Economic PolicyThoughts for Today and Tomorrow

Third Edition

Ludwig von Mises

von MisesInstitute

AUBURN,ALABAMA

Originally published 1979 by Regnery/Gateway, Inc., Chicago(ISBN 0-89526-899-X). Copyright © by Margit von Mises.

Second edition copyright © 1995 by Bettina Bien Greaves.

Third edition copyright © 2006 by Bettina Bien Greaves.

All rights reserved. No part of this book may be reproduced inany manner whatsoever without written permission except inthe case of reprints in the context of reviews. For informationwrite the Ludwig von Mises Institute, 518 West MagnoliaAvenue, Auburn, Alabama 36832.

ISBN 13: 978-1-933550-01-5

ISBN 10: 1-933550-01-5

Contents

Introduction by Bettina Bien Greaves vii

Foreword by Margit von Mises xiii

1st Lecture Capitalism 1

2nd Lecture Socialism 17

3rd Lecture Interventionism 37

4th Lecture Inflation 55

5th Lecture Foreign Investment 75

6th Lecture Policies and Ideas 93

Index 107

Introduction

The ideal economic policy, both for today and tomor-row, is very simple. Government should protect and de-fend against domestic and foreign aggression the livesand property of the persons under its jurisdiction, settledisputes that arise, and leave the people otherwise freeto pursue their various goals and ends in life. This is aradical idea in our interventionist age. Governments to-day are often asked to regulate and control production,to raise the prices of some goods and services and tolower the prices of others, to fix wages, to help somebusinesses get started and to keep others from failing,to encourage or hamper imports and exports, to care forthe sick and the elderly, to support the profligate, andso on and on and on.

Ideally government should be a sort of caretaker, notof the people themselves, but of the conditions whichwill allow individuals, producers, traders, workers, en-trepreneurs, savers, and consumers to pursue their owngoals in peace. If government does that, and no more,the people will be able to provide for themselves muchbetter than the government possibly could. This in es-sence is the message of Professor Ludwig von Mises inthis small volume.

Professor Mises (1881-1973) was one of the 20th cen-

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tury's foremost economists. He was the author of pro-found theoretical books such a Human Action, Socialism,Theory and History, and a dozen other works. However,in these lectures, delivered in Argentina in 1959, hespoke in nontechnical terms suitable for his audience ofbusiness professionals, professors, teachers, and stu-dents. He illustrates theory with homespun examples.He explains simple truths of history in terms of eco-nomic principles. He describes how capitalism destroyedthe hierarchical order of European feudalism, and dis-cusses the political consequences of various kinds ofgovernment. He analyzes the failures of socialism andthe welfare state and shows what consumers and work-ers can accomplish when they are free under capitalismto determine their own destinies.

When government protects the rights of individualsto do as they wish, so long as they do not infringe on theequal freedom of others to do the same, they will dowhat comes naturally—work, cooperate, and trade withone another. They will then have the incentive to save,accumulate capital, innovate, experiment, take advan-tage of opportunities, and produce. Under these condi-tions, capitalism will develop. The remarkable economicimprovements of the 18th and 19th centuries and Ger-many's post-World War II "economic miracle" were due,as Professor Mises explains, to capitalism:

[I]n economic policies, there are no miracles. You have read inmany newspapers and speeches, about the so-called Germaneconomic miracle—the recovery of Germany after its defeatand destruction in the Second World War. But this was nomiracle. It was the application of the principles of the free marketeconomy, of the methods of capitalism, even though they werenot applied completely in all respects. Every country can expe-rience the same "miracle" of economic recovery, although I

Introduction ix

must insist that economic recovery does not come from a mir-acle; it comes from the adoption of—and is the result of—soundeconomic policies, (p. 15)

So we see that the best economic policy is to limitgovernment to creating the conditions which permit in-dividuals to pursue their own goals and live at peacewith their neighbors. Government's obligation is simplyto protect life and property and to allow people to enjoythe freedom and opportunity to cooperate and tradewith one another. In this way government creates theeconomic environment that permits capitalism to flour-ish:

The development of capitalism consists in everyone's havingthe right to serve the customer better and /or more cheaply.And this method, this principle, has, within a comparativelyshort time, transformed the whole world. It has made possiblean unprecedented increase in world population, (p. 5)

When government assumes authority and power to domore than this, and abuses that authority and power, asit has many times throughout history—notably in Ger-many under Hitler, in the U.S.S.R. under Stalin, and inArgentina under Peron—it hampers the capitalistic sys-tem and becomes destructive of human freedom.

Dictator Juan Peron, elected President in 1946, was inexile when Mises visited Argentina in 1959, having beenforced out of the country in 1955. His wife, the popularEva, had died earlier, in 1952. Although Peron was outof the country, he had many supporters and was still aforce to be reckoned with. He returned to Argentina in1973, was again elected President and, with his new wifeIsabelita as Vice President, ruled until he died tenmonths later. His widow, Isabelita, then took over until

x ECONOMIC POLICY

her administration, charged with corruption, was finallyousted in 1976. Argentina has had a series of Presidentssince then and has made some strides toward improvingher economic situation. Life and property have been ac-corded greater respect, some nationalized industrieshave been sold to private buyers, and the inflation hasbeen slowed.

The present work is a felicitous introduction to Mises'ideas. They are, of course, elaborated more fully in Hu-man Action and his other scholarly works. Newcomersto his ideas would do well, however, to start with someof his simpler books such as Bureaucracy, or The Anti-Capitalistic Mentality. With this background, readers willfind it easier to grasp the principles of the free marketand the economic theories of the Austrian school thatMises presents in his major works.

BETTINA BIEN GREAVESFebruary 1995

Introduction xi

Mises' Major Works(Date of first publication in parentheses)

The Theory of Money and Credit (1912)Nation, State and Economy (1919)Socialism (1922)Liberalism (1927; 1st English translation titled,

The Free and Prosperous Commonwealth)Critique of Interventionism (1929)Epistemological Problems of Economics (1933)Nationalokonomie (1940) Predecessor to

Human Action; no English translation.Bureaucracy (1944)Omnipotent Government (1944)Human Action (1949)Planning for Freedom (1952)The Anti-Capitalistic Mentality (1956)Theory and History (1957)The Ultimate Foundation of Economic Science (1962)

Posthumous Publications:Notes and Recollections (1978)On the Manipulation of Money and Credit (1978)Economic Policy (1979)Money, Method, and the Market Process (1990)Economic Freedom and Interventionism (1990)Interventionism: An Economic Analysis (1998)

ForewordThe present book fully reflects tlie author's fundamental posi-tion for which he was—and still is—admired by followers andreviled by opponents.... While each of tlw six lectures canstand alone as an independent essay, the harmony of the seriesgives an aesthetic pleasure similar to tltat derived from lookingat the architecture of a well-designed edifice.

—Fritz MachlupPrinceton, 1979

Late in 1958, when my husband was invited by Dr. Al-berto Benegas-Lynch to come to Argentina and delivera series of lectures, I was asked to accompany him. Thisbook contains, in written word, what my husband saidto hundreds of Argentinian students in those lectures.

We arrived in Argentina several years after Peron hadbeen forced to leave the country. He had governed de-structively and completely destroyed Argentina's eco-nomic foundations. His successors were not much better.The nation was ready for new ideas, and my husbandwas equally ready to provide them.

His lectures were delivered in English, in the enor-mous lecture hall of the University of Buenos Aires. Intwo neighboring rooms his words were simultaneouslytranslated into Spanish for students who listened withearphones. Ludwig von Mises spoke without any re-

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straint about capitalism, socialism, interventionism, com-munism, fascism, economic policy and the dangers ofdictatorship. These young people, who listened to myhusband, did not know much about freedom of the mar-ket or individual freedom. As I wrote about this occasionin My Years with Ludzvig von Mises, "If anyone in thosetimes would have dared to attack communism and fas-cism as my husband did, the police would have come inand taken hold of him immediately, and the assemblywould have been broken up."

The audience reacted as if a window had been openedand fresh air allowed to breeze through the rooms. Hespoke without any notes. As always, his thoughts wereguided by just a few words, written on a scrap of paper.He knew exactly what he wanted to say, and by usingcomparatively simple terms, he succeeded in communi-cating his ideas to an audience not familiar with hiswork, so that they could understand exactly what hewas saying.

The lectures were taped, and the tapes were later tran-scribed by a Spanish-speaking secretary whose typedmanuscript I found among my husband's posthumouspapers. On reading the transcript, I remembered vividlythe singular enthusiasm with which those Argentinianshad responded to my husband's words. And it seemedto me, as a non-economist, that these lectures, deliveredto a lay audience in South America, were much easierto understand than many of Ludwig von Mises' moretheoretical writings. I felt they contained so much valu-able material, so many thoughts important for today andthe future, that they should be made available to thepublic.

Since my husband had never revised the transcriptsof his lectures for book publication, that task remained

Foreword xv

for me. I have been very careful to keep intact the mean-ing of every sentence, to change nothing of the contentand to preserve all the expressions my husband oftenused which are so familiar to his readers. My only contri-bution has been to pull the sentences together and takeout some of the little words one uses when talking infor-mally. If my attempt to convert these lectures into a bookhas succeeded, it is only due to the fact that, with everysentence, I heard my husband's voice, I heard him talk.He was alive to me, alive in how clearly he demonstratedthe evil and danger of too much government; how com-prehensibly and lucidly he described the differences be-tween dictatorship and interventionism; with how muchwit he talked about important historic personalities; withhow few remarks he succeeded in making bygone timescome alive.

I want to use this opportunity to thank my goodfriend George Koether for assisting me with this task.His editorial experience and his understanding of myhusband's theories were a great help to this book.

I hope these lectures will be read not only by scholarsbut also by my husband's many admirers among non-economists. And I earnestly hope that this book will bemade available to younger audiences, especially highschool and college students around the world.

MARGIT VON MISESNew YorkJune 1979

1st Lecture

Capitalism

Descriptive terms which people use are often quite mis-leading. In talking about modern captains of industryand leaders of big business, for instance, they call a mana "chocolate king" or a "cotton king" or an "automobileking." Their use of such terminology implies that theysee practically no difference between the modern headsof industry and those feudal kings, dukes or lords ofearlier days. But the difference is in fact very great, for achocolate king does not rule at all, he serves. He does notreign over conquered territory, independent of the mar-ket, independent of his customers. The chocolate king—or the steel king or the automobile king or any otherking of modern industry—depends on the industry heoperates and on the customers he serves. This "king"must stay in the good graces of his subjects, the consum-ers; he loses his "kingdom" as soon as he is no longer ina position to give his customers better service and pro-vide it at lower cost than others with whom he mustcompete.

Two hundred years ago, before the advent of capital-ism, a man's social status was fixed from the beginningto the end of his life; he inherited it from his ancestors,and it never changed. If he was born poor, he alwaysremained poor, and if he was born rich—a lord or a

2 ECONOMIC POLICY

duke—he kept his dukedom and the property that wentwith it for the rest of his life.

As for manufacturing, the primitive processing indus-tries of those days existed almost exclusively for thebenefit of the wealthy. Most of the people (ninety per-cent or more of the European population) worked theland and did not come in contact with the city-orientedprocessing industries. This rigid system of feudal societyprevailed in the most developed areas of Europe formany hundreds of years.

However, as the rural population expanded, there de-veloped a surplus of people on the land. For this surplusof population without inherited land or estates, therewas not enough to do, nor was it possible for them towork in the processing industries; the kings of the citiesdenied them access. The numbers of these "outcasts"continued to grow, and still no one knew what to dowith them. They were, in the full sense of the word,"proletarians," outcasts whom the government couldonly put into the workhouse or the poorhouse. In somesections of Europe, especially in the Netherlands and inEngland, they became so numerous that, by the eight-eenth century, they were a real menace to the preserva-tion of the prevailing social system.

Today, in discussing similar conditions in places likeIndia or other developing countries, we must not forgetthat, in eighteenth-century England, conditions weremuch worse. At that time, England had a population ofsix or seven million people, but of those six or sevenmillion people, more than one million, probably two mil-lion, were simply poor outcasts for whom the existingsocial system made no provision. What to do with theseoutcasts was one of the great problems of eighteenth-century England.

Capitalism 3

Another great problem was the lack of raw materials.The British, very seriously, had to ask themselves thisquestion: what are we going to do in the future, whenour forests will no longer give us the wood we need forour industries and for heating our houses? For the rulingclasses it was a desperate situation. The statesmen didnot know what to do, and the ruling gentry were abso-lutely without any ideas on how to improve conditions.

Out of this serious social situation emerged the begin-nings of modern capitalism. There were some personsamong those outcasts, among those poor people, whotried to organize others to set up small shops whichcould produce something. This was an innovation. Theseinnovators did not produce expensive goods suitableonly for the upper classes; they produced cheaper prod-ucts for everyone's needs. And this was the origin ofcapitalism as it operates today. It was the beginning ofmass production, the fundamental principle of capitalisticindustry. Whereas the old processing industries servingthe rich people in the cities had existed almost exclu-sively for the demands of the upper classes, the newcapitalist industries began to produce things that couldbe purchased by the general population. It was massproduction to satisfy the needs of the masses.

This is the fundamental principle of capitalism as itexists today in all of those countries in which there is ahighly developed system of mass production: Big busi-ness, the target of the most fanatic attacks by the so-called leftists, produces almost exclusively to satisfy thewants of the masses. Enterprises producing luxurygoods solely for the well-to-do can never attain the mag-nitude of big businesses. And today, it is the people whowork in large factories who are the main consumers ofthe products made in those factories. This is the funda-

4 ECONOMIC POLICY

mental difference between the capitalistic principles ofproduction and the feudalistic principles of the preced-ing ages.

When people assume, or claim, that there is a differ-ence between the producers and the consumers of theproducts of big businesses, they are badly mistaken. InAmerican department stores you hear the slogan, "thecustomer is always right." And this customer is the sameman who produces in the factory those things which aresold in the department stores. The people who think thatthe power of big business is enormous are mistaken also,since big business depends entirely on the patronage ofthose who buy its products: the biggest enterprise losesits power and its influence when it loses its customers.

Fifty or sixty years ago it was said in almost all capital-ist countries that the railroad companies were too bigand too powerful; they had a monopoly; it was impos-sible to compete with them. It was alleged that, in thefield of transportation, capitalism had already reached astage at which it had destroyed itself, for it had elimi-nated competition. What people overlooked was the factthat the power of the railroads depended on their abilityto serve people better than any other method of trans-portation. Of course it would have been ridiculous tocompete with one of these big railroad companies bybuilding another railroad parallel to the old line, sincethe old line was sufficient to serve existing needs. Butvery soon there came other competitors. Freedom ofcompetition does not mean that you can succeed simplyby imitating or copying precisely what someone else hasdone. Freedom of the press does not mean that you havethe right to copy what another man has written and thusto acquire the success which this other man has dulymerited on account of his achievements. It means that

Capitalism 5

you have the right to write something different. Freedomof competition concerning railroads, for example, meansthat you are free to invent something, to do something,which will challenge the railroads and place them in avery precarious competitive situation.

In the United States the competition to the railroads—in the form of buses, automobiles, trucks, and air-planes—has caused the railroads to suffer and to be al-most completely defeated, as far as passenger transpor-tation is concerned.

The development of capitalism consists in everyone'shaving the right to serve the customer better and /ormore cheaply. And this method, this principle, has,within a comparatively short time, transformed thewhole world. It has made possible an unprecedentedincrease in world population.

In eighteenth-century England, the land could sup-port only six million people at a very low standard ofliving. Today more than fifty million people enjoy amuch higher standard of living than even the rich en-joyed during the eighteenth-century. And today's stan-dard of living in England would probably be still higher,had not a great deal of the energy of the British beenwasted in what were, from various points of view,avoidable political and military "adventures."

These are the facts about capitalism. Thus, if an Eng-lishman—or, for that matter, any other man in any coun-try of the world—says today to his friends that he isopposed to capitalism, there is a wonderful way to an-swer him: "You know that the population of this planetis now ten times greater than it was in the ages precedingcapitalism; you know that all men today enjoy a higherstandard of living than your ancestors did before the ageof capitalism. But how do you know that you are the one

6 ECONOMIC POLICY

out of ten who would have lived in the absence of capi-talism? The mere fact that you are living today is proofthat capitalism has succeeded, whether or not you con-sider your own life very valuable."

In spite of all its benefits, capitalism has been furiouslyattacked and criticized. It is necessary that we under-stand the origin of this antipathy. It is a fact that thehatred of capitalism originated not with the masses, notamong the workers themselves, but among the landedaristocracy—the gentry, the nobility, of England and theEuropean continent. They blamed capitalism for some-thing that was not very pleasant for them: at the begin-ning of the nineteenth century, the higher wages paidby industry to its workers forced the landed gentry topay equally higher wages to their agricultural workers.The aristocracy attacked the industries by criticising thestandard of living of the masses of the workers.

Of course—from our viewpoint, the workers' stan-dard of living was extremely low; conditions under earlycapitalism were absolutely shocking, but not because thenewly developed capitalistic industries had harmed theworkers. The people hired to work in factories had al-ready been existing at a virtually subhuman level.

The famous old story, repeated hundreds of times,that the factories employed women and children andthat these women and children, before they were work-ing in factories, had lived under satisfactory conditions,is one of the greatest falsehoods of history. The motherswho worked in the factories had nothing to cook with;they did not leave their homes and their kitchens to gointo the factories, they went into factories because theyhad no kitchens, and if they had a kitchen they had nofood to cook in those kitchens. And the children did notcome from comfortable nurseries. They were starving

Capitalism 7

and dying. And all the talk about the so-called unspeak-able horror of early capitalism can be refuted by a singlestatistic: precisely in these years in which British capital-ism developed, precisely in the age called the IndustrialRevolution in England, in the years from 1760 to 1830,precisely in those years the population of England dou-bled, which means that hundreds or thousands of chil-dren—who would have died in preceding times—sur-vived and grew to become men and women.

There is no doubt that the conditions of the precedingtimes were very unsatisfactory. It was capitalist businessthat improved them. It was precisely those early facto-ries that provided for the needs of their workers, eitherdirectly or indirectly by exporting products and import-ing food and raw materials from other countries. Againand again, the early historians of capitalism have—onecan hardly use a milder word—falsified history.

One anecdote they used to tell, quite possibly in-vented, involved Benjamin Franklin. According to thestory, Ben Franklin visited a cotton mill in England, andthe owner of the mill told him, full of pride: "Look, hereare cotton goods for Hungary." Benjamin Franklin, look-ing around, seeing that the workers were shabbilydressed, said: "Why don't you produce also for yourown workers?"

But those exports of which the owner of the mill spokereally meant that he did produce for his own workers,because England had to import all its raw materials.There was no cotton either in England or in continentalEurope. There was a shortage of food in England, andfood had to be imported from Poland, from Russia, fromHungary. These exports were the payment for the im-ports of the food which made the survival of the Britishpopulation possible. Many examples from the history of

8 ECONOMIC POLICY

those ages will show the attitude of the gentry and aris-tocracy toward the workers. I want to cite only two ex-amples. One is the famous British "Speenhamland" sys-tem. By this system, the British government paid allworkers who did not get the minimum wage (deter-mined by the government) the difference between thewages they received and this minimum wage. This savedthe landed aristocracy the trouble of paying higherwages. The gentry would pay the traditionally low agri-cultural wage, and the government would supplementit, thus keeping workers from leaving rural occupationsto seek urban factory employment.

Eighty years later, after capitalism's expansion fromEngland to continental Europe, the landed aristocracyagain reacted against the new production system. InGermany the Prussian Junkers, having lost many work-ers to the higher-paying capitalistic industries, inventeda special term for the problem: "flight from the country-side"—Landflucht. And in the German Parliament, theydiscussed what might be done against this evil, as it wasseen from the point of view of the landed aristocracy.

Prince Bismarck, the famous chancellor of the GermanReich, in a speech one day said, "I met a man in Berlinwho once had worked on my estate, and I asked this man,'Why did you leave the estate; why did you go away fromthe country; why are you now living in Berlin?'" And,according to Bismarck, this man answered, "You don'thave such a nice Biergarten in the village as we have herein Berlin, where you can sit, drink beer, and listen tomusic." This is, of course, a story told from the point ofview of Prince Bismarck, the employer. It was not thepoint of view of all his employees. They went into indus-try because industry paid them higher wages and raisedtheir standard of living to an unprecedented degree.

Capitalism 9

Today, in the capitalist countries, there is relativelylittle difference between the basic life of the so-calledhigher and lower classes; both have food, clothing,and shelter. But in the eighteenth century and earlier,the difference between the man of the middle class andthe man of the lower class was that the man of themiddle class had shoes and the man of the lower classdid not have shoes. In the United States today thedifference between a rich man and a poor man meansvery often only the difference between a Cadillac and aChevrolet. The Chevrolet may be bought secondhand,but basically it renders the same services to its owner:he, too, can drive from one point to another. Morethan fifty percent of the people in the United Statesare living in houses and apartments they own them-selves.

The attacks against capitalism—especially with re-spect to the higher wage rates—start from the false as-sumption that wages are ultimately paid by people whoare different from those who are employed in the facto-ries. Now it is all right for economists and for studentsof economic theories to distinguish between the workerand the consumer and to make a distinction betweenthem. But the fact is that every consumer must, in someway or the other, earn the money he spends, and theimmense majority of the consumers are precisely thesame people who work as employees in the enterprisesthat produce the things which they consume. Wage ratesunder capitalism are not set by a class of people differentfrom the class of people who earn the wages; they arethe same people. It is not the Hollywood film corporationthat pays the wages of a movie star; it is the people whopay admission to the movies. And it is not the entrepre-neur of a boxing match who pays the enormous de-

10 ECONOMIC POLICY

mands of the prize fighters; it is the people who payadmission to the fight. Through the distinction betweenthe employer and the employee, a distinction is drawnin economic theory, but it is not a distinction in real life;here, the employer and the employee ultimately are oneand the same person.

There are people in many countries who consider itvery unjust that a man who has to support a family withseveral children will receive the same salary as a manwho has only himself to take care of. But the question isnot whether the employer should bear greater responsi-bility for the size of a worker's family.

The question we must ask in this case is: Are you, asan individual, prepared to pay more for something, letus say, a loaf of bread, if you are told that the man whoproduced this loaf of bread has six children? The honestman will certainly answer in the negative and say, "Inprinciple I would, but in fact if it costs less I would ratherbuy the bread produced by a man without any children/'The fact is that, if the buyers do not pay the employerenough to enable him to pay his workers, it becomesimpossible for the employer to remain in business.

The capitalist system was termed "capitalism" not bya friend of the system, but by an individual who consid-ered it to be the worst of all historical systems, the great-est evil that had ever befallen mankind. That man wasKarl Marx. Nevertheless, there is no reason to rejectMarx's term, because it describes clearly the source ofthe great social improvements brought about by capital-ism. Those improvements are the result of capital accu-mulation; they are based on the fact that people, as arule, do not consume everything they have produced,that they save—and invest—a part of it. There is a greatdeal of misunderstanding about this problem and—in

Capitalism 11

the course of these lectures—I will have the opportunityto deal with the most fundamental misapprehensionswhich people have concerning the accumulation of capi-tal, the use of capital, and the universal advantages tobe gained from such use. I will deal with capitalism par-ticularly in my lectures about foreign investment andabout that most critical problem of present-day politics,inflation. You know, of course, that inflation exists notonly in this country. It is a problem all over the worldtoday.

An often unrealized fact about capitalism is this: sav-ings mean benefits for all those who are anxious to pro-duce or to earn wages. When a man has accrued a certainamount of money—let us say, one thousand dollars—and, instead of spending it, entrusts these dollars to asavings bank or an insurance company, the money goesinto the hands of an entrepreneur, a businessman, en-abling him to go out and embark on a project whichcould not have been embarked on yesterday, because therequired capital was unavailable.

What will the businessman do now with the addi-tional capital? The first thing he must do, the first usehe will make of this additional capital, is to go out andhire workers and buy raw materials—in turn causing afurther demand for workers and raw materials to de-velop, as well as a tendency toward higher wages andhigher prices for raw materials. Long before the saveror the entrepreneur obtains any profit from all of this,the unemployed worker, the producer of raw materials,the farmer, and the wage-earner are all sharing in thebenefits of the additional savings.

When the entrepreneur will get something out of theproject depends on the future state of the market andon his ability to anticipate correctly the future state of

12 ECONOMIC POLICY

the market. But the workers as well as the producers ofraw materials get the benefits immediately. Much wassaid, thirty or forty years ago, about the "wage policy/'as they called it, of Henry Ford. One of Mr. Ford's greataccomplishments was that he paid higher wages thandid other industrialists or factories. His wage policy wasdescribed as an "invention," yet it is not enough to saythat this new "invented" policy was the result of theliberality of Mr. Ford. A new branch of business, or anew factory in an already existing branch of business,has to attract workers from other employments, fromother parts of the country, even from other countries.And the only way to do this is to offer the workershigher wages for their work. This is what took place inthe early days of capitalism, and it is still taking placetoday.

When the manufacturers in Great Britain first beganto produce cotton goods, they paid their workers morethan they had earned before. Of course, a great percent-age of these new workers had earned nothing at all be-fore that and were prepared to take anything they wereoffered. But after a short time—when more and morecapital was accumulated and more and more new enter-prises were developed—wage rates went up, and theresult was the unprecedented increase in British popula-tion which I spoke of earlier.

The scornful depiction of capitalism by some peopleas a system designed to make the rich become richer andthe poor become poorer is wrong from beginning to end.Marx's thesis regarding the coming of socialism wasbased on the assumption that workers were gettingpoorer, that the masses were becoming more destitute,and that finally all the wealth of a country would beconcentrated in a few hands or in the hands of one man

Capitalism 13

only. And then the masses of impoverished workerswould finally rebel and expropriate the riches of thewealthy proprietors. According to this doctrine of KarlMarx, there can be no opportunity, no possibility withinthe capitalistic system for any improvement of the condi-tions of the workers.

In 1864, speaking before the International Working-men's Association in England, Marx said the belief thatlabor unions could improve conditions for the workingpopulation was "absolutely in error." The union policyof asking for higher wage rates and shorter work hourshe called conservative—conservatism being, of course, themost condemnatory term which Karl Marx could use.He suggested that the unions set themselves a new, revo-lutionary goal: that they ''do away with the wage systemaltogether," that they substitute "socialism"—govern-ment ownership of the means of production—for thesystem of private ownership.

If we look upon the history of the world, and espe-cially upon the history of England since 1865, we realizethat Marx was wrong in every respect. There is no west-ern, capitalistic country in which the conditions of themasses have not improved in an unprecedented way.All these improvements of the last eighty or ninety yearswere made in spite of the prognostications of Karl Marx.For the Marxian socialists believed that the conditionsof the workers could never be ameliorated. They fol-lowed a false theory, the famous "iron law of wages"—the law which stated that a worker's wages, under capi-talism, would not exceed the amount he needed to sus-tain his life for service to the enterprise.

The Marxians formulated their theory in this way: ifthe workers' wage rates go up, raising wages above thesubsistence level, they will have more children; and

14 ECONOMIC POLICY

these children, when they enter the labor force, will in-crease the number of workers to the point where thewage rates will drop, bringing the workers once moredown to the subsistence level—to that minimal suste-nance level which will just barely prevent the workingpopulation from dying out. But this idea of Marx, andof many other socialists, is a concept of the working manprecisely like that which biologists use—and rightly so—in studying the life of animals. Of mice, for instance.

If you increase the quantity of food available for ani-mal organisms or for microbes, then more of them willsurvive. And if you restrict their food, then you willrestrict their numbers. But man is different. Even theworker—in spite of the fact that Marxists do not ac-knowledge it—has human wants other than food andreproduction of his species. An increase in real wagesresults not only in an increase in population, it resultsalso, and first of all, in an improvement in the averagestandard of living. That is why today we have a higherstandard of living in Western Europe and in the UnitedStates than in the developing nations of, say, Africa.

We must realize, however, that this higher standardof living depends on the supply of capital. This explainsthe difference between conditions in the United Statesand conditions in India; modern methods of fightingcontagious diseases have been introduced in India—atleast, to some extent—and the effect has been an un-precedented increase in population but, since this in-crease in population has not been accompanied by acorresponding increase in the amount of capital in-vested, the result has been an increase in poverty. Acountry becomes more prosperous in proportion to the rise inthe invested capital per unit of its population.

I hope that in my other lectures I will have the oppor-

Capitalism 15

tunity to deal in greater detail with these problems andwill be able to clarify them, because some terms—suchas "the capital invested per capita"—require a ratherdetailed explanation.

But you have to remember that, in economic policies,there are no miracles. You have read in many news-papers and speeches, about the so-called German eco-nomic miracle—the recovery of Germany after its defeatand destruction in the Second World War. But this wasno miracle. It was the application of the principles of thefree market economy, of the methods of capitalism, eventhough they were not applied completely in all respects.Every country can experience the same "miracle" of eco-nomic recovery, although I must insist that economicrecovery does not come from a miracle; it comes from theadoption of—and is the result of—sound economic poli-cies.

2nd Lecture

Socialism

I am here in Buenos Aires as a guest of the Centro deDifusion Economia Libre.* What is economia libre? Whatdoes this system of economic freedom mean? The an-swer is simple: it is the market economy, it is the systemin which the cooperation of individuals in the social divi-sion of labor is achieved by the market. This market isnot a place; it is a process, it is the way in which, by sellingand buying, by producing and consuming, the individu-als contribute to the total workings of society.

In dealing with this system of economic organiza-tion—the market economy—we employ the term "eco-nomic freedom." Very often, people misunderstandwhat it means, believing that economic freedom is some-thing quite apart from other freedoms, and that theseother freedoms—which they hold to be more impor-tant—can be preserved even in the absence of economicfreedom. The meaning of economic freedom is this: thatthe individual is in a position to choose the way in whichhe wants to integrate himself into the totality of society.The individual is able to choose his career, he is free todo what he wants to do.

This is of course not meant in any sense which so

"Later the Centro de Estudios sobre la Libertad

17

18 ECONOMIC POLICY

many people attach to the word freedom today; it ismeant rather in the sense that, through economic free-dom, man is freed from natural conditions. In nature,there is nothing that can be termed freedom, there is onlythe regularity of the laws of nature, which man mustobey if he wants to attain something.

In using the term freedom as applied to human be-ings, we think only of freedom within society. Yet, today,social freedoms are considered by many people to beindependent of one another. Those who call themselves"liberals" today are asking for policies which are pre-cisely the opposite of those policies which the liberals ofthe nineteenth century advocated in their liberal pro-grams. The so-called liberals of today have the verypopular idea that freedom of speech, of thought, of thepress, freedom of religion, freedom from imprisonmentwithout trial—that all these freedoms can be preservedin the absence of what is called economic freedom. Theydo not realize that, in a system where there is no market,where the government directs everything, all those otherfreedoms are illusory, even if they are made into lawsand written up in constitutions.

Let us take one freedom, the freedom of the press. Ifthe government owns all the printing presses, it willdetermine what is to be printed and what is not to beprinted. And if the government owns all the printingpresses and determines what shall or shall not beprinted, then the possibility of printing any kind of op-posing arguments against the ideas of the governmentbecomes practically nonexistent. Freedom of the pressdisappears. And it is the same with all the other free-doms.

In a market economy, the individual has the freedomto choose whatever career he wishes to pursue, to choose

Socialism 19

his own way of integrating himself into society. But in asocialist system, that is not so: his career is decided bydecree of the government. The government can orderpeople whom it dislikes, whom it does not want to livein certain regions, to move into other regions and toother places. And the government is always in a positionto justify and to explain such procedure by declaringthat the governmental plan requires the presence of thiseminent citizen five thousand miles away from the placein which he could be disagreeable to those in power.

It is true that the freedom a man may have in a marketeconomy is not a perfect freedom from the metaphysicalpoint of view. But there is no such thing as perfect free-dom. Freedom means something only within the frame-work of society. The eighteenth-century authors of"natural law"—above all, Jean Jacques Rousseau—be-lieved that once, in the remote past, men enjoyed some-thing called "natural" freedom. But in that remote age,individuals were not free, they were at the mercy ofeveryone who was stronger than they were. The famouswords of Rousseau: "Man is born free and everywherehe is in chains" may sound good, but man is in fact notborn free. Man is born a very weak suckling. Withoutthe protection of his parents, without the protectiongiven to his parents by society, he would not be able topreserve his life.

Freedom in society means that a man depends asmuch upon other people as other people depend uponhim. Society under the market economy, under the con-ditions of "economia libre," means a state of affairs inwhich everybody serves his fellow citizens and is servedby them in return. People believe that there are in themarket economy bosses who are independent of thegood will and support of other people. They believe that

20 ECONOMIC POLICY

the captains of industry, the businessmen, the entrepre-neurs are the real bosses in the economic system. Butthis is an illusion. The real bosses in the economic systemare the consumers. And if the consumers stop patroniz-ing a branch of business, these businessmen are eitherforced to abandon their eminent position in the eco-nomic system or to adjust their actions to the wishes andto the orders of the consumers.

One of the best-known propagators of communismwas Lady Passfield, under her maiden name BeatricePotter, and well-known also through her husband Sid-ney Webb. This lady was the daughter of a wealthy busi-nessman and, when she was a young adult, she servedas her father's secretary. In her memoirs she writes: "Inthe business of my father everybody had to obey theorders issued by my father, the boss. He alone had togive orders, but to him nobody gave any orders." Thisis a very short-sighted view. Orders were given to herfather by the consumers, by the buyers. Unfortunately,she could not see these orders; she could not see whatgoes on in a market economy, because she was interestedonly in the orders given within her father's office or hisfactory.

In all economic problems, we must bear in mind thewords of the great French economist Frederic Bastiat,who titled one of his brilliant essays: "Ce qu'on voit et cequ'on ne voit pas" ("That which is seen and that which isnot seen"). In order to comprehend the operation of aneconomic system, we must deal not only with the thingsthat can be seen, but we also have to give our attentionto the things which cannot be perceived directly. Forinstance, an order issued by a boss to an office boy canbe heard by everybody who is present in the room. What

Socialism 21

cannot be heard are the orders given to the boss by hiscustomers.

The fact is that, under the capitalistic system, the ulti-mate bosses are the consumers. The sovereign is not thestate, it is the people. And the proof that they are thesovereign is borne out by the fact that they have the rightto be foolish. This is the privilege of the sovereign. He hasthe right to make mistakes, no one can prevent him frommaking them, but of course he has to pay for his mis-takes. If we say the consumer is supreme or that theconsumer is sovereign, we do not say that the consumeris free from faults, that the consumer is a man who al-ways knows what would be best for him. The consumersvery often buy things or consume things they ought notto buy or ought not to consume.

But the notion that a capitalist form of governmentcan prevent people from hurting themselves by control-ling their consumption is false. The idea of governmentas a paternal authority, as a guardian for everybody, isthe idea of those who favor socialism. In the UnitedStates some years ago, the government tried what wascalled "a noble experiment." This noble experiment wasa law making it illegal to buy or sell intoxicating bever-ages. It is certainly true that many people drink toomuch brandy and whiskey, and that they may hurtthemselves by doing so. Some authorities in the UnitedStates are even opposed to smoking. Certainly there aremany people who smoke too much and who smoke inspite of the fact that it would be better for them not tosmoke. This raises a question which goes far beyondeconomic discussion: it shows what freedom reallymeans.

Granted, that it is good to keep people from hurting

22 ECONOMIC POLICY

themselves by drinking or smoking too much. But onceyou have admitted this, other people will say: Is thebody everything? Is not the mind of man much moreimportant? Is not the mind of man the real human en-dowment, the real human quality? If you give the gov-ernment the right to determine the consumption of thehuman body, to determine whether one should smokeor not smoke, drink or not drink, there is no good replyyou can give to people who say: "More important thanthe body is the mind and the soul, and man hurts himselfmuch more by reading bad books, by listening to badmusic and looking at bad movies. Therefore it is the dutyof the government to prevent people from committingthese faults/'

And, as you know, for many hundreds of years gov-ernments and authorities believed that this really wastheir duty. Nor did this happen in far distant ages only;not long ago, there was a government in Germany thatconsidered it a governmental duty to distinguish be-tween good and bad paintings—which of course meantgood and bad from the point of view of a man who, inhis youth, had failed the entrance examination at theAcademy of Art in Vienna; good and bad from the pointof view of a picture-postcard painter, Adolf Hitler. Andit became illegal for people to utter other views aboutart and paintings than his, the Supreme Fiihrer's.

Once you begin to admit that it is the duty of thegovernment to control your consumption of alcohol,what can you reply to those who say the control of booksand ideas is much more important?

Freedom really means the freedom to make mistakes. Thiswe have to realize. We may be highly critical with regardto the way in which our fellow citizens are spendingtheir money and living their lives. We may believe that

Socialism 23

what they are doing is absolutely foolish and bad, butin a free society, there are many ways for people to airtheir opinions on how their fellow citizens shouldchange their ways of life. They can write books; they canwrite articles; they can make speeches; they can evenpreach at street corners if they want—and they do thisin many countries. But they must not try to police otherpeople in order to prevent them from doing certainthings simply because they themselves do not want theseother people to have the freedom to do it.

This is the difference between slavery and freedom.The slave must do what his superior orders him to do,but the free citizen—and this is what freedom means—isin a position to choose his own way of life., Certainlythis capitalistic system can be abused, and is abused, bysome people. It is certainly possible to do things whichought not to be done. But if these things are approvedby a majority of the people, a disapproving person al-ways has a way to attempt to change the minds of hisfellow citizens. He can try to persuade them, to convincethem, but he may not try to force them by the use ofpower, of governmental police power.

In the market economy, everyone serves his fellowcitizens by serving himself. This is what the liberalauthors of the eighteenth century had in mind when theyspoke of the harmony of the rightly understood interestsof all groups and of all individuals of the population.And it was this doctrine of the harmony of interestswhich the socialists opposed. They spoke of an "irrecon-cilable conflict of interests" between various groups.

What does this mean? When Karl Marx—in the firstchapter of the Communist Manifesto, that small pamphletwhich inaugurated his socialist movement—claimedthat there was an irreconcilable conflict between classes,

24 ECONOMIC POLICY

he could not illustrate his thesis by any examples otherthan those drawn from the conditions of precapitalisticsociety. In precapitalistic ages, society was divided intohereditary status groups, which in India are called"castes/' In a status society a man was not, for example,born a Frenchman; he was born as a member of theFrench aristocracy or of the French bourgeoisie or of theFrench peasantry. In the greater part of the Middle Ages,he was simply a serf. And serfdom, in France, did notdisappear completely until after the American Revolu-tion. In other parts of Europe it disappeared even later.

But the worst form in which serfdom existed—andcontinued to exist even after the abolition of slavery—was in the British colonies abroad. The individual inher-ited his status from his parents, and he retained itthroughout his life. He transferred it to his children.Every group had privileges and disadvantages. Thehighest groups had only privileges, the lowest groupsonly disadvantages. And there was no way a man couldrid himself of the legal disadvantages placed upon himby his status other than by fighting a political struggleagainst the other classes. Under such conditions, youcould say that there was an "irreconcilable conflict ofinterests between the slave owners and the slaves," be-cause what the slaves wanted was to be rid of their slav-ery, of their quality of being slaves. This meant a loss,however, for the owners. Therefore, there is no questionthat there had to be this irreconcilable conflict of interestsbetween the members of the various classes.

One must not forget that in those ages—in which thestatus societies were predominant in Europe, as well asin the colonies which the Europeans later founded inAmerica—people did not consider themselves to be con-nected in any special way with the other classes of their

Socialism 25

own nation; they felt much more at one with the mem-bers of their own class in other countries. A French aris-tocrat did not look upon lower class Frenchmen as hisfellow citizens; they were the "rabble/' which he did notlike. He regarded only the aristocrats of other coun-tries—those of Italy, England,and Germany, for instance,as his equals.

The most visible effect of this state of affairs was thefact that the aristocrats all over Europe used the samelanguage. And this language was French, a languagewhich was not understood, outside France, by othergroups of the population. The middle classes—the bour-geoisie—had their own language, while the lowerclasses—the peasantry—used local dialects which veryoften were not understood by other groups of the popu-lation. The same was true with regard to the way peopledressed. When you travelled in 1750 from one countryto another, you found that the upper classes, the aristo-crats, were usually dressed in the same way all overEurope, and you found that the lower classes dresseddifferently. When you met someone in the street, youcould see immediately—from the way he dressed—towhich class, to which status he belonged.

It is difficult to imagine how different these conditionswere from present-day conditions. When I come fromthe United States to Argentina and I see a man on thestreet, I cannot know what his status is. I only assumethat he is a citizen of Argentina and that he is not amember of some legally restricted group. This is onething that capitalism has brought about. Of course, thereare also differences within capitalism. There are differ-ences in wealth, differences which Marxians mistakenlyconsider to be equivalent to the old differences that ex-isted between men in the status society.

26 ECONOMIC POLICY

The differences within a capitalist society are not thesame as those in a socialist society. In the Middle Ages—and in many countries even much later—a family couldbe an aristocrat family and possess great wealth, it couldbe a family of dukes for hundreds and hundreds ofyears, whatever its qualities, its talents, its character ormorals. But, under modern capitalistic conditions, thereis what has been technically described by sociologists as"social mobility." The operating principle of this socialmobility, according to the Italian sociologist and econo-mist Vilfredo Pareto, is "la circulation des elites" (thecirculation of the elites). This means that there are al-ways people who are at the top of the social ladder, whoare wealthy, who are politically important, but thesepeople—these elites—are continually changing.

This is perfectly true in a capitalist society. It was nottrue for a precapitalistic status society. The families whowere considered the great aristocratic families of Europeare still the same families today or, let us say, they arethe descendants of families that were foremost inEurope, 800 or 1000 or more years ago. The Capetiansof Bourbon—who for a very long time ruled here inArgentina—were a royal house as early as the tenth cen-tury. These kings ruled the territory which is knownnow as the Ile-de-France, extending their reign from gen-eration to generation. But in a capitalist society, there iscontinuous mobility—poor people becoming rich andthe descendants of those rich people losing their wealthand becoming poor.

Today I saw in a bookshop in one of the central streetsof Buenos Aires the biography of a businessman whowas so eminent, so important, so characteristic of bigbusiness in the nineteenth century in Europe that, evenin this country, far away from Europe, the bookshop

Socialism 27

carried copies of his biography. I happen to know thegrandson of this man. He has the same name his grand-father had, and he still has a right to wear the title ofnobility which his grandfather—who started as a black-smith—had received eighty years ago. Today this grand-son is a poor photographer in New York City.

Other people, who were poor at the time this photog-rapher's grandfather became one of Europe's biggest in-dustrialists, are today captains of industry. Everyone isfree to change his status. That is the difference betweenthe status system and the capitalist system of economicfreedom, in which everyone has only himself to blameif he does not reach the position he wants to reach.

The most famous industrialist of the twentieth centuryup to now is Henry Ford. He started with a few hundreddollars which he had borrowed from his friends, andwithin a very short time he developed one of the mostimportant big business firms of the world. And one candiscover hundreds of such cases every day.

Every day, the New York Times prints long notices ofpeople who have died. If you read these biographies,you may come across the name of an eminent business-man, who started out as a seller of newspapers at streetcorners in New York. Or he started as an office boy, andat his death he was the president of the same bankingfirm where he started on the lowest rung of the ladder.Of course, not all people can attain these positions. Notall people want to attain them. There are people who aremore interested in other problems and, for these people,other ways are open today which were not open in thedays of feudal society, in the ages of the status society.

The socialist system, however, forbids this fundamen-tal freedom to choose one's own career. Under socialistconditions, there is only one economic authority, and it

28 ECONOMIC POLICY

has the right to determine all matters concerning pro-duction.

One of the characteristic features of our day is thatpeople use many names for the same thing. One syno-nym for socialism and communism is "planning." If peo-ple speak of "planning" they mean, of course, centralplanning, which means one plan made by the government—one plan that prevents planning by anyone except thegovernment.

A British lady, who also is a member of the UpperHouse, wrote a book entitled Plan or No Plan, a bookwhich was quite popular around the world. What doesthe title of her book mean? When she says "plan," shemeans only the type of plan envisioned by Lenin andStalin and their successors, the type which governs allthe activities of all the people of a nation. Thus, this ladymeans a central plan which excludes all the personalplans that individuals may have. Her title Plan or NoPlan is therefore an illusion, a deception; the alternativeis not a central plan or no plan, it is the total plan of acentral governmental authority or freedom for individu-als to make their own plans, to do their own planning.The individual plans his life, every day, changing hisdaily plans whenever he will.

The free man plans daily for his needs; he says, forexample: "Yesterday I planned to work all my life inCordoba." Now he learns about better conditions in Bue-nos Aires and changes his plans, saying: "Instead ofworking in Cordoba, I want to go to Buenos Aires." Andthat is what freedom means. It may be that he is mis-taken, it may be that his going to Buenos Aires will turnout to have been a mistake. Conditions may have beenbetter for him in Cordoba, but he himself made his plans.

Socialism 29

Under government planning, he is like a soldier in anarmy. The soldier in the army does not have the right tochoose his garrison, to choose the place where he willserve. He has to obey orders. And the socialist system—as Karl Marx, Lenin, and all socialist leaders knew andadmitted—is the transfer of army rule to the whole pro-duction system. Marx spoke of "industrial armies/' andLenin called for "the organization of everything—thepostoffice, the factory, and other industries, accordingto the model of the army."

Therefore, in the socialist system everything dependson the wisdom, the talents, and the gifts of those peoplewho form the supreme authority. That which the su-preme dictator—or his committee—does not know, isnot taken into account. But the knowledge which man-kind has accumulated in its long history is not acquiredby everyone; we have accumulated such an enormousamount of scientific and technical knowledge over thecenturies that it is humanly impossible for one individ-ual to know all these things, even though he be a mostgifted man.

And people are different, they are unequal. They al-ways will be. There are some people who are more giftedin one subject and less in another one. And there arepeople who have the gift to find new paths, to changethe trend of knowledge. In capitalist societies, techno-logical progress and economic progress are gainedthrough such people. If a man has an idea, he will try tofind a few people who are clever enough to realize thevalue of his idea. Some capitalists, who dare to look intothe future, who realize the possible consequences of suchan idea, will start to put it to work. Other people, at first,may say: "They are fools"; but they will stop saying so

30 ECONOMIC POLICY

when they discover that this enterprise, which theycalled foolish, is flourishing, and that people are happyto buy its products.

Under the Marxian system, on the other hand, thesupreme government body must first be convinced ofthe value of such an idea before it can be pursued anddeveloped. This can be a very difficult thing to do, foronly the group of people at the head—or the supremedictator himself—has the power to make decisions. Andif these people—because of laziness or old age, or be-cause they are not very bright and learned—are unableto grasp the importance of the new idea, then the newproject will not be undertaken.

We can think of examples from military history. Na-poleon was certainly a genius in military affairs; he hadone serious problem, however, and his inability to solvethat problem culminated, finally, in his defeat and exileto the loneliness of St. Helena. Napoleon's problem was:"How to conquer England?" In order to do that, heneeded a navy to cross the English Channel, and therewere people who told him they had a way to accomplishthat crossing, people who—in an age of sailing ships—had come up with the new idea of steam ships. But Na-poleon did not understand their proposal.

Then there was Germany's Generalstab, the famousGerman general staff. Before the First World War, it wasuniversally considered to be unsurpassed in militarywisdom. A similar reputation was held by the staff ofGeneral Foch in France. But neither the Germans nor theFrench—who, under the leadership of General Foch,later defeated the Germans—realized the importance ofaviation for military purposes., The German general staffsaid: "Aviation is merely for pleasure, flying is good foridle people. From a military point of view, only the Zep-

Socialism 31

pelins are important/' and the French general staff wasof the same opinion.

Later, during the period between World War I andWorld War II, there was a general in the United Stateswho was convinced that aviation would be very impor-tant in the next war. But all other experts in the UnitedStates were against him. He could not convince them. Ifyou have to convince a group of people who are notdirectly dependent on the solution of a problem, youwill never succeed. This is true also of noneconomicproblems.

There have been painters, poets, writers, composers,who complained that the public did not acknowledgetheir work and caused them to remain poor. The publicmay certainly have had poor judgment, but when theseartists said: "The government ought to support greatartists, painters, and writers/' they were very much inthe wrong. Whom should the government entrust withthe task of deciding whether a newcomer is really a greatpainter or not? It would have to rely on the judgment ofthe critics, and the professors of the history of art whoare always looking back into the past yet who very rarelyhave shown the talent to discover new genius. This is thegreat difference between a system of "planning" and asystem in which everyone can plan and act for himself.

It is true, of course, that great painters and great writ-ers have often had to endure great hardships. Theymight have succeeded in their art, but not always ingetting money. Van Gogh was certainly a great painter.He had to suffer unbearable hardship and, finally, whenhe was thirty-seven years old, he committed suicide. Inall his life he sold only one painting and the buyer of itwas his cousin. Apart from this one sale, he lived fromthe money of his brother, who was not an artist nor a

32 ECONOMIC POLICY

painter. But van Gogh's brother understood a painter'sneeds. Today you cannot buy a van Gogh for less thanhundred or two hundred thousand dollars.

Under a socialist system, van Gogh's fate might havebeen different. Some government official would haveasked some well-known painters (whom van Gogh cer-tainly would not have regarded as artists at all) whetherthis young man, half or completely crazy, was really apainter worthy to be supported. And they without adoubt, would have answered: "No, he is not a painter;he is not an artist; he is just a man who wastes paint;"and they would have sent him into a milk factory or intoa home for the insane. Therefore all this enthusiasm infavor of socialism by the rising generation of painters,poets, musicians, journalists, actors, is based on an illu-sion. I mention this because these groups are among themost fanatical supporters of the socialist idea.

When it comes to choosing between socialism andcapitalism as an economic system, the problem is some-what different. The authors of socialism never suspectedthat modern industry, and all the operations of modernbusiness, are based on calculation. Engineers are by nomeans the only ones who make plans on the basis ofcalculations, businessmen also must do so. And busi-nessmen's calculations are all based on the fact that, inthe market economy, the money prices of goods informnot only the consumer, they also provide vital informa-tion to businessmen about the factors of production, themain function of the market being not merely to deter-mine the cost of the last part of the process of productionand transfer of goods to the hands of the consumer, butthe cost of those steps leading up to it. The whole marketsystem is bound up with the fact that there is a mentallycalculated division of labor between the various busi-

Socialism 33

nessmen who vie with each other in bidding for the fac-tors of production—the raw materials, the machines, theinstruments—and for the human factor of production,the wages paid to labor. This sort of calculation by thebusinessman cannot be accomplished in the absence ofprices supplied by the market.

At the very instant you abolish the market—which iswhat the socialists would like to do—you render uselessall the computations and calculations of the engineersand technologists. The technologists can give you a greatnumber of projects which, from the point of view of thenatural sciences, are equally feasible, but it takes themarket-based calculations of the businessman to makeclear which of those projects is the most advantageous,from the economic point of view.

The problem with which I am dealing here is the fun-damental issue of capitalistic economic calculation as op-posed to socialism. The fact is that economic calculation,and therefore all technological planning, is possible onlyif there are money prices, not only for consumer goodsbut also for the factors of production. This means therehas to be a market for raw materials, for all half-finishedgoods, for all tools and machines, and for all kinds ofhuman labor and human services.

When this fact was discovered, the socialists did notknow how to respond. For 150 years they had said: "Allthe evils in the world come from the fact that there aremarkets and market prices. We want to abolish the mar-ket and with it, of course, the market economy, and sub-stitute for it a system without prices and without mar-kets." They wanted to abolish what Marx called the"commodity character" of commodities and of labor.

When faced with this new problem, the authors ofsocialism, having no answer, finally said: "We will not

34 ECONOMIC POLICY

abolish the market altogether; we will pretend that amarket exists; we will play market, like children whoplay school/' But everyone knows that when childrenplay school, they do not learn anything. It is just an exer-cise, a game, and you can "play" at many things.

This is a very difficult and complicated problem andin order to deal with it in full one needs a little moretime than I have here. I have explained it in detail inmy writings. In six lectures I cannot enter into an analy-sis of all its aspects. Therefore, I want to advise you, ifyou are interested in the fundamental problem of theimpossibility of calculation and planning under social-ism, read my book Human Action, which is available inan excellent Spanish translation.

But read other books, too, like the book of the Norwe-gian economist Trygve Hoff, who wrote on economiccalculation. And if you do not want to be one-sided, Irecommend that you read the highly-regarded socialistbook on this subject by the eminent Polish economistOskar Lange, who at one time was a professor at anAmerican university, then became a Polish ambassador,and later returned to Poland.

You will probably ask me: "What about Russia? Howdo the Russians handle this question?" This changes theproblem. The Russians operate their socialistic systemwithin a world in which there are prices for all the fac-tors of production, for all raw materials, for everything.They can therefore employ, for their planning, the foreignprices of the world market. And because there are certaindifferences between conditions in Russia and those inUnited States, the result is very often that the Russiansconsider something to be justified and advisable—fromtheir economic point of view—that the Americans wouldnot consider economically justifiable at all.

Socialism 35

The "Soviet experiment/' as it was called, does notprove anything. It does not tell us anything about thefundamental problem of socialism, the problem of calcu-lation. But are we entitled to speak of it as an experi-ment? I do not believe there is such a thing as a scientificexperiment in the field of human action and economics.You cannot make laboratory experiments in the field ofhuman action because a scientific experiment requiresthat you do the same thing under various conditions, orthat you maintain the same conditions, changing per-haps only one factor. For instance, if you inject into acancerous animal some experimental medication, the re-sult may be that the cancer will disappear. You can testthis with various animals of the same kind which sufferfrom the same malignancy. If you treat some of themwith the new method and do not treat the rest, then youcan compare the result. You cannot do this within thefield of human action. There are no laboratory experi-ments in human action.

The so-called Soviet "experiment" merely shows thatthe standard of living is incomparably lower in SovietRussia than it is in the country that is considered, by thewhole world, as the paragon of capitalism: the UnitedStates.

Of course, if you tell this to a socialist, he will say:"Things are wonderful in Russia." And you tell him:"They may be wonderful, but the average standard ofliving is much lower." Then he will answer: "Yes, butremember how terrible it was for the Russians under thetsars and how terrible a war we had to fight."

I do not want to enter into discussion of whether this isor is not a correct explanation, but if you deny that theconditions are the same, you deny that it was an experi-ment. You must then say this (which would be much

36 ECONOMIC POLICY

more correct): ''Socialism in Russia has not brought aboutan improvement in the conditions of the average manwhich can be compared with the improvement of condi-tions, during the same period, in the United States."

In the United States you hear of something new, ofsome improvement, almost every week. These are im-provements that business has generated, because thou-sands and thousands of business people are trying dayand night to find some new product which satisfies theconsumer better or is less expensive to produce, or betterand less expensive than the existing products. They donot do this out of altruism, they do it because they wantto make money. And the effect is that you have an im-provement in the standard of living in the United Stateswhich is almost miraculous, when compared with theconditions that existed fifty or a hundred years ago. Butin Soviet Russia, where you do not have such a system,you do not have a comparable improvement. So thosepeople who tell us that we ought to adopt the Sovietsystem are badly mistaken.

There is something else that should be mentioned. TheAmerican consumer, the individual, is both a buyer anda boss. When you leave a store in America, you may finda sign saying: 'Thank you for your patronage. Pleasecome again." But when you go into a shop in a totalitar-ian country—be it in present-day Russia, or in Germanyas it was under the regime of Hitler—the shopkeepertells you: "You have to be thankful to the great leaderfor giving you this."

In socialist countries, it is not the seller who has to begrateful, it is the buyer. The citizen is not the boss; theboss is the Central Committee, the Central Office. Thosesocialist committees and leaders and dictators are su-preme, and the people simply have to obey them.

3rd Lecture

Interventionism

A famous, very often quoted phrase says: 'That govern-ment is best, which governs least." I do not believe thisto be a correct description of the functions of a goodgovernment. Government ought to do all the things forwhich it is needed and for which it was established.Government ought to protect the individuals within thecountry against the violent and fraudulent attacks ofgangsters, and it should defend the country against for-eign enemies. These are the functions of governmentwithin a free system, within the system of the marketeconomy.

Under socialism, of course, the government is totali-tarian, and there is nothing outside its sphere and itsjurisdiction. But in the market economy the main taskof the government is to protect the smooth functioningof the market economy against fraud or violence fromwithin and from outside the country.

People who do not agree with this definition of thefunctions of government may say: "This man hates thegovernment." Nothing could be farther from the truth.If I should say that gasoline is a very useful liquid, usefulfor many purposes, but that I would nevertheless notdrink gasoline because I think that would not be theright use for it, I am not an enemy of gasoline, and I do

37

38 ECONOMIC POLICY

not hate gasoline. I only say that gasoline is very usefulfor certain purposes, but not fit for other purposes. If Isay it is the government's duty to arrest murderers andother criminals, but not its duty to run the railroads orto spend money for useless things, then I do not hate thegovernment by declaring that it is fit to do certain thingsbut not fit to do other things.

It has been said that under present-day conditions weno longer have a free market economy. Under present-day conditions we have something called the "mixedeconomy." And for evidence of our "mixed economy,"people point to the many enterprises which are operatedand owned by the government. The economy is mixed,people say, because there are, in many countries, certaininstitutions—like the telephone, telegraph, and rail-roads—which are owned and operated by the govern-ment.

That some of these institutions and enterprises areoperated by the government is certainly true. But thisfact alone does not change the character of our economicsystem. It does not even mean there is a "little socialism"within the otherwise nonsocialist, free market economy.For the government, in operating these enterprises, issubject to the supremacy of the market, which means itis subject to the supremacy of the consumers. The gov-ernment—if it operates, let us say, post offices or rail-roads—has to hire people who have to work in theseenterprises. It also has to buy the raw materials andother things that are needed for the conduct of theseenterprises. And on the other hand, it "sells" these serv-ices or commodities to the public. Yet, even though itoperates these institutions using the methods of the freeeconomic system, the result, as a rule, is a deficit. Thegovernment, however, is in a position to finance such a

lnterventionism 39deficit—at least the members of the government and ofthe ruling party believe so.

It is certainly different for an individual. The individ-ual's power to operate something with a deficit is verylimited. If the deficit is not very soon eliminated, and ifthe enterprise does not become profitable (or at leastshow that no further deficit losses are being incurred),the individual goes bankrupt and the enterprise mustcome to an end.

But for the government, conditions are different. Thegovernment can run at a deficit, because it has the powerto tax people. And if the taxpayers are prepared to payhigher taxes in order to make it possible for the govern-ment to operate an enterprise at a loss—that is, in a lessefficient way than it would be done by a private institu-tion—and if the public will accept this loss, then ofcourse the enterprise will continue.

In recent years, governments have increased the num-ber of nationalized institutions and enterprises in mostcountries to such an extent that the deficits have grownfar beyond the amount that could be collected in taxesfrom the citizens. What happens then is not the subjectof today's lecture. It is inflation, and I shall deal withthat tomorrow. I mentioned this only because the mixedeconomy must not be confused with the problem of in-terventionism, about which I want to talk tonight.

What is interventionism? lnterventionism means thatthe government does not restrict its activity to the pres-ervation of order, or—as people used to say a hundredyears ago—to "the production of security/' Intervention-ism means that the government wants to do more. Itwants to interfere with market phenomena.

If one objects and says the government should notinterfere with business, people very often answer: "But

40 ECONOMIC POLICY

the government necessarily always interferes. If there arepolicemen on the street, the government interferes. Itinterferes with a robber looting a shop or it prevents aman from stealing a car." But when dealing with inter-ventionism and defining what is meant by intervention-ism, we are speaking about government interferencewith the market. (That the government and the policeare expected to protect the citizens, which includes busi-nessmen, and of course their employees, against attackson the part of domestic or foreign gangsters, is in fact anormal, necessary expectation of any government. Suchprotection is not an intervention, for the government'sonly legitimate function is, precisely, to produce secu-rity.)

What we have in mind when we talk about interven-tionism is the government's desire to do more than pre-vent assaults and fraud. Interventionism means that thegovernment not only fails to protect the smooth func-tioning of the market economy, but that it interferes withthe various market phenomena; it interferes with prices,with wage rates, interest rates, and profits.

The government wants to interfere in order to forcebusinessmen to conduct their affairs in a different waythan they would have chosen if they had obeyed onlythe consumers. Thus, all the measures of interventionismby the government are directed toward restricting thesupremacy of consumers. The government wants to ar-rogate to itself the power, or at least a part of the power,which, in the free market economy, is in the hands of theconsumers.

Let us consider one example of interventionism, verypopular in many countries and tried again and again bymany governments, especially in times of inflation. I re-fer to price control.

Interventionism 41

Governments usually resort to price control whenthey have inflated the money supply and people havebegun to complain about the resulting rise in prices.There are many famous historical examples of price con-trol methods that failed, but I shall refer to only two ofthem because, in both these cases, the governments werereally very energetic in enforcing or trying to enforcetheir price controls.

The first famous example is the case of the RomanEmperor Diocletian, very well-known as the last of thoseRoman emperors who persecuted the Christians. TheRoman emperor in the second part of the third centuryhad only one financial method, and this was currencydebasement. In those primitive ages, before the inven-tion of the printing press, even inflation was, let us say,primitive. It involved debasement of the coinage, espe-cially the silver. The government mixed more and morecopper into the silver until the color of the silver coinswas changed and the weight was reduced considerably.The result of this coinage debasement and the associatedincrease in the quantity of money was an increase inprices, followed by an edict to control prices. And Ro-man emperors were not very mild when they enforceda law; they did not consider death too mild a punish-ment for a man who had asked for a higher price. Theyenforced price control, but they failed to maintain thesociety. The result was the disintegration of the RomanEmpire and the system of the division of labor.

Then, 1500 years later, the same currency debasementtook place during the French Revolution. But this timea different method was used. The technology for produc-ing money was considerably improved. It was no longernecessary for the French to resort to debasement of thecoinage: they had the printing press. And the printing

42 ECONOMIC POLICY

press was very efficient. Again, the result was an un-precedented rise in prices. But in the French Revolutionmaximum prices were not enforced by the same methodof capital punishment which the Emperor Diocletian hadused. There had also been an improvement in the tech-nique of killing citizens. You all remember the famousDoctor J. L Guillotin (1738-1814), who advocated the useof the guillotine. Despite the guillotine the French alsofailed with their laws of maximum prices. When Robes-pierre himself was carted off to the guillotine the peopleshouted, "There goes the dirty Maximum."

I wanted to mention this, because people often say:"What is needed in order to make price control effectiveand efficient is merely more brutality and more energy."Now certainly, Diocletian was very brutal, and so wasthe French Revolution. Nevertheless, price control meas-ures in both ages failed entirely.

Now let us analyze the reasons for this failure. Thegovernment hears people complain that the price of milkhas gone up. And milk is certainly very important, espe-cially for the rising generation, for children. Conse-quently, the government declares a maximum price formilk, a maximum price that is lower than the potentialmarket price would be. Now the government says: "Cer-tainly we have done everything needed in order to makeit possible for poor parents to buy as much milk as theyneed to feed their children."

But what happens? On the one hand, the lower priceof milk increases the demand for milk; people who couldnot afford to buy milk at a higher price are now able tobuy it at the lower price which the government has de-creed. And on the other hand some of the producers,those producers of milk who are producing at the high-est cost—that is, the marginal producers—are now suf-

Interventionism 43

fering losses, because the price which the governmenthas decreed is lower than their costs. This is the impor-tant point in the market economy. The private entrepre-neur, the private producer, cannot take losses in the longrun. And as he cannot take losses in milk, he restricts theproduction of milk for the market. He may sell some ofhis cows for the slaughter house, or instead of milk hemay sell some products made out of milk, for instancesour cream, butter or cheese.

Thus the government's interference with the price ofmilk will result in less milk than there was before, andat the same time there will be a greater demand. Somepeople who are prepared to pay the government-de-creed price cannot buy it. Another result will be thatanxious people will hurry to be first at the shops. Theyhave to wait outside. The long lines of people waiting atshops always appear as a familiar phenomenon in a cityin which the government has decreed maximum pricesfor commodities that the government considers as im-portant. This has happened everywhere when the priceof milk was controlled. This was always prognosticatedby economists. Of course, only by sound economists,and their number is not very great.

But what is the result of the government's price con-trol? The government is disappointed. It wanted to in-crease the satisfaction of the milk drinkers. But actuallyit has dissatisfied them. Before the government inter-fered, milk was expensive, but people could buy it. Nowthere is only an insufficient quantity of milk available.Therefore, the total consumption of milk drops. The chil-dren are getting less milk, not more. The next measureto which the government now resorts, is rationing. Butrationing only means that certain people are privilegedand are getting milk while other people are not getting

44 ECONOMIC POLICY

any at all. Who gets milk and who does not, of course,is always very arbitrarily determined. One order maydetermine, for example, that children under four yearsold should get milk, and that children over four years,or between the age of four and six should get only halfthe ration which children under four years receive.

Whatever the government does, the fact remains,there is only a smaller amount of milk available. Thuspeople are still more dissatisfied than they were before.Now the government asks the milk producers (becausethe government does not have enough imagination tofind out for itself): "Why do you not produce the sameamount of milk you produced before?" The governmentgets the answer: "We cannot do it, since the costs ofproduction are higher than the maximum price whichthe government has established." Now the governmentstudies the costs of the various items of production, andit discovers one of the items is fodder.

"Oh," says the government, "the same control we ap-plied to milk we will now apply to fodder. We will deter-mine a maximum price for fodder, and then you will beable to feed your cows at a lower price, at a lower ex-penditure. Then everything will be all right; you will beable to produce more milk and you will sell more milk."

But what happens now? The same story repeats itselfwith fodder, and as you can understand, for the samereasons. The production of fodder drops and the govern-ment is again faced with a dilemma. So the governmentarranges new hearings, to find out what is wrong withfodder production. And it gets an explanation from theproducers of fodder precisely like the one it got from themilk producers. So the government must go a step far-ther, since it does not want to abandon the principle ofprice control. It determines maximum prices for produc-

Interventionism 45

ers' goods which are necessary for the production offodder. And the same story happens again.

The government at the same time starts controllingnot only milk, but also eggs, meat, and other necessities.And every time the government gets the same result,everywhere the consequence is the same. Once the gov-ernment fixes a maximum price for consumer goods, ithas to go farther back to producers' goods, and limit theprices of the producers' goods required for the produc-tion of the price-controlled consumer goods. And so thegovernment, having started with only a few price con-trols, goes farther and farther back in the process of pro-duction, fixing maximum prices for all kinds of produc-ers' goods, including of course the price of labor, becausewithout wage control, the government's "cost control"would be meaningless.

Moreover, the government cannot limit its interfer-ence into the market to only those things which it viewsas vital necessities, like milk, butter, eggs, and meat. Itmust necessarily include luxury goods, because if it didnot limit their prices, capital and labor would abandonthe production of vital necessities and would turn toproducing those things which the government considersunnecessary luxury goods. Thus, the isolated interfer-ence with one or a few prices of consumer goods alwaysbrings about effects—and this is important to realize—which are even less satisfactory than the conditions thatprevailed before.

Before the government interfered, milk and eggs wereexpensive; after the government interfered they beganto disappear from the market. The government consid-ered those items to be so important that it interfered; itwanted to increase the quantity and improve the supply.The result was the opposite: the isolated interference

46 ECONOMIC POLICYbrought about a condition which—from, the point ofview of the government—is even more undesirable thanthe previous state of affairs which the governmentwanted to alter. And as the government goes farther andfarther, it will finally arrive at a point where all prices,all wage rates, all interest rates, in short everything inthe whole economic system, is determined by the gov-ernment. And this, clearly, is socialism.

What I have told you here, this schematic and theoreti-cal explanation, is precisely what happened in thosecountries which tried to enforce a maximum price con-trol, where governments were stubborn enough to gostep by step until they came to the end. This happenedin the First World War in Germany and England.

Let us analyze the situation in both countries. Bothcountries experienced inflation. Prices went up, and thetwo governments imposed price controls. Starting witha few prices, starting with only milk and eggs, they hadto go farther and farther. The longer the war went on,the more inflation was generated. And after three yearsof war, the Germans—systematically as always—elabo-rated a great plan. They called it the Hindenburg Plan:everything in Germany considered to be good by thegovernment at that time was named after Hindenburg.

The Hindenburg Plan meant that the whole Germaneconomic system should be controlled by the govern-ment: prices, wages, profits ... everything. And the bu-reaucracy immediately began to put this into effect. Butbefore they had finished, the debacle came: the Germanempire broke down, the entire bureaucratic apparatusdisappeared, the revolution brought its bloody results—things came to an end.

In England they started in the same way, but after a

Interventionism 47

time, in the spring of 1917, the United States entered thewar and supplied the British with sufficient quantitiesof everything. Therefore the road to socialism, the roadto serfdom, was interrupted.

Before Hitler came to power, Chancellor Briiningagain introduced price control in Germany for the usualreasons. Hitler enforced it, even before the war started.For in Hitler's Germany there was no private enterpriseor private initiative. In Hitler's Germany there was asystem of socialism which differed from the Russian sys-tem only to the extent that the terminology and labels ofthe free economic system were still retained. There stillexisted "private enterprises," as they were called. But theowner was no longer an entrepreneur, the owner wascalled a "shop manager" (Betriebsfuhrer).

The whole of Germany was organized in a hierarchyof fuhrers; there was the Highest Fiihrer, Hitler ofcourse, and then there were fuhrers down to the manyhierarchies of smaller fuhrers. And the head of an enter-prise was the Betriebsfuhrer. And the workers of the en-terprise were named by a word that, in the Middle Ages,had signified the retinue of a feudal lord: the Gefolgschaft.And all of these people had to obey the orders issuedby an institution which had a terribly long name:Reichsfuhrerwirtschaftsministerium* at the head of whichwas the well-known fat man, named Goering, adornedwith jewelry and medals.

And from this body of ministers with the long namecame all the orders to every enterprise: what to produce,in what quantity, where to get the raw materials andwhat to pay for them, to whom to sell the products and

'Fiihrer of the Reich's, i.e., the empire's, Ministry of Economics.

48 ECONOMIC POLICYat what prices to sell them. The workers got the orderto work in a definite factory, and they received wageswhich the government decreed. The whole economicsystem was now regulated in every detail by the govern-ment.

The Betriebsfiihrer did not have the right to take theprofits for himself; he received what amounted to a sal-ary, and if he wanted to get more he would, for example,say: "I am very sick, I need an operation immediately,and the operation will cost 500 Marks/' then he had toask the fiihrer of the district (the Gaufuhrer or Gauleiter)whether he had the right to take out more than the salarywhich was given to him. The prices were no longerprices, the wages were no longer wages, they were allquantitative terms in a system of socialism.

Now let me tell you how that system broke down.One day, after years of fighting, the foreign armies ar-rived in Germany. They tried to preserve this govern-ment-directed economic system, but the brutality ofHitler would have been necessary to preserve it and,without this, it did not work.

And while this was going on in Germany, Great Brit-ain—during the Second World War—did precisely whatGermany did. Starting with the price control of somecommodities only, the British government began stepby step (in the same way Hitler had done in peacetime,even before the start of the war) to control more andmore of the economy until, by the time the war ended,they had reached something that was almost pure social-ism.

Great Britain was not brought to socialism by theLabour government which was established in 1945.Great Britain became socialist during the war, throughthe government of which Sir Winston Churchill was the

Interventionism 49

prime minister. The Labour government simply retainedthe system of socialism which the government of SirWinston Churchill had already introduced. And this inspite of great resistance by the people.

The nationalizations in Great Britain did not meanvery much; the nationalization of the Bank of Englandwas merely nominal, because the Bank of England wasalready under the complete control of the government.And it was the same with the nationalization of the rail-roads and the steel industry. The "war socialism/' as itwas called—meaning the system of interventionism pro-ceeding step by step—had already virtually nationalizedthe system.

The difference between the German and British sys-tems was not important since the people who operatedthem had been appointed by the government and in bothcases they had to obey the government's orders in everyrespect. As I said before, the system of the German Nazisretained the labels and terms of the capitalistic free mar-ket economy. But they meant something very different:there were now only government decrees.

This was also true for the British system. When theConservative party in Britain was returned to power,some of those controls were removed. In Great Britainwe now have attempts from one side to retain controlsand from the other side to abolish them. (But one mustnot forget that, in England, conditions are very differentfrom conditions in Russia.) The same is true for othercountries which depend on the importation of food andraw materials and therefore have to export manufac-tured goods. For countries depending heavily on exporttrade, a system of government control simply does notwork.

Thus, as far as there is economic freedom left (and

50 ECONOMIC POLICYthere is still substantial freedom in some countries, suchas Norway, England, Sweden), it exists because of thenecessity to retain export trade. Earlier, I chose the exampleof milk, not because I have a special preference for milk,but because practically all governments—or most ofthem—in recent decades, have regulated milk, egg orbutter prices.

I want to refer, in a few words, to another example,and that is rent control. If the government controls rents,one result is that people who would otherwise havemoved from bigger apartments to smaller ones whentheir family conditions changed, will no longer do so.For example, consider parents whose children left homewhen they came into their twenties, married or went intoother cities to work. Such parents used to change theirapartments and take smaller and cheaper ones. This ne-cessity disappeared when rent controls were imposed.

In Vienna, Austria, in the early twenties, where rentcontrol was well-established, the amount of money thatthe landlord received for an average apartment underrent control was not more than twice the price of a ticketfor a ride on the city-owned street cars. You can imaginethat people did not have any incentive to change theirapartments. And, on the other hand, there was no con-struction of new houses. Similar conditions prevailed inthe United States after the Second World War and arecontinuing in many cities to this day.

One of the main reasons why many cities in theUnited States are in such great financial difficulty is thatthey have rent control and a resulting shortage of hous-ing. So the government has spent billions for the build-ing of new houses. But why was there such a housingshortage? The housing shortage developed for the samereasons that brought milk shortages when there was

Interventionism 51

milk price control. That means: when the government inter-feres with the market, it is more and more driven towardssocialism.

And this is the answer to those people who say: "Weare not socialists, we do not want the government tocontrol everything. We realize this is bad. But whyshould not the government interfere a little bit with themarket? Why shouldn't the government do away withsome things which we do not like?"

These people talk of a "middle-of-the-road" policy.What they do not see is that the isolated interference,which means the interference with only one small partof the economic system, brings about a situation whichthe government itself—and the people who are askingfor government interference—find worse than the condi-tions they wanted to abolish: the people who are askingfor rent control are very angry when they discover thereis a shortage of apartments and a shortage of housing.

But this shortage of housing was created precisely bygovernment interference, by the establishment of rentsbelow the level people would have had to pay in a freemarket.

The idea that there is a third system—between social-ism and capitalism, as its supporters say—a system asfar away from socialism as it is from capitalism but thatretains the advantages and avoids the disadvantages ofeach—is pure nonsense. People who believe there is sucha mythical system can become really poetic when theypraise the glories of interventionism. One can only saythey are mistaken. The government interference whichthey praise brings about conditions which they them-selves do not like.

One of the problems I will deal with later is protection-ism. The government tries to isolate the domestic market

52 ECONOMIC POLICY

from the world market. It introduces tariffs which raisethe domestic price of a commodity above the world mar-ket price, making it possible for domestic producers toform cartels. The cartels are then attacked by the govern-ment, declaring: "Under these conditions, anti-cartel leg-islation is necessary/'

This is precisely the situation with most of the Euro-pean governments. In the United States, there are yetother reasons for antitrust legislation and the govern-ment's campaign against the specter of monopoly.

It is absurd to see the government—which creates byits own intervention the conditions making possible theemergence of domestic cartels—point its finger at busi-ness, saying: "There are cartels, therefore governmentinterference with business is necessary." It would bemuch simpler to avoid cartels by ending the govern-ment's interference with the market—an interferencewhich makes these cartels possible.

The idea of government interference as a "solution"to economic problems leads, in every country, to condi-tions which, at the least, are very unsatisfactory andoften quite chaotic. If the government does not stop intime, it will bring on socialism.

Nevertheless, government interference with businessis still very popular. As soon as someone does not likesomething that happens in the world, he says: "The gov-ernment ought to do something about it. What do wehave a government for? The government should do it."And this is a characteristic remnant of thought from pastages, of ages preceding modern freedom, modern consti-tutional government, before representative governmentor modern republicanism.

For centuries there was the doctrine—maintained andaccepted by everyone—that a king, an anointed king,

Interventionism 53

was the messenger of God; he had more wisdom thanhis subjects, and he had supernatural powers. As re-cently as the beginning of the nineteenth century, peoplesuffering from certain diseases expected to be cured bythe royal touch, by the hand of the king. Doctors wereusually better; nevertheless, they had their patients trythe king.

This doctrine of the superiority of a paternal govern-ment, of the supernatural and superhuman powers ofthe hereditary kings gradually disappeared—or at leastwe thought so. But it came back again. There was aGerman professor named Werner Sombart (I knew himvery well), who was known the world over, who wasan honorary doctor of many universities and an honor-ary member of the American Economic Association. Thatprofessor wrote a book, which is available in an Englishtranslation, published by the Princeton University Press.It is available also in a French translation, and probablyalso in Spanish—at least I hope it is available, becausethen you can check what I am saying. In this book, pub-lished in our century, not in the Dark Ages, Werner Som-bart, a professor of economics, simply says: "The Fiihrer,our Fiihrer"—he means, of course, Hitler—"gets his or-ders directly from God, the Fiihrer of the Universe."

I spoke of this hierarchy of the fuhrers earlier, and inthis hierarchy, I mentioned Hitler as the "SupremeFiihrer" . . . But there is, according to Werner Sombart, astill higher Fuhrer, God, the Fiihrer of the universe. AndGod, he wrote, gives His orders directly to Hitler. Ofcourse, Professor Sombart said very modestly: "We donot know how God communicates with the Fuhrer. Butthe fact cannot be denied."

Now, if you hear that such a book can be publishedin the German language, the language of a nation which

54 ECONOMIC POLICY

was once hailed as "the nation of philosophers and po-ets/' and if you see it translated into English and French,then you will not be astonished at the fact that even alittle bureaucrat considers himself wiser and better thanthe citizens and wants to interfere with everything, eventhough he is only a poor little bureaucrat, and not thefamous Professor Werner Sombart, honorary memberof everything.

Is there a remedy against such happenings? I wouldsay, yes, there is a remedy. And this remedy is the powerof the citizens; they have to prevent the establishmentof such an autocratic regime that arrogates to itself ahigher wisdom than that of the average citizen. This isthe fundamental difference between freedom and serf-dom.

The socialist nations have arrogated to themselves theterm democracy. The Russians call their own system aPeople's Democracy; they probably maintain that thepeople are represented in the person of the dictator. Ithink that one dictator, Juan Peron here in Argentina,was given a good answer when he was forced into exilein 1955. Let us hope that all other dictators, in othernations, will be accorded a similar response.

4th Lecture

Inflation

If the supply of caviar were as plentiful as the supply ofpotatoes, the price of caviar—that is, the exchange ratiobetween caviar and money or caviar and other com-modities—would change considerably. In that case, onecould obtain caviar at a much smaller sacrifice than isrequired today. Likewise, if the quantity of money isincreased, the purchasing power of the monetary unitdecreases, and the quantity of goods that can be obtainedfor one unit of this money decreases also.

When, in the sixteenth century, American resourcesof gold and silver were discovered and exploited, enor-mous quantities of the precious metals were transportedto Europe. The result of this increase in the quantity ofmoney was a general tendency toward an upward move-ment of prices in Europe. In the same way, today, whena government increases the quantity of paper money, theresult is that the purchasing power of the monetary unitbegins to drop, and so prices rise. This is called inflation.

Unfortunately, in the United States, as well as in othercountries, some people prefer to attribute the cause ofinflation not to an increase in the quantity of money but,rather, to the rise in prices.

However, there has never been any serious argumentagainst the economic interpretation of the relationship

55

56 ECONOMIC POLICYbetween prices and the quantity of money, or the ex-change ratio between money and other goods, commodi-ties, and services. Under present day technological con-ditions there is nothing easier than to manufacturepieces of paper upon which certain monetary amountsare printed. In the United States, where all the notes areof the same size, it does not cost the government moreto print a bill of a thousand dollars than it does to printa bill of one dollar. It is purely a printing procedure thatrequires the same quantity of paper and ink.

In the eighteenth century, when the first attemptswere made to issue bank notes and to give these banknotes the quality of legal tender—that is, the right to behonored in exchange transactions in the same way thatgold and silver pieces were honored—the governmentsand nations believed that bankers had some secretknowledge enabling them to produce wealth out ofnothing. When the governments of the eighteenth cen-tury were in financial difficulties, they thought all theyneeded was a clever banker at the head of their financialmanagement in order to get rid of all their difficulties.

Some years before the French Revolution, when theroyalty of France was in financial trouble, the king ofFrance sought out such a clever banker, and appointedhim to a high position. This man was, in every regard,the opposite of the people who, up to that time, hadruled France. First of all he was not a Frenchman, he wasa foreigner—a Swiss from Geneva, Jacques Necker. Sec-ondly, he was not a member of the aristocracy, he was asimple commoner. And what counted even more in eight-eenth century France, he was not a Catholic, but a Prot-estant. And so Monsieur Necker, the father of the famousMadame de Stael, became the minister of finance, andeveryone expected him to solve the financial problems

Inflation 57

of France. But in spite of the high degree of confidenceMonsieur Necker enjoyed, the royal cashbox remainedempty—Necker's greatest mistake having been his at-tempt to finance aid to the American colonists in theirwar of independence against England without raisingtaxes. That was certainly the wrong way to go aboutsolving France's financial troubles.

There can be no secret way to the solution of the finan-cial problems of a government; if it needs money, it hasto obtain the money by taxing its citizens (or, underspecial conditions, by borrowing it from people whohave the money). But many governments, we can evensay most governments, think there is another method forgetting the needed money; simply to print it.

If the government wants to do something beneficial—if, for example, it wants to build a hospital—the way tofind the needed money for this project is to tax the citi-zens and build the hospital out of tax revenues. Thenno special "price revolution" will occur, because whenthe government collects money for the construction ofthe hospital, the citizens—having paid the taxes—areforced to reduce their spending. The individual taxpayeris forced to restrict either his consumption, his invest-ments or his savings. The government, appearing on themarket as a buyer, replaces the individual citizen: thecitizen buys less, but the government buys more. Thegovernment, of course, does not always buy the samegoods which the citizens would have bought; but on theaverage there occurs no rise in prices due to the govern-ment's construction of a hospital.

I choose this example of a hospital precisely becausepeople sometimes say: "It makes a difference whetherthe government uses its money for good or for bad pur-poses." I want to assume that the government always

58 ECONOMIC POLICYuses the money which it has printed for the best possiblepurposes—purposes with which we all agree. For it isnot the way in which the money is spent, it is the way inwhich the government obtains this money that bringsabout those consequences we call inflation and whichmost people in the world today do not consider as bene-ficial.

For example, without inflating, the government coulduse the tax-collected money for hiring new employeesor for raising the salaries of those who are already ingovernment service. Then these people, whose salarieshave been increased, are in a position to buy more. Whenthe government taxes the citizens and uses this moneyto increase the salaries of government employees, thetaxpayers have less to spend, but the government em-ployees have more. Prices in general will not increase.

But if the government does not use tax money for thispurpose, if it uses freshly printed money instead, itmeans that there will be people who now have moremoney while all other people still have as much as theyhad before. So those who received the newly-printedmoney will be competing with those people who werebuyers before. And since there are no more commoditiesthan there were previously, but there is more money onthe market—and since there are now people who canbuy more today than they could have bought yester-day—there will be an additional demand for that samequantity of goods. Therefore prices will tend to go up.This cannot be avoided, no matter what the use of thisnewly-issued money will be.

And more importantly, this tendency for prices to goup will develop step by step; it is not a general upwardmovement of what has been called the "price level." The

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metaphorical expression "price level" must never beused.

When people talk of a "price level," they have in mindthe image of a level of a liquid which goes up or downaccording to the increase or decrease in its quantity, butwhich, like a liquid in a tank, always rises evenly. Butwith prices, there is no such thing as a "level." Prices donot change to the same extent at the same time. Thereare always prices that are changing more rapidly, risingor falling more rapidly than other prices. There is a rea-son for this.

Consider the case of the government employee whoreceived the new money added to the money supply.People do not buy today precisely the same commoditiesand in the same quantities as they did yesterday. Theadditional money which the government has printedand introduced into the market is not used for the pur-chase of all commodities and services. It is used for thepurchase of certain commodities, the prices of which willrise, while other commodities will still remain at theprices that prevailed before the new money was put onthe market. Therefore, when inflation starts, differentgroups within the population are affected by this infla-tion in different ways. Those groups who get the newmoney first gain a temporary benefit.

When the government inflates in order to wage a war,it has to buy munitions, and the first to get the additionalmoney are the munitions industries and the workerswithin these industries. These groups are now in a veryfavorable position. They have higher profits and higherwages; their business is moving. Why? Because theywere the first to receive the additional money. And hav-ing now more money at their disposal, they are buying.

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And they are buying from other people who are manu-facturing and selling the commodities that these muni-tions makers want.

These other people form a second group. And thissecond group considers inflation to be very good forbusiness. Why not? Isn't it wonderful to sell more? Forexample, the owner of a restaurant in the neighborhoodof a munitions factory says: "It is really marvelous! Themunitions workers have more money; there are manymore of them now than before; they are all patronizingmy restaurant; I am very happy about it." He does notsee any reason to feel otherwise,.

The situation is this: those people to whom the moneycomes first now have a higher income, and they can stillbuy many commodities and services at prices which cor-respond to the previous state of the market, to the condi-tion that existed on the eve of inflation. Therefore, theyare in a very favorable position. And thus inflation con-tinues step by step, from one group of the population toanother. And all those to whom the additional moneycomes at the early state of inflation are benefited becausethey are buying some things at prices still correspondingto the previous stage of the the exchange ratio betweenmoney and commodities.

But there are other groups in the population to whomthis additional money comes much, much later. Thesepeople are in an unfavorable position. Before the addi-tional money comes to them they are forced to payhigher prices than they paid before for some—or forpractically all—of the commodities they wanted to pur-chase, while their income has remained the same, or hasnot increased proportionately with prices.

Consider for instance a country like the United Statesduring the Second World War; on the one hand, inflation

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at that time favored the munitions workers, the muni-tions industries, the manufacturers of guns, while on theother hand it worked against other groups of the popula-tion. And the ones who suffered the greatest disadvan-tages from inflation were the teachers and the ministers.

As you know, a minister is a very modest person whoserves God and must not talk too much about money.Teachers, likewise, are dedicated persons who are sup-posed to think more about educating the young thanabout their salaries. Consequently, the teachers and min-isters were among those who were most penalized byinflation, for the various schools and churches were thelast to realize that they must raise salaries. When thechurch elders and the school corporations finally discov-ered that, after all, one should also raise the salaries ofthose dedicated people, the earlier losses they had suf-fered still remained.

For a long time, they had to buy less than they didbefore, to cut down their consumption of better andmore expensive foods, and to restrict their purchase ofclothing—because prices had already adjusted upward,while their incomes, their salaries, had not yet beenraised. (This situation has changed considerably today,at least for teachers.)

There are therefore always different groups in thepopulation being affected differently by inflation. Forsome of them, inflation is not so bad; they even ask fora continuation of it, because they are the first to profitfrom it. We will see, in the next lecture, how this uneven-ness in the consequences of inflation vitally affects thepolitics that lead toward inflation.

Under these changes brought about by inflation, wehave groups who are favored and groups who are di-rectly profiteering. I do not use the term ''profiteering"

62 ECONOMIC POLICYas a reproach to these people, for ii there is someone toblame, it is the government that established the inflation.And there are always people who favor inflation, becausethey realize what is going on sooner than other peopledo. Their special profits are due to the fact that therewill necessarily be unevenness in the process of inflation.

The government may think that inflation—as amethod of raising funds—is better than taxation, whichis always unpopular and difficult. In many rich andgreat nations, legislators have often discussed, formonths and months, the various forms of new taxes thatwere necessary because the parliament had decided toincrease expenditures. Having discussed various meth-ods of getting the money by taxation, they finally de-cided that perhaps it was better to do it by inflation.

But of course, the word "inflation" was not used. Thepolitician in power who proceeds toward inflation doesnot announce: "I am proceeding toward inflation." Thetechnical methods employed to achieve the inflation areso complicated that the average citizen does not realizeinflation has begun.

One of the biggest inflations in history was in theGerman Reich after the First World War. The inflationwas not so momentous during the war; it was the infla-tion after the war that brought about the catastrophe. Thegovernment did not say: "We are proceeding towardinflation." The government simply borrowed moneyvery indirectly from the central bank. The governmentdid not have to ask how the central bank would find anddeliver the money. The central bank simply printed it.

Today the techniques for inflation are complicated bythe fact that there is checkbook money. It involves an-other technique, but the result is the same. With thestroke of a pen, the government creates fiat money, thus

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increasing the quantity of money and credit. The govern-ment simply issues the order, and the fiat money is there.

The government does not care, at first, that some peo-ple will be losers, it does not care that prices will go up.The legislators say: "This is a wonderful system!" Butthis wonderful system has one fundamental weakness:it cannot last. If inflation could go on forever, therewould be no point in telling governments they shouldnot inflate. But the certain fact about inflation is that,sooner or later, it must come to an end. It is a policy thatcannot last.

In the long run, inflation comes to an end with thebreakdown of the currency; it comes to a catastrophe, toa situation like the one in Germany in 1923. On August1, 1914, the value of the dollar was four marks andtwenty pfennigs. Nine years and three months later, inNovember 1923, the dollar was pegged at 4.2 trillionmarks. In other words, the mark was worth nothing. Itno longer had any value.

Some years ago, a famous author, John MaynardKeynes, wrote: "In the long run we are all dead." Thisis certainly true, I am sorry to say. But the question is,how short or long will the short run be? In the eighteenthcentury there was a famous lady, Madame de Pompa-dour, who is credited with the dictum: "Apr&s nous ledeluge" ("After us will come the flood"). Madame dePompadour was happy enough to die in the short run.But her successor in office, Madame du Barry, outlivedthe short run and was beheaded in the long run. Formany people the "long run" quickly becomes the "shortrun"—and the longer inflation goes on the sooner the"short run."

How long can the short run last? How long can acentral bank continue an inflation? Probably as long as

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people are convinced that the government, sooner orlater, but certainly not too late, will stop printing moneyand thereby stop decreasing the value of each unit ofmoney.

When people no longer believe this, when they realizethat the government will go on and on without any in-tention of stopping, then they begin to understand thatprices tomorrow will be higher than they are today.Then they begin buying at any price, causing prices togo up to such heights that the monetary system breaksdown.

I refer to the case of Germany, which the whole worldwas watching. Many books have described the eventsof that time. (Although I am not a German, but an Aus-trian, I saw everything from the inside: in Austria, condi-tions were not very different from those in Germany;nor were they much different in many other Europeancountries.) For several years, the German people be-lieved that their inflation was just a temporary affair,that it would soon come to an end. They believed it foralmost nine years, until the summer of 1923. Then, fi-nally, they began to doubt. As the inflation continued,people thought it wiser to buy anything available, in-stead of keeping money in their pockets. Furthermore,they reasoned that one should not give loans of money,but on the contrary, that it was a very good idea to be adebtor. Thus inflation continued feeding on itself.

And it went on in Germany until exactly November 20,1923. The masses had believed inflation money to be realmoney, but then they found out that conditions hadchanged. At the end of the German inflation, in the fallof 1923, the German factories paid their workers everymorning in advance for the day. And the workingmanwho came to the factory with his wife, handed his

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wages—all the millions he got—over to her immediately.And the lady immediately went to a shop to buy some-thing, no matter what. She realized what most peopleknew at that time—that overnight, from one day to an-other, the mark lost 50% of its purchasing power.Money, like chocolate in a hot oven, was melting in thepockets of the people. This last phase of German infla-tion did not last long; after a few days, the whole night-mare was over: the mark was valueless and a new cur-rency had to be established.

Lord Keynes, the same man who said that in the longrun we are all dead, was one of a long line of inflationistauthors of the twentieth century. They all wrote againstthe gold standard. When Keynes attacked the gold stan-dard, he called it a "barbarous relic/' And most peopletoday consider it ridiculous to speak of a return to thegold standard. In the United States, for instance, you areconsidered to be more or less a dreamer if you say:"Sooner or later, the United States will have to return tothe gold standard/7

Yet the gold standard has one tremendous virtue: thequantity of money under the gold standard is indepen-dent of the policies of governments and political parties.This is its advantage. It is a form of protection againstspendthrift governments. If, under the gold standard, agovernment is asked to spend money for somethingnew, the minister of finance can say: "And where do Iget the money? Tell me, first, how I will find the moneyfor this additional expenditure."

Under an inflationary system, nothing is simpler forthe politicians to do than to order the government print-ing office to provide as much money as they need fortheir projects. Under a gold standard, sound governmenthas a much better chance; its leaders can say to the peo-

66 ECONOMIC POLICYpie and to the politicians: "We can't do it unless weincrease taxes."

But under inflationary conditions, people acquire thehabit of looking upon the government as an institutionwith limitless means at its disposal: the state, the govern-ment, can do anything. If, for instance, the nation wantsa new highway system, the government is expected tobuild it. But where will the government get the money?

One could say that in the United States today—andeven in the past, under McKinley—the Republican partywas more or less in favor of sound money and of thegold standard, and the Democratic party was in favorof inflation, of course not a paper inflation, but a silverinflation.

It was, however, a Democratic president of the UnitedStates, President Cleveland, who at the end of the 1880svetoed a decision of Congress, to give a small sum—about $10,000—to help a community that had sufferedsome disaster. And President Cleveland justified his vetoby writing: "While it is the duty of the citizens to supportthe government, it is not the duty of the government tosupport the citizens." This is something which everystatesman should write on the wall of his office to showto people who come asking for money.

I am rather embarrassed by the necessity to simplifythese problems. There are so many complex problemsin the monetary system, and I would not have writtenvolumes about them if they were as simple as I am de-scribing them here. But the fundamentals are preciselythese: if you increase the quantity of money, you bringabout the lowering of the purchasing power of themonetary unit. This is what people whose private affairsare unfavorably affected do not like. People who do notbenefit from inflation are the ones who complain.

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If inflation is bad and if people realize it, why has itbecome almost a way of life in all countries? Even someof the richest countries suffer from this disease. TheUnited States today is certainly the richest country in theworld, with the highest standard of living. But when youtravel in the United States, you will discover that thereis constant talk about inflation and about the necessityto stop it. But they only talk; they do not act.

To give you some facts: after the First World War,Great Britain returned to the prewar gold parity of thepound. That is, it revalued the pound upward. This in-creased the purchasing power of every worker's wages.In an unhampered market the nominal money wagewould have fallen to compensate for this and the work-ers' real wage would not have suffered. We do not havetime here to discuss the reasons for this. But the unionsin Great Britain were unwilling to accept an adjustmentof money wage rates downward as the purchasingpower of the monetary unit rose. Therefore real wageswere raised considerably by this monetary measure. Thiswas a serious catastrophe for England, because GreatBritain is a predominantly industrial country that has toimport its raw materials, half-finished goods, and foodstuffs in order to live, and has to export manufacturedgoods to pay for these imports. With the rise in the inter-national value of the pound, the price of British goodsrose on foreign markets and sales and exports declined.Great Britain had, in effect, priced itself out of the worldmarket.

The unions could not be defeated. You know thepower of a union today. It has the right, practically theprivilege, to resort to violence. And a union order is,therefore, let us say, not less important than a govern-ment decree. The government decree is an order for the

68 ECONOMIC POLICYenforcement of which the enforcement apparatus of thegovernment—the police—is ready. You must obey thegovernment decree, otherwise you will have difficultieswith the police.

Unfortunately, we have now, in almost all countriesall over the world, a second power that is in a positionto exercise force: the labor unions. The labor unions de-termine wages and then strike to enforce them in thesame way in which the government might decree a mini-mum wage rate. I will not discuss the union questionnow; I shall deal with it later. I only want to establishthat it is the union policy to raise wage rates above thelevel they would have on an unhampered market. As aresult, a considerable part of the potential labor force canbe employed only by people or industries that are pre-pared to suffer losses. And, since businesses are not ableto keep on suffering losses, they close their doors andpeople become unemployed. The setting of wage ratesabove the level they would have on the unhamperedmarket always results in the unemployment of a consid-erable part of the potential labor force.

In Great Britain, the result of high wage rates enforcedby the labor unions was lasting unemployment, pro-longed year after year. Millions of workers were unem-ployed, production figures dropped. Even experts wereperplexed. In this situation the British government madea move which it considered an indispensable, emergencymeasure: it devalued its currency.

The result was that the purchasing power of themoney wages, upon which the unions had insisted, wasno longer the same. The real wages, the commoditywages, were reduced. Now the worker could not buy asmuch as he had been able to buy before, even though the

Inflation 69

nominal wage rates remained the same. In this way, itwas thought, real wage rates would return to free marketlevels and unemployment would disappear.

This measure—devaluation—was adopted by variousother countries, by France, the Netherlands, and Bel-gium. One country even resorted twice to this measurewithin a period of one year and a half. That country wasCzechoslovakia. It was a surreptitious method, let ussay, to thwart the power of the unions. You could notcall it a real success, however.

After a few years, the people, the workers, even theunions, began to understand what was going on. Theycame to realize that currency devaluation had reducedtheir real wages. The unions had the power to opposethis. In many countries they inserted a clause into wagecontracts providing that money wages must go up auto-matically with an increase in prices. This is called index-ing. The unions became index conscious. So, this methodof reducing unemployment that the government ofGreat Britain started in 1931—which was later adoptedby almost all important governments—this method of"solving unemployment" no longer works today.

In 1936, in his General Theory of Employment, Interestand Money, Lord Keynes unfortunately elevated thismethod—the emergency measures of the period be-tween 1929 and 1933—to a principle, to a fundamentalsystem of policy. And he justified it by saying, in effect:"Unemployment is bad. If you want unemployment todisappear you must inflate the currency."

He realized very well that wage rates can be too highfor the market, that is, too high to make it profitable foran employer to increase his work force, thus too highfrom the point of view of the total working population,

70 ECONOMIC POLICYfor with wage rates imposed by unions above the marketonly a part of those anxious to earn wages can obtainjobs.

And Keynes said, in effect: "Certainly mass unem-ployment, prolonged year after year, is a very unsatisfac-tory condition." But instead of suggesting that wagerates could and should be adjusted to market conditions,he said, in effect: "If one devalues the currency and theworkers are not clever enough to realize it, they will notoffer resistance against a drop in real wage rates, as longas nominal wage rates remain the same." In other words,Lord Keynes was saying that if a man gets the sameamount of sterling today as he got before the currencywas devalued, he will not realize that he is, in fact, nowgetting less.

In old fashioned language, Keynes proposed cheatingthe workers. Instead of declaring openly that wage ratesmust be adjusted to the conditions of the market—be-cause, if they are not, a part of the labor force will inevi-tably remain unemployed—he said, in effect: "Full em-ployment can be reached only if you have inflation.Cheat the workers." The most interesting fact, however,is that when his General Theory was published, it was nolonger possible to cheat, because people had already be-come index conscious. But the goal of full employmentremained.

What does "full employment" mean? It has to do withthe unhampered labor market, which is not manipulatedby the unions or by the government. On this market,wage rates for every type of labor tend to reach a pointat which everybody who wants a job can get one andevery employer can hire as many workers as he needs.If there is an increase in the demand for labor, the wage

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rate will tend to be greater, and if fewer workers areneeded, the wage rate will tend to fall.

The only method by which a "full employment" situ-ation can be brought about is by the maintenance of anunhampered labor market. This is valid for every kindof labor and for every kind of commodity.

What does a businessman do who wants to sell a com-modity for five dollars a unit? When he cannot sell it atthat price, the technical business expression in theUnited States is, "the inventory does not move." But itmust move. He cannot retain things because he must buysomething new; fashions are changing. So he sells at alower price. If he cannot sell the merchandise at fivedollars, he must sell it at four. If he cannot sell it at four,he must sell it at three. There is no other choice as longas he stays in business. He may suffer losses, but theselosses are due to the fact that his anticipation of themarket for his product was wrong.

It is the same with the thousands and thousands ofyoung people who come every day from the agriculturaldistricts into the city trying to earn money. It happensso in every industrial nation. In the United States theycome to town with the idea that they should get, say, ahundred dollars a week. This may be impossible. So if aman cannot get a job for a hundred dollars a week, hemust try to get a job for ninety or eighty dollars, andperhaps even less. But if he were to say—as the unionsdo—"one hundred dollars a week or nothing," then hemight have to remain unemployed. (Many do not mindbeing unemployed, because the government pays unem-ployment benefits—out of special taxes levied on theemployers—which are sometimes nearly as high as thewages the man would receive if he were employed.)

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Because a certain group of people believes that fullemployment can be attained only by inflation, inflationis accepted in the United States. But people are discuss-ing the question: Should we have a sound currency withunemployment, or inflation with full employment? Thisis in fact a very vicious analysis.

To deal with this problem we must raise the question:How can one improve the condition of the workers andof all other groups of the population? The answer is: bymaintaining an unhampered labor market and thusachieving full employment. Our dilemma is, shall themarket determine wage rates or shall they be deter-mined by union pressure and compulsion? The dilemmais not "shall we have inflation or unemployment?"

This mistaken analysis of the problem is argued inEngland, in European industrial countries and even inthe United States. And some people say: "Now look,even the United States is inflating. Why should we notdo it also."

To these people one should answer first of all: "Oneof the privileges of a rich man is that he can afford to befoolish much longer than a poor man." And this is thesituation of the United States. The financial policy of theUnited States is very bad and is getting worse. Perhapsthe United States can afford to be foolish a bit longerthan some other countries.

The most important thing to remember is that infla-tion is not an act of God; inflation is not a catastropheof the elements or a disease that comes like the plague.Inflation is a policy—a deliberate policy of people whoresort to inflation because they consider it to be a lesserevil than unemployment. But the fact is that, in the notvery long run, inflation does not cure unemployment.

Inflation is a policy. And a policy can be changed.

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Therefore, there is no reason to give in to inflation. If oneregards inflation as an evil, then one has to stop inflating.One has to balance the budget of the government. Ofcourse, public opinion must support this; the intellectu-als must help the people to understand. Given the sup-port of public opinion, it is certainly possible for thepeople's elected representatives to abandon the policyof inflation.

We must remember that, in the long run, we may allbe dead and certainly will be dead. But we should ar-range our earthly affairs, for the short run in which wehave to live, in the best possible way. And one of themeasures necessary for this purpose is to abandon infla-tionary policies.

5th Lecture

Foreign Investment

Some people call the programs of economic freedom anegative program. They say: "What do you liberalsreally want? You are against socialism, government in-tervention, inflation, labor union violence, protective tar-iffs You say 'no' to everything."

I would call this statement a one-sided and shallowformulation of the problem. For it is possible to formu-late a liberal program in a positive way. If a man says: "Iam against censorship," he is not negative; he is in favorof authors having the right to determine what they wantto publish without the interference of government. Thisis not negativism, this is precisely freedom. (Of course,when I use the term "liberal" with respect to the condi-tions of the economic system, I mean liberal in the oldclassical sense of the word.)

Today, most people regard the considerable differ-ences in the standard of living between many countriesas unsatisfactory. Two hundred years ago, conditions inGreat Britain were much worse than they are today inIndia. But the British in 1750 did not call themselves"undeveloped" or "backward," because they were notin a position to compare the conditions of their countrywith those of countries in which economic conditionswere more satisfactory. Today all people who have not

75

76 ECONOMIC POLICY

attained the average standard of living of the UnitedStates believe that there is something wrong with theirown economic situation. Many of these countries callthemselves "developing countries'' and, as such, are ask-ing for aid from the so-called developed or even overde-veloped countries.

Let me explain the reality of this situation. The stand-ard of living is lower in the so-called developing coun-tries because the average earnings for the same type oflabor is lower in those countries than it is in some coun-tries of Western Europe, Canada, Japan, and especiallyin the United States. If we try to find the reasons for thisdifference, we must realize that it is not due to an inferi-ority of the workers or other employees. There prevailsamong some groups of North American workers a tend-ency to believe that they themselves are better than otherpeople—that it is through their own merit that they aregetting higher wages than other people.

It would only be necessary for an American workerto visit another country—let us say, Italy, where manyAmerican workers came from—in order to discover thatit is not his personal qualities but the conditions in thecountry that make it possible for him to earn higherwages. If a man from Sicily immigrates to the UnitedStates, he can very soon earn the wage rates that arecustomary in the United States. And if the same manreturns to Sicily, he will discover that his visit to theUnited States did not give him qualities which wouldpermit him to earn higher wages in Sicily than his fellowcountrymen.

Nor can one explain this economic situation by assum-ing any inferiority on the part of the entrepreneurs out-side the United States. It is a fact that outside of theUnited States, Canada, Western Europe, and certain

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parts of Asia the equipment of the factories and the tech-nological methods employed are, by and large, inferiorto those within the United States. But this is not due tothe ignorance of the entrepreneurs in those "undevel-oped" countries. They know very well that the factoriesin the United States and Canada are much betterequipped. They themselves know everything they mustknow about technology, and if they do not, they havethe opportunity to learn what they must know from text-books and technical magazines which disseminate thisknowledge.

Once again: the difference is not personal inferiorityor ignorance. The difference is the supply of capital, thequantity of capital goods available. In other words, theamount of capital invested per unit of the population isgreater in the so-called advanced nations than in thedeveloping nations.

A businessman cannot pay a worker more than theamount added by the work of this employee to the valueof the product. He cannot pay him more than the cus-tomers are prepared to pay for the additional work of thisindividual worker. If he pays him more, he will not re-cover his expenditures from the customers. He incurslosses and, as I have pointed out again and again, andas everybody knows, a businessman who suffers lossesmust change his methods of business, or go bankrupt.

The economists describe this state of affairs by saying"wages are determined by the marginal productivity oflabor." This is only another expression for what I havejust said before. It is a fact that the scale of wages isdetermined by the amount a man's work increases thevalue of the product. If a man works with better andmore efficient tools, then he can perform in one hourmuch more than a man who works one hour with less

78 ECONOMIC POLICYefficient instruments. It is obvious that 100 men workingin an American shoe factory, equipped with the mostmodern tools and machines, produce much more in thesame length of time than 100 shoemakers in India, whohave to work with old-fashioned tools in a less sophisti-cated way.

The employers in all of these developing nationsknow very well that better tools would make their ownenterprises more profitable. They would like to buildmore and better factories. The only thing that preventsthem from doing it is the shortage of capital. The differ-ence between the less developed and the more devel-oped nations is a function of time: the British started tosave sooner than all other nations: they also startedsooner to accumulate capital and to invest it in business.Because they started sooner, there was a higher standardof living in Great Britain when, in all other Europeancountries, there was still a lower standard of living.Gradually, all the other nations began to study Britishconditions, and it was not difficult for them to discoverthe reason for Great Britain's wealth. So they began toimitate the methods of British business.

Since other nations started later, and since the Britishdid not stop investing capital, there remained a largedifference between conditions in England and conditionsin those other countries. But something happened whichcaused the headstart of Great Britain to disappear.

What happened was the greatest event in the historyof the nineteenth century, and this means not only in thehistory of an individual country. This great event wasthe development, in the nineteenth century, of foreigninvestment. In 1817, the great British economist Ricardostill took it for granted that capital could be investedonly within the borders of a country. He took it for

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granted that capitalists would not try to invest abroad.But a few decades later, capital investment abroad beganto play a most important role in world affairs.

Without capital investment, it would have been neces-sary for nations less developed than Great Britain to startwith the methods and the technology with which theBritish had started in the beginning and middle of theeighteenth century, and slowly, step by step—always farbelow the technological level of the British economy—try to imitate what the British had done.

It would have taken many, many decades for thesecountries to attain the standard of technological develop-ment which Great Britain had reached a hundred yearsor more before them. But the great event that helped allthese countries was foreign investment.

Foreign investment meant that British capitalists in-vested British capital in other parts of the world. Theyfirst invested it in those European countries which, fromthe point of view of Great Britain, were short of capitaland backward in their development. It is a well-knownfact that the railroads of most European countries, andalso of the United States, were built with the aid of Brit-ish capital. You know that the same happened in thiscountry, in Argentina.

The gas companies in all the cities of Europe were alsoBritish. In the mid 1870s, a British author and poet criti-cized his countrymen. He said: "The British have losttheir old vigor and they have no longer any new ideas.They are no longer an important or leading nation in theworld." To which Herbert Spencer, the great sociologist,answered: "Look at the European continent. All Euro-pean capitals have light because a British gas companyprovides them with gas." This was, of course, in whatseems to us the "remote" age of gas lighting. Further

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answering this British critic, Herbert Spencer added:"You say that the Germans are far ahead of Great Britain.But look at Germany. Even Berlin, the capital of the Ger-man Reich, the capital of Geist, would be in the dark if aBritish gas company had not invaded the country andlighted the streets."

In the same way, British capital developed the rail-roads and many branches of industry in the UnitedStates. And, of course, as long as a country imports capi-tal its balance of trade is what the noneconomists call"unfavorable." That means that it has an excess of im-ports over exports. The reason for the "favorable balanceof trade" of Great Britain was that the British factoriessent many types of equipment to the United States, andthis equipment was not paid for by anything other thanshares of American corporations. This period in the his-tory of the United States lasted, by and large, until the1890s.

But when the United States, with the aid of Britishcapital—and later with the aid of its own procapitalisticpolicies—developed its own economic system in an un-precedented way, the Americans began to buy back thecapital stocks they had once sold to foreigners. Then theUnited States had a surplus of exports over imports. Thedifference was paid by the importation—by the repatria-tion, as one called it—of American common stock.

This period lasted until the First World War. Whathappened later is another story. It is the story of theAmerican subsidies for the belligerent countries in be-tween and after two world wars: the loans, the invest-ments the United States made in Europe, in addition tolend-lease, foreign aid, the Marshall Plan, food that wassent overseas, and other subsidies. I emphasize this be-cause people sometimes believe that it is shameful or

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degrading to have foreign capital working in their coun-try. You have to realize that, in all countries except Eng-land, foreign capital investment played a considerablepart in the development of modern industries.

If I say that foreign investment was the greatest his-torical event of the nineteenth century, you must thinkof all those things that would not have come into beingif there had not been any foreign investment. All therailroads, the harbors, the factories and mines in Asia,and the Suez Canal and many other things in the West-ern hemisphere, would not have been constructed hadthere been no foreign investment.

Foreign investment is made in the expectation that itwill not be expropriated. Nobody would invest anythingif he knew in advance that somebody would expropriatehis investments. At the time when these foreign invest-ments were made in the nineteenth century, and at thebeginning of the twentieth century, there was no ques-tion of expropriation. From the beginning, some coun-tries showed a certain hostility toward foreign capital,but for the most part they realized very well that theyderived an enormous advantage from these foreign in-vestments.

In some cases, these foreign investments were notmade directly to foreign capitalists, but indirectly byloans to the foreign government. Then it was the govern-ment that used the money for investments. Such was, forinstance, the case in Russia. For purely political reasons,the French invested in Russia, in the two decades preced-ing the First World War, about twenty billion goldfrancs, lending them chiefly to the Russian government.All the great enterprises of the Russian government—forinstance, the railroad that connects Russia from the UralMountains, through the ice and snow of Siberia, to the

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Pacific—were built mostly with foreign capital lent to theRussian government. You will realize that the French didnot assume that one day there would be a communistRussian government that would simply declare it wouldnot pay the debts incurred by its predecessor, the tsaristgovernment.

Starting with the First World War, there began a pe-riod of worldwide open warfare against foreign invest-ments. Since there is no remedy to prevent a governmentfrom expropriating invested capital, there is practicallyno legal protection for foreign investments in the worldtoday. The capitalists did not foresee this. If the capital-ists of the capital exporting countries had realized it, allforeign investments would have come to an end fortyor fifty years ago. But the capitalists did not believe thatany country would be so unethical as to renege on adebt, to expropriate and confiscate foreign capital. Withthese acts, a new chapter began in the economic historyof the world.

With the end of the great period in the nineteenthcentury when foreign capital helped to develop, in allparts of the world, modern methods of transportation,manufacturing, mining, and agriculture, there came anew era in which the governments and the political par-ties considered the foreign investor as an exploiter whoshould be expelled from the country.

In this anti-capitalist attitude the Russians were notthe only sinners. Remember, for example, the expropria-tion of the American oil fields in Mexico, and all thethings that have happened in this country (Argentina)which I have no need to discuss.

The situation in the world today, created by the sys-tem of expropriation of foreign capital, consists either ofdirect expropriation or of indirect expropriation through

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foreign exchange control or tax discrimination. This ismainly a problem of developing nations.

Take, for instance, the biggest of these nations: India.Under the British system, British capital—predominatelyBritish capital, but also capital of other European coun-tries—was invested in India. And the British exportedto India something else which also has to be mentionedin this connection; they exported into India modernmethods of fighting contagious diseases. The result wasa tremendous increase in the Indian population and acorresponding increase in the country's troubles. Facingsuch a worsening situation, India turned to expropria-tion as a means of dealing with its problems. But it wasnot always direct expropriation; the government har-assed foreign capitalists, hampering them in their invest-ments in such a way that these foreign investors wereforced to sell out.

India could, of course, accumulate capital by anothermethod: the domestic accumulation of capital. However,India is as hostile to the domestic accumulation of capitalas it is to foreign capitalists. The Indian government saysit wants to industrialize India, but what it really has inmind is to have socialist enterprises.

A few years ago the famous statesman JawaharlalNehru published a collection of his speeches. The bookwas published with the intention of making foreign in-vestment in India more attractive. The Indian govern-ment is not opposed to foreign investment before it isinvested. The hostility begins only when it is already in-vested. In this book—I am quoting literally from thebook—Mr. Nehru said: "Of course, we want to socialize.But we are not opposed to private enterprise. We wantto encourage in every way private enterprise. We wantto promise the entrepreneurs who invest in our country,

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that we will not expropriate them nor socialize them forten years, perhaps even for a longer time." And hethought this was an invitation to come to India!

The problem—as you know—is domestic capital accu-mulation. In all countries today there are very heavytaxes on corporations. In fact, there is double taxationon corporations. First, the profits of corporations aretaxed very heavily, and the dividends which corpora-tions pay to their shareholders are taxed again. And thisis done in a progressive way.

Progressive taxation of income and profits means thatprecisely those parts of the income which people wouldhave saved and invested are taxed away. Take the ex-ample of the United States. A few years ago, there wasan "excess-profit" tax, which meant that out of one dol-lar earned, a corporation retained only eighteen cents.When these eighteen cents were paid out to the share-holders, those who had a great number of shares had topay another sixty or eighty or even greater percent of itin taxes. Out of the dollar of profit they retained aboutseven cents, and ninety-three cents went to the govern-ment. Of this ninety-three percent, the greater partwould have been saved and invested. Instead, the gov-ernment used it for current expenditure. This is the pol-icy of the United States.

I think I have made it clear that the policy of theUnited States is not an example to be imitated by othercountries. This policy of the United States is worse thanbad—it is insane. The only thing I would add is that arich country can afford more bad policies than a poorcountry. In the United States, in spite of all these meth-ods of taxation, there is still some additional accumula-tion of capital and investment every year, and therefore

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there is still a trend toward an improvement of the stand-ard of living.

But in many other countries the problem is very criti-cal. There is no—or not sufficient—domestic saving, andcapital investment from abroad is seriously reduced bythe fact that these countries are openly hostile to foreigninvestment. How can they talk about industrialization,about the necessity to develop new plants, to improveconditions, to raise the standard of living, to have higherwage rates, better means of transportation, if they aredoing things that will have precisely the opposite effect?What their policies actually accomplish is to prevent orto slow down the accumulation of domestic capital andto put obstacles in the way of foreign capital.

The end result is certainly very bad. Such a situationmust bring about a loss of confidence, and there is nowmore and more distrust of foreign investment in theworld. Even if the countries concerned were to changetheir policies immediately and were to make all possiblepromises, it is very doubtful that they could once moreinspire foreign capitalists to invest.

There are, of course, some methods to avoid this con-sequence. One could establish some international stat-utes, not only agreements, that would withdraw the for-eign investments from national jurisdiction. This issomething the United Nations could do. But the UnitedNations is simply a meeting place for useless discus-sions. Realizing the enormous importance of foreign in-vestment, realizing that foreign investment alone canbring about an improvement in political and economicalworld conditions, one could try to do something fromthe point of view of international legislation.

This is a technical legal problem, which I only men-

86 ECONOMIC POLICYtion, because the situation is not hopeless. If the worldreally wanted to make it possible for the developingcountries to raise their standard of living to the level ofthe American way of life, then it could be done. It is onlynecessary to realize how it could be done.

What is lacking in order to make the developing coun-tries as prosperous as the United States is only one thing:capital—and, of course, the freedom to employ it underthe discipline of the market and not the discipline of thegovernment. These nations must accumulate domesticcapital, and they must make it possible for foreign capi-tal to come into their countries.

For the development of domestic saving it is necessaryto mention again that domestic saving by the masses ofthe population presupposes a stable monetary unit. Thisimplies the absence of any kind of inflation.

A great part of the capital at work in American enter-prises is owned by the workers themselves and by otherpeople with modest means. Billions and billions of sav-ing deposits, of bonds, and of insurance policies are op-erating in these enterprises. On the American moneymarket today it is no longer the banks, it is the insurancecompanies that are the greatest money lenders. And themoney of the insurance company is—not legally, buteconomically—the property of the insured. And practi-cally everybody in the United States is insured in oneway or another.

The prerequisite for more economic equality in theworld is industrialization. And this is possible onlythrough increased capital investment, increased capitalaccumulation. You may be astonished that I have notmentioned a measure which is considered a primemethod to industrialize a country. I mean protectionism.But tariffs and foreign exchange controls are exactly the

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means to prevent the importation of capital and industri-alization into the country. The only way to increase in-dustrialization is to have more capital. Protectionism canonly divert investments from one branch of business toanother branch.

Protectionism, in itself, does not add anything to thecapital of a country. To start a new factory one needscapital. To improve an already existing factory oneneeds capital, and not a tariff.

I do not want to discuss the whole problem of freetrade or protectionism. I hope that most of your text-books on economics represent it in a proper way. Protec-tion does not change the economic situation in a countryfor the better. And what certainly does not change it forthe better is labor unionism. If conditions are unsatisfac-tory, if wages are low, if the wage earner in a countrylooks to the United States and reads about what is goingon there, if he sees in the movies how the home of anaverage American is equipped with all modern com-forts, he may be envious. He is perfectly right in saying:"We ought to have the same thing." But the only wayto obtain it is through an increase in capital.

Labor unions use violence against entrepreneurs andagainst people they call strikebreakers. Despite theirpower and their violence, however, unions cannot raisewages continually for all wage earners. Equally ineffec-tive are government decrees fixing minimum wage rates.What the unions do bring about (if they succeed in rais-ing wage rates) is permanent, lasting unemployment.

But unions cannot industrialize the country, they can-not raise the standard of living of the workers. And thisis the decisive point: One must realize that all the poli-cies of a country that wants to improve its standard ofliving must be directed toward an increase in the capital

88 ECONOMIC POLICYinvested per capital. This per capita investment of capitalis still increasing in the United States, in spite of all ofthe bad policies there. And the same is true in Canadaand in some of the West European countries. But it isunfortunately decreasing in countries like India.

We read every day in the newspapers that the popula-tion of the world is becoming greater, by perhaps 45million people—or even more—per year. And how willthis end? What will the results and the consequences be?Remember what I said about Great Britain. In 1750 theBritish people believed that six million constituted a tre-mendous overpopulation of the British Isles and thatthey were headed for famines and plagues. But on theeve of the last world war, in 1939, fifty million peoplewere living in the British Isles, and the standard of livingwas incomparably higher than it had been in 1750. Thiswas the effect of what is called industrialization—arather inadequate term.

Britain's progress was brought about by increasingthe per capita investment of capital. As I said before,there is only one way a nation can achieve prosperity: ifyou increase capital, you increase the marginal produc-tivity of labor, and the effect will be that real wages willrise.

In a world without migration barriers, there wouldbe a tendency all over the world toward an equalizationof wage rates. If there were no migration barriers today,probably twenty million people would try to reach theUnited States every year, in order to get higher wages.The inflow would reduce wages in the United States, andraise them in other countries.

I do not have time to deal with this problem of migra-tion barriers. But I do want to say that there is anothermethod toward the equalization of wage rates all over

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the world. This other method, which operates in the ab-sence of the freedom to migrate, is the migration of capital.Capitalists have the tendency to move towards thosecountries in which there is plenty of labor available andin which labor is reasonable. And by the fact that theybring capital into these countries, they bring about atrend toward higher wage rates. This has worked in thepast, and it will work in the future, in the same way.

When British capital was first invested in, let us say,Austria or Bolivia, wage rates there were much, muchlower than they were in Great Britain. But this additionalinvestment brought about a trend toward higher wagerates in those countries. And such a tendency prevailedall over the world. It is a very well-known fact that assoon as, for instance, the United Fruit Company movedinto Guatemala, the result was a general tendency to-ward higher wage rates, beginning with the wageswhich United Fruit Company paid, which then made itnecessary for other employers to pay higher wages also.Therefore, there is no reason at all to be pessimistic inregard to the future of "undeveloped" countries.

I fully agree with the Communists and the labor un-ions, when they say: "What is needed is to raise thestandard of living." A short time ago, in a book pub-lished in the United States, a professor said: "We nowhave enough of everything, why should people in theworld still work so hard? We have everything already."I do not doubt that this professor has everything. Butthere are other people in other countries, also many peo-ple in the United States, who want and should have abetter standard of living.

Outside of the United States—in Latin America, andstill more in Asia and Africa—everyone wishes to seeconditions improved in his own country. A higher stand-

90 ECONOMIC POLICYard of living also brings about a higher standard of cul-ture and civilization.

So I fully agree with the ultimate goal of raising thestandard of living everywhere. But I disagree about themeasures to be adopted in attaining this goal. Whatmeasures will attain this end? Not protection, not gov-ernment interference, not socialism, and certainly not theviolence of the labor unions (euphemistically called col-lective bargaining, which, in fact, is bargaining at thepoint of a gun).

To attain the end, as I see it, there is only one way! Itis a slow method. Some people may say, it is too slow.But there are no short cuts to an earthly paradise. It takestime, and one has to work. But it does not take as muchtime as people believe, and finally an equalization willcome.

Around 1840, in the western part of Germany—inSwabia and Wiirtemberg, which was one of the mostindustrialized areas in the world—it was said: "We cannever attain the level of the British. The English have ahead start, and they will forever be ahead of us." Thirtyyears later the British said: "This German competition,we cannot stand it; we have to do something against it."At that time, of course, the German standard was rapidlyrising and was, even then, approaching the British stan-dard. And today the German income per capita is notbehind that of Great Britain at all.

In the center of Europe, there is a small country, Swit-zerland, which nature has endowed very poorly. It hasno coal mines, no minerals, and no natural resources.But its people, over the centuries, have continually pur-sued a capitalistic policy. They have developed the high-est standard of living in continental Europe, and theircountry ranks as one of the world's great centers of civi-

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lization. I do not see why a country such as Argentina—which is much larger than Switzerland both in popula-tion and in size—should not attain the same high stan-dard of living after some years of good policies. But—asI pointed out—the policies must be good.

6th Lecture

Politics and Ideas

In the Age of Enlightenment, in the years in which theNorth Americans founded their independence, and afew years later, when the Spanish and Portuguese colo-nies were transformed into independent nations, the pre-vailing mood in Western civilization was optimistic. Atthat time all philosophers and statesmen were fully con-vinced that we were living at the beginning of a new ageof prosperity, progress, and freedom. In those days peo-ple expected that the new political institutions—the con-stitutional representative governments established in thefree nations of Europe and America—would work in avery beneficial way, and that economic freedom wouldcontinuously improve the material conditions of man-kind.

We know very well that some of these expectationswere too optimistic. It is certainly true that we have ex-perienced, in the nineteenth and twentieth centuries, anunprecedented improvement in economic conditions,making it possible for a much larger population to live ata much higher standard of living. But we also know thatmany of the hopes of the eighteenth century philosophershave been badly shattered—hopes that there would notbe any more wars and that revolutions would becomeunnecessary. These expectations were not realized.

93

94 ECONOMIC POLICYDuring the nineteenth century, there was a period

when wars decreased in both number and severity. Butthe twentieth century brought a resurgence of the war-like spirit, and we can fairly well say that we may notyet be at the end of the trials through which mankindwill have to go.

The constitutional system that began at the end of theeighteenth and the beginning of the nineteenth centuryhas disappointed mankind. Most people—also mostauthors—who have dealt with this problem seem tothink there has been no connection between the eco-nomic and the political side of the problem. Thus, theytend to deal at great length with the decay of parliamen-tarianism—government by the representatives of thepeople—as if this phenomenon were completely inde-pendent of the economic situation and of the economicideas that determine the activities of people.

But such an independence does not exist. Man is nota being that, on the one hand, has an economic side and,on the other hand, a political side, with no connectionbetween the two. In fact, what is called the decay offreedom, of constitutional government and representa-tive institutions, is the consequence of the radical changein economic and political ideas. The political events arethe inevitable consequence of the change in economicpolicies.

The ideas that guided the statesmen, philosophers andlawyers who, in the eighteenth century and in the earlynineteenth century developed the fundamentals of thenew political system, started from the assumption that,within a nation, all honest citizens have the same ulti-mate goal. This ultimate goal, to which all decent menshould be dedicated, is the welfare of the whole nation,

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and also the welfare of other nations—these moral andpolitical leaders being fully convinced that a free nationis not interested in conquest. They conceived of partystrife as only natural, that it was perfectly normal forthere to be differences of opinion concerning the bestway to conduct the affairs of state.

Those people who held similar ideas about a problemcooperated, and this cooperation was called a party. Buta party structure was not permanent. It did not dependon the position of the individuals within the whole socialstructure. It could change if people learned that theiroriginal position was based on erroneous assumptions,on erroneous ideas. From this point of view, many re-garded the discussions in the election campaigns andlater in the legislative assemblies as an important politi-cal factor. The speeches of members of a legislature werenot considered to be merely pronouncements telling theworld what a political party wanted. They were re-garded as attempts to convince opposing groups that thespeaker's own ideas were more correct, more beneficialto the common weal, than those which they had heardbefore.

Political speeches, editorials in newspapers, pam-phlets, and books were written in order to persuade.There was little reason to believe that one could notconvince the majority that one's own position was abso-lutely correct if one's ideas were sound. It was from thispoint of view that the constitutional rules were writtenin the legislative bodies of the early nineteenth century.

But this implied that the government would not inter-fere with the economic conditions of the market. It im-plied that all citizens had only one political aim: thewelfare of the whole country and of the whole nation.

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And it is precisely this social and economic philosophythat interventionism has replaced. Interventionism hasspawned a very different philosophy.

Under interventionist ideas, it is the duty of the gov-ernment to support, to subsidize, to give privileges tospecial groups. The idea of the eighteenth century states-men was that the legislators had special ideas about thecommon good. But what we have today, what we seetoday in the reality of political life, practically withoutany exceptions, in all the countries of the world wherethere is not simply communist dictatorship, is a situationwhere there are no longer real political parties in the oldclassical sense, but merely pressure groups.

A pressure group is a group of people who want toattain for themselves a special privilege at the expenseof the rest of the nation. This privilege may consist in atariff on competing imports, it may consist in a subsidy,it may consist in laws that prevent other people fromcompeting with the members of the pressure group. Atany rate, it gives to the members of the pressure groupa special position. It gives them something which is de-nied or ought to be denied—according to the ideas of thepressure group—to other groups.

In the United States, the two-party system of the olddays is seemingly still preserved. But this is only acamouflage of the real situation. In fact, the political lifeof the United States—as well as the political life of allother countries—is determined by the struggle and aspi-rations of pressure groups. In the United States there isstill a Republican party and a Democratic party, but ineach of these parties there are pressure group represent-atives. These pressure group representatives are moreinterested in cooperation with representatives of the

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same pressure group in the opposing party than with theefforts of fellow members in their own party.

To give you an example, if you talk to people in theUnited States who really know the business of Congress,they will tell you: "This man, this member of Congressrepresents the interests of the silver groups." Or theywill tell you another man represents the wheat growers.

Of course each of these pressure groups is necessarilya minority. In a system based on the division of labor,every special group that aims at privileges has to be aminority. And minorities never have the chance to attainsuccess if they do not cooperate with other similar mi-norities, similar pressure groups. In the legislative as-semblies, they try to bring about a coalition betweenvarious pressure groups, so that they might become themajority. But, after a time, this coalition may disinte-grate, because there are problems on which it is impos-sible to reach agreement with other pressure groups, andnew pressure group coalitions are formed.

That is what happened in France in 1871, a situationwhich historians deemed "the decay of the Third Repub-lic." It was not a decay of the Third Republic; it wassimply an exemplification of the fact that the pressuregroup system is not a system that can be successfullyapplied to the government of a big nation.

You have, in the legislatures, representatives of wheat,of meat, of silver, and of oil, but first of all, of the variousunions. Only one thing is not represented in the legisla-ture: the nation as a whole. There are only a few whotake the side of the nation as a whole. And all problems,even those of foreign policy, are seen from the point ofview of the special pressure group interests.

In the United States, some of the less-populated states

98 ECONOMIC POLICYare interested in the price of silver. But not everybodyin these states is interested in it. Nevertheless, the UnitedStates, for many decades, has spent a considerable sumof money, at the expense of the taxpayers, in order tobuy silver above its market price. For another example,in the United States only a small proportion of the popu-lation is employed in agriculture; the remainder of thepopulation is made up of consumers—but not produc-ers—of agricultural products. The United States, never-theless, has a policy of spending billions and billions inorder to keep the prices of agricultural products abovethe potential market price.

One cannot say that this is a policy in favor of a smallminority, because these agricultural interests are not uni-form. The dairy farmer is not interested in a high pricefor cereals; on the contrary, he would prefer a lowerprice for this product. A chicken farmer wants a lowerprice for chicken feed. There are many incompatible spe-cial interests within this group. And yet, clever diplo-macy in congressional politics makes it possible for smallminority groups to get privileges at the expense of themajority.

One situation, especially interesting in the UnitedStates, concerns sugar. Perhaps only one out of 500Americans is interested in a higher price for sugar. Prob-ably 499 out of 500 want a lower price for sugar. Never-theless, the policy of the United States is committed, bytariffs and other special measures, to a higher price forsugar. This policy is not only detrimental to the interestsof those 499 who are consumers of sugar, it also createsa very severe problem of foreign policy for the UnitedStates. The aim of foreign policy is cooperation with allother American republics, some of which are interestedin selling sugar to the United States. They would like to

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sell a greater quantity of it. This illustrates how pressuregroup interests may determine even the foreign policyof a nation.

For years, people throughout the world have beenwriting about democracy—about popular, representa-tive government. They have been complaining about itsinadequacies, but the democracy they criticize is onlythat democracy under which interventionism is the gov-erning policy of the country.

Today one might hear people say: "In the early nine-teenth century, in the legislatures of France, England, theUnited States, and other nations, there were speechesabout the great problems of mankind. They foughtagainst tyranny, for freedom, for cooperation with allother free nations. But now we are more practical in thelegislature!"

If course we are more practical; people today do nottalk about freedom: they talk about a higher price for pea-nuts. If this is practical, then of course the legislatureshave changed considerably, but not improved.

These political changes, brought about by interven-tionism, have considerably weakened the power of na-tions and of representatives to resist the aspirations ofdictators and the operations of tyrants. The legislativerepresentatives whose only concern is to satisfy the vot-ers who want, for instance, a high price for sugar, milk,and butter, and a low price for wheat (subsidized by thegovernment) can represent the people only in a veryweak way; they can never represent all their constitu-ents.

The voters who are in favor of such privileges do notrealize that there are also opponents who want the oppo-site thing and who prevent their representatives fromachieving full success.

100 ECONOMIC POLICYThis system leads also to a constant increase of public

expenditures, on the one hand, and makes it more diffi-cult, on the other, to levy taxes. These pressure grouprepresentatives want many special privileges for theirpressure groups, but they do not want to burden theirsupporters with a too-heavy tax load.

It was not the idea of the eighteenth century foundersof modern constitutional government that a legislatorshould represent, not the whole nation, but only the spe-cial interests of the district in which he was elected; thatwas one of the consequences of interventionism. Theoriginal idea was that every member of the legislatureshould represent the whole nation. He was elected in aspecial district only because there he was known andelected by people who had confidence in him.

But it was not intended that he go into governmentin order to procure something special for his constitu-ency, that he ask for a new school or a new hospital or anew lunatic asylum—thereby causing a considerable risein government expenditures within his district. Pressuregroup politics explains why it is almost impossible forall governments to stop inflation. As soon as the electedofficials try to restrict expenditures, to limit spending,those who support special interests, who derive advan-tages from special items in the budget, come and declarethat this particular project cannot be undertaken, or thatthat one must be done.

Dictatorship, of course, is no solution to the problemsof economics, just as it is not the answer to the problemsof freedom. A dictator may start out by making promisesof every sort but, being a dictator, he will not keep hispromises. He will, instead, suppress free speech immedi-ately, so that the newspapers and the legislative speech-makers will not be able to point out—days, months or

Policies and Ideas 101years afterwards—that he said something different onthe first day of his dictatorship than he did later on.

The terrible dictatorship which such a big country asGermany had to live through in the recent past comesto mind, as we look upon the decline of freedom in somany countries today. As a result, people speak nowabout the decay of freedom and about the decline of ourcivilization.

People say that every civilization must finally fall intoruin and disintegrate. There are eminent supporters ofthis idea. One was a German teacher, Spengler, and an-other one, much better known, was the English historian,Toynbee. They tell us that our civilization is now old.Spengler compared civilizations to plants which growand grow, but whose life finally comes to an end. Thesame, he says, is true for civilizations. The metaphoricallikening of a civilization to a plant is completely arbi-trary.

First of all, it is within the history of mankind verydifficult to distinguish between different, independentcivilizations. Civilizations are not independent; they areinterdependent, they constantly influence each other. Onecannot speak of the decline of a particular civilization,therefore, in the same way that one can speak of thedeath of a particular plant.

But even if you refute the doctrines of Spengler andToynbee, a very popular comparison still remains: thecomparison of decaying civilizations. It is certainly truethat in the second century A.D., the Roman Empire nur-tured a very flourishing civilization, that in those partsof Europe, Asia, and Africa in which the Roman Empireruled, there was a very high civilization. There was alsoa very high economic civilization, based on a certain de-gree of division of labor. Although it appears quite

102 ECONOMIC POLICY

primitive when compared with our conditions today, itcertainly was remarkable. It reached the highest degreeof the division of labor ever attained before modern capi-talism. It is no less true that this civilization disinte-grated, especially in the third century. This disintegra-tion within the Roman Empire made it impossible for theRomans to resist aggression from without. Although theaggression was no worse than that which the Romanshad resisted again and again in the preceding centuries,they could withstand it no longer after what had takenplace within the Roman Empire.

What had taken place? What was the problem? Whatwas it that caused the disintegration of an empire which,in every regard, had attained the highest civilizationever achieved before the eighteenth century? The truthis that what destroyed this ancient civilization was some-thing similar, almost identical to the dangers thatthreaten our civilization today: on the one hand it wasinterventionism, and on the other hand, inflation. The in-terventionism of the Roman Empire consisted in the factthat the Roman Empire, following the preceding Greekpolicy, did not abstain from price control. This price con-trol was mild, practically without any consequences, be-cause for centuries it did not try to reduce prices belowthe market level.

But when inflation began in the third century, thepoor Romans did not yet have our technical means forinflation. They could not print money; they had to de-base the coinage, and this was a much inferior systemof inflation compared to the present system, which—through the use of the modern printing press—can soeasily destroy the value of money. But it was efficientenough, and it brought about the same result as pricecontrol, for the prices which the authorities tolerated

Policies and Ideas 103were now below the potential price to which inflationhad brought the prices of the various commodities.

The result, of course, was that the supply of foodstuffsin the cities declined. The people in the cities were forcedto go back to the country and to return to agriculturallife. The Romans never realized what was happening.They did not understand it. They had not developed themental tools to interpret the problems of the division oflabor and the consequences of inflation upon marketprices. That this currency inflation, currency debase-ment, was bad, this they knew of course very well.

Consequently, the emperors made laws against thismovement. There were laws preventing the city dwellerfrom moving to the country, but such laws were ineffec-tive. As the people did not have anything to eat in thecity, as they were starving, no law could keep them fromleaving the city and going back into agriculture. The citydweller could no longer work in the processing indus-tries of the cities as an artisan. And, with the loss of themarkets in the cities, no one could buy anything thereanymore.

Thus we see that, from the third century on, the citiesof the Roman Empire were declining and that the divi-sion of labor became less intensive than it had been be-fore. Finally, the medieval system of the self-sufficienthousehold, of the "villa," as it was called in later laws,emerged.

Therefore, if people compare our conditions withthose of the Roman Empire and say: "We will go thesame way," they have some reasons for saying so. Theycan find some facts which are similar. But there are alsoenormous differences. These differences are not in thepolitical structure which prevailed in the second part ofthe third century. Then, on the average of every three

104 ECONOMIC POLICY

years, an emperor was assassinated, and the man whokilled him or had caused his death became his successor.After three years, on the average, the same happened tothe new emperor. When Diocletian, in the year 284, be-came emperor, he tried for some time to oppose thedecay, but without success.

There are enormous differences between present-dayconditions and those that prevailed in Rome, in that themeasures that caused the disintegration of the RomanEmpire were not premeditated. They were not, I wouldsay, the result of reprehensible formalized doctrines.

In contrast, however, the interventionist ideas, the so-cialist ideas, the inflationist ideas of our time, have beenconcocted and formalized by writers and professors.And they are taught at colleges and universities., Youmay say: "Today's situation is much worse." I will an-swer: "No, it is not worse." It is better, in my opinion,because ideas can be defeated by other ideas. Nobodydoubted, in the age of the Roman emperors, that thegovernment had the right and that it was a good policyto determine maximum prices. Nobody disputed this.

But now that we have schools and professors andbooks that recommend this, we know very well that thisis a problem for discussion. All these bad ideas fromwhich we suffer today, which have made our policiesso harmful, were developed by academic theorists.

A famous Spanish author* spoke about "the revolt ofthe masses." We have to be very cautious in using thisterm, because this revolt was not made by the masses: itwas made by the intellectuals. And those intellectualswho developed these doctrines were not men from themasses. The Marxian doctrine pretends that it is only the

*Jose Ortega y Gasset

Policies and Ideas 105

proletarians that have the good ideas and that only theproletarian mind created socialism, but all the socialistauthors, without exception, were bourgeois in the sensein which the socialists use this term.

Karl Marx was not a man from the proletariat. He wasthe son of a lawyer. He did not have to work to go to theuniversity. He studied at the university in the same wayas do the sons of well-to-do people today. Later, and forthe rest of his life, he was supported by his friend Fried-rich Engels, who—being a manufacturer—was the worsttype of "bourgeois," according to socialist ideas. In thelanguage of Marxism, he was an exploiter.

Everything that happens in the social world in ourtime is the result of ideas. Good things and bad things.What is needed is to fight bad ideas. We must fight allthat we dislike in public life. We must substitute betterideas for wrong ideas. We must refute the doctrines thatpromote union violence. We must oppose the confisca-tion of property, the control of prices, inflation, and allthose evils from which we suffer.

Ideas and only ideas can light the darkness. Theseideas must be brought to the public in such a way thatthey persuade people. We must convince them that theseideas are the right ideas and not the wrong ones. Thegreat age of the nineteenth century, the great achieve-ments of capitalism, were the result of the ideas of theclassical economists, of Adam Smith and David Ricardo,of Bastiat and others.

What we need is nothing else than to substitute betterideas for bad ideas. This, I hope and am confident, willbe done by the rising generation. Our civilization is notdoomed, as Spengler and Toynbee tell us. Our civiliza-tion will not be conquered by the spirit of Moscow. Ourcivilization will and must survive. And it will survive

106 ECONOMIC POLICY

through better ideas than those which now govern mostof the world today, and these better ideas will be devel-oped by the rising generation.

I consider it as a very good sign that, while fifty yearsago, practically nobody in the world had the courage tosay anything in favor of a free economy, we have now,at least in some of the advanced countries of the world,institutions that are centers for the propagation of a freeeconomy, such as, for example, the "Centro" in yourcountry which invited me to come to Buenos Aires to saya few words in this great city.

I could not say much about these important matters.Six lectures may be very much for an audience, but theyare not enough to develop the whole philosophy of afree economic system, and certainly not enough to refuteall the nonsense that has been written in the last fiftyyears about the economic problems with which we aredealing.

I am very grateful to this center for giving me theopportunity to address such a distinguished audience,and I hope that in a few years the number of those whoare supporting ideas for freedom in this country, and inother countries, will increase considerably. I myself havefull confidence in the future of freedom, both politicaland economic.

Index

Anti-capitalistic mentality, 6,9,82

Argentina, ix-x, xiii, 25-26, 82

Bastiat, Fr&teric, 20,105Benegas Lynch, Alberto, xiiiBismarck, Prince Otto von, 8Briining, Heinrich, 47

Capitalism, viii-ix, 1-15, 26-27,29

Centro de Difusi6n de EconomiaLibre, 17,106

Centro de Estudios sobre la Li-bertad, 17n

Churchill Winston, 48-49Civilizations, 101Classes, castes, status society, 1-

2, 23-28Cleveland, Grover, 66Competition, freedom of, 4-5Consumer/customer sover-

eignty, 1,4,19-21, 36,77Controls of prices/rents, 41-47,

50-51,102-103

Devaluation, 68-70Developing countries and invest-

ment, 75-81, 84-89Dictatorship, 100-101Diocletian, Emperor, 41, 42,104

Du Barry, Mme. Marie JeanneBecu, 63

Economic calculation, 32-34Economic freedom, 17,49-50,75Engels, Friedrich, 105Entrepreneurs and economic pro-

gress, 11-12, 29-30

Foch, General Ferdinand, 30Ford, Henry, 12,27Foreign aid, 80-81Foreign investment, 75-91Franklin, Benjamin, 7Freedom, 18-19, 22-23Freedom of speech/press, 18,22-

23,104-106French history/revolution, 24-

25,41-42,56, 63, 81-82,97

Germany, 19th century, 8, 79-80,90

Germany, World War I to 1923,30,46, 62-65

Germany, World War II, viii-ix,15, 22, 47, 49, 53,101

Goering, Hermann, 47Gold, 55, 65-66, 67Government planning, 28-36Government, limited role of, vii-

ix, 37-38,40, 93-95, 99,100

107

108Government spending, 38-39,

57-62Great Britain, 2, 6-8, 46-^7, 48-

49, 67-68, 75-80, 83, 88-89Guillotin, Joseph Ignace, 42

Hindenburg, Plan, 46Hitler, Adolf, ix, 22, 47, 53Hoff, Trygve, 34

Ideas, role of, 93-106India, 14, 8S-84Industrial Revolution, 6-8Inflation, 41-46, 55-73,102-103Interventionism, 37-54, 96-100,

102,104

Keynes, John Maynard, 63, 65,69-70

Koether, George, xv

Labor, wages, unions, 12-14, 67-71, 76-78, 87-90

Lange, Oskar, 34Lenin, Nikolai, 29

Machlup, Fritz, quoted, xiiiMarx, Karl, 10,12-14, 23, 29, 33,

105McKinley, William, 66Mexico, 82"Middle-of-the-road/' 51-52Migration, 88-89Mises, Ludwig von, vii-viii, x, xiMises, Margit von, xiii-xvMixed economy, 38

Napoleon Bonaparte, 30Nationalizations, expropriations,

49, 82-84Necker, Jacques, 56-57Nehru, Jawaharlal, 83-84

INDEX

Pareto, Vilfredo, 26Peron, Juan, Eva & Isabelita, ix-

x, xiii, 54Politics and ideas, 93-106Pompadour, Mme. Jeanne Anto-

inette Poisson de, 63Population, 2, 5, 7, 88Potter, Beatrice (Lady Passfield,

Mrs. Sidney Webb), 20Pre-capitalism, 2-3, 6-7, 24Pressure groups, special privi-

leges, 96-100Protectionism, trade barriers, 51-

52, 86-87, 98

Ricardo, David, 78,105Robespierre, Maximilien

Frangois Marie de, 42Roman Empire, 41,101-

104Rousseau, Jean Jacques, 19Russia, 34-36, 54, 81-82

Savings, capital investment, 11,14-15, 76-81, 84-88

Slavery, serfdom, 23-24Smith, Adam, 105Socialism, 13, 17-36, 46-49Sombart, Werner, 53-54Speenhamland system, 8Spencer, Herbert, 79-80Spengler, Oswald, 101,105Stael, Mme. Anne Louise Ger-

maine Necker de, 56Stalin, Joseph, ix

Taxation, 84Toynbee, Arnold, 101,105

United Fruit Co., 89United Nations, 85United States, 84, 96-97

Ortega y Gasset, Jose, 104n Van Gogh, Vincent, 31-32