merchandise.
(This is the reason why the movie star gets much more than the
charwoman.) If he were to pay more, he would not recover his outlays
from the purchasers; he would suffer losses and would finally go
bankrupt. In paying wages, the employer acts as a mandatory of the
consumers, as it were. It is upon the consumers that the incidence of
the wage payments falls. As the immense majority of the goods produced
are bought and consumed by people who are themselves receiving wages and
salaries, it is obvious that in spending their earnings the wage
earners and employees themselves are foremost in determining the height
of the compensation they and those like them will get.
Better Tools Help Workers Produce and Earn More
The buyers do not pay for the toil and trouble the worker took nor for the length of time he spent in working. They pay for the products. The better the tools are which the worker uses in his job, the more he can perform in an hour, the higher is, consequently, his remuneration. What makes wages rise and renders the material conditions of the wage earners more satisfactory is improvement in the technological equipment. American wages are higher than wages in other countries because the capital invested per head of the worker is greater and the plants are thereby in the position to use the most efficient tools and machines. What is called the American way of life is the result of the fact that the United States has put fewer obstacles in the way of saving and capital accumulation than other nations. The economic backwardness of such countries as India consists precisely in the fact that their policies hinder both the accumulation of domestic capital and the investment of foreign capital. As the capital required is lacking, the Indian enterprises are prevented from employing sufficient quantities of modern equipment, are therefore producing much less per man-hour, and can only afford to pay wage rates which, compared with American wage rates, appear as shockingly low.
There is only one way that leads to an
improvement of the standard of living for the wage-earning masses, viz.,
the increase in the amount of capital invested. All other methods,
however popular they may be, are not only futile, but are actually
detrimental to the well-being of those they allegedly want to benefit.
Raising Wages Artificially Causes Unemployment
The fundamental question is: is it possible to raise wage rates for all those eager to find jobs above the height they would have attained on an unhampered labor market?
Public opinion believes that the improvement
in the conditions of the wage earners is an achievement of the unions
and of various legislative measures. It gives to unionism and to
legislation credit for the rise in wage rates, the shortening of hours
of work, the disappearance of child labor, and many other changes. The
prevalence of this belief made unionism popular and is responsible for
the trend in labor legislation of the last two decades. As people think
that they owe to unionism their high standard of living, they condone
violence, coercion, and intimidation on the part of unionized labor and
are indifferent to the curtailment of personal freedom inherent in the
union-shop and closed-shop clauses. As long as these fallacies prevail
upon the minds of the voters, it is vain to expect a resolute departure
from the policies that are mistakenly called progressive.
Yet this popular doctrine misconstrues every
aspect of economic reality. The height of wage rates at which all those
eager to get jobs can be employed depends on the marginal productivity
of labor. The more capital—other things being equal—is invested, the
higher wages climb on the free labor market, i.e., on the labor market
not manipulated by the government and the unions. At these market wage
rates all those eager to employ workers can hire as many as they want.
At these market wage rates all those who want to be employed can get a
job. There prevails on a free labor market a tendency toward full
employment. In fact, the policy of letting the free market determine the
height of wage rates is the only reasonable and successful
full-employment policy. If wage rates, either by union pressure and
compulsion or by government decree, are raised above this height,
lasting unemployment of a part of the potential labor force develops.
Credit Expansion May Lower Real Wages Temporarily and Spark a “Boom”
These opinions are passionately rejected by the union bosses and their followers among politicians and the self-styled intellectuals. The panacea they recommend to fight unemployment is credit expansion and inflation, euphemistically called “an easy money policy.”
As has been pointed out above, an addition to
the available stock of capital previously accumulated makes a further
improvement of the industries’ technological equipment possible, thus
raises the marginal productivity of labor and consequently also wage
rates. But credit expansion, whether it is effected by issuing
additional banknotes or by granting additional credits on bank accounts
subject to check, does not add anything to the nation’s wealth of
capital goods. It merely creates the illusion of an increase in the
amount of funds available for an expansion of production. Because they
can obtain cheaper credit, people erroneously believe that the country’s
wealth has thereby been increased and that therefore certain projects
that could not be executed before are now feasible. The inauguration of
these projects enhances the demand for labor and for raw materials and
makes wage rates and commodity prices rise. An artificial boom is
kindled.
Under the conditions of this boom, nominal
wage rates which before the credit expansion were too high for the state
of the market and therefore created unemployment of a part of the
potential labor force are no longer too high and the unemployed can get
jobs again. However, this happens only because under the changed
monetary and credit conditions prices are rising or, what is the same
expressed in other words, the purchasing power of the monetary unit
drops. Then the same amount of nominal wages, i.e., wage rates expressed
in terms of money, means less in real wages, i.e., in terms of
commodities that can be bought by the monetary unit. Inflation can cure
unemployment only by curtailing the wage earner’s real wages. But
then the unions ask for a new increase in wages in order to keep pace
with the rising cost of living and we are back where we were before,
i.e., in a situation in which large-scale unemployment can only be
prevented by a further expansion of credit.
This is what happened in this country as well
as in many other countries in the last years. The unions, supported by
the government, forced the enterprises to agree to wage rates that went
beyond the potential market rates, i.e., the rates which the public was
prepared to refund to the employers in purchasing their products. This
would have inevitably resulted in rising unemployment figures. But the
government policies tried to prevent the emergence of serious
unemployment by credit expansion, i.e., inflation. The outcome was
rising prices, renewed demands for higher wages and reiterated credit
expansion; in short, protracted inflation.
Endless Inflation Leads to Disaster
But finally the authorities become frightened. They know that inflation cannot go on endlessly. If one does not stop in time the pernicious policy of increasing the quantity of money and fiduciary media, the nation’s currency system collapses entirely. The monetary unit’s purchasing power sinks to a point which for all practical purposes is not better than zero. This happened again and again, in this country with the Continental Currency in 1781, in France in 1796, in Germany in 1923. It is never too early for a nation to realize that inflation cannot be considered as a way of life and that it is imperative to return to sound monetary policies. In recognition of these facts the administration and the Federal Reserve authorities some time ago discontinued the policy of progressive credit expansion.
It is not the task of this short article to
deal with all the consequences which the termination of inflationary
measures brings about. We have only to establish the fact that the
return to monetary stability does not generate a crisis. It only
brings to light the malinvestments and other mistakes that were made
under the hallucination of the illusory prosperity created by the easy
money. People become aware of the faults committed and, no longer
blinded by the phantom of cheap credit, begin to readjust their
activities to the real state of the supply of material factors of
production. It is this—certainly painful, but unavoidable— readjustment
that constitutes the depression.
One of the unpleasant features of this
process of discarding chimeras and returning to a sober estimate of
reality concerns the height of wage rates. Under the impact of the
progressive inflationary policy the union bureaucracy acquired the habit
of asking at regular intervals for wage raises, and business, after
some sham resistance, yielded. As a result these rates were at the
moment too high for the state of the market and would have brought about
a conspicuous amount of unemployment. But the ceaselessly progressive
inflation very soon caught up with them. Then the unions asked again for
new raises and so on.
It does not matter what kind of justification
the unions and their henchmen advance in favor of their claims. The
unavoidable effects of forcing the employers to remunerate work done at
higher rates than those the consumers are willing to restore to them in
buying the products are always the same: rising unemployment figures.
At the present juncture the unions try to
take up the old, a hundred times refuted purchasing power fable. They
declare that putting more money into the hands of the wage earners—by
raising wage rates, by increasing the benefits to the unemployed and by
embarking upon new public works—would enable the workers to spend more
and thereby stimulate business and lead the economy out of the recession
into prosperity. This is the spurious pro-inflation argument to make
all people happy through printing paper bills. Of course, if the
quantity of the circulating media is increased, those into whose pockets
the new fictitious wealth comes—whether they are workers or farmers or
any other kind of people—will increase their spending. But it is
precisely this increase in spending that inevitably brings about a
general tendency of all prices to rise or, what is the same expressed in
a different way, a drop in the monetary unit’s purchasing power. Thus
the help that an inflationary action could give to the wage earners is
only of a short duration. To perpetuate it, one would have to resort
again and again to new inflationary measures. It is clear that this
leads to disaster.
Public, Political, and Union Pressures Can Lead Government to Inflate
There is a lot of nonsense said about these things. Some people assert that wage raises are “inflationary.” But they are not in themselves inflationary. Nothing is inflationary except inflation, i.e., an increase in the quantity of money in circulation and credit subject to check (check-book money). And under present conditions nobody but the government can bring an inflation into being. What the unions can generate by forcing the employers to accept wage rates higher than the potential market rates is not inflation and not higher commodity prices, but unemployment of a part of the people anxious to get a job. Inflation is a policy to which the government resorts in order to prevent the large-scale unemployment the unions’ wage raising would otherwise bring about.
The dilemma which this country—and no less
many other countries— has to face is very serious. The extremely popular
method of raising wage rates above the height the unhampered labor
market would have established would produce catastrophic mass
unemployment if inflationary credit expansion were not to rescue it. But
inflation has not only very pernicious social effects. It cannot go on
endlessly without resulting in the complete breakdown of the whole
monetary system.
Public opinion, entirely under the sway of
the fallacious labor union doctrines, sympathizes more or less with the
union bosses’ demand for a considerable rise in wage rates. As
conditions are today, the unions have the power to make the employers
submit to their dictates. They can call strikes and, without being
restrained by the authorities, resort with impunity to violence against
those willing to work. They are aware of the fact that the enhancement
of wage rates will increase the number of jobless. The only remedy they
suggest is more ample funds for unemployment compensation and a more
ample supply of credit, i.e., inflation. The government, meekly yielding
to a misguided public opinion and worried about the outcome of the
impending election campaign, has unfortunately already begun to reverse
its attempts to return to a sound monetary policy. Thus we are again
committed to the pernicious methods of meddling with the supply of
money. We are going on with the inflation that with accelerated speed
makes the purchasing power of the dollar shrink. Where will it end? This
is the question which Mr. Reuther and all the rest never ask.
Only stupendous ignorance can call the
policies adopted by the self-styled progressives “pro-labor” policies.
The wage earner like every other citizen is firmly interested in the
preservation of the dollar’s purchasing power. If, thanks to his union,
his weekly earnings are raised above the market rate, he must very soon
discover that the upward movement in prices not only deprives him of the
advantages he expected, but besides makes the value of his savings, of
his insurance policy and of his pension rights dwindle. And, still
worse, he may lose his job and will not find another.
All political parties and pressure groups
protest that they are opposed to inflation. But what they really mean is
that they do not like the unavoidable consequences of inflation, viz.,
the rise in living costs. Actually they favor all policies that
necessarily bring about an increase in the quantity of the circulating
media. They ask not only for an easy money policy to make the unions’
endless wage boosting possible but also for more government spending
and—at the same time—for tax abatement through raising the exemptions.
Duped by the spurious Marxian concept of
irreconcilable conflicts between the interests of the social classes,
people assume that the interests of the propertied classes alone are
opposed to the unions’ demand for higher wage rates. In fact, the wage
earners are no less interested in a return to sound money than any other
group or class. A lot has been said in the last months about the harm
fraudulent officers have inflicted upon the union membership. But the
havoc done to the workers by the unions’ excessive wage boosting is much
more detrimental.
It would be an exaggeration to contend that
the tactics of the unions are the sole threat to monetary stability and
to a reasonable economic policy. Organized wage earners are not the only
pressure group whose claims menace today the stability of our monetary
system. But they are the most powerful and most influential of these
groups and the primary responsibility rests with them.
Well-being Depends on Savings and Capital Formation
Capitalism has improved the standard of living of the wage earners to an unprecedented extent. The average American family enjoys today amenities of which, only a hundred years ago, not even the richest nabobs dreamed. All this well-being is conditioned by the increase in savings and capital accumulated; without these funds that enable business to make practical use of scientific and technological progress the American worker would not produce more and better things per hour of work than the Asiatic coolies, would not earn more and would, like them, wretchedly live on the verge of starvation. All measures which— like our income and corporation tax system—aim at preventing further capital accumulation or even at capital decumulation are therefore virtually anti-labor and anti-social.
One further observation must still be made
about this matter of saving and capital formation. The improvement of
well-being brought about by capitalism made it possible for the common
man to save and thus to become in a modest way himself a capitalist. A
considerable part of the capital working in American business is the
counterpart of the savings of the masses. Millions of wage earners own
saving deposits, bonds and insurance policies. All these claims are
payable in dollars and their worth depends on the soundness of the
nation’s money. To preserve the dollar’s purchasing power is also from
this point of view a vital interest of the masses. In order to attain
this end, it is not enough to print upon the bank notes the noble maxim In God We Trust. One must adopt an appropriate policy.
8
The Gold Problem*
Why have a monetary system based on gold? Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money’s purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called “sound money.”
The eminence and usefulness of the gold
standard consists in the fact that it makes the supply of money depend
on the profitability of mining gold, and thus checks large-scale
inflationary ventures on the part of governments.
The gold standard did not fail. Governments
deliberately sabotaged it, and still go on sabotaging it. But no
government is powerful enough to destroy the gold standard so long as
the market economy is not entirely suppressed by the establishment of
socialism in every part of the world.
Governments believe that it is the gold
standard’s fault alone that their inflationary schemes not only fail to
produce the expected benefits, but unavoidably bring about conditions
that (also in the eyes of the rulers themselves and most of the people)
are considered as much worse than the alleged or real evils they were
designed to eliminate. Except for the gold standard, governments are
told by pseudo-economists that they could make everybody perfectly
prosperous. Let us test the three doctrines advanced for the support of
this fable of government omnipotence.
The Fiction of Government Omnipotence
“The state is God,” said Ferdinand Lassalle, the founder of the German socialist movement. As such, the state has the power to “create” unlimited quantities of money and thus to make everybody happy. Intrepid and clear-headed people branded such a policy of “creating” money as inflation. The official terminology calls it nowadays “deficit spending.”
But whatever the name used in dealing with
this phenomenon may be, its meaning is obvious. The government increases
the quantity of money in circulation. Then a greater quantity of money
“chases” (as a rather silly but popular way of talking about these
problems says) a quantity of goods and services that has not been
increased. The government’s action did not add anything to the available
amount of useful things and services. It merely made the prices paid
for them soar.
If the government wishes to raise the income
of some people, for example, government employees, it has to confiscate
by taxation a part of some other people’s incomes, and then distribute
the amount collected to its employees or favored groups. Then the
taxpayers are forced to restrict their spending, while the recipients of
the higher salaries or benefits are increasing their spending to the
same amount. There does not result a conspicuous change in the
purchasing power of the monetary unit.
But if the government provides the money it
wants for the payment of higher salaries by printing it or the granting
of additional credits, the new money in the hands of these beneficiaries
constitutes on the market an additional demand for the not-increased
quantity of goods and services offered for sale. The unavoidable result
is a general tendency of prices to rise.
Any attempts the governments and their
propaganda offices make to conceal this concatenation of events are in
vain. Deficit spending means increasing the quantity of money in
circulation. That the official terminology avoids calling it inflation
is of no avail whatever.
The government and its chiefs do not have the
powers of the mythical Santa Claus. They cannot spend except by taking
out of the pockets of some people for the benefit of others.
The “Cheap-Money” Fallacy
Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods. Interest cannot be “abolished” as long as people prefer an apple available today to an apple available only in a year, in ten years, or in a hundred years.
The height of the originary rate of interest,*
which is the main component of the market rate of interest as
determined on the loan market, reflects the difference in the people’s
valuation of present and future satisfaction of needs. The disappearance
of interest, that is, an interest rate of zero, would mean that people
do not care a whit about satisfying any of their present wants and are exclusively
intent upon satisfying their future wants, their wants of the later
years, decades, and centuries to come. People would only save and invest
and would not be consuming.
On the other hand, if people were to stop
saving, that is, making any provision for the future, be it even the
future of the tomorrow, and would not save at all and consume all
capital goods accumulated by previous generations, the rate of interest
would rise beyond any limits.
It is thus obvious that the height of the
market rate of interest ultimately does not depend on the whims,
fancies, and pecuniary interests of the personnel operating the
government apparatus of coercion and compulsion, the much-referred-to
“public sector” of the economy. But the government has the power to push
the Federal Reserve System, and the banks subject to it, into a policy
of cheap money. Then the banks are expanding credit. Underbidding the
rate of interest as established on the not-manipulated loan market, they
offer additional credit created out of nothing. Thus they are
inescapably falsifying the businessmen’s estimation of market
conditions. Although the supply of capital goods (that can only be
increased by additional saving) remained unchanged, the illusion of a
richer supply of capital is conjured up. Business is induced to embark
upon projects which a sober calculation, not misled by the cheap-money
ventures, would have disclosed as mal-investments (over-investment in
capital). The additional quantities of credit inundating the market make
prices and wages soar. An artificial boom, a boom built entirely upon
the illusions of ample and easy money, develops. But such a boom cannot
last. Sooner or later it must become clear that, under the illusions
created by the credit expansion, business has embarked upon projects for
the execution of which the real savings are not rich enough. When this
mal-investment becomes visible, the boom collapses.
The depression that follows is the process of
liquidating the errors committed in the excesses of the artificial
boom; it is the return to calm reasoning and a reasonable conduct of
affairs within the limits of the available supply of capital goods. It
is a painful process, but it is a process of restoration of business
health.
Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.
If it were really possible to substitute
credit expansion (cheap money) for the accumulation of capital goods by
saving, there would not be any poverty in the world. The economically
backward nations would not have to complain about the insufficiency of
their capital equipment. All they would have to do for the improvement
of their conditions would be to expand money and credit more and more.
No “foreign aid” schemes would have emerged. But in granting foreign aid
to the backward nations, the American government implicitly
acknowledges that credit expansion is no real substitute for genuine
capital accumulation through saving.
The Failure of Minimum Wage Legislation and of Union Coercion
The height of wage rates is determined by the consumers’ appraisal of the value the worker’s labor adds to the value of the article available for sale. As the immense majority of the consumers are themselves earners of wages and salaries, this means that the determination of the compensation for work and services rendered is made by the same kind of people who are receiving these wages and salaries. The fat earnings of the movie star and the boxing champion are provided by the welders, street sweepers, and charwomen who attend the performances and matches.
An entrepreneur who would try to pay a hired
man less than the amount this man’s work adds to the value of the
product would be priced out of the labor market by the competition of
other entrepreneurs eager to earn money. On the other hand, no
entrepreneur can pay more to his helpers than the amount the consumers
are prepared to refund to him in buying the product. If he were to pay
higher wages, he would suffer losses and would be ejected from the ranks
of the businessmen.
Governments decreeing minimum wage laws above
the level of the market rates restrict the number of hands that can
find jobs. Such governments are producing unemployment of a part of the
labor force. The same is true for what is euphemistically called
“collective bargaining.”
The only difference between the two methods
concerns the apparatus enforcing the minimum wage. The government
enforces its orders in resorting to policemen and prison guards. The
unions “picket.” They and their members and officials have acquired the
power and the right to commit wrongs to person and property, to deprive
individuals of the means of earning a livelihood, and to commit many
other acts which no one can do with impunity.*
Nobody is today in a position to disobey an order issued by a union. To
the employers no other choice is left than either to surrender to the
dictates of the unions or to go out of business.
But governments and unions are impotent
against economic law. Violence can prevent the employers from hiring
help at potential market rates, but it cannot force them to employ all
those who are anxious to get jobs. The result of the governments’ and
the unions’ meddling with the height of wage rates cannot be anything
else than an incessant increase in the number of unemployed.
It is precisely to prevent this outcome that
the government-manipulated banking systems of all Western nations are
resorting to inflation. Increasing the quantity of money in circulation
and thereby lowering the purchasing power of the monetary unit, they are
cutting down the oversized payrolls to a height consonant with the
state of the market. This is today called Keynesian full-employment
policy. It is in fact a method to perpetuate by continued inflation the
futile attempts of governments and labor unions to meddle with the
conditions of the labor market. As soon as the progress of inflation has
adjusted wage rates so far as to avoid a spread of unemployment,
government and unions resume with renewed zeal their ventures to raise
wage rates above the level at which every job-seeker can find a job.
The experience of this age of the New Deal,
the Fair Deal, the New Frontier, and the Great Society confirms the
fundamental thesis of the true British lovers of political liberty in
the nineteenth century, namely, that there is but one means to improve
the material conditions of all of the wage earners, viz., to increase
the per-head quota of real capital invested. This result can only be
brought about by additional saving and capital accumulation, never by
government decrees, labor-union violence and intimidation, and
inflation. The foes of the gold standard are wrong also in this regard.
The Inescapable Consequence, Namely, the United States Government Gold Holdings Will Shrink
In many parts of the earth an increasing number of people realize that the United States and most of the other nations are firmly committed to a policy of progressing inflation. They have learned enough from the experience of the recent decades to conclude that on account of these inflationary policies an ounce of gold will one day become more expensive in terms both of the currency of the United States and of their own country. They are alarmed and would like to avoid being victimized by this outcome.
Americans are forbidden to own gold coins and gold ingots.*
Their attempts to protect their financial assets consist in the methods
that the Germans in the most spectacular inflation that history knows
called Flucht in die Sachwerte (flight into real values). They
are investing in common stocks and real estate, and prefer to have debts
payable in legal tender money rather than holding claims payable in it.
Even in the countries in which people are
free to buy gold there are up to now no conspicuous purchases of gold on
the part of financially potent individuals and institutions. Up to the
moment at which French agencies began to buy gold, the buyers of gold
were mostly people with modest incomes anxious to keep a few gold coins
as a reserve for rainy days. It was the purchases via the London gold
market on the part of such people that reduced the gold holdings of the
United States.
There is only one method available to prevent
a further reduction of the American gold reserve, namely, radical
abandonment of deficit spending as well as of any kind of “easy-money”
policy.
PART 3
Mises: Critic of Inflationism and Socialism
No effusions of authors
however brilliant and sophisticated can alter the perennial economic
laws. They are and work and take care of themselves.
—“Lord Keynes and Say’s Law”
Tyranny is the political corollary of socialism, as representative government is the political corollary of the market economy.
—“Liberty and Its Antithesis”
9
Benjamin M. Anderson Challenges the Philosophy of the Pseudo-Progressives*
The Two Lines of Marxian Thought and Policies
In all countries which have not openly adopted a policy of outright and all-round socialization the conduct of government affairs has been for many decades in the hands of statesmen and parties who style themselves “progressives” and scorn their opponents as “reactionaries.” These progressives become sometimes (but not always) very angry if somebody calls them Marxians. In this protest they are right insofar as their tenets and policies are contrary to some of the Marxian doctrines and their application to political action. But they are wrong insofar as they unreservedly endorse the fundamental dogmas of the Marxian creed and act accordingly. While calling in question the ideas of Marx, the champion of integral revolution, they subscribe to piecemeal revolution.
For there are in the writings of Marx two
distinct sets of theorems incompatible with each other: the line of the
integral revolution as upheld in earlier days by Kautsky and later by
Lenin, and the “reformist” line of revolution by instalments as
vindicated by Sombart in Germany and the Fabians in England.
Common to both lines is the unconditional
damnation of capitalism and its political “superstructure,”
representative government. Capitalism is described as a ghastly system
of exploitation. It heaps riches upon a constantly diminishing number of
“expropriators” and condemns the masses to increasing misery,
oppression, slavery and degradation. But it is precisely this awkward
system which “with the inexorability of a law of nature” finally brings
about salvation. The coming of socialism is inevitable. It will appear
as the result of the actions of the class-conscious proletarians. The
“people” will finally triumph. All machinations of the wicked
“bourgeois” are doomed to failure.
But here the two lines diverge.
In the Communist Manifesto Marx and
Engels designed a plan for the step-by-step transformation of capitalism
into socialism. The proletarians should “win the battle of democracy”
and thus raise themselves to the position of the ruling class. Then they
should use their political supremacy to wrest, “by degrees,” all
capital from the bourgeoisie. Marx and Engels give rather detailed
instructions for the various measures to be resorted to. It is
unnecessary to quote in extenso their battle plan. Its diverse items are
familiar to all Americans who have lived through the years of the New
Deal and the Fair Deal. It is more important to remember that the
fathers of Marxism themselves characterized the measures they
recommended as “despotic inroads on the rights of property and the
conditions of bourgeois production” and as “measures which appear
economically insufficient and untenable, but which in the course of the
movement outstrip themselves, necessitate further inroads upon the old
social order, and are unavoidable as a means of entirely revolutionizing
the mode of production.”*
It is obvious that all the “reformers” of the
last one hundred years were dedicated to the execution of the scheme
drafted by the authors of the Communist Manifesto in 1848. In this sense Bismarck’s Sozialpolitik as well as Roosevelt’s New Deal have a fair claim to the epithet Marxian.
But on the other hand Marx also conceived a doctrine radically different from that expounded in the Manifesto
and absolutely incompatible with it. According to this second doctrine
“no social formation ever disappears before all the productive forces
are developed for the development of which it is broad enough, and new
higher methods of production never appear before the material conditions
of their existence have been hatched out in the womb of the previous
society.” Full maturity of capitalism is the indispensable prerequisite
for the appearance of socialism. There is but one road toward the
realization of socialism, namely, the progressive evolution of
capitalism itself which, through the incurable contradictions of the
capitalist mode of production, causes its own collapse. Independently of
the wills of men this process “executes itself through the operation of
the inherent laws of capitalist production.”
The utmost concentration of capital by a
small cluster of expropriators on the one hand and unendurable
impoverishment of the exploited masses on the other hand are the factors
that alone can give rise to the great revulsion which will sweep away
capitalism. Only then will the patience of the wretched wage earners
give way and with a sudden stroke they will in a violent revolution
overthrow the “dictatorship” of the bourgeoisie grown old and decrepit.
From the point of view of this doctrine Marx
distinguishes between the policies of the petty bourgeois and those of
the class-conscious proletarians. The petty bourgeois in their ignorance
put all their hopes upon reforms. They are eager to restrain, to
regulate and to improve capitalism. They do not see that all such
endeavors are doomed to failure and make things worse, not better. For
they delay the evolution of capitalism and thereby the coming of its
maturity which alone can bring about the great debacle and thus deliver
mankind from the evils of exploitation. But the proletarians,
enlightened by the Marxian doctrine, do not indulge in these reveries.
They do not embark upon idle schemes for an improvement of capitalism.
They, on the contrary, recognize in every progress of capitalism, in
every impairment of their own conditions and in every new recurrence of
economic crisis a progress toward the inescapable collapse of the
capitalist mode of production. The essence of their policies is to
organize and to discipline their forces, the militant battalions of the
people, in order to be ready when the great day of the revolution dawns.
This rejection of petty-bourgeois policies
refers also to traditional labor union tactics. The plans of the workers
to raise, within the framework of capitalism, wage rates and their
standards of living through unionization and through strikes are vain.
For the inescapable tendency of capitalism, says Marx, is not to raise
but to lower the average standard of wages. Consequently he advised the
unions to change their policies entirely. “Instead of the conservative motto: A fair day’s wage for a fair day’s work, they ought to inscribe on their banner the revolutionary watchword: Abolition of the wages system.”
It is impossible to reconcile these two
varieties of Marxian doctrines and of Marxian policies. They preclude
one another. The authors of the Communist Manifesto in 1848
recommended precisely those policies which their later books and
pamphlets branded as petty-bourgeois nonsense. Yet they never repudiated
their scheme of 1848. They arranged new editions of the Manifesto.
In the preface of the 1872 edition they declared that the principles
for political action as outlined in 1848 need to be improved, as such
practical measures must be always adjusted to changing historical
conditions. But they did not, in this preface, stigmatize such reforms
as the outcome of petty-bourgeois mentality. Thus the dualism of the two
Marxian lines remained.
It was in perfect agreement with the
intransigent revolutionary line that the German Social-Democrats in the
eighties voted in the Reichstag against Bismarck’s social security
legislation and that their passionate opposition frustrated Bismarck’s
intention to socialize the German tobacco industry. It is no less
consonant with this revolutionary line that the Stalinists and their
henchmen describe the American New Deal and the Keynesian patent
medicines as clever but idle contrivances designed to salvage and to
preserve capitalism.
The present-day antagonism between the
Communists on the one hand and the Socialists, New Dealers, and
Keynesians on the other hand is a controversy about the means to be
resorted to for the attainment of a goal common to both of these
factions, namely the establishment of all-round central planning and the
entire elimination of the market economy. It is a feud between two
factions both of which are right in referring to the teachings of Marx.
And it is paradoxical indeed that in this controversy the anti-Communists’ title to the appellation “Marxian” is vested in the document called the Communist Manifesto.
The Guide of the Progressives
It is impossible to understand the mentality and the policy of the progressives if one does not take into account the fact that the Communist Manifesto is for them both manual and holy writ, the only reliable source of information about mankind’s future as well as the ultimate code of political conduct. The Communist Manifesto is the only piece of the writings of Marx which they have really perused. Apart from the Manifesto they know only a few sentences out of context and without any bearing on the problems of current policies. But from the Manifesto they have learned that the coming of socialism is inevitable and will transform the earth into a Garden of Eden. They call themselves progressives and their opponents reactionaries precisely because, fighting for the bliss that is bound to come, they are borne by the “wave of the future” while their adversaries are committed to the hopeless attempt to stop the wheel of Fate and History. What a comfort to know that one’s own cause is destined to conquer!
Then the progressive professors, writers, politicians, and civil servants discover in the Manifesto
a passage which especially flatters their vanity. They belong to that
“small section of the ruling class,” to that “portion of the bourgeois
ideologists” who have gone over to the proletariat, “the class that
holds the future in its hands.” Thus they are members of that elite “who
have raised themselves to the level of comprehending theoretically the
historical movements as a whole.”
Still more important is the fact that the Manifesto
provides them with an armor which makes them proof against all
criticisms levelled against their policies. The bourgeois describe these
progressive policies as “economically insufficient and untenable” and
think that they have thereby demonstrated their inadequacy. How wrong
they are! In the eyes of the progressives the excellence of these
policies consists in the very fact that they are “economically
insufficient and untenable.” For exactly such policies are, as the Manifesto says, “unavoidable as a means of entirely revolutionizing the mode of production.”
The Communist Manifesto serves as a
guidebook not only to the personnel of the ever-swelling hosts of
bureaucrats and pseudo- economists. It reveals to the “progressive”
authors the very nature of the “bourgeois class culture.” What a
disgrace is this so-called bourgeois civilization! Fortunately the eyes
of the self-styled “liberal” writers have been opened wide by Marx. The Manifesto
tells them the truth about the unspeakable meanness and depravity of
the bourgeoisie. Bourgeois marriage is “in fact a system of community of
women.” The bourgeois “sees in his wife a mere instrument of
production.” Our bourgeois, “not content with having the wives and
daughters of their proletarians at their disposal, not to speak of
common prostitutes, take the greatest pleasure in seducing each other’s
wives.” In this vein innumerable plays and novels portray the conditions
of the rotten society of decaying capitalism.
How different are conditions in the country
whose proletarians, the vanguard of what the great Fabians, Sidney and
Beatrice Webb, called the New Civilization, have already “liquidated” the exploiters! It may be granted that the Russian methods cannot be considered in every
respect as a pattern to be adopted by the “liberals” of the West. It
may also be true that the Russians, properly irritated by the
machinations of the Western capitalists who are unceasingly plotting for
a violent overthrow of the Soviet regime, become angry and sometimes
give vent to their indignation in unfriendly language. Yet the fact
remains that in Russia the word of the Communist Manifesto has
become flesh. While under capitalism “the workers have no country” and
“have nothing to lose but their chains,” Russia is the true fatherland
of all proletarians of the entire world. In a purely technical and legal
sense it may be wrong for an American or Canadian to hand over
confidential state documents or the secret designs of new weapons to the
Russian authorities. From a higher point of view it may be
understandable.
Anderson’s Fight Against Destructionism
Such was the ideology that got hold of the men who in the last decades controlled the administration and determined the course of American affairs. It was against such a mentality that the economists had to fight in criticizing the New Deal.
Foremost among these dissenters was Benjamin
McAlester Anderson. Throughout most of these fateful years he was the
editor and sole author, first of the Chase Economic Bulletin (issued by the Chase National Bank), and then of the Economic Bulletin
(issued by the Capital Research Company). In his brilliant articles he
analyzed the policies when they were still in the state of development
and then later again when their disastrous consequences had appeared. He
raised his warning voice when there was still time to abstain from
inadequate measures, and later he was never at a loss to show how the
havoc which had been done by rejecting his previous objections and
suggestions could be reduced as much as possible.
His criticism was never merely negative. He
was always intent upon indicating roads which could lead out of an
impasse. His was a constructive mind.
Anderson was not a doctrinaire remote from
contact with reality. In his capacity as the economist of the Chase
National Bank (from 1919 to 1939) he had ample opportunity to learn
everything about American economic conditions. His familiarity with
European business and politics was not surpassed by any other American.
He knew intimately all the men who were instrumental in the conduct of
national and international banking, business and politics. An
indefatigable student, he was well acquainted with the content of state
documents, statistical reports and many confidential papers. His
information was always complete and up-to-date.
But his most eminent qualities were his
inflexible honesty, his unhesitating sincerity and his unflinching
patriotism. He never yielded. He always freely enunciated what he
considered to be true. If he had been prepared to suppress or only to
soften his criticism of popular but obnoxious policies, the most
influential positions and offices would have been offered to him. But he
never compromised. This firmness marks him as one of the outstanding
characters in this age of the supremacy of time-servers.
His criticism of the easy money policy, of
credit expansion and inflation, of the abandonment of the gold standard,
of unbalanced budgets, of Keynesian spending, of price control, of
subsidies, of silver purchases, of the tariff and many other similar
expedients was crushing. The apologists of these nostrums did not have
the remotest idea how to refute his objections. All they did was to
dismiss Anderson as “orthodox.” Although the undesired effects of the
“unorthodox” policies he had assailed never failed to appear exactly as
he had predicted, almost nobody in Washington paid any heed to his
words.
The reason is obvious. The essence of
Anderson’s criticism was that all these measures were “economically
insufficient and untenable,” that they were “despotic inroads” on the
conditions of production, that they “necessitate further inroads” and
that they must finally destroy our whole economic system. But these were
just the ends which the Washington Marxians were aiming at. They did
not bother about sabotaging all essential institutions of capitalism,
for in their eyes capitalism was the worst of all evils and was doomed
anyway by the inexorable laws of historical evolution. Their plan was to
bring about, step by step, the welfare state of central planning. In
order to attain this goal they had adopted the “untenable” policies
which the Communist Manifesto had declared to be “unavoidable as a means of entirely revolutionizing the mode of production.”
Anderson never tired of pointing out that the
attempts to lower the rate of interest by means of credit expansion
must result in an artificial boom and its inevitable aftermath,
depression. In this vein he had attacked, long before 1929, the easy
money policy of the twenties, and later again, long before the breakdown
of 1937, the New Deal’s pump-priming. He preached to deaf ears. For his
opponents had learned from Marx that the recurrence of depressions is a
necessary outcome of the absence of central planning and cannot be
avoided where there is “anarchy of production.” The heavier the crisis
may be, the nearer it brings the day of salvation when socialism will be
substituted for capitalism.
The policy of keeping wage rates, either by
government decree or by union violence and intimidation, above the
height the unhampered labor market would have determined creates mass
unemployment prolonged year after year. In dealing with American
conditions as well as with those of Great Britain and other European
countries, Anderson again and again referred to this economic law which,
as even Lord Beveridge had asserted a few years before, is not
contested by any competent authority. His arguments did not impress
those who paraded as “friends of labor.” They considered private
enterprise’s alleged “inability to provide jobs for all” as inevitable
and were resolved to use mass unemployment as a lever for the
realization of their designs.
If one wants to repulse the onslaughts of the
Communists and Socialists and to shield Western civilization from
Sovietization, it is not enough to disclose the abortiveness and
impropriety of the progressive policies allegedly aiming at improving
the economic conditions of the masses. What is needed is a frontal
attack upon the whole web of Marxian, Veblenian, and Keynesian
fallacies. As long as the syllogisms of these pseudo-philosophies retain
their undeserved prestige, the average intellectual will go on blaming
capitalism for all the disastrous effects of anti-capitalist schemes and
devices.
Anderson’s Posthumous Economic History
Benjamin Anderson devoted the last years of his life to the composition of a great book, the financial and economic history of our age of wars and progressing disintegration of civilization.
The most eminent historical works have come
from authors who wrote the history of their own time for an audience
contemporary with the events recorded. When gloom began to descend on
the glory of Athens, one of its best citizens dedicated himself to Clio.
Thucydides wrote the history of the Peloponnesian Wars and of the
fateful direction of Athenian politics not merely as an unaffected
student. His keen mind had fully recognized the disastrous significance
of the course his countrymen were steering. He had been himself in
politics and in the fighting forces. In writing history he wanted to
serve his fellow-citizens. He wanted to admonish and to warn them, to
stop their march toward the abyss.
Such also were the intentions of Anderson. He
did not write merely for the sake of recording. His history is in some
way also a continuation and recapitulation of his critical examination
and interpretation of current events as provided by his Bulletins
and other papers. It does not chronicle a dead past. It deals with
forces which are still operating and spreading ruin. Like Thucydides,
Anderson was eager to serve those who desire an exact knowledge of the
past as a key to the future.
Like Thucydides, too, Anderson unfortunately
did not live to see his book published. After his premature death, much
lamented by all his friends and admirers, the D. Van Nostrand Company
published it, with a preface by Henry Hazlitt, under the title Economics and the Public Welfare, Financial and Economic History of the United States, 1914–1946.
It contains more than this title indicates. For the economic and
financial history of the United States in this period was so closely
intertwined with that of all other nations that his narrative embraces
the whole orbit of Western civilization. The chapters dealing with
British and French affairs are without doubt the best that has been said
about the decline of these once flourishing countries.
It is very difficult for a reviewer to select
from the treasure of information, wisdom and keen economic analysis
assembled in this volume the most precious gems. The discriminating
reader is captivated from the first page on and will not put it aside
before he has reached the last page.
There are people who think that economic
history neglects what they call the “human angle.” Now, the proper field
of economic history is prices and production, money and credit, taxes
and budgets, and other such phenomena. But all these things are the
outcome of human volitions and actions, plans and ambitions. The topic
of economic history is man with all his knowledge and ignorance, his
truth and his errors, his virtues and his vices.
Let us quote one of Anderson’s observations.
In commenting upon America’s abandonment of the gold standard he
remarks: “There is no need in human life so great as that men should
trust one another and should trust their government, should believe in
promises, and should keep promises in order that future promises may be
believed in and in order that confident cooperation may be possible.
Good faith—personal, national, and international—is the first
prerequisite of decent living, of the steady going on of industry, of
governmental financial strength, and of international peace” (pages
317–18).
Such were the ideas that prompted the
self-styled progressives to depreciate Anderson as “orthodox,”
“old-fashioned,” “reactionary” and “Victorian.” Sir Stafford Cripps, who
twelve times solemnly denied that he would ever change the official
relation of the pound against dollars and then, when he had done so,
protested that he naturally could not admit such intention, is more to their liking.
10
Lord Keynes and Say’s Law*
I
Lord Keynes’s main contribution did not lie in the development of new ideas but “in escaping from the old ones,” as he himself declared at the end of the preface to his “General Theory.” The Keynesians tell us that his immortal achievement consists in the entire refutation of what has come to be known as Say’s Law of Markets. The rejection of this law, they declare, is the gist of all Keynes’s teachings; all other propositions of his doctrine follow with logical necessity from this fundamental insight and must collapse if the futility of his attack on Say’s Law can be demonstrated.*
Now it is important to realize that what is
called Say’s Law was in the first instance designed as a refutation of
doctrines popularly held in the ages preceding the development of
economics as a branch of human knowledge. It was not an integral part of
the new science of economics as taught by the Classical economists. It
was rather a preliminary—the exposure and removal of garbled and
untenable ideas which dimmed people’s minds and were a serious obstacle
to a reasonable analysis of conditions.
Whenever business turned bad, the average
merchant had two explanations at hand: the evil was caused by a scarcity
of money and by general overproduction. Adam Smith, in a famous passage
in “The Wealth of ations,” exploded the first of these myths. Say
devoted himself predominantly to a thorough refutation of the second.
As long as a definite thing is still an economic good and not a “free good,” its supply is not, of course, absolutely
abundant. There are still unsatisfied needs which a larger supply of
the good concerned could satisfy. There are still people who would be
glad to get more of this good than they are really getting. With regard
to economic goods there can never be absolute overproduction.
(And economics deals only with economic goods, not with free goods such
as air which are no object of purposive human action, are therefore not
produced, and with regard to which the employment of terms like
underproduction and overproduction is simply nonsensical.)
With regard to economic goods there can be only relative
overproduction. While the consumers are asking for definite quantities
of shirts and of shoes, business has produced, say, a larger quantity of
shoes and a smaller quantity of shirts. This is not general
overproduction of all commodities. To the overproduction of shoes
corresponds an underproduction of shirts. Consequently the result cannot
be a general depression of all branches of business. The outcome is a
change in the exchange ratio between shoes and shirts. If, for instance,
previously one pair of shoes could buy four shirts, it now buys only
three shirts. While business is bad for the shoemakers, it is good for
the shirtmakers. The attempts to explain the general depression of trade
by referring to an allegedly general overproduction are therefore
fallacious.
Commodities, says Say, are ultimately paid
for not by money, but by other commodities. Money is merely the commonly
used medium of exchange; it plays only an intermediary role. What the
seller wants ultimately to receive in exchange for the commodities sold
is other commodities. Every commodity produced is therefore a price, as
it were, for other commodities produced. The situation of the producer
of any commodity is improved by any increase in the production of other
commodities. What may hurt the interests of the producer of a definite
commodity is his failure to anticipate correctly the state of the
market. He has overrated the public’s demand for his commodity and
underrated its demand for other commodities. Consumers have no use for
such a bungling entrepreneur; they buy his products only at prices which
make him incur losses, and they force him, if he does not in time
correct his mistakes, to go out of business. On the other hand, those
entrepreneurs who have better succeeded in anticipating the public
demand earn profits and are in a position to expand their business
activities. This, says Say, is the truth behind the confused assertions
of businessmen that the main difficulty is not in producing but in
selling. It would be more appropriate to declare that the first and main
problem of business is to produce in the best and cheapest way those
commodities which will satisfy the most urgent of the not yet satisfied
needs of the public.
Thus Smith and Say demolished the oldest and
most naïve explanation of the trade cycle as provided by the popular
effusions of inefficient traders. True, their achievement was merely
negative. They exploded the belief that the recurrence of periods of bad
business was caused by a scarcity of money and by a general
overproduction. But they did not give us an elaborated theory of the
trade cycle. The first explanation of this phenomenon was provided much
later by the British Currency School.
The important contributions of Smith and Say
were not entirely new and original. The history of economic thought can
trace back some essential points of their reasoning to older authors.
This in no way detracts from the merits of Smith and Say. They were the
first to deal with the issue in a systematic way and to apply their
conclusions to the problem of economic depressions. They were therefore
also the first against whom the supporters of the spurious popular
doctrine directed their violent attacks. Sismondi and Malthus chose Say
as the target of passionate volleys when they tried—in vain—to salvage
the discredited popular prejudices.
II
Say emerged victoriously from his polemics with Malthus and Sismondi. He proved his case, while his adversaries could not prove theirs. Henceforth, during the whole rest of the nineteenth century, the acknowledgment of the truth contained in Say’s Law was the distinctive mark of an economist. Those authors and politicians who made the alleged scarcity of money responsible for all ills and advocated inflation as the panacea were no longer considered economists but “monetary cranks.”
The struggle between the champions of sound
money and the inflationists went on for many decades. But it was no
longer considered a controversy between various schools of economists.
It was viewed as a conflict between economists and anti-economists,
between reasonable men and ignorant zealots. When all civilized
countries had adopted the gold standard or the gold-exchange standard,
the cause of inflation seemed to be lost forever.
Economics did not content itself with what
Smith and Say had taught about the problems involved. It developed an
integrated system of theorems which cogently demonstrated the absurdity
of the inflationist sophisms. It depicted in detail the inevitable
consequences of an increase in the quantity of money in circulation and
of credit expansion. It elaborated the monetary or circulation credit
theory of the business cycle which clearly showed how the recurrence of
depressions of trade is caused by the repeated attempts to “stimulate”
business through credit expansion. Thus it conclusively proved that the
slump, whose appearance the inflationists attributed to an insufficiency
of the supply of money, is on the contrary the necessary outcome of
attempts to remove such an alleged scarcity of money through credit
expansion.
The economists did not contest the fact that a
credit expansion in its initial stage makes business boom. But they
pointed out how such a contrived boom must inevitably collapse after a
while and produce a general depression. This demonstration could appeal
to statesmen intent on promoting the enduring well-being of their
nation. It could not influence demagogues who care for nothing but
success in the impending election campaign and are not in the least
troubled about what will happen the day after tomorrow. But it is
precisely such people who have become supreme in the political life of
this age of wars and revolutions. In defiance of all the teachings of
the economists, inflation and credit expansion have been elevated to the
dignity of the first principle of economic policy. Nearly all
governments are now committed to reckless spending and finance their
deficits by issuing additional quantities of unredeemable paper money
and by boundless credit expansion.
The great economists were harbingers of new
ideas. The economic policies they recommended were at variance with the
policies practiced by contemporary governments and political parties. As
a rule many years, even decades, passed before public opinion accepted
the new ideas as propagated by the economists and before the required
corresponding changes in policies were effected.
It was different with the “new economics” of
Lord Keynes. The policies he advocated were precisely those which almost
all governments, including the British, had already adopted many years
before his “General Theory” was published. Keynes was not an innovator
and champion of new methods of managing economic affairs. His
contribution consisted rather in providing an apparent justification for
the policies which were popular with those in power in spite of the
fact that all economists viewed them as disastrous. His achievement was a
rationalization of the policies already practiced. He was not a
“revolutionary,” as some of his adepts called him. The “Keynesian
revolution” took place long before Keynes approved of it and fabricated a
pseudo-scientific justification for it. What he really did was to write
an apology for the prevailing policies of governments.
This explains the quick success of his book.
It was greeted enthusiastically by the governments and the ruling
political parties. Especially enraptured were a new type of
intellectuals, the “government economists.” They had had a bad
conscience. They were aware of the fact that they were carrying out
policies which all economists condemned as contrary to purpose and
disastrous. Now they felt relieved. The “new economics” reestablished
their moral equilibrium. Today they are no longer ashamed of being the
handymen of bad policies. They glorify themselves. They are the prophets
of the new creed.
III
The exuberant epithets which these admirers have bestowed upon his work cannot obscure the fact that Keynes did not refute Say’s Law. He rejected it emotionally, but he did not advance a single tenable argument to invalidate its rationale.
Neither did Keynes try to refute by
discursive reasoning the teachings of modern economics. He chose to
ignore them, that was all. He never found any word of serious criticism
against the theorem that increasing the quantity of money cannot effect
anything else than, on the one hand, to favor some groups at the expense
of other groups, and, on the other hand, to foster capital
malinvestment and capital decumulation. He was at a complete loss when
it came to advancing any sound argument to demolish the monetary theory
of the trade cycle. All he did was to revive the self-contradictory
dogmas of the various sects of inflationism. He did not add anything to
the empty presumptions of his predecessors, from the old Birmingham
School of Little Shilling Men down to Silvio Gesell. He merely
translated their sophisms—a hundred times refuted—into the questionable
language of mathematical economics. He passed over in silence all the
objections which such men as Jevons, Walras and Wicksell—to name only a
few—opposed to the effusions of the inflationists.
It is the same with his disciples. They think
that calling “those who fail to be moved to admiration of Keynes’s
genius” such names as “dullard” or “narrow-minded fanatic”*
is a substitute for sound economic reasoning. They believe that they
have proved their case by dismissing their adversaries as “orthodox” or
“neo-classical.” They reveal the utmost ignorance in thinking that their
doctrine is correct because it is new.
In fact, inflationism is the oldest of all
fallacies. It was very popular long before the days of Smith, Say and
Ricardo, against whose teachings the Keynesians cannot advance any other
objection than that they are old.
IV
The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the “deficit spending” policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.
Yet no effusions of authors however brilliant
and sophisticated can alter the perennial economic laws. They are and
work and take care of themselves. Notwithstanding all the passionate
fulminations of the spokesmen of governments, the inevitable
consequences of inflationism and expansionism as depicted by the
“orthodox” economists are coming to pass. And then, very late indeed,
even simple people will discover that Keynes did not teach us how to
perform the “miracle . . . of turning a stone into bread,”† but the not at all miraculous procedure of eating the seed corn.‡
11
Stones into Bread, the Keynesian Miracle*
I
The stock-in-trade of all Socialist authors is the idea that there is potential plenty and that the substitution of socialism for capitalism would make it possible to give to everybody “according to his needs.” Other authors want to bring about this paradise by a reform of the monetary and credit system. As they see it, all that is lacking is more money and credit. They consider that the rate of interest is a phenomenon artificially created by the man-made scarcity of the “means of payment.” In hundreds, even thousands, of books and pamphlets they passionately blame the “orthodox” economists for their reluctance to admit that inflationist and expansionist doctrines are sound. All evils, they repeat again and again, are caused by the erroneous teachings of the “dismal science” of economics and the “credit monopoly” of the bankers and usurers. To unchain money from the fetters of “restrictionism,” to create free money (Freigeld, in the terminology of Silvio Gesell) and to grant cheap or even gratuitous credit, is the main plank in their political platform.
Such ideas appeal to the uninformed masses.
And they are very popular with governments committed to a policy of
increasing the quantity both of money in circulation and of deposits
subject to check. However, the inflationist governments and parties have
not been ready to admit openly their endorsement of the tenets of the
inflationists. While most countries embarked upon inflation and on a
policy of easy money, the literary champions of inflationism were still
spurned as “monetary cranks.” Their doctrines were not taught at the
universities.
John Maynard Keynes, late economic adviser to
the British government, is the new prophet of inflationism. The
“Keynesian Revolution” consisted in the fact that he openly espoused the
doctrines of Silvio Gesell. As the foremost of the British Gesellians,
Lord Keynes adopted also the peculiar messianic jargon of inflationist
literature and introduced it into official documents. Credit expansion,
says the Paper of the British Experts of April 8, 1943, performs the “miracle . . . of turning a stone into bread.”*
The author of this document was, of course, Keynes. Great Britain has
indeed traveled a long way to this statement from Hume’s and Mill’s
views on miracles.
II
Keynes entered the political scene in 1920 with his book, The Economic Consequences of the Peace. He tried to prove that the sums demanded for reparations were far in excess of what Germany could afford to pay and to “transfer.” The success of the book was overwhelming. The propaganda machine of the German nationalists, well entrenched in every country, was busily representing Keynes as the world’s most eminent economist and Great Britain’s wisest statesman.
Yet it would be a mistake to blame Keynes for
the suicidal foreign policy that Great Britain followed in the interwar
period. Other forces, especially the adoption of the Marxian doctrine
of imperialism and “capitalist warmongering,” were of incomparably
greater importance in the rise of appeasement. With the exception of a
small number of keen-sighted men, all Britons supported the policy which
finally made it possible for the Nazis to start the Second World War.
A highly gifted French economist, Étienne
Mantoux, has analyzed Keynes’s famous book point for point. The result
of his very careful and conscientious study is devastating for Keynes
the economist and statistician, as well as Keynes the statesman. The
friends of Keynes are at a loss to find any substantial rejoinder. The
only argument that his friend and biographer, Professor E. A. G.
Robinson, could advance is that this powerful indictment of Keynes’s
position came “as might have been expected, from a Frenchman.” (Economic Journal, vol. LVII, p. 23.) As if the disastrous effects of appeasement and defeatism had not affected Great Britain also!
Étienne Mantoux, son of the famous historian
Paul Mantoux, was the most distinguished of the younger French
economists. He had already made valuable contributions to economic
theory—among them a keen critique of Keynes’s General Theory, published in 1937 in the Revue d’Économie Politique—before he began his The Carthaginian Peace or the Economic Consequences of Mr. Keynes
(Oxford University Press, 1946). He did not live to see his book
published. As an officer in the French forces he was killed on active
service during the last days of the war. His premature death was a heavy
blow to France, which is today badly in need of sound and courageous
economists.
III
It would be a mistake, also, to blame Keynes for the faults and failures of contemporary British economic and financial policies. When he began to write, Britain had long since abandoned the principle of laissez-faire. That was the achievement of such men as Thomas Carlyle and John Ruskin and, especially, of the Fabians. Those born in the eighties of the nineteenth century and later were merely epigones of the university and parlor Socialists of the late Victorian period. They were no critics of the ruling system, as their predecessors had been, but apologists of government and pressure group policies whose inadequacy, futility and perniciousness became more and more evident.
Professor Seymour E. Harris has just
published a stout volume of collected essays by various academic and
bureaucratic authors dealing with Keynes’s doctrines as developed in his
General Theory of Employment, Interest and Money, published in 1936. The title of the volume is The New Economics, Keynes’ Influence on Theory and Public Policy (Alfred A. Knopf, New York, 1947). Whether Keynesianism has a fair claim to the appellation “new
economics” or whether it is not, rather, a rehash of often-refuted
Mercantilist fallacies and of the syllogisms of the innumerable authors
who wanted to make everybody prosperous by fiat money, is unimportant.
What matters is not whether a doctrine is new, but whether it is sound.
The remarkable thing about this symposium is that it does not even attempt to refute the substantiated
objections raised against Keynes by serious economists. The editor
seems to be unable to conceive that any honest and uncorrupted man could
disagree with Keynes. As he sees it, opposition to Keynes comes from
“the vested interests of scholars in the older theory” and “the
preponderant influence of press, radio, finance and subsidized
research.” In his eyes, non-Keynesians are just a bunch of bribed
sycophants, unworthy of attention. Professor Harris thus adopts the
methods of the Marxians and the Nazis, who preferred to smear their
critics and to question their motives instead of refuting their theses.
A few of the contributions are written in
dignified language and are reserved, even critical, in their appraisal
of Keynes’s achievements. Others are simply dithyrambic outbursts. Thus
Professor Paul A. Samuelson tells us: “To have been born as an economist
before 1936 was a boon—yes. But not to have been born too long before!”
And he proceeds to quote Wordsworth:
- Bliss was it in that dawn to be alive,
- But to be young was very heaven!
Descending
from the lofty heights of Parnassus into the prosaic valleys of
quantitative science, Professor Samuelson provides us with exact
information about the susceptibility of economists to the Keynesian
gospel of 1936. Those under the age of 35 fully grasped its meaning
after some time; those beyond 50 turned out to be quite immune, while
economists in-between were divided. After thus serving us a warmed-over
version of Mussolini’s giovanezza theme, he offers more of the
outworn slogans of fascism, e.g., the “wave of the future.” However, on
this point another contributor, Mr. Paul M. Sweezy, disagrees. In his
eyes Keynes, tainted by “the shortcomings of bourgeois thought” as he
was, is not the savior of mankind, but only the forerunner whose
historical mission it is to prepare the British mind for the acceptance
of pure Marxism and to make Great Britain ideologically ripe for full
socialism.
IV
In resorting to the method of innuendo and trying to make their adversaries suspect by referring to them in ambiguous terms allowing of various interpretations, the camp-followers of Lord Keynes are imitating their idol’s own procedures. For what many people have admiringly called Keynes’s “brilliance of style” and “mastery of language” were, in fact, cheap rhetorical tricks.
Ricardo, says Keynes, “conquered England as
completely as the Holy Inquisition conquered Spain.” This is as vicious
as any comparison could be. The Inquisition, aided by armed constables
and executioners, beat the Spanish people into submission. Ricardo’s
theories were accepted as correct by British intellectuals without any
pressure or compulsion being exercised in their favor. But in comparing
the two entirely different things, Keynes obliquely hints that there was
something shameful in the success of Ricardo’s teachings and that those
who disapprove of them are as heroic, noble and fearless champions of
freedom as were those who fought the horrors of the Inquisition.
The most famous of Keynes’s aperçus
is: “Two pyramids, two masses for the dead, are twice as good as one;
but not so two railways from London to York.” It is obvious that this
sally, worthy of a character in a play by Oscar Wilde or Bernard Shaw,
does not in any way prove the thesis that digging holes in the ground
and paying for them out of savings “will increase the real national
dividend of useful goods and services.” But it puts the adversary in the
awkard position of either leaving an apparent argument unanswered or of
employing the tools of logic and discursive reasoning against sparkling
wit.
Another instance of Keynes’s technique is
provided by his malicious description of the Paris Peace Conference.
Keynes disagreed with Clemenceau’s ideas. Thus, he tried to ridicule his
adversary by broadly expatiating upon his clothing and appearance
which, it seems, did not meet with the standard set by London
outfitters. It is hard to discover any connection with the German
reparations problem in the fact that Clemenceau’s boots “were of thick
black leather, very good, but of a country style, and sometimes fastened
in front, curiously, by a buckle instead of laces.” After 15 million
human beings had perished in the war, the foremost statesmen of the
world were assembled to give mankind a new international order and
lasting peace—and the British Empire’s financial expert was amused by
the rustic style of the French prime minister’s footwear.
Fourteen years later there was another
international conference. This time Keynes was not a subordinate
adviser, as in 1919, but one of the main figures. Concerning this London
World Economic Conference of 1933, Professor Robinson observes: “Many
economists the world over will remember . . . the performance in 1933 at
Covent Garden in honour of the Delegates of the World Economic
Conference, which owed its conception and organization very much to
Maynard Keynes.”
Those economists who were not in the service
of one of the lamentably inept governments of 1933 and therefore were
not delegates and did not attend the delightful ballet evening will
remember the London Conference for other reasons. It marked the most
spectacular failure in the history of international affairs of those
policies of neo-Mercantilism which Keynes backed. Compared with this
fiasco of 1933, the Paris Conference of 1919 appears to have been a
highly successful affair. But Keynes did not publish any sarcastic
comments on the coats, boots and gloves of the delegates of 1933.
V
Although Keynes looked upon “the strange, unduly neglected prophet Silvio Gesell” as a forerunner, his own teachings differ considerably from those of Gesell. What Keynes borrowed from Gesell as well as from the host of other pro-inflation propagandists was not the content of their doctrine, but their practical conclusions and the tactics they applied to undermine their opponents’ prestige. These stratagems are:
(a) All adversaries, that is, all those who do not consider credit expansion as the panacea, are lumped together and called orthodox. It is implied that there are no differences between them.
(b) It is assumed that the evolution of
economic science culminated in Alfred Marshall and ended with him. The
findings of modern subjective economics are disregarded.
(c) All that economists from David Hume on
down to our time have done to clarify the results of changes in the
quantity of money and money substitutes is simply ignored. Keynes never
embarked upon the hopeless task of refuting these teachings by
ratiocination.
In all these respects the contributors to the
symposium adopt their master’s technique. Their critique aims at a body
of doctrine created by their own illusions, which has no resemblance to
the theories expounded by serious economists. They pass over in silence
all that economists have said about the inevitable outcome of credit
expansion. It seems as if they have never heard anything about the
monetary theory of the trade cycle.
For a correct appraisal of the success which Keynes’s General Theory
found in academic circles, one must consider the conditions prevailing
in university economics during the period between the two world wars.
Among the men who occupied chairs of
economics in the last few decades, there have been only a few genuine
economists, i.e., men fully conversant with the theories developed by
modern subjective economics. The ideas of the old classical economists,
as well as those of the modern economists, were caricatured in the
textbooks and in the classrooms; they were called such names as
old-fashioned, orthodox, reactionary, bourgeois or Wall Street
economics. The teachers prided themselves on having refuted for all time
the abstract doctrines of Manchesterism and laissez-faire.
The antagonism between the two schools of
thought had its practical focus in the treatment of the labor union
problem. Those economists disparaged as orthodox taught that a permanent
rise in wage rates for all people eager to earn wages is possible only
to the extent that the per capita quota of capital invested and the
productivity of labor increases. If— whether by government decree or by
labor union pressure—minimum wage rates are fixed at a higher level than
that at which the unhampered market would have fixed them, unemployment
results as a permanent mass phenomenon.
Almost all professors of the fashionable
universities sharply attacked this theory. As these self-styled
“unorthodox” doctrinaires interpreted the economic history of the last
two hundred years, the unprecedented rise in real wage rates and
standards of living was caused by labor unionism and government
pro-labor legislation. Labor unionism was, in their opinion, highly
beneficial to the true interests of all wage-earners and of the whole
nation. Only dishonest apologists of the manifestly unfair interests of
callous exploiters could find fault with the violent acts of the unions,
they maintained. The foremost concern of popular government, they said,
should be to encourage the unions as much as possible and to give them
all the assistance they needed to combat the intrigues of the employers
and to fix wage rates higher and higher.
But as soon as the governments and
legislatures had vested the unions with all the powers they needed to
enforce their minimum wage rates, the consequences appeared which the
“orthodox” economists had predicted; unemployment of a considerable part
of the potential labor force was prolonged year after year.
The “unorthodox” doctrinaires were perplexed.
The only argument they had advanced against the “orthodox” theory was
the appeal to their own fallacious interpretation of experience. But now
events developed precisely as the “abstract school” had predicted.
There was confusion among the “unorthodox.”
It was at this moment that Keynes published his General Theory.
What a comfort for the embarrassed “progressives”! Here, at last, they
had something to oppose to the “orthodox” view. The cause of
unemployment was not the inappropriate labor policies, but the
shortcomings of the monetary and credit system. No need to worry any
longer about the insufficiency of savings and capital accumulation and
about deficits in the public household. On the contrary. The only method
to do away with unemployment was to increase “effective demand” through
public spending financed by credit expansion and inflation.
The policies which the General Theory
recommended were precisely those which the “monetary cranks” had
advanced long before and which most governments had espoused in the
depression of 1929 and the following years. Some people believe that
Keynes’s earlier writings played an important part in the process which
converted the world’s most powerful governments to the doctrines of
reckless spending, credit expansion and inflation. We may leave this
minor issue undecided. At any rate it cannot be denied that the
governments and peoples did not wait for the General Theory to embark upon these “Keynesian”—or more correctly, Gesellian policies.
VI
Keynes’s General Theory of 1936 did not inaugurate a new age of economic policies; rather, it marked the end of a period. The policies which Keynes recommended were already then very close to the time when their inevitable consequences would be apparent and their continuation would be impossible. Even the most fanatical Keynesians do not dare to say that present-day England’s distress is an effect of too much saving and insufficient spending. The essence of the much glorified “progressive” economic policies of the last decades was to expropriate ever-increasing parts of the higher incomes and to employ the funds thus raised for financing public waste and for subsidizing the members of the most powerful pressure groups. In the eyes of the “unorthodox,” every kind of policy, however manifest its inadequacy may have been, was justified as a means of bringing about more equality. Now this process has reached its end. With the present tax rates and the methods applied in the control of prices, profits and interest rates, the system has liquidated itself. Even the confiscation of every penny earned above 1,000 pounds a year will not provide any perceptible increase to Great Britain’s public revenue. The most bigoted Fabians cannot fail to realize that henceforth funds for public spending must be taken from the same people who are supposed to profit from it. Great Britain has reached the limit both of monetary expansionism and of spending.
Conditions in this country are not
essentially different. The Keynesian recipe to make wage rates soar no
longer works. Credit expansion, on an unprecedented scale engineered by
the New Deal, for a short time delayed the consequences of inappropriate
labor policies. During this interval the Administration and the union
bosses could boast of the “social gains” they had secured for the
“common man.” But now the inevitable consequences of the increase in the
quantity of money and deposits has become visible; prices are rising
higher and higher. What is going on today in the United States is the
final failure of Keynesianism.
There is no doubt that the American public is
moving away from the Keynesian notions and slogans. Their prestige is
dwindling. Only a few years ago politicians were naively discussing the
extent of national income in dollars without taking into account the
changes which government-made inflation had brought about in the
dollar’s purchasing power. Demagogues specified the level to which they
wanted to bring the national (dollar) income. Today this form of
reasoning is no longer popular. At last the “common man” has learned
that increasing the quantity of dollars does not make America richer.
Professor Harris still praises the Roosevelt Administration for having
raised dollar incomes. But such Keynesian consistency is found today
only in classrooms.
There are still teachers who tell their
students that “an economy can lift itself by its own bootstraps” and
that “we can spend our way into prosperity.”*
But the Keynesian miracle fails to materialize; the stones do not turn
into bread. The panegyrics of the learned authors who cooperated in the
production of the present volume merely confirm the editor’s
introductory statement that “Keynes could awaken in his disciples an
almost religious fervor for his economics, which could be effectively
harnessed for the dissemination of the new economics.” And Professor
Harris goes on to say, “Keynes indeed had the Revelation.”
There is no use in arguing with people who
are driven by “an almost religious fervor” and believe that their master
“had the Revelation.” It is one of the tasks of economics to analyze
carefully each of the inflation-ist plans, those of Keynes and Gesell no
less than those of their innumerable predecessors from John Law down to
Major Douglas. Yet no one should expect that any logical argument or
any experience could ever shake the almost religious fervor of those who
believe in salvation through spending and credit expansion.
12
Liberty and Its Antithesis*
As the harbingers of socialism tell us again and again, socialism will not only make all people rich, but will also bring perfect freedom to everybody. The transition to socialism, declares Frederick Engels, the friend and collaborator of Marx, is the leap of mankind from the realm of necessity into the realm of freedom. Under capitalism, say the Communists, there is bondage for the immense majority; in the Soviet Union alone there is genuine liberty for all.
The treatment of this problem of freedom and
bondage has been muddled by confounding it with the issues of the
nature-given conditions of man’s existence. In nature there is nothing
that could be called freedom. Nature is inexorable necessity. It is the
state of affairs into which all created beings are placed and with which
they have to cope. Man has to adjust his conduct to the world as it is.
He lacks the power to rise in rebellion against the “laws of nature.”
If he wants to substitute more satisfactory conditions for less
satisfactory, he has to comply with them.
Freedom in Society Means Freedom for Individuals to Choose
The concept of freedom and its antithesis make sense only in referring to the conditions of social cooperation among men. Social cooperation, the basis of any really human and civilized existence, can be achieved by two different methods. It can be cooperation by virtue of contract and voluntary coordination on the part of all individuals, or it can be cooperation by virtue of command on the part of a Führer and compulsory subordination of the many. The latter system is authoritarian.
In the libertarian system every individual is
a moral person, that is, he is free to choose and to act and is
responsible for his conduct. In the authoritarian system the supreme
chief alone is a free agent while all the others are bondsmen subject to
his discretion. Where the authoritarian system is fully established, as
was for instance the case in the empire of the Inca in pre-Columbian
America, the subjects are merely in a zoological sense human; virtually
they are deprived of their specifically human faculty of choosing and
acting and are not accountable for their conduct. It was in accordance
with this degradation of man’s moral dignity that the Nazi criminals
declined any responsibility for their deeds by pointing out that all
they did was to obey the orders of their superiors.
Western civilization is based upon the
libertarian principle, and all its achievements are the result of the
actions of free men. Only in the frame of a free society is it
meaningful to distinguish between what is good and ought to be done and
what is bad and ought to be avoided. Only in such a free society has the
individual the power to choose between morally commendable and morally
reprehensible conduct.
Man is not a perfect being and there is no
perfection in human affairs. Conditions in the free society are
certainly in many regards unsatisfactory. There is still ample room for
the endeavors of those who are intent upon fighting evil and raising the
moral, intellectual and material level of mankind.
Socialism Leads to Total Control
But the designs of the Communists, Socialists, and all their allies aim at something else. They want to establish the authoritarian system. What they mean in extolling the benefits to be derived from what they call “planning” is a society in which all of the people should be prevented from planning their own conduct and from arranging their lives according to their own moral convictions. One plan alone should prevail, the plan of the great idol State (with a capital S), the plan of the supreme chief of the government, enforced by the police. Every individual should be forced to renounce his autonomy and to obey, without asking questions, the orders issued from the Politburo, the Führer’s secretariat. This is the kind of freedom that Engels had in mind. It is precisely the opposite of what the term freedom used to signify up to our age.
It was the great merit of Professor Friedrich
von Hayek to have directed attention to the authoritarian character of
the socialist schemes, whether they are advocated by international or by
nationalist socialists, by atheists or by misguided believers, by
white-skinned or by dark-skinned fanatics. Although there have always
been authors who exposed the authoritarianism of the socialist designs,
the main criticism of socialism centered around its economic inadequacy,
and did not sufficiently deal with its effects upon the lives of the
citizens. Because of this neglect of the human angle of the issue, the
great majority of those supporting socialist policies vaguely assumed
that the restriction of the individuals’ freedom by a socialist regime
will apply “only” to economic matters and will not affect freedom in
non-economic affairs.
But as Hayek in 1944 clearly pointed out in his book The Road To Serfdom,
economic control is not merely control of a sector of human life that
can be separated from the rest; it is the control of the means for all
our ends. As the socialist state has sole control of the means, it has
the power to determine which ends are to be served and what men are to
strive for. It is not an accident that Marxian socialism in Russia and
nationalist socialism in Germany resulted in the complete abolition of
all civil liberties and the establishment of the most rigid despotism.
Tyranny is the political corollary of socialism, as representative
government is the political corollary of the market economy.
Now Professor Hayek has enlarged and substantiated his ideas in a comprehensive treatise, The Constitution of Liberty.*
In the first two parts of this book the author provides a brilliant
exposition of the meaning of liberty and the creative powers of a free
civilization. Endorsing the famous definition that describes liberty as
the rule of laws and not of men, he analyzes the constitutional and
legal foundations of a commonwealth of free citizens. He contrasts the
two schemes of society’s social and political organization, government
by the people (representative government) based upon legality, and
government by the discretionary power of an authoritarian ruler or a
ruling clique, an Obrigkeit as the Germans used to call it. Fully
appreciating the moral, practical and material superiority of the
former, he shows in detail what the legal requirements of such a state
of affairs are and what has to be done in order to make it work and to
defend it against the machinations of its foes.
The Welfare State Leads to Socialism
Unfortunately, the third part of Professor Hayek’s book is rather disappointing. Here the author tries to distinguish between socialism and the Welfare State. Socialism, he alleges, is on the decline; the Welfare State is supplanting it. And he thinks that the Welfare State is, under certain conditions, compatible with liberty.
In fact, the Welfare State is merely a method
for transforming the market economy step by step into socialism. The
original plan of socialist action as developed by Karl Marx in 1848 in
the Communist Manifesto aimed at a gradual realization of
socialism by a series of governmental measures. The ten most powerful of
such measures were enumerated in the Manifesto. They are well
known to everybody because they are the very measures that form the
essence of the activities of the Welfare State, of Bismarck’s and the
kaiser’s German Sozialpolitik as well as of the American New Deal and British Fabian Socialism. The Communist Manifesto
calls these measures which it suggests “economically insufficient and
untenable,” but it stresses the fact that “in the course of the movement
[they] outstrip themselves, necessitate further inroads upon the old
social order, and are unavoidable as a means of entirely revolutionizing
the mode of production.”
Later, Marx adopted a different method for
the policies of his party. He abandoned the tactics of a gradual
approach to the total state of socialism and instead advocated a violent
revolutionary overthrow of the “bourgeois” system that at one stroke
should “liquidate” the “exploiters” and establish “the dictatorship of
the proletariat.” It was this that Lenin did in 1917 in Russia and what
the Communist International plans to achieve everywhere. What separates
the Communists from the advocates of the Welfare State is not the
ultimate goal of their endeavors, but the methods by means of which they
want to attain a goal that is common to both of them. The difference of
opinions that divides them is the same that distinguishes the Marx of
1848 from the Marx of 1867, the year of the first publication of the
first volume of Das Kapital.
The Failure of Economic Planning
However, the fact that Professor Hayek has misjudged the character of the Welfare State does not seriously detract from the value of his great book. For his searching analysis of the policies and concerns of the Welfare State shows to every thoughtful reader why and how these much-praised welfare policies inevitably always fail. These policies never attain those—allegedly beneficial—ends which the government and the self-styled progressives who advocated them wanted to attain, but—on the contrary—bring about a state of affairs which—from the very point of view of the government and its supporters—is even more unsatisfactory than the previous state of affairs they wanted to “improve.” If the government does not repeal its first intervention, it is induced to supplement it by further acts of intervention. As these fail again, still more meddling with business is resorted to until all economic freedom has been virtually abolished. What emerges is the system of all-round planning, i.e., socialism of the type which the German Hindenburg Plan was aiming at in the First World War and which was later put into effect by Hitler after his seizure of power, and by the British Coalition Cabinet in the Second World War.
The main error that prevents many of our
contemporaries from adequately comprehending the significance of various
party programs and the trend of the welfare policies is their failure
to recognize that there is apart from outright nationalization of all
plants and farms (as effected in Russia and China) a second method for
the full realization of socialism. Under this system that is commonly
called “planning” (or, in war time, war socialism) the various plants
and farms remain outwardly and seemingly units, but they become entirely
and unconditionally subject to the orders of the supreme planning
authority. Every citizen, whatever his nominal position in the economic
system may be, is bound to toil in strict compliance with the orders of
the planning board, and his income—the amount he is permitted to spend
for his consumption—is exclusively determined by these orders. Some
labels and terms of the capitalistic system may be preserved, but they
signify under the altered conditions something entirely different from
what they used to signify in the market economy. Other terms may be
changed. Thus in Hitler Germany the head of an outfit who supplanted the
entrepreneur or the corporation president of the market economy was
styled “shop manager” (Betriebsführer) and the labor force “followers” (Gefolgschaft).
As the theoretical pace-makers of this system, e.g., the late Professor
Othmar Spann, has pointed out again and again, it retains only the name
of private ownership, while in fact there is exclusively
public—state—ownership.
Only by paying full attention to these
fundamental issues can one form a correct appreciation of the political
controversies in the nations of Western civilization. For if socialism
and communism should succeed in these countries, it will be the
socialism of the planning scheme and not the socialism of the
nationalization scheme. The latter is a method applicable to
predominantly agricultural countries like those of Eastern Europe and
Asia. In the industrial countries of the West the planning scheme is
more popular because even the most fanatical statolatrists shrink from
directly nationalizing the intricate apparatus of modern manufacturing.
Yet the “planning scheme” is just as
destructive of freedom as the “nationalization scheme” and both lead on
to the authoritarian state.
PART 4
Ideas
"Profit is a product of
the mind, of success in anticipating the future state of the market. It
is a spiritual and intellectual phenomenon. . . .
Men must choose between capitalism and socialism. They cannot avoid this dilemma by resorting to a capitalist system without entrepreneurial profit. . . . If control of production is shifted from the hands of entrepreneurs, daily anew elected by a plebiscite of the consumers, into the hands of the supreme commander . . . neither representative government nor any civil liberties can survive."
Men must choose between capitalism and socialism. They cannot avoid this dilemma by resorting to a capitalist system without entrepreneurial profit. . . . If control of production is shifted from the hands of entrepreneurs, daily anew elected by a plebiscite of the consumers, into the hands of the supreme commander . . . neither representative government nor any civil liberties can survive."
—“Profit and Loss”
13
My Contributions to Economic Theory*
Your kind invitation to address you on my contributions to economic theory honors me greatly. It is not an easy task. Looking back on my work, I realize very well that the share of one individual in the total achievements of an epoch is small indeed, that he is indebted not only to his predecessors and teachers, but to all his colleagues and no less to his pupils. I know how much I owe to the economists of this country in particular since the time, many years ago, when my teacher Böhm-Bawerk directed my attention to the study of the works of John Bates Clark, Frank A. Fetter, and other American scholars. And during all my activities, the recognition of my contributions by American economists encouraged me. Nor can I forget that, when still a student at the University of Vienna, I published a monograph on the development of Austrian labor legislation, an American economist was the first who showed an interest in it. And later the first scholar who appreciated my The Theory of Money and Credit was again an American, my distinguished friend Professor B. M. Anderson, in his book The Value of Money, published in 1917.
Monetary Theory
When I first began to study the problems of monetary theory there was a general belief, namely, that modern marginal utility economics was unable to deal with monetary theory in a satisfactory way. Helfferich was the most outspoken of those who held this opinion. In his Treatise on Money he tried to establish that marginal utility analysis must necessarily fail in its attempts to build up a theory of money.
This challenge provided me with the incentive
to use the methods of modern marginal utility economics in the study of
monetary problems. To do so I had to use an approach radically
different from that of the mathematical economists who try to establish
the formulas of the so-called equation of exchange.
In dealing with such an equation the
mathematical economist assumes that something (obviously, one of the
elements of the equation) changes and that corresponding changes in the
other values must needs follow. These elements of the equation are not
items in the individual’s economy, but categories of the whole economic
system, and consequently the changes do not occur with individuals but
with the whole system, with the Volkswirtschaft as a whole. This way of reasoning is eminently unrealistic and differs radically from the procedure of modern catallactics.*
It is a return to the manner of reasoning which doomed to frustration
the work of the older Classical economists. Monetary problems are
economic problems and have to be dealt with in the same way as all other
economic problems. The monetary economist does not have to deal with
universal entities like volume of trade meaning total volume of trade,
or quantity of money meaning all the money current in the whole economic
system. Still less can he make use of the nebulous metaphor “velocity
of circulation.” He has to realize that the demand for money arises from
the preferences of individuals within a market society. Because
everybody wishes to have a certain amount of cash, sometimes more,
sometimes less, there is a demand for money. Money is never simply in
the economic system, money is never simply circulating. All the money
available is always in the cash-holdings of somebody. Every piece of
money may one day—sometimes oftener, sometimes more seldom—pass from one
man’s cash-holding to another man’s. But at every moment it is owned by
somebody and is a part of somebody’s cash-holdings. The decisions of
individuals regarding the magnitude of their cash-holding, their choices
between the dis-utility of holding more cash and its advantages
constitute the ultimate factor in the formation of purchasing power.
Changes in the supply of money or in the
demand for it can never occur for all individuals at the same time and
to the same extent and they, therefore, never affect their judgments of
value and their behavior as buyers and sellers to the same degree.
Therefore the changes in prices do not affect all commodities at the
same time and to the same degree. The over-simple formula both of the
primitive quantity theory and of contemporary mathematical economists
according to which prices, that is, all prices, rise or fall in the
proportion of the increase or decrease in the quantity of money is
absolutely wrong.
We have to study monetary changes as changes
which occur first for some groups of individuals only and slowly spread
over the whole economic system to the extent that the additional demand
of those first benefited reaches other classes of individuals. Only in
this way can we obtain a realistic insight into the social consequences
of monetary changes.
The Business Cycle
Taking this as my point of departure I developed a general theory of money and credit and tried to explain the business cycle as a credit phenomenon. This theory, which is today styled the monetary theory or sometimes the Austrian theory of the trade cycle, led me to make some criticism of the continental, especially of the German, credit system. Readers were at first more interested in my pessimistic judgment of the trends of German Central Bank policy and my pessimistic forecast which nobody believed in 1912 until a few years later things turned out much worse even than I had predicted. It is the fate of the economist that people are more interested in his conclusions than in his explanations, and that they are reluctant to abandon a policy whose undesired but inevitable results the economist has demonstrated.
Economic Calculation under Socialism
From my studies of monetary and credit problems, which later stimulated me to found the Austrian Institute of Business Cycle Research, I came to the study of the problem of economic calculation within a socialist community. In my essay on economic calculation in a socialist world, first published in 1920, and then later in my book on Socialism, I have proved that an economic system, where there is no private ownership of the means of production, could not find any criterion for determining the values of the factors of production and therefore could not calculate. Since I first touched upon this point, many dozens of books and many hundreds of articles published in different languages have dealt with the problem; this discussion has left my thesis unshattered. The treatment of the problems connected with planning, of course total planning and socialization, has been given a completely new direction by the indication of this as the crucial point.
Is There a Middle Way?
From the comparative study of the essential features both of capitalist and socialist economy I came to the related problem of whether, apart from these two thinkable systems of social cooperation, i.e., private ownership of the means of production and public ownership, there is a third possible social system. Such a third solution, a system which its proponents claim is neither socialism nor capitalism, but midway between both and avoiding the disadvantages of each and retaining the advantages of both, has again and again been suggested. I tried to examine the economic implications of these systems of government interference and to demonstrate that they can never attain the ends which people wish to attain with them. I later broadened the field of my research in order to include the problems of the stato corporativo, the panacea recommended by fascism.
Human Action
Occupation with all these problems made necessary an approach to the question of the values and ends of human activity. The reproach of sociologists to the effect that economists deal only with an unrealistic “economic man” could no longer be endured. I tried to demonstrate that the economists were never so narrow as their critics believed. The prices whose formation we try to explain are a function of demand and it does not make any difference what kind of motives actuated those involved in the transaction. It is immaterial whether the motives of those who wish to buy are egoistic or altruistic, moral or immoral, patriotic or unpatriotic. Economics deals with the scarce means of attaining ends, irrespective of the quality of the ends. The ends are beyond the scope of rationality, but every action of a conscious being directed towards a specific goal is necessarily rational. It is futile to convict economics because it is rational and deals with rationality. Of course, science is always rational.
In my treatise on economic theory,* published in the German language in Geneva a few months ago—an English edition will be published in the near future†
—I have dealt not only with the economic problems of a market society
but in the same way with the economics of all other thinkable types of
social cooperation. I think that this is indispensable in a world where
the fundamental principles of economic organization are at stake.
I try in my treatise to consider the concept
of static equilibrium as instrumental only and to make use of this
purely hypothetical abstraction only as a means of approaching an
understanding of a continuously changing world. It is one of the
shortcomings of many economic theorists that they have forgotten the
purpose underlying the introduction of this hypothetical concept into
our analysis. We cannot do without this notion of a world where there is
no change; but we have to use it only for the purpose of studying
changes and their consequences, that means for the study of risk and
uncertainty and therefore of profits and losses.
Capital Accumulation and Interest Theory
The logical result of this view is the disintegration of some mythical interpretations of economic entities. The almost metaphysical use of terms like capital has to be avoided. There is in nature nothing which corresponds to the terms capital or income. There are different commodities, producers goods, and consumers goods; it is the intention of the individuals or of acting groups which makes some goods capital and others income. The maintenance of capital or the accumulation of new capital is always the outcome of a conscious action on the part of men who restrict their consumption to limits which do not reduce the value of the stock available. It is a mistake to assume the immutability of the capital stock as something natural which does not require special attention. In this respect I have to disagree with the opinions of one of the most eminent economists of our time, with Professor Knight of Chicago.
The weak point of the Böhm-Bawerkian theory
[of capital and interest] is not, as Professor Knight believes, the
useless introduction of the concept of the period of production. It is a
more serious deficiency that Böhm-Bawerk reverts to the errors of the
so-called productivity theory. Like Professor Fetter of Princeton I
aimed at an elimination of this weakness by basing the explanation of
interest on time preference only.
The touchstone of any economic theory is
according to an oft-quoted dictum, the treatment of the trade cycle. I
have tried not only to restate the monetary theory of the cycle but also
to demonstrate that all other explanations cannot avoid using the main
argument of this theory. Of course, the boom means an upward movement of
prices or at least a compensation for tendencies working toward falling
prices, and to explain this requires the postulation of a rising supply
of credit or money.
Economist’s Role: Challenge Economic Error
In every part of my treatise I try to take into account the relative weight to be assigned to different institutional factors and to different economic data. I further discuss the objections raised not only by different theoretical schools but also by those who deny the possibility of any economic science. The economist has to answer those who believe that there is no such thing as a universally valid science of society, who doubt the unity of human logic and experience and try to replace what they call international and, therefore, as they say, vain knowledge with doctrines which represent the peculiar point of view of their own class, nation or race. We do not have the right to let these pretensions pass unchallenged even if we have to assert truths which to us seem obvious. But it is sometimes necessary to repeat truths because we find repeated instances of the old errors.
14
Economic Teaching at the Universities*
A few years ago a House of Representatives subcommittee on publicity and propaganda in the executive departments, under the chairman-ship of Representative Forest A. Harness, investigated federal propaganda operations. On one occasion the committee had as a witness a government-employed doctor. When asked if his public speeches throughout the country presented both sides of the discussion touching compulsory national health insurance, this witness answered: “I don’t know what you mean by both sides.”
This naive answer throws light on the state
of mind of people who proudly call themselves progressive intellectuals.
They simply do not imagine that any argument could be advanced against
the various schemes they are suggesting. As they see it, everybody,
without asking questions, must support every project aiming at more and
more government control of all aspects of the citizen’s life and
conduct. They never try to refute the objections raised against their
doctrines. They prefer, as Mrs. Eleanor Roosevelt recently did in her
column, to call dishonest those with whom they do not agree.
Many eminent citizens hold educational
institutions responsible for the spread of this bigotry. They sharply
criticize the way in which economics, philosophy, sociology, history and
political science are taught at most American universities and
colleges. They blame many teachers for indoctrinating their students
with the ideas of all-round planning, socialism and communism. Some of
those attacked try to deny any responsibility. Others, realizing the
futility of this mode of defense, cry out about “persecution” and
infringement of “academic freedom.”
Yet what is unsatisfactory with present-day
academic conditions— not only in this country but in most foreign
nations—is not the fact that many teachers are blindly committed to
Veblenian, Marxian and Keynesian fallacies, and try to convince their
students that no tenable objections can be raised against what they call
progressive policies. The mischief is rather to be seen in the fact
that the statements of these teachers are not challenged by any
criticism in the academic sphere. The pseudo-liberals monopolize the
teaching jobs at many universities. Only men who agree with them are
appointed as teachers and instructors of the social sciences, and only
textbooks supporting their ideas are used. The essential question is not
how to get rid of inept teachers and poor textbooks. It is how to give
the students an opportunity to hear something about the ideas of
economists rejecting the tenets of the interventionists, inflationists,
Socialists and Communists.
Methods of the “Progressive” Teachers
Let us illustrate the matter by reviewing a recently published book. A professor of Harvard University edits, with the support of an advisory committee whose members are all like himself professors of economics at Harvard University, a series of textbooks, the “Economics Handbook Series.” In this series there was published a volume on socialism. Its author, Paul M. Sweezy, opens his preface with the declaration that the book “is written from the standpoint of a Socialist.” The editor of the series, Professor Seymour E. Harris, in his introduction goes a step further in stating that the author’s “viewpoint is nearer that of the group which determines Soviet policy than the one which now [1949] holds the reins of government in Britain.” This is a mild description of the fact that the volume is from the first to the last page an uncritical eulogy of the Soviet system.
Now it is perfectly legitimate for Dr. Sweezy
to write such a book and for professors to edit and to publish it. The
United States is a free country—one of the few free countries left in
the world—and the Constitution and its amendments grant to everybody the
right to think as he likes and to have published in print what he
thinks. Sweezy has in fact unwittingly rendered a great service to the
discerning public. For his volume clearly shows to every judicious
reader conversant with economics that the most eminent advocates of
socialism are at their wits’ end, do not know how to advance any
plausible argument in favor of their creed, and are utterly at a loss to
refute any of the serious objections raised against it.
But the book is not designed for
perspicacious scholars well acquainted with the social sciences. It is,
as the editors’ introduction emphasizes, written for the general reader
in order to popularize ideas and especially also for use in the
classroom. Laymen and students who know nothing or very little about the
problems involved will draw all their knowledge about socialism from
it. They lack the familiarity with theories and facts which would enable
them to form an independent opinion about the various doctrines
expounded by the author. They will accept all his theses and
descriptions as incontestable science and wisdom. How could they be so
presumptuous as to doubt the reliability of a book, written, as the
introduction says, by an “authority” in the field and sponsored by a
committee of professors of venerable Harvard!
The shortcoming of the committee is not to be
seen in the fact that they have published such a book, but in the fact
that their series contains only this book about socialism. If they had,
together with Dr. Sweezy’s book, published another volume critically
analyzing communist ideas and the achievements of socialist governments,
nobody could blame them for disseminating communism. Decency should
have impelled them to give the critics of socialism and communism the
same chance to represent their views to the students of universities and
colleges as they gave to Dr. Sweezy.
On every page of Dr. Sweezy’s book one finds
really amazing statements. Thus, in dealing with the problem of civil
rights under a socialist regime, he simply equates the Soviet
Constitution with the American Constitution. Both, he declares, are generally
accepted as the statement of the ideals which ought to guide the
actions of both the state and the individual citizen. That these ideals
are not always lived up to—either in the Soviet Union or in the United
States—is certainly both true and important; but it does not mean that
they do not exist or that they can be ignored, still less that they can
be transformed into their opposite.
Leaving aside most of what could be advanced
to explode this reasoning, there is need to realize that the American
Constitution is not merely an ideal but the valid law of the country. To
prevent it from becoming a dead letter there is an independent
judiciary culminating in the Supreme Court. Without such a guardian of
law and legality any law can be and is ignored and transformed into its
opposite. Did Dr. Sweezy never become aware of this nuance? Does he
really believe that the millions languishing in Soviet prisons and labor
camps can invoke habeas corpus?
To say it again: Dr. Sweezy has the
right—precisely because the American Bill of Rights is not merely an
ideal, but an enforced law—to transform every fact into its opposite.
But professors who hand out such praise of the Soviets to their students
without informing them about the opinions of the opponents of socialism
must not raise the cry of witchhunt if they are criticized.
Professor Harris in his introduction contends
that “those who fear undue influence of the present volume may be
cheered by a forthcoming companion volume on capitalism in this series
written by one as devoted to private enterprise as Dr. Sweezy is to
socialism.” This volume, written by Professor David McCord Wright of the
University of Virginia, has been published in the meantime. It deals
incidentally also with socialism and tries to explode some minor
socialist fallacies, such as the doctrine of the withering away of the
State, a doctrine which even the most fanatical Soviet authors relegate
today to an insignificant position. But it certainly cannot be
considered a satisfactory substitute, or a substitute at all, for a
thoroughly critical examination of the whole body of socialist and
communist ideas and the lamentable failure of all socialist experiments.
Some of the teachers try to refute the
accusations of ideological intolerance leveled against their
universities and to demonstrate their own impartiality by occasionally
inviting a dissenting outsider to address their students. This is mere
eyewash. One hour of sound economics against several years of
indoctrination of errors! The present writer may quote from a letter in
which he declined such an invitation:
What makes it impossible for me to present the operation of the market economy in a short lecture—whether fifty minutes or twice fifty minutes—is the fact that people, influenced by the prevailing ideas on economic problems, are full of erroneous opinions concerning this system. They are convinced that economic depressions, mass unemployment, monopoly, aggressive imperialism and wars, and the poverty of the greater part of mankind, are caused by the unhampered operation of the capitalist mode of production.
If a lecturer does not dispel each of these dogmas, the impression left with the audience is unsatisfactory. Now, exploding any one of them requires much more time than that assigned to me in your program. The hearers will think: “He did not refer at all to this” or “He made only a few casual remarks about that.” My lecture would rather confirm them in their misunderstanding of the system. . . . If it were possible to expound the operation of capitalism in one or two short addresses, it would be a waste of time to keep the students of economics for several years at the universities. It would be difficult to explain why voluminous textbooks have to be written about this subject. . . . It is these reasons that impel me reluctantly to decline your kind invitation.
The Alleged Impartiality of the Universities
The pseudo-progressive teachers excuse their policy of barring all those whom they smear as old-fashioned reactionaries from access to teaching positions by calling these men biased.
The reference to bias is quite out of place
if the accuser is not in a position to demonstrate clearly in what the
deficiency of the smeared author’s doctrine consists. The only thing
that matters is whether a doctrine is sound or unsound. This is to be
established by facts and deductive reasoning. If no tenable arguments
can be advanced to invalidate a theory, it does not in the least detract
from its correctness if the author is called names. If, on the other
hand, the falsity of a doctrine has already been clearly demonstrated by
an irrefutable chain of reasoning, there is no need to call its author
biased.
A biographer may try to explain the
manifestly exploded errors of the person whose life he is writing about
by tracing them back to bias. But such psychological interpretation is
immaterial in discussions concerning the correctness or falsity of a
theory. Professors who call those with whom they disagree biased merely
confess their inability to discover any fault in their adversaries’
theories.
Many “progressive” professors have for some
time served in one of the various alphabetical government agencies. The
tasks entrusted to them in the bureaus were as a rule ancillary only.
They compiled statistics and wrote memoranda which their superiors,
either politicians or former managers of corporations, filed without
reading. The professors did not instill a scientific spirit into the
bureaus. But the bureaus gave them the mentality of authoritarianism.
They distrust the populace and consider the State (with a capital S) as
the God-sent guardian of the wretched underlings. Only the Government is
impartial and unbiased. Whoever opposes any expansion of governmental
powers is by this token unmasked as an enemy of the commonweal. It is
manifest that he “hates” the State.
Now if an economist is opposed to the
socialization of industries, he does not “hate” the State. He simply
declares that the commonwealth is better served by private ownership of
the means of production than by public ownership. Nobody could pretend
that experience with nationalized enterprises contradicts this opinion.
Another typically bureaucratic prejudice
which the professors acquired in Washington is to call the attitudes of
those opposing government controls and the establishment of new offices
“negativism.” In the light of this terminology all that has been
achieved by the American individual enterprise system is only
“negative”; the bureaus alone are “positive.”
There is, furthermore, the spurious
antithesis “plan or no plan.” Only totalitarian government planning that
reduces the citizens to mere pawns in the designs of the bureaucracy is
called planning. The plans of the individual citizens are simply “no
plans.” What semantics!
How Modern History Is Taught
The progressive intellectual looks upon capitalism as the most ghastly of all evils. Mankind, he contends, lived rather happily in the good old days. But then, as a British historian said, the Industrial Revolution “fell like a war or a plague” on the peoples. The “bourgeoisie” converted plenty into scarcity. A few tycoons enjoy all luxuries. But, as Marx himself observed, the worker “sinks deeper and deeper” because the bourgeoisie “is incompetent to assure an existence to its slave within his slavery.”
Still worse are the intellectual and moral
effects of the capitalist mode of production. There is but one means,
the progressive believes, to free mankind from the misery and
degradation produced by laissez-faire and rugged individualism, viz., to
adopt central planning, the system with which the Russians are
successfully experimenting. It is true that the results obtained by the
Soviets are not yet fully satisfactory. But these shortcomings were
caused only by the peculiar conditions of Russia. The West will avoid
the pitfalls of the Russians and will realize the Welfare State without
the merely accidental features that disfigured it in Russia and in
Hitler Germany.
Such is the philosophy taught at most
present-day schools and propagated by novels and plays. It is this
doctrine that guides the actions of almost all contemporary governments.
The American “progressive” feels ashamed of what he calls the social
backwardness of his country. He considers it a duty of the United States
to subsidize foreign socialist governments lavishly in order to enable
them to go on with their ruinous socialist ventures. In his eyes the
real enemy of the American people is Big Business, that is, the
enterprises which provide the American common man with the highest
standard of living ever reached in history. He hails every step forward
on the road toward all-round control of business as progress. He smears
all those who hint at the pernicious effects of waste, deficit spending
and capital decumulation as reactionaries, economic royalists and
Fascists. He never mentions the new or improved products which business
almost every year makes accessible to the masses. But he goes into
raptures about the rather questionable achievements of the Tennessee
Valley Authority, the deficit of which is made good out of taxes
collected from Big Business.
The most infatuated expositors of this
ideology are to be found in the university departments of history,
political science, sociology and literature. The professors of these
departments enjoy the advantage, in referring to economic issues, that
they are talking about a subject with which they are not familiar at
all. This is especially flagrant in the case of historians. The way in
which the history of the last two hundred years has been treated is
really a scandal. Only recently eminent scholars have begun to unmask
the crude fallacies of Lujo Brentano, the Webbs, the Hammonds, Tawney,
Arnold Toynbee, Elie Halévy, the Beards and other authors. At the last
meeting of the Mont Pèlerin Society the occupant of the chair of
economic history at the London School of Economics, Professor T. S.
Ashton, presented a paper in which he pointed out that the commonly
accepted views of the economic developments of the nineteenth century
“are not informed by any glimmering of economic sense.” The historians
tortured the facts when they concocted the legend that “the dominant
form of organization under industrial capitalism, the factory, arose out
of the demands, not of ordinary people, but of the rich and the
rulers.”
The truth is that the characteristic feature
of capitalism was and is mass production for the needs of the masses.
Whenever the factory with its methods of mass production by means of
power-driven machines invaded a new branch of production, it started
with cheap goods for the broad masses. The factories turned to the
production of more refined and therefore more expensive merchandise only
at a later stage, when the unprecedented improvement which they had
caused in the masses’ standard of living made it reasonable to apply the
methods of mass production to better articles as well. Big business
caters to the needs of the many; it depends exclusively upon mass
consumption. In his capacity as consumer the common man is the sovereign
whose buying or abstention from buying decides the fate of
entrepreneurial activities. The “proletarian” is the much-talked-about
customer who is always right.
The most popular method of deprecating
capitalism is to make it responsible for every condition which is
considered unsatisfactory. Tuberculosis, and, until a few years ago,
syphilis, were called diseases of capitalism. The destitution of scores
of millions in countries like India, which did not adopt
capitalism, is blamed on capitalism. It is a sad fact that people become
debilitated in old age and finally die. But this happens not only to
salesmen but also to employers, and it was no less tragic in the
pre-capitalistic ages than it is under capitalism. Prostitution,
dipsomania and drug addiction are all called capitalist vices.
Whenever people discuss the alleged misdeeds
of the capitalists, a learned professor or a sophisticated artist refers
to the high income of movie stars, boxers and wrestlers. But who
contributes more to these incomes, the millionaires or the
“proletarians”?
It must be admitted that the worst excesses
in this propaganda are not committed by professors of economics but by
the teachers of the other social sciences, by journalists, writers and
sometimes even by ministers. But the source from which all the slogans
of this hectic fanaticism spring is the teachings handed down by the
“institutionalist” school of economic policies. All these dogmas and
fallacies can be ultimately traced back to allegedly economic doctrines.
The Proscription of Sound Economics
The Marxians, Keynesians, Veblenians and other “progressives” know very well that their doctrines cannot stand any critical analysis. They are fully aware of the fact that one representative of sound economics in their department would nullify all their teachings. This is why they are so anxious to bar every “orthodox” from access to the strongholds of their “un-orthodoxy.”
The worst consequence of this proscription of
sound economics is the fact that gifted young graduates shun the career
of an academic economist. They do not want to be boycotted by
universities, book reviewers and publishing firms. They prefer to go
into business or the practice of law, where their talents will be fairly
appreciated. It is mainly compromisers, who are not eager to find out
the shortcomings of the official doctrine, who aspire to the teaching
positions. There are few competent men left to take the place of the
eminent scholars who die or reach the retirement age. Among the rising
generation of instructors are hardly any worthy successors of such
economists as Frank A. Fetter and Edwin W. Kemmerer of Princeton, Irving
Fisher of Yale and Benjamin M. Anderson of California.
There is but one way to remedy this
situation. True economists must be given the same opportunity in our
faculties which only the advocates of socialism and interventionism
enjoy today. This is surely not too much to ask as long as this country
has not yet gone totalitarian.
15
The Political Chances of Genuine Liberalism*
The outlook of many eminent champions of genuine liberalism is rather pessimistic today. As they see it, the vitriolic slogans of the socialists and interventionists call forth a better response from the masses than the cool reasoning of judicious men. The majority of the voters are just dull and mentally inert people who dislike thinking and are easily deceived by the enticing promises of irresponsible pied pipers. Subconscious inferiority complexes and envy push people toward the parties of the left. They rejoice in the policies of confiscating the greater part of the income and wealth of successful businessmen without grasping the fact that these policies harm their own material interests. Disregarding all the objections raised by economists, they firmly believe that they can get many good things for nothing.
Even in the United States people, although enjoying the highest
standard of living ever attained in history, are prepared to condemn
capitalism as a vile economy of scarcity and to indulge in daydreams
about an economy of abundance in which everybody will get everything
“according to his needs.” The case for freedom and material prosperity
is hopeless. The future belongs to the demagogues who know nothing else
than to dissipate the capital accumulated by previous generations.
Mankind is plunging into a return to the dark ages. Western civilization
is doomed.
The Ideas of the Masses Come from Intellectuals
The main error of this widespread pessimism is the belief that the destructionist ideas and policies of our age sprang from the proletarians and are a “revolt of the masses.” In fact, the masses, precisely because they are not creative and do not develop philosophies of their own, follow the leaders. The ideologies which produced all the mischiefs and catastrophes of our century are not an achievement of the mob. They are the feat of pseudo-scholars and pseudo-intellectuals. They were propagated from the chairs of universities and from the pulpit, they were disseminated by the press, by novels and plays, and by the movies and the radio. The intellectuals converted the masses to socialism and interventionism. These ideologies owe the power they have today to the fact that all means of communication have been turned over to their supporters and almost all dissenters have been virtually silenced. What is needed to turn the flood is to change the mentality of the intellectuals. Then the masses will follow suit.
Furthermore it is not true that the ideas of
genuine liberalism are too complicated to appeal to the untutored mind
of the average voter. It is not a hopeless task to explain to the wage
earners that the only means to raise wage rates for all those eager to find jobs and to earn wages
is to increase the per head quota of capital invested. The pessimists
under-rate the mental abilities of the “common man” when they assert
that he cannot grasp the disastrous consequences of policies resulting
in capital decumulation. Why do all “underdeveloped countries” ask for
American aid and American capital? Why do they not rather expect aid
from socialist Russia?
Government Programs Raise Prices
The acme of the policies of all self-styled progressive parties and governments is to raise artificially the prices of vital commodities above the height they would have attained on the markets of unhampered laissez-faire capitalism. Only an infinitesimal fraction of the American people is interested in the preservation of a high price for sugar. The immense majority of the American voters are buyers and consumers, not producers and sellers of sugar. Nonetheless the American government is firmly committed to a policy of high sugar prices by rigorously restricting both the importation of sugar from abroad and domestic production. Similar policies are adopted with regard to the prices of bread, meat, butter, eggs, potatoes, cotton and many other agricultural products. It is a serious blunder to call this procedure indiscriminately a pro-farmers policy. Less than one fifth of the United States’s total population are dependent upon agriculture for a living. Yet the interests of these people with regard to the prices of various agricultural products are not identical. The dairyman is not interested in a high, but in a low price for wheat, fodder, sugar and cotton. The owners of chicken farms are hurt by high prices of any agricultural product but chickens and eggs. It is obvious that the growers of cotton, grapes, oranges, apples, grapefruit and cranberries are prejudiced by a system which raises the prices of staple foods. Most of the items of the so-called pro-farm policy favor only a minority of the total farming population at the expense of the majority not only of the non-farming, but also of the farming population.
Things are hardly different in other fields.
When the railroadmen or the workers of the building trades, supported by
laws and administrative practices which are admittedly loaded against
their employers, indulge in feather-bedding and other devices allegedly
destined to “create more jobs,” they are unfairly fleecing the immense
majority of their fellow citizens. The unions of the printers enhance
the prices of books and periodicals and thus affect all people eager to
read and to learn. The so-called pro-labor policies bring about a state
of affairs under which each group of wage earners is intent upon
improving their own conditions at the expense of the consumers, viz.,
the enormous majority.
Nobody knows today whether he wins more from
those policies which are favoring the group to which he himself belongs
than he loses on account of the policies which favor all the other
groups. But it is certain that all are adversely affected by the general
drop in the productivity of industrial effort and output which these
allegedly beneficial policies inevitably bring about.
Until a few years ago the advocates of these
unsuitable policies tried to defend them by pointing out that their
incidence reduces only the wealth and income of the rich and benefits
the masses at the sole expense of useless parasites. There is no need to
explode the fallacies of this reasoning. Even if we admit its
conclusiveness for the sake of argument, we must realize that, with the
exception of a few countries, this “surplus” fund of the rich has
already been exhausted. Even Mr. Hugh Gaitskell, Sir Stafford Cripps’s
successor as the Führer of Great Britain’s economy, could not
help declaring that “there is not enough money to take away from
England’s rich to raise standards of living any further.” In the United
States the policy of “soaking the rich” has not yet gone so far as that.
But if the trend of American politics is not entirely reversed very
soon, this richest of all countries will have to face the same situation
in a few years.
Prospects for a Genuine Liberal Revival
Conditions being such, the prospects for a genuinely liberal revival may appear propitious. At least fifty per cent of the voters are women, most of them housewives or prospective housewives. To the common sense of these women a program of low prices will make a strong appeal. They will certainly cast their ballot for candidates who proclaim: Do away peremptorily with all policies and measures destined to enhance prices above the height of the unhampered market! Do away with all this dismal stuff of price supports, parity prices, tariffs and quotas, intergovernmental commodity control agreements and so on! Abstain from increasing the quantity of money in circulation and from credit expansion, from all illusory attempts to lower the rate of interest and from deficit spending! What we want is low prices.
In the end these judicious householders will even succeed in convincing their husbands.
In the Communist Manifesto Karl Marx
and Frederick Engels asserted: “The cheap prices of its commodities are
the heavy artillery with which capitalism batters down all Chinese
walls.” We may hope that these cheap prices will also batter down the
highest of all Chinese walls, viz., those erected by the folly of bad
economic policies.
To express such hopes is not merely wishful thinking.
16
Trends Can Change*
One of the cherished dogmas implied in contemporary fashionable doctrines is the belief that tendencies of social evolution as manifested in the recent past will prevail in the future too. Study of the past, it is assumed, discloses the shape of things to come. Any attempt to reverse or even to stop a trend is doomed to failure. Man must submit to the irresistible power of historical destiny.
To this dogma is added the Hegelian idea of
progressive improvement in human conditions. Every later stage of
history, Hegel taught, is of necessity a higher and more perfect state
than the preceding one, is progress toward the ultimate goal which God
in his infinite goodness set for mankind. Thus any doubt with regard to
the excellence of what is bound to come is unwarranted, unscientific and
blasphemous. Those fighting “progress” are not only committed to a
hopeless venture. They are also morally wicked, reactionary, for they want to prevent the emergence of conditions that will benefit the immense majority.
From the point of view of this philosophy its
adepts, the self-styled “progressives,” deal with the fundamental
issues of economic policies. They do not examine the merits and demerits
of suggested measures and reforms. This would, in their eyes, be
unscientific. As they see it, the only question that has to be answered
is whether such proposed innovations do or do not agree with the spirit
of our age and follow the direction which destiny has ordained for the
course of human affairs. The drift of the policies of the recent past
teaches us what is both inescapable and beneficial. The only legitimate
source for the cognition of what is salutary and has to be accomplished
today is the knowledge of what was accomplished yesterday.
In the last decades there prevailed a trend
toward more and more government interference with business. The sphere
of the private citizen’s initiative was narrowed down. Laws and
administrative decrees restricted the field in which entrepreneurs and
capitalists were free to conduct their activities in compliance with the
wishes of the consumers as manifested in the structure of the market.
From year to year an ever-increasing portion of profits and interest on
capital invested was confiscated by taxation of corporation earnings and
individual incomes and estates. “Social” control, i.e., government
control, of business is step by step substituted for private control.
The “progressives” are certain that this trend toward wresting
“economic” power from the parasitic “leisure class” and its transfer to
“the people” will go on until the “welfare state” will have supplanted
the nefarious capitalistic system which history has doomed for ever.
Notwithstanding sinister machinations on the part of “the interests,”
mankind, led by government economists and other bureaucrats,
politicians, and union bosses, marches steadily toward the bliss of an
earthly paradise.
The prestige of this myth is so enormous that
it quells any opposition. It spreads defeatism among those who do not
share the opinion that everything which comes later is better than what
preceded and are fully aware of the disastrous effects of all-round
planning, i.e., totalitarian socialism. They, too, meekly submit to
what, the pseudo-scholars tell them, is inevitable. It is this mentality
of passively accepting defeat that has made socialism triumph in many
European countries and may very soon make it conquer in this country
too.
The Marxian dogma of the inevitability of
socialism was based on the thesis that capitalism necessarily results in
progressive impoverishment of the immense majority of people. All the
advantages of technological progress benefit exclusively the small
minority of exploiters. The masses are condemned to increasing “misery,
oppression, slavery, degradation, exploitation.” No action on the part
of governments or labor unions can succeed in stopping this evolution.
Only socialism, which is bound to come “with the inexorability of a law
of nature,” will bring salvation by “the expropriation of the few
usurpers by the mass of people.”
Facts have belied this prognosis no less than
all other Marxian forecasts. In the capitalist countries the common
man’s standard of living is today incomparably higher than it was in the
days of Marx. It is simply not true that the fruits of technological
improvement are enjoyed exclusively by the capitalists while the
laborer, as the Communist Manifesto says, “instead of rising with
the progress of industry, sinks deeper and deeper.” Not a minority of
“rugged individualists,” but the masses, are the main consumers of the
products turned out by large-scale production. Only morons can still
cling to the fable that capitalism “is incompetent to assure an
existence to its slave within his slavery.”
Today the doctrine of the irreversibility of
prevailing trends has supplanted the Marxian doctrine concerning the
inevitability of progressive impoverishment.
Now this doctrine is devoid of any logical or
experimental verification. Historical trends do not necessarily go on
for ever. No practical man is so foolish as to assume that prices will
keep rising because the price curves of the past show an upward
tendency. On the contrary, the more prices soar, the more alarmed
cautious businessmen become about a possible reversal. Almost all
prognostications which our government statisticians made on the basis of
their study of the figures available—which necessarily always refer to
the past—have proved faulty. What is called extrapolation of trend lines
is viewed by sound statistical theory with the utmost suspicion.
The same refers also to developments in
fields which are not open to description by statistical figures. There
was, for instance, in the course of ancient Greco-Roman civilization a
tendency toward an interregional division of labor. The trade between
the various parts of the vast Roman Empire intensified more and more.
But then came a turning point. Commerce declined and there finally
emerged the medieval manor system, with almost complete autarky of every
landowner’s household.
Or, to quote another example, there prevailed
in the eighteenth century a tendency toward reducing the severity and
the horrors of war. In 1770 the Comte de Guibert could write: “Today the
whole of Europe is civilized. Wars have become less cruel. Except in
combat no blood is shed; prisoners are respected; towns are no longer
destroyed; the country is no more ravaged.”
Can anybody maintain that this trend has not been changed?
But even if it were true that an historical
trend must go on forever, and that therefore the coming of socialism is
inevitable, it would still not be permissible to infer that socialism
will be a better, or even more than that, the most perfect state of
society’s economic organization. There is nothing to support such a
conclusion other than the arbitrary pseudo-theological surmises of
Hegel, Comte and Marx, according to which every later stage of the
historical process must necessarily be a better state. It is not true
that human conditions must always improve, and that a relapse into very
unsatisfactory modes of life, penury and barbarism is impossible. The
comparatively high standard of living which the common man enjoys today
in the capitalist countries is an achievement of laissez-faire
capitalism. Neither theoretical reasoning nor historical experience
allows the inference that it could be preserved, still less be improved
under socialism.
In the last decades in many countries the
number of divorces and of suicides has increased from year to year. Yet
hardly anybody will have the temerity to contend that this trend means
progress toward more satisfactory conditions.
The typical graduate of colleges and high
schools very soon forgets most of the things he has learned. But there
is one piece of indoctrination which makes a lasting impression on his
mind, viz., the dogma of the irreversibility of the trend toward
all-round planning and regimentation. He does not doubt the thesis that
mankind will never return to capitalism, the dismal system of an age
gone forever, and that the “wave of the future” carries us toward the
promised land of Cockaigne. If he had any doubts, what he reads in
newspapers and what he hears from the politicians would dispel them. For
even the candidates nominated by the parties of opposition, although
critical of the measures of the party in power, protest that they are
not “reactionary,” and do not venture to stop the march toward
“progress.”
Thus the average man is predisposed in favor
of socialism. Of course, he does not approve of everything that the
Soviets have done. He thinks that the Russians have blundered in many
respects, and he excuses these errors as being caused by their
unfamiliarity with freedom. He blames the leaders, especially Stalin,
for the corruption of the lofty ideal of all-round planning. His
sympathies go rather to Tito, the upright rebel, who refuses to
surrender to Russia. Not so long ago he displayed the same friendly
feelings for Benes, and until only a few months ago for Mao Tse-tung,
the “agrarian reformer.”
At any rate, a good part of American public
opinion believes that this country is in essential matters backward, as
it has not yet, like the Russians, wiped out production for profit and
unemployment and has not yet attained stability. Practically nobody
thinks that he could learn something important about these problems from
a serious occupation with economics. The dogmas of the irreversibility
of prevailing tendencies and of their unfailingly beneficial effects
render such studies supererogatory. If economics confirms these dogmas,
it is superfluous; if it is at variance with them, it is illusory and
deceptive.
Now trends of evolution can change, and
hitherto they almost always have changed. But they changed only because
they met firm opposition. The prevailing trend toward what Hilaire
Belloc called the servile state will certainly not be reversed if nobody
has the courage to attack its underlying dogmas.
17
Profit and Loss*
Entrepreneurs Earn Profits by Anticipating Consumer Wants
In the capitalist system of society’s economic organization the entrepreneurs determine the course of production. In the performance of this function they are unconditionally and totally subject to the sovereignty of the buying public, the consumers. If they fail to produce in the cheapest and best possible way those commodities which the consumers are asking for most urgently, they suffer losses and are finally eliminated from their entrepreneurial position. Other men who know better how to serve the consumers replace them.
If all people were to anticipate correctly
the future state of the market, the entrepreneurs would neither earn any
profits nor suffer any losses. They would have to buy the complementary
factors of production at prices which would, already at the instant of
the purchase, fully reflect the future prices of the products. No room
would be left either for profit or for loss. What makes profit emerge is
the fact that the entrepreneur who judges the future prices of the
products more correctly than other people do buys some or all of the
factors of production at prices which, seen from the point of view of
the future state of the market, are too low. Thus the total costs of
production—including interest on the capital invested—lag behind the
prices which the entrepreneur receives for the product. This difference
is entrepreneurial profit.
On the other hand, the entrepreneur who
misjudges the future prices of the products allows for the factors of
production prices which, seen from the point of view of the future state
of the market, are too high. His total costs of production exceed the
prices at which he can sell the product. This difference is
entrepreneurial loss.
Thus profit and loss are generated by success
or failure in adjusting the course of production activities to the most
urgent demand of the consumers. Once this adjustment is achieved, they
disappear. The prices of the complementary factors of production reach a
height at which total costs of production coincide with the price of
the product. Profit and loss are ever-present features only on account
of the fact that ceaseless change in the economic data makes again and
again new discrepancies, and consequently the need for new adjustments
originate.
The Entrepreneur Is an Enterprise’s Decisionmaker
Many errors concerning the nature of profit and loss were caused by the practice of applying the term profit to the totality of the residual proceeds of an entrepreneur.
Interest on the capital employed is not a
component part of profit. The dividends of a corporation are not profit.
They are interest on the capital invested plus profit or minus loss.
The market equivalent of work performed by
the entrepreneur in the conduct of the enterprise’s affairs is
entrepreneurial quasi-wages but not profit.
If the enterprise owns a factor on which it
can earn monopoly prices, it makes a monopoly gain. If this enterprise
is a corporation, such gains increase the dividend. Yet they are not
profit proper.
Still more serious are the errors due to the confusion of entrepreneurial activity and technological innovation and improvement.
The maladjustment, the removal of which is
the essential function of entrepreneurship, may often consist in the
fact that new technological methods have not yet been utilized to the
full extent to which they should be in order to bring about the best
possible satisfaction of consumers’ demand. But this is not necessarily
always the case. Changes in the data, especially in consumers’ demand,
may require adjustments which have no reference at all to technological
innovations and improvements. The entrepreneur who simply increases the
production of an article by adding to the existing production facilities
a new outfit without any change in the technological method of
production is no less an entrepreneur than the man who inaugurates a new
way of producing. The business of the entrepreneur is not merely to
experiment with new technological methods, but to select from the
multitude of technologically feasible methods those which are best fit
to supply the public in the cheapest way with the things they are asking
for most urgently. Whether a new technological procedure is or is not
fit for this purpose is to be provisionally decided by the entrepreneur
and will be finally decided by the conduct of the buying public. The
question is not whether a new method is to be considered as a more
“elegant” solution of a technological problem. It is whether, under the
given state of economic data, it is the best possible method of
supplying the consumers in the cheapest way.
The activities of the entrepreneur consist in
making decisions. He determines for what purpose the factors of
production should be employed. Any other acts which an entrepreneur may
perform are merely accidental to his entrepreneurial function. It is
this that laymen often fail to realize. They confuse the entrepreneurial
activities with the conduct of the technological and administrative
affairs of a plant. In their eyes not the stockholders, the promoters
and speculators, but hired employees are the real entrepreneurs. The
former are merely idle parasites who pocket the dividends.
Now nobody ever contended that one could
produce without working. But neither is it possible to produce without
capital goods, the previously produced factors of further production.
These capital goods are scarce, i.e., they do not suffice for the
production of all things which one would like to have produced. Hence
the economic problem arises: to employ them in such a way that only
those goods should be produced which are fit to satisfy the most urgent
demands of the consumers. No good should remain unproduced on account of
the fact that the factors required for its production were used—wasted—
for the production of another good for which the demand of the public
is less intense. To achieve this is, under capitalism, the function of
entrepreneurship that determines the allocation of capital to the
various branches of production. Under socialism it would be a function
of the state, the social apparatus of coercion and oppression. The
problem whether a socialist directorate, lacking any method of economic
calculation, could fulfill this function is not to be dealt with in this
essay.
There is a simple rule of thumb to tell
entrepreneurs from non-entrepreneurs. The entrepreneurs are those on
whom the incidence of losses on the capital employed falls.
Amateur-economists may confuse profits with other kinds of intakes. But
it is impossible to fail to recognize losses on the capital employed.
Government Is Necessary to Preserve and Protect
What has been called the democracy of the market manifests itself in the fact that profit-seeking business is unconditionally subject to the supremacy of the buying public.
Non-profit organizations are sovereign unto
themselves. They are, within the limits drawn by the amount of capital
at their disposal, in a position to defy the wishes of the public.
A special case is that of the conduct of
government affairs, the administration of the social apparatus of
coercion and oppression, viz., the police power. The objectives of
government, the protection of the inviolability of the individuals’
lives and health and of their efforts to improve the material conditions
of their existence, are indispensable. They benefit all and are the
necessary prerequisite of social cooperation and civilization. But they
cannot be sold and bought in the way merchandise is sold and bought;
they have therefore no price on the market. With regard to them there
cannot be any economic calculation. The costs expended for their conduct
cannot be confronted with a price received for the product. This state
of affairs would make the officers entrusted with the administration of
governmental activities irresponsible despots if they were not curbed by
the budget system. Under this system the administrators are forced to
comply with detailed instructions enjoined upon them by the sovereign,
be it a self-appointed autocrat or the whole people acting through
elected representatives. To the officers limited funds are assigned
which they are bound to spend only for those purposes which the
sovereign has ordered. Thus the management of public administration
becomes bureaucratic, i.e., dependent on definite detailed rules and
regulations.
Bureaucratic management is the only alternative available where there is no profit and loss management.*
On the Market, Consumers Are Sovereign
The consumers by their buying and abstention from buying elect the entrepreneurs in a daily repeated plebiscite as it were. They determine who should own and who not, and how much each owner should own.
As is the case with all acts of choosing a
person—choosing holders of public office, employees, friends or a
consort—the decision of the consumers is made on the ground of
experience and thus necessarily always refers to the past. There is no
experience of the future. The ballot of the market elevates those who in
the immediate past have best served the consumers. However, the choice
is not unalterable and can daily be corrected. The elected who
disappoints the electorate is speedily reduced to the ranks.
Each ballot of the consumers adds only a
little to the elected man’s sphere of action. To reach the upper levels
of entrepreneurship he needs a great number of votes, repeated again and
again over a long period of time, a protracted series of successful
strokes. He must stand every day a new trial, must submit anew to
reelection as it were.
It is the same with his heirs. They can
retain their eminent position only by receiving again and again
confirmation on the part of the public. Their office is revocable. If
they retain it, it is not on account of the deserts of their
predecessor, but on account of their own ability to employ the capital
for the best possible satisfaction of the consumers.
The entrepreneurs are neither perfect nor
good in any metaphysical sense. They owe their position exclusively to
the fact that they are better fit for the performance of the functions
incumbent upon them than other people are. They earn profit not because
they are clever in performing their tasks, but because they are more
clever or less clumsy than other people are. They are not infallible and
often blunder. But they are less liable to error and blunder less than
other people do. Nobody has the right to take offense at the errors made
by the entrepreneurs in the conduct of affairs and to stress the point
that people would have been better supplied if the entrepreneurs had
been more skillful and prescient. If the grumbler knew better, why did
he not himself fill the gap and seize the opportunity to earn profits?
It is easy indeed to display foresight after the event. In retrospect
all fools become wise.
A popular chain of reasoning runs this way:
The entrepreneur earns profit not only on account of the fact that other
people were less successful than he in anticipating correctly the
future state of the market. He himself contributed to the emergence of
profit by not producing more of the article concerned; but for
intentional restriction of output on his part, the supply of this
article would have been so ample that the price would have dropped to a
point at which no surplus of proceeds over costs of production expended
would have emerged. This reasoning is at the bottom of the spurious
doctrines of imperfect and monopolistic competition. It was resorted to a
short time ago by the American administration when it blamed the
enterprises of the steel industry for the fact that the steel production
capacity of the United States was not greater than it really was.
Certainly those engaged in the production of
steel are not responsible for the fact that other people did not
likewise enter this field of production. The reproach on the part of the
authorities would have been sensible if they had conferred on the
existing steel corporations the monopoly of steel production. But in the
absence of such a privilege, the reprimand given to the operating mills
is not more justified than it would be to censure the nation’s poets
and musicians for the fact that there are not more and better poets and
musicians. If somebody is to blame for the fact that the number of
people who joined the voluntary civilian defense organization is not
larger, then it is not those who have already joined but only those who
have not.
Capital and Factors of Production Are Limited
That the production of a commodity p is not larger than it really is, is due to the fact that the complementary factors of production required for an expansion were employed for the production of other commodities. To speak of an insufficiency of the supply of p is empty rhetoric if it does not indicate the various products m which were produced in too large quantities with the effect that their production appears now, i.e., after the event, as a waste of scarce factors of production. We may assume that the entrepreneurs who instead of producing additional quantities of p turned to the production of excessive amounts of m and consequently suffered losses did not intentionally make their mistake.
Neither did the producers of p intentionally restrict the production of p.
Every entrepreneur’s capital is limited; he employs it for those
projects which, he expects, will, by filling the most urgent demand of
the public, yield the highest profit.
An entrepreneur at whose disposal are 100 units of capital employs, for instance, 50 units for the production of p and 50 units for the production of q. If both lines are profitable, it is odd to blame him for not having employed more, e.g., 75 units, for the production of p. He could increase the production of p only by curtailing correspondingly the production of q. But with regard to q the same fault could be found by the grumblers. If one blames the entrepreneur for not having produced more p, one must blame him also for not having produced more q.
This means: one blames the entrepreneur for the facts that there is a
scarcity of the factors of production and that the earth is not a land
of Cockaigne.
Perhaps the grumbler will object on the ground that he considers p a vital commodity, much more important than q, and that therefore the production of p should be expanded and that of q
restricted. If this is really the meaning of his criticism, he is at
variance with the valuations of the consumers. He throws off his mask
and shows his dictatorial aspirations. Production should not be directed
by the wishes of the public but by his own despotic discretion.
But if our entrepreneur’s production of q involves a loss, it is obvious that his fault was poor foresight and not intentional.
Entrance into the ranks of the entrepreneurs
in a market society, not sabotaged by the interference of government or
other agencies resorting to violence, is open to everybody. Those who
know how to take advantage of any business opportunity cropping up will
always find the capital required. For the market is always full of
capitalists anxious to find the most promising employment for their
funds and in search of the ingenious newcomers, in partnership with whom
they could execute the most remunerative projects.
People often failed to realize this inherent
feature of capitalism because they did not grasp the meaning and the
effects of capital scarcity. The task of the entrepreneur is to select
from the multitude of technologically feasible projects those which will
satisfy the most urgent of the not yet satisfied needs of the public.
Those projects for the execution of which the capital supply does not
suffice must not be carried out. The market is always crammed with
visionaries who want to float such impracticable and unworkable schemes.
It is these dreamers who always complain about the blindness of the
capitalists who are too stupid to look after their own interests. Of
course, the investors often err in the choice of their investments. But
these faults consist precisely in the fact that they preferred an
unsuitable project to another that would have satisfied more urgent
needs of the buying public.
Entrepreneurs Follow Consumers When Deciding What to Produce
People often err very lamentably in estimating the work of the creative genius. Only a minority of men are appreciative enough to attach the right value to the achievement of poets, artists and thinkers. It may happen that the indifference of his contemporaries makes it impossible for a genius to accomplish what he would have accomplished if his fellow-men had displayed better judgment. The way in which the poet laureate and the philosopher à la mode are selected is certainly questionable.
But it is impermissible to question the free
market’s choice of the entrepreneurs. The consumers’ preference for
definite articles may be open to condemnation from the point of view of a
philosopher’s judgment. But judgments of value are necessarily always
personal and subjective. The consumer chooses what, as he thinks,
satisfies him best. Nobody is called upon to determine what could make
another man happier or less unhappy. The popularity of motor cars,
television sets and nylon stockings may be criticized from a “higher”
point of view. But these are the things that people are asking for. They
cast their ballots for those entrepreneurs who offer them this
merchandise of the best quality at the cheapest price.
In choosing between various political parties
and programs for the commonwealth’s social and economic organization
most people are uninformed and groping in the dark. The average voter
lacks the insight to distinguish between policies suitable to attain the
ends he is aiming at and those unsuitable. He is at a loss to examine
the long chains of aprioristic reasoning which constitute the philosophy
of a comprehensive social program. He may at best form some opinion
about the short-run effects of the policies concerned. He is helpless in
dealing with the long-run effects. The socialists and communists in
principle often assert the infallibility of majority decisions. However,
they belie their own words in criticizing parliamentary majorities
rejecting their creed, and in denying to the people, under the one-party
system, the opportunity to choose between different parties.
But in buying a commodity or abstaining from
its purchase there is nothing else involved than the consumer’s longing
for the best possible satisfaction of his instantaneous wishes. The
consumer does not—like the voter in political voting—choose between
different means whose effects appear only later. He chooses between
things which immediately provide satisfaction. His decision is final.
An entrepreneur earns profit by serving the
consumers, the people, as they are and not as they should be according
to the fancies of some grumbler or potential dictator.
Entrepreneurs Earn Profits by Removing Maladjustments
Profits are never normal. They appear only where there is a maladjustment, a divergence between actual production and production as it should be in order to utilize the available material and mental resources for the best possible satisfaction of the wishes of the public. They are the prize of those who remove this maladjustment; they disappear as soon as the maladjustment is entirely removed. In the imaginary construction of an evenly rotating economy there are no profits. There the sum of the prices of the complementary factors of production, due allowance being made for time preference, coincides with the price of the product.
The greater the preceding maladjustments, the
greater the profit earned by their removal. Maladjustments may
sometimes be called excessive. But it is inappropriate to apply the
epithet “excessive” to profits.
People arrive at the idea of excessive
profits by confronting the profit earned with the capital employed in
the enterprise and measuring the profit as a percentage of the capital.
This method is suggested by the customary procedure applied in
partnerships and corporations for the assignment of quotas of the total
profit to the individual partners and shareholders. These men have
contributed to a different extent to the realization of the project and
share in the profits and losses according to the extent of their
contribution.
But it is not the capital employed that
creates profits and losses. Capital does not “beget profit” as Marx
thought. The capital goods as such are dead things that in themselves do
not accomplish anything. If they are utilized according to a good idea,
profit results. If they are utilized according to a mistaken idea, no
profit or losses result. It is the entrepreneurial decision that creates
either profit or loss. It is mental acts, the mind of the entrepreneur,
from which profits ultimately originate. Profit is a product of the
mind, of success in anticipating the future state of the market. It is a
spiritual and intellectual phenomenon.
The absurdity of condemning any profits as excessive can easily be shown. An enterprise with a capital of the amount c produced a definite quantity of p which it sold at prices that brought a surplus of proceeds over costs of s and consequently a profit of n per cent. If the entrepreneur had been less capable, he would have needed a capital of 2c for the production of the same quantity of p.
For the sake of argument we may even neglect the fact that this would
have necessarily increased costs of production as it would have doubled
the interest on the capital employed, and we may assume that s would have remained unchanged. But at any rate s would have been confronted with 2c instead of c and thus the profit would have been only n/2
per cent of the capital employed. The “excessive” profit would have
been reduced to a “fair” level. Why? Because the entrepreneur was less
efficient and because his lack of efficiency deprived his fellow-men of
all the advantages they could have got if an amount c of capital goods had been left available for the production of other merchandise.
Profits Transfer Capital to Those Who Serve the Public Best
In branding profits as excessive and penalizing the efficient entrepreneurs by discriminatory taxation, people are injuring themselves. Taxing profits is tantamount to taxing success in best serving the public. The only goal of all production activities is to employ the factors of production in such a way that they render the highest possible output. The smaller the input required for the production of an article becomes, the more of the scarce factors of production is left for the production of other articles. But the better an entrepreneur succeeds in this regard, the more is he vilified and the more is he soaked by taxation. Increasing costs per unit of output, that is, waste, is praised as a virtue.
The most amazing manifestation of this
complete failure to grasp the task of production and the nature and
functions of profit and loss is shown in the popular superstition that
profit is an addendum to the costs of production, the height of which
depends uniquely on the discretion of the seller. It is this belief that
guides governments in controlling prices. It is the same belief that
has prompted many governments to make arrangements with their
contractors according to which the price to be paid for an article
delivered is to equal costs of production expended by the seller
increased by a definite percentage. The effect was that the purveyor got
a surplus the higher, the less he succeeded in avoiding superfluous
costs. Contracts of this type enhanced considerably the sums the United
States had to expend in the two world wars. But the bureaucrats, first
of all the professors of economics who served in the various war
agencies, boasted of their clever handling of the matter.
All people, entrepreneurs as well as
non-entrepreneurs, look askance upon any profits earned by other people.
Envy is a common weakness of men. People are loath to acknowledge the
fact that they themselves could have earned profits if they had
displayed the same foresight and judgment the successful businessman
did. Their resentment is the more violent the more they are
subconsciously aware of this fact.
There would not be any profits but for the
eagerness of the public to acquire the merchandise offered for sale by
the successful entrepreneur. But the same people who scramble for these
articles vilify the businessman and call his profit ill got.
The semantic expression of this enviousness
is the distinction between earned and unearned income. It permeates the
textbooks, the language of the laws and administrative procedure. Thus,
for instance, the official Form 201 for the New York state income tax
return calls “earnings” only the compensation received by employees and,
by implication, all other income, also that resulting from the exercise
of a profession, unearned income. Such is the terminology of a state
whose governor is a Republican and whose state assembly has a Republican
majority.
Public opinion condones profits only as far
as they do not exceed the salary paid to an employee. All surplus is
rejected as unfair. The objective of taxation is, under the
ability-to-pay principle, to confiscate this surplus.
Now one of the main functions of profits is
to shift the control of capital to those who know how to employ it in
the best possible way for the satisfaction of the public. The more
profits a man earns, the greater his wealth consequently becomes, the
more influential does he become in the conduct of business affairs.
Profit and loss are the instruments by means of which the consumers pass
the direction of production activities into the hands of those who are
best fit to serve them. Whatever is undertaken to curtail or to
confiscate profits impairs this function. The result of such measures is
to loosen the grip the consumers hold over the course of production.
The economic machine becomes, from the point of view of the people, less
efficient and less responsive.
The jealousy of the common man looks upon the
profits of the entrepreneurs as if they were totally used for
consumption. A part of them is, of course, consumed. But only those
entrepreneurs attain wealth and influence in the realm of business who
consume merely a fraction of their proceeds and plough back the much
greater part into their enterprises. What makes small business develop
into big business is not spending, but saving and capital accumulation.
Profits Exceed Losses in a Progressing Economy
We call a stationary economy an economy in which the per head quota of the income and wealth of the individuals remains unchanged. In such an economy what the consumers spend more for the purchase of some articles must be equal to what they spend less for other articles. The total amount of the profits earned by one part of the entrepreneurs equals the total amount of losses suffered by other entrepreneurs.
A surplus of the sum of all profits earned in
the whole economy above the sum of all losses suffered emerges only in a
progressing economy, that is, in an economy in which the per head quota
of capital increases. This increment is an effect of saving that adds
new capital goods to the quantity already previously available. The
increase of capital available creates maladjustments insofar as it
brings about a discrepancy between the actual state of production and
that state which the additional capital makes possible. Thanks to the
emergence of additional capital, certain projects which hitherto could
not be executed become feasible. In directing the new capital into those
channels in which it satisfies the most urgent among the previously not
satisfied wants of the consumers, the entrepreneurs earn profits which
are not counterbalanced by the losses of other entrepreneurs.
The enrichment which the additional capital
generates goes only in part to those who have created it by saving. The
rest goes, by raising the marginal productivity of labor and thereby
wage rates, to the earners of wages and salaries and, by raising the
prices of definite raw materials and foodstuffs, to the owners of land,
and, finally, to the entrepreneurs who integrate this new capital into
the most economical production processes. But while the gain of the wage
earners and of the landowners is permanent, the profits of the
entrepreneurs disappear once this integration is accomplished. Profits
of the entrepreneurs are, as has been mentioned already, a permanent
phenomenon only on account of the fact that maladjustments appear daily
anew by the elimination of which profits are earned.
Let us for the sake of argument resort to the
concept of national income as employed in popular economics. Then it is
obvious that in a stationary economy no part of the national income
goes into profits. Only in a progressing economy is there a surplus of
total profits over total losses. The popular belief that profits are a
deduction from the income of workers and consumers is entirely
fallacious. If we want to apply the term deduction to the issue, we have
to say that this surplus of profits over losses as well as the
increments of the wage earners and the landowners is deducted from the
gains of those whose saving brought about the additional capital. It is
their saving that is the vehicle of economic improvment, that makes the
employment of technological innovations possible and raises productivity
and the standard of living. It is the entrepreneurs whose activity
takes care of the most economical employment of the additional capital.
As far as they themselves do not save, neither the workers nor the
landowners contribute anything to the emergence of the circumstances
which generate what is called economic progress and improvement. They
are benefited by other peoples’ saving that creates additional capital
on the one hand and by the entrepreneurial action that directs this
additional capital toward the satisfaction of the most urgent wants on
the other hand.
A retrogressing economy is an economy in
which the per head quota of capital invested is decreasing. In such an
economy the total amount of losses incurred by entrepreneurs exceeds the
total amount of profits earned by other entrepreneurs.
Expressing Profits in Monetary Terms Can Cause Problems
The originary praxeological categories of profit and loss are psychic qualities and not reducible to any interpersonal description in quantitative terms. They are intensive magnitudes. The difference between the value of the end attained and that of the means applied for its attainment is profit if it is positive and loss if it is negative.
Where there are social division of efforts
and cooperation as well as private ownership of the means of production,
economic calculation in terms of monetary units becomes feasible and
necessary. Profit and loss are computable as social phenomena. The
psychic phenomena of profit and loss, from which they are ultimately
derived, remain, of course, incalculable intensive magnitudes.
The fact that in the frame of the market
economy entrepreneurial profit and loss are determined by arithmetical
operations has misled many people. They fail to see that essential items
that enter into this calculation are estimates emanating from the
entrepreneur’s specific understanding of the future state of the market.
They think that these computations are open to examination and
verification or alteration on the part of a disinterested expert. They
ignore the fact that such computations are as a rule an inherent part of
the entrepreneur’s speculative anticipation of uncertain future
conditions.
For the task of this essay it suffices to
refer to one of the problems of cost accounting. One of the items of a
bill of costs is the establishment of the difference between the price
paid for the acquisition of what is commonly called durable production
equipment and its present value. This present value is the money
equivalent of the contribution this equipment will make to future
earnings. There is no certainty about the future state of the market and
about the height of these earnings. They can only be determined by a
speculative anticipation on the part of the entrepreneur. It is
preposterous to call in an expert and to substitute his arbitrary
judgment for that of the entrepreneur. The expert is objective insofar
as he is not affected by an error made. But the entrepreneur exposes his
own material well-being.
Of course, the law determines magnitudes
which it calls profit and loss. But these magnitudes are not identical
with the economic concepts of profit and loss and must not be confused
with them. If a tax law calls a magnitude profit, it in effect
determines the height of taxes due. It calls this magnitude profit
because it wants to justify its tax policy in the eyes of the public. It
would be more correct for the legislator to omit the term profit and
simply to speak of the basis for the computation of the tax due.
The tendency of the tax laws is to compute
what they call profit as high as possible in order to increase immediate
public revenue. But there are other laws which are committed to the
tendency to restrict the magnitude they call profit. The commercial
codes of many nations were and are guided by the endeavor to protect the
rights of creditors. They aimed at restricting what they called profit
in order to prevent the entrepreneur from withdrawing to the prejudice
of creditors too much from the firm or corporation for his own benefit.
It was these tendencies which were operative in the evolution of the
commercial usages concerning the customary height of depreciation
quotas.
There is no need today to dwell upon the
problem of the falsification of economic calculation under inflationary
conditions. All people begin to comprehend the phenomenon of illusory
profits, the offshoot of the great inflations of our age.
Failure to grasp the effects of inflation upon the customary methods of computing profits originated the modern concept of profiteering.
An entrepreneur is dubbed a profiteer if his profit and loss statement,
calculated in terms of a currency subject to a rapidly progressing
inflation, shows profits which other people deem “excessive.” It has
happened very often in many countries that the profit and loss statement
of such a profiteer, when calculated in terms of a non-inflated or less
inflated currency, showed not only no profit at all but considerable
losses.
Even if we neglect for the sake of argument
any reference to the phenomenon of merely inflation-induced illusory
profits, it is obvious that the epithet profiteer is the expression of
an arbitrary judgment of value. There is no other standard available for
the distinction between profiteering and earning fair profits than that
provided by the censor’s personal envy and resentment.
Logician Distinguishes “Legitimate” from “Illegitimate” Profits
It is strange indeed that an eminent logician, the late L. Susan Stebbing, entirely failed to perceive the issue involved. Professor Stebbing equated the concept of profiteering to concepts which refer to a clear distinction of such a nature that no sharp line can be drawn between extremes. The distinction between excess profits or profiteering, and “legitimate profits,” she declared, is clear, although it is not a sharp distinction.* Now this distinction is clear only in reference to an act of legislation that defines the term excess profits as used in its context. But this is not what Stebbing had in mind. She explicitly emphasized that such legal definitions are made “in an arbitrary manner for the practical purposes of administration.” She used the term legitimate without any reference to legal statutes and their definitions. But is it permissible to employ the term legitimate without reference to any standard from the point of view of which the thing in question is to be considered as legitimate? And is there any other standard available for the distinction between profiteering and legitimate profits than one provided by personal judgments of value?
Professor Stebbing referred to the famous acervus and calvus
arguments of the old logicians. Many words are vague insofar as they
apply to characteristics which may be possessed in varying degrees. It
is impossible to draw a sharp line between those who are bald and those
who are not. It is impossible to define precisely the concept of
baldness. But what Professor Stebbing failed to notice is that the
characteristic according to which people distinguish between those who
are bald and those who are not is open to a precise definition. It is
the presence or the absence of hair on the head of a person. This is a
clear and unambiguous mark of which the presence or absence is to be
established by observation and to be expressed by propositions about
existence. What is vague is merely the determination of the point at
which non-baldness turns into baldness. People may disagree with regard
to the determination of this point. But their disagreement refers to the
interpretation of the convention that attaches a certain meaning to the
word baldness. No judgments of value are implied. It may, of course,
happen that the difference of opinion is in a concrete case caused by
bias. But this is another thing.
The vagueness of words like bald is the same
that is inherent in the indefinite numerals and pronouns. Language needs
such terms as for many purposes of daily communication between men an
exact arithmetical establishment of quantities is superfluous and too
bothersome. Logicians are badly mistaken in attempting to attach to such
words whose vagueness is intentional and serves definite purposes the
precision of the definite numerals. For an individual who plans to visit
Seattle the information that there are many hotels in this city is
sufficient. A committee that plans to hold a convention in Seattle needs
precise information about the number of hotel beds available.
Professor Stebbing’s error consisted in the
confusion of existential propositions with judgments of value. Her
unfamiliarity with the problems of economics, which all her otherwise
valuable writings display, led her astray. She would not have made such a
blunder in a field that was better known to her. She would not have
declared that there is a clear distinction between an author’s
“legitimate royalties” and “illegitimate royalties.” She would have
comprehended that the height of the royalties depends on the public’s
appreciation of a book and that an observer who criticizes the height of
royalties merely expresses his personal judgment of value.
Suppose Profits Were Abolished?
Those who spurn entrepreneurial profit as “unearned” mean that it is lucre unfairly withheld either from the workers or from the consumers or from both. Such is the idea underlying the alleged “right to the whole produce of labor” and the Marxian doctrine of exploitation. It can be said that most governments—if not all—and the immense majority of our contemporaries by and large endorse this opinion although some of them are generous enough to acquiesce in the suggestion that a fraction of profits should be left to the “exploiters.”
There is no use in arguing about the adequacy
of ethical precepts. They are derived from intuition; they are
arbitrary and subjective. There is no objective standard available with
regard to which they could be judged. Ultimate ends are chosen by the
individual’s judgments of value. They cannot be determined by scientific
inquiry and logical reasoning. If a man says, “This is what I am aiming
at whatever the consequences of my conduct and the price I shall have
to pay for it may be,” nobody is in a position to oppose any arguments
against him. But the question is whether it is really true that this man
is ready to pay any price for the attainment of the end concerned. If
this latter question is answered in the negative, it becomes possible to
enter into an examination of the issue involved.
If there were really people who are prepared
to put up with all the consequences of the abolition of profit, however
detrimental they may be, it would not be possible for economics to deal
with the problem. But this is not the case. Those who want to abolish
profit are guided by the idea that this confiscation would improve the
material well-being of all non-entrepreneurs. In their eyes the
abolition of profit is not an ultimate end but a means for the
attainment of a definite end, viz., the enrichment of the
non-entrepreneurs. Whether this end can really be attained by the
employment of this means and whether the employment of this means does
not perhaps bring about some other effects which may to some or to all
people appear more undesirable than conditions before the employment of
this means, these are questions which economics is called upon to
examine.
The idea to abolish profit for the advantage
of the consumers involves that the entrepreneur should be forced to sell
the products at prices not exceeding the costs of production expended.
As such prices are, for all articles the sale of which would have
brought profit, below the potential market price, the available supply
is not sufficient to make it possible for all those who want to buy at
these prices to acquire the articles. The market is paralyzed by the
maximum price decree. It can no longer allocate the products to the
consumers. A system of rationing must be adopted.
The suggestion to abolish the entrepreneur’s
profit for the benefit of the employees aims not at the abolition of
profit. It aims at wresting it from the hands of the entrepreneur and
handing it over to his employees.
Under such a scheme the incidence of losses
incurred falls upon the entrepreneur, while profits go to the employees.
It is probable that the effect of this arrangement would consist in
making losses increase and profits dwindle. At any rate, a greater part
of the profits would be consumed and less would be saved and ploughed
back into the enterprise. No capital would be available for the
establishment of new branches of production and for the transfer of
capital from branches which—in compliance with the demand of the
customers—should shrink into branches which should expand. For it would
harm the interests of those employed in a definite enterprise or branch
to restrict the capital employed in it and to transfer it into another
enterprise or branch. If such a scheme had been adopted half a century
ago, all the innovations accomplished in this period would have been
rendered impossible. If, for the sake of argument, we were prepared to
neglect any reference to the problem of capital accumulation, we would
still have to realize that giving profit to the employees must result in
rigidity of the once attained state of production and preclude any
adjustment, improvement and progress.
In fact, the scheme would transfer ownership
of the capital invested into the hands of the employees. It would be
tantamount to the establishment of syndicalism and would generate all
the effects of syndicalism, a system which no author or reformer ever
had the courage to advocate openly.
A third solution of the problem would be to
confiscate all the profits earned by the entrepreneurs for the benefit
of the state. A one hundred per cent tax on profits would accomplish
this task. It would transform the entrepreneurs into irresponsible
administrators of all plants and workshops. They would no longer be
subject to the supremacy of the buying public. They would just be people
who have the power to deal with production as it pleases them.
The policies of all contemporary governments
which have not adopted outright socialism apply all these three schemes
jointly. They confiscate by various measures of price control a part of
the potential profits for the alleged benefit of the consumers. They
support the labor unions in their endeavors to wrest, under the
ability-to-pay principle of wage determination, a part of the profits
from the entrepreneurs. And, last but not least, they are intent upon
confiscating, by progressive income taxes, special taxes on corporation
income, and “excess profits” taxes, an ever-increasing part of profits
for public revenue. It can easily be seen that these policies if
continued will very soon succeed in abolishing entrepreneurial profit
altogether.
The joint effect of the application of these
policies is already today rising chaos. The final effect will be the
full realization of socialism by smoking out the entrepreneurs.
Capitalism cannot survive the abolition of profit. It is profit and loss
that force the capitalists to employ their capital for the best
possible service to the consumers. It is profit and loss that make those
people supreme in the conduct of business who are best fit to satisfy
the public. If profit is abolished, chaos results.
Profits and Losses Guide Entrepreneurs
All the reasons advanced in favor of an anti-profit policy are the outcome of an erroneous interpretation of the operation of the market economy.
The tycoons are too powerful, too rich and
too big. They abuse their power for their own enrichment. They are
irresponsible tyrants. Bigness of an enterprise is in itself an evil.
There is no reason why some men should own millions while others are
poor. The wealth of the few is the cause of the poverty of the masses.
Each word of these passionate denunciations
is false. The businessmen are not irresponsible tyrants. It is precisely
the necessity of making profits and avoiding losses that gives to the
consumers a firm hold over the entrepreneurs and forces them to comply
with the wishes of the people. What makes a firm big is its success in
best filling the demands of the buyers. If the bigger enterprise did not
better serve the people than a smaller one, it would long since have
been reduced to smallness. There is no harm in a businessman’s endeavors
to enrich himself by increasing his profits. The businessman has in his
capacity as a businessman only one task: to strive after the highest
possible profit. Huge profits are the proof of good service rendered in
supplying the consumers. Losses are the proof of blunders committed, of
failure to perform satisfactorily the tasks incumbent upon an
entrepreneur. The riches of successful entrepreneurs are not the cause
of anybody’s poverty; they are consequences of the fact that the
consumers are better supplied than they would have been in the absence
of the entrepreneur’s effort. The penury of millions in the backward
countries is not caused by anybody’s opulence; it is the correlative of
the fact that their country lacks entrepreneurs who have acquired
riches. The standard of living of the common man is highest in those
countries which have the greatest number of wealthy entrepreneurs. It is
to the foremost material interest of everybody that control of the
factors of production should be concentrated in the hands of those who
know how to utilize them in the most efficient way.
It is the avowed objective of the policies of
all present-day governments and political parties to prevent the
emergence of new millionaires. If this policy had been adopted in the
United States fifty years ago, the growth of the industries producing
new articles would have been stunted. Motorcars, refrigerators, radio
sets and a hundred other less spectacular but even more useful
innovations would not have become standard equipment of most of the
American family households.
The average wage earner thinks that nothing
else is needed to keep the social apparatus of production running and to
improve and to increase output than the comparatively simple routine
work assigned to him. He does not realize that the mere toil and trouble
of the routinist is not sufficient. Sedulousness and skill are spent in
vain if they are not directed toward the most important goal by the
entrepreneur’s foresight and are not aided by the capital accumulated by
capitalists. The American worker is badly mistaken when he believes
that his high standard of living is due to his own excellence. He is
neither more industrious nor more skillful than the workers of Western
Europe. He owes his superior income to the fact that his country clung
to “rugged individualism” much longer than Europe. It was his luck that
the United States turned to an anti-capitalistic policy as much as forty
or fifty years later than Germany. His wages are higher than those of
the workers of the rest of the world because the capital equipment per
head of the employee is highest in America and because the American
entrepreneur was not so much restricted by crippling regimentation as
his colleagues in other areas. The comparatively greater prosperity of
the United States is an outcome of the fact that the New Deal did not
come in 1900 or 1910, but only in 1933.
If one wants to study the reasons for
Europe’s backwardness, it would be necessary to examine the manifold
laws and regulations that prevented in Europe the establishment of an
equivalent of the American drugstore and crippled the evolution of chain
stores, department stores, supermarkets and kindred outfits. It would
be important to investigate the German Reich’s effort to protect the
inefficient methods of traditional Handwerk (handicraft) against the competition of capitalist business. Still more revealing would be an examination of the Austrian Gewerbepolitik,
a policy that from the early eighties on aimed at preserving the
economic structure of the ages preceding the Industrial Revolution.
The worst menace to prosperity and
civilization and to the material well-being of the wage earners is the
inability of union bosses, of “union economists” and of the less
intelligent strata of the workers themselves to appreciate the role
entrepreneurs play in production. This lack of insight has found a
classical expression in the writings of Lenin. As Lenin saw it all that
production requires besides the manual work of the laborer and the
designing of the engineers is “control of production and distribution,” a
task that can easily be accomplished “by the armed workers.” For this
accounting and control “have been simplified by capitalism to the
utmost, till they have become the extraordinarily simple operations of
watching, recording and issuing receipts, within the reach of everybody
who can read and write and knows the first four rules of arithmetic.”* No further comment is needed.
In the eyes of the parties who style
themselves progressive and leftist the main vice of capitalism is the
inequality of incomes and wealth. The ultimate end of their policies is
to establish equality. The moderates want to attain this goal step by
step; the radicals plan to attain it at one stroke, by a revolutionary
overthrow of the capitalist mode of production.
However, in talking about equality and asking
vehemently for its realization, nobody advocates a curtailment of his
own present income. The term equality as employed in contemporary
political language always means upward levelling of one’s income, never
downward levelling. It means getting more, not sharing one’s own
affluence with people who have less.
If the American automobile worker,
railroadman or compositor says equality, he means expropriating the
holders of shares and bonds for his own benefit. He does not consider
sharing with the unskilled workers who earn less. At best, he thinks of
equality of all American citizens. It never occurs to him that the
peoples of Latin America, Asia and Africa may interpret the postulate of
equality as world equality and not as national equality.
Worldwide Income Equalization Would Damage the International Capital Market
The political labor movement as well as the labor union movement flamboyantly advertise their internationalism. But this internationalism is a mere rhetorical gesture without any substantial meaning. In every country in which average wage rates are higher than in any other area, the unions advocate insurmountable immigration barriers in order to prevent foreign “comrades” and “brothers” from competing with their own members. Compared with the anti-immigration laws of the European nations, the immigration legislation of the American republics is mild indeed because it permits the immigration of a limited number of people. No such normal quotas are provided in most of the European laws.
All the arguments advanced in favor of income
equalization within a country can with the same justification or lack
of justification also be advanced in favor of world equalization. An
American worker has no better title to claim the savings of the American
capitalist than has any foreigner. That a man has earned profits by
serving the consumers and has not entirely consumed his funds but
ploughed back the greater part of them into industrial equipment does
not give anybody a valid title to expropriate this capital for his own
benefit. But if one maintains the opinion to the contrary, there is
certainly no reason to ascribe to anybody a better right to expropriate
than to anybody else. There is no reason to assert that only Americans
have the right to expropriate other Americans. The big shots of American
business are the scions of people who immigrated to the United States
from England, Scotland, Ireland, France, Germany and other European
countries. The people of their country of origin contend that they have
the same title to seize the property acquired by these men as the
American people have. The American radicals are badly mistaken in
believing that their social program is identical or at least compatible
with the objectives of the radicals of other countries. It is not. The
foreign radicals will not acquiesce in leaving to the Americans, a
minority of less than seven per cent of the world’s total population,
what they think is a privileged position. A world government of the kind
the American radicals are asking for would try to confiscate by a world
income tax all the surplus an average American earns above the average
income of a Chinese or Indian worker. Those who question the correctness
of this statement would drop their doubts after a conversation with any
of the intellectual leaders of Asia.
There is hardly any Iranian who would qualify
the objections raised by the British Labor government against the
confiscation of the oil wells as anything else but a manifestation of
the most reactionary spirit of capitalist exploitation. Today
governments abstain from virtually expropriating—by foreign exchange
control, discriminatory taxation and similar devices—foreign investments
only if they expect to get in the next years more foreign capital and
thus to be able in the future to expropriate a greater amount.
The disintegration of the international
capital market is one of the most important effects of the anti-profit
mentality of our age. But no less disastrous is the fact that the
greater part of the world’s population looks upon the United States—not
only upon the American capitalists but also upon the American
workers—with the same feelings of envy, hatred and hostility with which,
stimulated by the socialist and communist doctrines, the masses
everywhere look upon the capitalists of their own nation.
Will Government Programs Achieve Their Goals?
A customary method of dealing with political programs and movements is to explain and to justify their popularity by referring to the conditions which people found unsatisfactory and to the goals they wanted to attain by the realization of these programs.
However, the only thing that matters is
whether or not the program concerned is fit to attain the ends sought. A
bad program and a bad policy can never be explained, still less
justified by pointing to the unsatisfactory conditions of its
originators and supporters. The sole question that counts is whether or
not these policies can remove or alleviate the evils which they are
designed to remedy.
Yet almost all our contemporaries declare
again and again: If you want to succeed in fighting communism, socialism
and interventionism, you must first of all improve peoples’ material
conditions. The policy of laissez faire aims precisely at making
people more prosperous. But it cannot succeed as long as want is
worsened more and more by socialist and interventionist measures.
In the very short run the conditions of a
part of the people can be improved by expropriating entrepreneurs and
capitalists and by distributing the booty. But such predatory inroads,
which even the Communist Manifesto described as “despotic” and as
“economically insufficient and untenable,” sabotage the operation of
the market economy, impair very soon the conditions of all the people,
and frustrate the endeavors of entrepreneurs and capitalists to make the
masses more prosperous. What is good for a quickly vanishing instant,
(i.e., in the shortest run) may very soon (i.e., in the long run) result
in most detrimental consequences.
Historians are mistaken in explaining the
rise of Nazism by referring to real or imaginary adversities and
hardships of the German people. What made the Germans support almost
unanimously the twenty-five points of the “unalterable” Hitler program
was not some conditions which they deemed unsatisfactory, but their
expectation that the execution of this program would remove their
complaints and render them happier. They turned to Nazism because they
lacked common sense and intelligence. They were not judicious enough to
recognize in time the disasters that Nazism was bound to bring upon
them.
The immense majority of the world’s
population is extremely poor when compared with the average standard of
living of the capitalist nations. But this poverty does not explain
their propensity to adopt the communist program. They are
anti-capitalistic because they are blinded by envy, ignorant and too
dull to appreciate correctly the causes of their distress. There is but
one means to improve their material conditions, namely, to convince them
that only capitalism can render them more prosperous.
The worst method to fight communism is that
of the Marshall Plan. It gives to the recipients the impression that the
United States alone is interested in the preservation of the profit
system while their own concerns require a communist regime. The United
States, they think, is aiding them because its people have a bad
conscience. They themselves pocket this bribe but their sympathies go to
the socialist system. The American subsidies make it possible for their
governments to conceal partially the disastrous effects of the various
socialist measures they have adopted.
Not poverty is the source of socialism, but
spurious ideological pre-possessions. Most of our contemporaries reject
beforehand, without having ever studied them, all the teachings of
economics as aprioristic nonsense. Only experience, they maintain, is to
be relied upon. But is there any experience that would speak in favor
of socialism?
Retorts the socialist: But capitalism creates
poverty; look at India and China. The objection is vain. Neither India
nor China has ever established capitalism. Their poverty is the result
of the absence of capitalism.
What happened in these and other
underdeveloped countries was that they were benefited from abroad by
some of the fruits of capitalism without having adopted the capitalist
mode of production. European, and in more recent years also American,
capitalists invested capital in their areas and thereby increased the
marginal productivity of labor and wage rates. At the same time these
peoples received from abroad the means to fight contagious diseases,
medications developed in the capitalist countries. Consequently
mortality rates, especially infant mortality, dropped considerably. In
the capitalist countries this prolongation of the average length of life
was partially compensated by a drop in the birth rate. As capital
accumulation increased more quickly than population, the per head quota
of capital invested grew continuously. The result was progressing
prosperity. It was different in the countries which enjoyed some of the
effects of capitalism without turning to capitalism. There the birth
rate did not decline at all or not to the extent required to make the
per head quota of capital invested rise. These nations prevent by their
policies both the importation of foreign capital and the accumulation of
domestic capital. The joint effect of the high birth rate and the
absence of an increase in capital is, of course, increasing poverty.
There is but one means to improve the
material well-being of men, viz., to accelerate the increase in capital
accumulated as against population. No psychological lucubrations,
however sophisticated, can alter this fact. There is no excuse whatever
for the pursuit of policies which not only fail to attain the ends
sought, but even seriously impair conditions.
As soon as the problem of profits is raised,
people shift it from the praxeological sphere into the sphere of ethical
judgments of value. Then everybody glories in the aureole of a saint
and an ascetic. He himself does not care for money and material
well-being. He serves his fellow-men to the best of his abilities
unselfishly. He strives after higher and nobler things than wealth.
Thank God, he is not one of those egoistic profiteers.
Businessmen Improve Social Cooperation and Economic Welfare by Earning Profits
The businessmen are blamed because the only thing they have in mind is to succeed. Yet everybody—without any exception—in acting aims at the attainment of a definite end. The only alternative to success is failure; nobody ever wants to fail. It is the very essence of human nature that man consciously aims at substituting a more satisfactory state of affairs for a less satisfactory. What distinguishes the decent man from the crook is the different goals they are aiming at and the different means they are resorting to in order to attain the ends chosen. But they both want to succeed in their sense. It is logically impermissible to distinguish between people who aim at success and those who do not.
Practically everybody aims at improving the
material conditions of his existence. Public opinion takes no offense at
the endeavors of farmers, workers, clerks, teachers, doctors,
ministers, and people from many other callings to earn as much as they
can. But it censures the capitalists and entrepreneurs for their greed.
While enjoying without any scruples all the goods business delivers, the
consumer sharply condemns the selfishness of the purveyors of this
merchandise. He does not realize that he himself creates their profits
by scrambling for the things they have to sell.
Neither does the average man comprehend that
profits are indispensable in order to direct the activities of business
into those channels in which they serve him best. He looks upon profits
as if their only function were to enable the recipients to consume more
than he himself does. He fails to realize that their main function is to
convey control of the factors of production into the hands of those who
best utilize them for his own purposes. He did not, as he thinks,
renounce becoming an entrepreneur out of moral scruples. He chose a
position with a more modest yield because he lacked the abilities
required for entrepreneur-ship or, in rare cases indeed, because his
inclinations prompted him to enter upon another career.
Mankind ought to be grateful to those
exceptional men who out of scientific zeal, humanitarian enthusiasm or
religious faith sacrificed their lives, health and wealth, in the
service of their fellow-men. But the philistines practice self-deception
in comparing themselves with the pioneers of medical X-ray application
or with nuns who attend people afflicted with the plague. It is not
self-denial that makes the average physician choose a medical career,
but the expectation of attaining a respected social position and a
suitable income.
Everybody is eager to charge for his services
and accomplishments as much as the traffic can bear. In this regard
there is no difference between the workers, whether unionized or not,
the ministers, and teachers on the one hand and the entrepreneurs on the
other hand. Neither of them has the right to talk as if he were Francis
d’Assisi.
What Is Morally Good Fosters Social Cooperation
There is no other standard of what is morally good and morally bad than the effects produced by conduct upon social cooperation. A—hypothetical—isolated and self-sufficient individual would not in acting have to take into account anything else than his own well-being. Social man must in all his actions avoid indulging in any conduct that would jeopardize the smooth working of the system of social cooperation. In complying with the moral law man does not sacrifice his own concerns to those of a mythical higher entity, whether it is called class, state, nation, race or humanity. He curbs some of his own instinctive urges, appetites and greed, that is his short-run concerns, in order to serve best his own—rightly understood or long-run—interests. He foregoes a small gain that he could reap instantly lest he miss a greater but later satisfaction. For the attainment of all human ends, whatever they may be, is conditioned by the preservation and further development of social bonds and interhuman cooperation. What is an indispensable means to intensify social cooperation and to make it possible for more people to survive and to enjoy a higher standard of living is morally good and socially desirable. Those who reject this principle as un-Christian ought to ponder over the text: “That thy days may be long upon the land which the Lord thy God giveth thee.” They can certainly not deny that capitalism has made man’s days longer than they were in the precapitalistic ages.
There is no reason why capitalists and
entrepreneurs should be ashamed of earning profits. It is silly that
some people try to defend American capitalism by declaring: “The record
of American business is good; profits are not too high.” The function of
entrepreneurs is to make profits; high profits are the proof that they
have well performed their task of removing maladjustments of production.
Of course, as a rule capitalists and
entrepreneurs are not saints excelling in the virtue of self-denial. But
neither are their critics saintly. And with all the regard due to the
sublime self-effacement of saints, we cannot help stating the fact that
the world would be in a rather desolate condition if it were peopled
exclusively by men not interested in the pursuit of material well-being.
Socialists Ignore the Role of Change and Entrepreneurial Decisions in Producing and Creating Wealth
The average man lacks the imagination to realize that the conditions of life and action are in a continual flux. As he sees it, there is no change in the external objects that constitute his well-being. His world view is static and stationary. It mirrors a stagnating environment. He knows neither that the past differed from the present nor that there prevails uncertainty about future things. He is at a complete loss to conceive the function of entrepreneurship because he is unaware of this uncertainty. Like children who take all the things the parents give them without asking any questions, he takes all the goods business offers him. He is unaware of the efforts that supply him with all he needs. He ignores the role of capital accumulation and of entrepreneurial decisions. He simply takes it for granted that a magic table appears at a moment’s notice laden with all he wants to enjoy.
This mentality is reflected in the popular
idea of socialization. Once the parasitic capitalists and entrepreneurs
are thrown out, he himself will get all that they used to consume. It is
but the minor error of this expectation that it grotesquely overrates
the increment in income, if any, each individual could receive from such
a distribution. Much more serious is the fact that it assumes that the
only thing required is to continue in the various plants production of
those goods they are producing at the moment of the socialization in the
ways they were hitherto produced. No account is taken of the necessity
to adjust production daily anew to perpetually changing conditions. The
dilettante-socialist does not comprehend that a socialization effected
fifty years ago would not have socialized the structure of business as
it exists today but a very different structure. He does not give a
thought to the enormous effort that is needed in order to transform
business again and again to render the best possible service.
This dilettantish inability to comprehend the
essential issues of the conduct of production affairs is not only
manifested in the writings of Marx and Engels. It permeates no less the
contributions of contemporary pseudo-economics.
The imaginary construction of an evenly
rotating economy is an indispensable mental tool of economic thinking.
In order to conceive the function of profit and loss, the economist
constructs the image of a hypothetical, although unrealizable, state of
affairs in which nothing changes, in which tomorrow does not differ at
all from today, and in which consequently no maladjustments can arise
and no need for any alteration in the conduct of business emerges.
In
the frame of this imaginary construction there are no entrepreneurs and
no entrepreneurial profits and losses. The wheels turn spontaneously, as
it were. But the real world in which men live and have to work can
never duplicate the hypothetical world of this mental makeshift.
Now one of the main shortcomings of the
mathematical economists is that they deal with this evenly rotating
economy—they call it the static state—as if it were something really
existing. Prepossessed by the fallacy that economics is to be treated
with mathematical methods, they concentrate their efforts upon the
analysis of static states which, of course, allow a description in sets
of simultaneous differential equations. But this mathematical treatment
virtually avoids any reference to the real problems of economics. It
indulges in quite useless mathematical play without adding anything to
the comprehension of the problems of human acting and producing. It
creates the misunderstanding as if the analysis of static states were
the main concern of economics. It confuses a merely ancillary tool of
thinking with reality.
The mathematical economist is so blinded by
his epistemological prejudice that he simply fails to see what the tasks
of economics are. He is anxious to show us that socialism is realizable
under static conditions. As static conditions, as he himself admits,
are unrealizable, this amounts merely to the assertion that in an
unrealizable state of the world socialism would be realizable. A very
valuable result, indeed, of a hundred years of the joint work of
hundreds of authors, taught at all universities, publicized in
innumerable textbooks and monographs and in scores of allegedly
scientific magazines!
There is no such thing as a static economy.
All the conclusions derived from preoccupation with the image of static
states and static equilibrium are of no avail for the description of the
world as it is and will always be.
Men Must Choose Capitalism or Socialism: There Is No Middle Way
A social order based on private control of the means of production cannot work without entrepreneurial action and entrepreneurial profit and, of course, entrepreneurial loss. The elimination of profit, whatever methods may be resorted to for its execution, must transform society into a senseless jumble. It would create poverty for all.
In a socialist system there are neither
entrepreneurs nor entrepreneurial profit and loss. The supreme director
of the socialist commonwealth would, however, have to strive in the same
way after a surplus of proceeds over costs as the entrepreneurs do
under capitalism. It is not the task of this essay to deal with
socialism. Therefore it is not necessary to stress the point that, not
being able to apply any kind of economic calculation, the socialist
chief would never know what the costs and what the proceeds of his
operations are.
What matters in this context is merely the
fact that there is no third system feasible. There cannot be any such
thing as a non-socialist system without entrepreneurial profit and loss.
The endeavors to eliminate profits from the capitalist system are
merely destructive. They disintegrate capitalism without putting
anything in its place. It is this that we have in mind in maintaining
that they result in chaos.
Men must choose between capitalism and
socialism. They cannot avoid this dilemma by resorting to a capitalist
system without entrepreneurial profit. Every step toward the elimination
of profit is progress on the way toward social disintegration.
In choosing between capitalism and socialism
people are implicitly also choosing between all the social institutions
which are the necessary accompaniment of each of these systems, its
“superstructure” as Marx said. If control of production is shifted from
the hands of entrepreneurs, daily anew elected by a plebiscite of the
consumers, into the hands of the supreme commander of the “industrial
armies” (Marx and Engels) or of the “armed workers” (Lenin), neither
representative government nor any civil liberties can survive. Wall
Street, against which the self-styled idealists are battling, is merely a
symbol. But the walls of the Soviet prisons within which all dissenters
disappear forever are a hard fact.
[* ] Address delivered before the American Academy of Political and Social Science, Philadelphia, Pa., March 30, 1945.
[* ] [Editor’s note: “Zwang (German), compulsion; Wirtschaft (German), economy; hence, “compulsory economy.”]
[* ] Originally published in Plain Talk, January 1949. Reprinted with permission from the Foundation for Economic Education.
[* ] Cf. especially A. Oncken, Die Maxime laissez faire et laissez passer, ihr Ursprung, ihr Werden, Bern 1886; G. Schelle, Vincent de Gournay, Paris 1897, pp. 214–26.
[* ] Cf. John Stuart Mill, Autobiography, London 1873, p. 191.
[† ]
Cf. J. E. Cairnes, “Political Economy and Laissez Faire,” an
introductory lecture delivered in University College, London, November,
1870; reprinted in Essays in Political Economy, London 1873, pp. 232–64.
[* ] Cf. Cairnes, l.c., pp. 244–45.
[† ] Cf. Cairnes, l.c., p. 250.
[‡ ] Cf. Cairnes, l.c., p. 246.
[* ] Cf. W. Sombart, Deutscher Sozialismus, Charlottenburg 1934, p. 213 (American edition: A New Social Philosophy, translated by K. F. Geiser, Princeton 1937, p. 194).
[† ] Cf. Cairnes, l.c., p. 251.
[* ] Cf. A. H. Hansen, “Social Planning for Tomorrow,” in The United States after the War, Cornell University Lectures, Ithaca 1945, pp. 32–33.
[* ] Cf. Laski’s broadcast, Revolution by Consent, reprinted in Talks, Vol. X, Number 10, p. 7 (October 1945).
[* ] Cf. A. Gray, The Socialist Tradition Moses to Lenin, London 1946, p. 385.
[† ] Cf. L. Brentano, Ist das “System Brentano” zusammengebrochen?, Berlin 1918, p. 19.
[* ]
The present writer refuted this distinction between “positive” and
“constructive” socialism and interventionism on the one hand, and
“negative” liberalism of the laissez-faire type on the other in his
article “Sozialliberalismus,” first published in 1926 in Zeitschrift für die Gesamte Staatswissenschaft, and reprinted in 1929 in his book Kritik des Interventionismus, pp. 55–90. [Editor’s note: This article was translated as “Social Liberalism” and published in A Critique of Interventionism (New Rochelle, N. Y.: Arlington House, 1977), pp. 71–106; 2d revised ed., Critique of Interventionism (Irvington-on-Hudson, N. Y.: Foundation for Economic Education, 1996), pp. 43–70.]
[* ] Address delivered before the University Club of Milwaukee (Wisconsin) on October 13, 1952.
[* ] Cf. Jawaharlal Nehru, Independence and After: A Collection of Speeches, 1946–1949, New York 1950, page 192.
[* ] Cf. J. Schumpeter, “Keynes, the Economist,” in The New Economics, ed. by S. E. Harris, New York 1947, page 85.
[* ] Address delivered before the University Club in New York, April 18, 1950. First printed by Commercial and Financial Chronicle, May 4, 1950.
[* ] Cf. Lenin, State and Revolution, Little Lenin Library No. 14, New York 1932, p. 84.
[† ] Ibidem, p. 44.
[* ]The Commercial and Financial Chronicle, December 20, 1945.
[* ]The Commercial and Financial Chronicle, February 23, 1950.
[* ]Christian Economics, March 4, 1958.
[* ] Originally published in The Freeman, June 1965. Reprinted with permission from the Foundation for Economic Education.
[* ] See “Originary Interest” in Human Action by Ludwig von Mises, pages 526–32 (fourth edition, Irvington-on-Hudson, N. Y.: Foundation for Economic Education, 1996).
[* ] Cf. Roscoe Pound, Legal Immunities of Labor Unions, Washington, D.C., 1957, page 21.
[* ]
[Editor’s note: In 1933, U.S. citizens were denied the right to own
gold coins and gold ingots. They regained that right in January 1976.]
[* ] Originally published in Plain Talk, February 1950. Reprinted with permission from the Foundation for Economic Education.
[* ]
It is important to realize that the words “necessitate further inroads
upon the old social order” are lacking in the original German text of
the Manifesto as well as in the later authorized German editions.
They were inserted in 1888 by Engels into the translation by Samuel
Moore which was published with the subtitle: “Authorized English
Translation, edited and annotated by Frederick Engels.”
[* ] Originally published in The Freeman, October 30, 1950. Reprinted with permission from the Foundation for Economic Education.
[* ] P. M. Sweezy in The New Economics, ed. by S. E. Harris, New York, 1947, p. 105.
[* ] Professor G. Haberler, [“The General Theory,” in The New Economics, ibid.,] p. 161
[† ] Keynes, [“Proposals for an International Clearing Union,” in The New Economics, ibid.,] p. 332.
[‡ ] See Henry Hazlitt, The Failure of the “New Economics,” chapter 3 on “Keynes vs. Say’s Law,” pp. 32–43. Arlington House, New Rochelle, New York, 1959.
See also Clarence B. Carson, “Permanent Depression,” The Freeman, December 1979, volume 29, no. 12, pp. 743–51. The Foundation for Economic Education, Inc., Irvingtonon-Hudson, New York.
[* ] Originally published in Plain Talk, March 1948, as “The Keynesian Miracle.” Reprinted with permission from the Foundation for Economic Education.
[* ] [Editor’s note: Reprinted as “Proposals for an International Clearing Union,” in The New Economics, ed. Seymour E. Harris (New York: Knopf, 1947), p. 332.]
[* ] Cf. Lorie Tarshis, The Elements of Economics, New York 1947, p. 565.
[* ]Christian Economics, August 1, 1960.
[* ] F. A. Hayek, The Constitution of Liberty, the University of Chicago Press, 1959, 580 pages.
[* ] Address delivered before the economics faculty of New York University at the Faculty Club on November 20, 1940.
[* ]
Catallactics is a name for the science of exchanges, the “branch of
knowledge to investigate the market phenomena, that is, the
determination of the mutual exchange ratios of the goods and services
negotiated on markets, their origin in human action and their effects
upon later action.” Mises, Human Action [1966, 1996, and Liberty Fund, 2007], page 232.
[* ]Nationalökonomie, Theorie des Handelns und Wirtschaftens, Éditions Union, Geneva, Switzerland, May 1940, 772 pages.
[† ] [Editor’s note: Mises’s Human Action, first published by Yale University Press in 1949, was a complete rewrite, not a translation, of his 1940 Nationaloekonomie.]
[* ] Originally published in The Freeman, April 7, 1952, as “Our Leftist Economic Teaching.” Reprinted with permission from the Foundation for Economic Education.
[* ] First printed in Farmand, February 17, 1951, Oslo, Norway.
[* ] Originally published in The Freeman, February 12, 1951. Reprinted with permission from the Foundation for Economic Education.
[* ] A paper prepared for the meeting of the Mont Pèlerin Society held in Beauvallon, France, September 9 to 16, 1951.
[* ] Cf. Mises, Human Action, Yale University Press, 1949, pages 305–7 [Auburn, Ala.: Ludwig von Mises Institute, 1998; Indianapolis: Liberty Fund, 2007]; Bureaucracy, Yale University Press, 1944, pages 40–73 [Grove City, Pa.: Libertarian Press, 1996; Indianapolis: Liberty Fund, 2007].
[* ] Cf. L. Susan Stebbing, Thinking to Some Purpose (Pelican Books A44), pages 185–87.
[* ] Lenin, State and Revolution, 1917 (Edition by International Publishers, New York, pages 83– 84). The italics are Lenin’s (or the communist translator’s).
No comments:
Post a Comment