Economic Policy Thoughts for Today and Tomorrow-OCR

8/13/2019 Economic Policy Thoughts for Today and Tomorrow-OCR

1/122

Economic PolicyThoughts for Today and Tomorrow

Third Edition

Ludwig von Mises

Ludwigvox Mises

InstituteAUBURN, ALABAMA


2/122

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


3/122

Contents

Introduction by Bettina Bien Greaves . V11

F oreroord by Margit von Mises . . . . X111

1st Lecture C a p i t a l i s m . . . . . . .

2nd Lecture Socialism. . . . . . . . . 173rd Lecture In te rvent ion ism. . . . . 37

4th Lecture I n f l a t i o n . . . . . . . . . . 55

5th Lecture Fo r ei gn In vestment . . . 75

6th Lecture Po l ic ies and Ideas. . . . 93

Index 107


4/122


5/122

Introduction

The ideal economic policy, both for today and tomorrow, is very simple. Government should protect and defend against domestic and foreign aggression the livesand property of the persons under its jurisdiction, settledisputes that arise, and leave the people otherwise free

to pursue their various goals and ends in life. This is aradical idea in our interventionist age. Governments today 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 for

the sick and the elderly, to support the profligate, andso on and on and on.Ideally government should be a sort of caretaker, not

of the people themselves, but of the conditions whichwill allow individuals, producers, traders, workers, entrepreneurs, 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 essence is the message of Professor Ludwig von Mises inthis small volume.

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


6/122

V111 ECONOMIC POLICY

tury's f oremost economists. He was the author of profound theoretical books such a Human Action, Socialism,Theory and History, and a dozen other works. However,in these lectures, deliv ered in A r g en tina in 1959, hespoke in nontechnical terms suitable for his audience ofbusiness pr ofessionals, pr ofessors, teachers, and s t udents. He illustrates theory with homespun examples.He explains simple truths of history in terms of economic principles. He describes how capitalism destroyedthe hierarchical order of European feudalism, and discusses the political consequences of various kinds ofgovernment, He analyzes the failures of socialism andthe welfare state and shows what consumers and workers 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 advantage of opportunities, and produce. Under these conditions, capitalism will develop. The remarkable economicimprovements of the 18th and 19th centuries and Germany's post-World War II "economic miracle" were due,as Professor Mises explains, to capitalism:

[lln 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 o f the free market economy, of the methods of capitalism, even though they werenot applied completely in all respects. Every country can experience the same "miracle" of economic recovery, although I


7/122

Introduction tx

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

S o we see that the best economic po licy is to l i m i tgovernment to creating the conditions which permit individuals to pursue their own goals and live at peacewith their neighbors. Government's obligation is simply

to protect life and property and to allow people to enjoythe freedom an d o p p or tu nit y t o c oo perate and tr ad ewith one another. In this way government creates theeconomic environment that permits capitalism to flourish:

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 Germany under Hitler, in the U.S.S.R. under Stalin, and inArgentina under Peron it hampers the capitalistic system 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 a

force to be reckoned with. He returned to Argentina in1973, was again elected President and, with his new wifeI sabelita as V i ce P re sident, ru led u n ti l h e d i e d t e nmonths later. His widow, Isabelita, then took over until


8/122

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 accorded 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 Human 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 GREA VESFebruary 1995


9/122

Introduction

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

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

The Free and Prosperous Commonroealth)

Critique o f 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 fhe 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)


10/122


11/122

ForewordThe present book fully reflects tlu author's fi (ndamentnl posi tion for which he was and still is admired byfollowers and reviled by opponents.... While each o f tlu.' six lectures can stand alone as an independent essay, the harmony o f the series gives an aesthetic pleasure similar to til t derived from looking at the architecture o f a well-designed edifice.

Fritz MachlupPrinceton, 1979

Late in 1958, when my husband was invited by Dr. Alberto 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 destructively and completely destroyed Argentina's economic foundations. His successors were not much better.The nation was ready fo r new i deas, and my hu sb andwas 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 withe arphones. Lud wi g vo n M i se s spoke wi th out an y r e


12/122

X1V ECONOMIC POLICY

straint about capitalism, socialism, interventionism, communism, fascism, economic policy and the dangers ofdictatorship. These young people, who listened to myhusband, did not know much about freedom of the market or indivi dual f reedom. As I wrote about this occasionin My Years with Ludwig von Mises, "If anyone in thosetimes would have dared to attack communism and fascism 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 using

comparatively simple terms, he succeeded in communic ating his i dea s to an au di ence not fa mi lia r w it h h i swork, so that they co uld unde rstand exactly wh at hewas saying.

The lectures were taped, and the tapes were later transcribed by a Spanish-speaking secretary whose typedmanuscript I found among my husband's posthumous

papers. 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 man y of Lu dwi g vo n M i ses' mor etheoretical writings. I felt they contained so much valuable 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


13/122

Foreword XV

for me. I have been very careful to keep intact the meaning of every sentence, to change nothing of the contentand to preserve all the expressions my husband often

used which are so familiar to his readers. My only contribution has been to pull the sentences together and takeout some of the little words one uses when talking informally. 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 comprehensibly and lucidly he described the differences between dictatorship and interventionism; with how muchwit he talked about impo rtant his toric personalities; withhow few remarks he succeeded in making bygone timescome alive.

I want to use this opportunity to thank my goodfriend George Ko ether fo r assisting me wit h th i s ta sk.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 avai lable to y o unge r au diences, especially hi ghschool and college students around the world.

MARGIT VON MISESNew York June 1979


14/122


15/122

1st Lecture

Capitalism

Descriptive terms which people use are often quite misleading. 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 they

see practically no difference between the modern headsof industry and t hose feudal ki ngs, dukes or lo rd s 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 market, independent of hi s customers. The chocolate kingor the steel king or the automobile king or any other

king of modern industry depends on the industry heoperates and on th e cus tomers he serves. This "k ing "must stay in the good graces of his subjects, the consumers; he loses his "kingdom" as soon as he is no longer ina position to give his customers better service and provide it at l ow er cost than ot hers wit h w ho m he m u stcompete.

Two hundred years ago, before the advent of capitalism, 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 po or , and i f h e w a s bor n r ich a lord or a


16/122

2 ECONOMIC POLICY

duke he kept his dukedom and the property that wentwith it for the rest of his life.As for manufactur ing, the primi tive processing indus

t ries of t hose days ex isted almost exclusively fo r t h ebenefit of the wealthy. Most of the people (ninety percent 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 developed 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 preservation of the prevailing social system.Today, in discussing similar conditions in places like

India or other developing countries, we must not forgetthat, in e i ghteenth-century En gl and, condi tions wer emuch worse. At that time, England had a population ofsix or seven mi l l ion pe ople, but of those six or sevenmillion people, more than one million, probably two million, were simply poor outcasts for whom the existingsocial system made no provision. What to do with theseoutcasts was one of the great problems of eighteenthcentury England .


17/122

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 indus tr ies 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 absolutely without any ideas on how to improve conditions.

Out of this serious social situation emerged the beginnings 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 products for everyone's needs. And this was the origin ofcapitalism as i t op era tes today. It wa s the beginning o f mass production, the fundamental principle of capitalisticindustry. Wh ereas the old processing indust ries servingthe rich pe opl e in th e ci ti es had existed almost exclusively for the demands of the upper classes, the newcapitalist industries began to produce things that could

be purchased by the general population. It was massproduction to satisfy the needs of the masses.This is the fundamental principle of capitalism as it

exists today in all of those countries in which there is ahighly developed system of mass production: Big business, the target of th e mos t fa na tic attacks by the socalled leftists, produces almost exclusively to satisfy thewants of t h e m a sses. Enterprises pr oducing l u xu rygoods solely for the well -to-do can never attain the magnitude of big businesses. And today, it is the people whowork in large factories who are the main consumers ofthe products made in th ose factories. This is the funda


18/122

4 ECONOMIC POLICY

mental difference between the capitalistic principles ofproduction and the feudalistic principles of the preceding ages.

When people assume, or claim, that there is a difference 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 capitalist countries that the railroad companies were too bigand too powerful; they had a monopoly; it was impossible 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 eliminated competition. What people overlooked was the factthat the power of the railroads depended on their ability

to serve people better than any other method of transportation. Of co urse it w o ul d hav e been ri di cul ous 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 ot her co mp etitors. 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


19/122

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 railroadsin the f or m o f b u s es, au tomobiles, trucks, and a i rplanes has caused the railroads to suffer and to be almost completely de feated, as far as passenger transportation 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 c o m p ar at ively sh ort t i me, t r ansformed th ewhole world. It has made possible an unprecedentedincrease in world population.

In eighteenth-century England, the land could support 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 standard of living in England would probably be still higher,

had not a great deal of the energy of the British beenwasted in w h a t w e re , fr om v a ri ous po ints of v i ew ,avoidable political and military "adventures."

These are the facts about capitalism. Thus, if an Englishman or, for that matter, any other man in any country of the world says today to his friends that he isopposed to capitalism, there is a wonderful way to answer 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


20/122

6 ECONOMIC POLICY

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

In spite of all its benefits, capitalism has been furiouslyattacked and criticized. It is necessary that we understand the or igin of t hi s an ti pathy, It i s a fa ct that th ehatred of capitalism originated not with the masses, not among the workers themselves, but among the landedaristocracy the gentry, the nobility, of England and theEuropean continent. They blamed capitalism for something that was not very pleasant for them: at the beginning 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' standard 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 working 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


21/122

Capitalism 7

and dying. And all the talk about the so-called unspeakable horror of early capitalism can be refuted by a singlestatistic: precisely in these years in which British capitalism 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 doubled, which means that hundreds or thousands of children who would have died in preceding times survived 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 factories that provided for the needs of their workers, eitherdirectly or indirectly by exporting products and importing food and raw materials from other countries. Again

and again, the early historians of capitalism have onecan hardly use a milder word falsified history.

One anecdote they used to tell, quite possibly invented, 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 imports of the food which made the survival of the Britishpopulation possible. Many examples from the history of


22/122

8 ECONOMIC POLICY

those ages will show the attitude of the gentry and aristocracy toward the workers. I want to cite only two examples. One is the famous British "Speenhamland" system. By this system, the British government paid allworkers who did not get the minimum wage (determined 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 agricultural 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 workers to the higher-paying capitalistic industries, inventeda special term for the problem: "flight from the countryside" Lnndflucht. 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 German

Reich, in a speech one day said, "I met a man in Berl inwho 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 industry because industry paid them higher wages and raisedtheir standard of living to an unprecedented degree.


23/122

Capitalism 9

Today, in the capitalist countries, there is relativelylittle difference between the basic life of the so-calledhigher and l o w e r c l asses; both h ave foo d, cl oth ing,and shelter. But in the eighteenth century and earlier,the difference between the man of the middle class andt he man of t h e l o we r c las s was tha t th e ma n o f t h emiddle 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 d r iv e f ro m o n e p o in t t o an ot her. M or ethan fift y p er cent of th e p eo ple i n th e U n i ted Statesare living i n h o us es and ap ar tments they ow n th emselves.

The attacks against capitalism especially with respect to the higher wage rates start from the false assumption that wages are ultimately paid by people whoare different from those who are employed in the factories. Now it is all right for economists and for studentsof economic theories to distinguish between the worker

and the consumer and to m ak e a d i st inction betweenthem. But the fact is that every consumer must, in someway or the other, earn the money he spends, and theimmense major ity o f t h e con sum ers are precisely th esame 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 entrepreneur of a b o x in g m at ch wh o p ay s th e enor mous de


24/122

10 ECONOMIC POLICY

mands of the pr iz e fi ghters; it is the people who p ayadmission 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 responsibility 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 considered it to be the worst of all historical systems, the greatest evil that had ever befallen mankind. That man wasKarl M ar x. N ev er theless, there is no r eason to re jectMarx's term, because it describes clearly the source ofthe great social improvements brought about by capitalism. Those improvements are the result of capital accumulation; 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


25/122

Capitalism

the course of these lectures I will have the opportunityto deal with the most fundamental misapprehensionswhich people have concerning the accumulation of capital, the use of capital, and the universal advantages tobe gained from such use. I will deal with capitalism particularly in m y l e c tu res about fo reign in vestment 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: savings mean benefits for all those who are anxious to produce or to earn wages. When a man has accrued a certainamount of money let us say, one thousand dollarsand, instead of spending it, entrusts these dollars to asavings bank or an insurance company, the money goesinto the hands of an entrepreneur, a businessman, enabling him t o g o ou t an d e mbark on a p r oj ect wh ic hcould not have been embarked on yesterday, because therequired capital was unavailable.

What wi ll th e b u si nessman do now w i t h th e ad ditional capital? The first thing he must do, the first use

he 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 develop, 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 wor ker, 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


26/122

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 " i n v ent ed" po lic y wa s the result of th eliberality of M r . Ford . A new b r anch of bu siness, or anew factory in an a l ready exi sting branch of business,has to attract workers from other employ ments, fromother parts of the country, even from other countries.And the onl y w a y t o d o t hi s is to of fer the w or ker shigher wages for their work. fhis 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 percentage of these new workers had earned nothing at all before that and were prepared to take anything they wereoffered. But after a short time when more and more

capital was accumulated and more and more new enterp rises were developed wage rates went up , and t h eresult was the unprecedented increase in British population 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 th e co mi ng o f soc ialism wasbased on t h e a ss ump tion t ha t w o r ke rs zvere gettingpoorer, that the masses were becoming more destitute,a nd that fi nally all th e we alth of a cou ntry w o ul d beconcentrated in a few hands or in the hands of one man


27/122

Capitalism 13

only. An d t he n th e m as ses of i m po veri shed wo rk ersw ould fi na lly r ebel and exp ro pri ate the ri ches of th ewealthy proprietors. According to this doctrine of KarlMarx, there can be no opportunity, no possibility withinthe capitalistic system for any impr ovement of the conditions of the workers .

In 1864, speaking before the International Workingmen'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 ter m w h ic h Ka rl M ar x co uld us e.He suggested that the unions set themselves a new, revo lutionary goal: that they "do away with the wage system

altogether," that they substitute "socialism" government ownership of the means of production for thesystem of private ownership.

If we look upo n th e hi story of the wo rl d, and especially upon the history of England since 1865, we realizethat Marx was wrong in every respect. There is no western, capitalistic count ry in w h ich th e condi tions of th e

masses have not i m pr oved i n an u n precedented wa y.All these improvements of the last eighty or ninety yearswere made in spite o f the prognostications of Karl Marx .For the Marxian socialists believed that the conditionsof the workers could never be ameliorated. They followed a false theory, the famous "iron law of wages"the law which stated that a worker's wages, under capitalism, would not exceed the amount he needed to sustain 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 w i l l h av e m or e ch i ldr en; and


28/122

14 ECONOMIC POLICY

these children, when they enter the labor force, will increase the num ber of w o r kers to th e po int wh ere th ewage rates will drop, bringing the workers once moredown to the su bs istence level to that mi ni mal sustenance 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 soin studying the life of animals. Of mice, for instance.

If you increase the quantity of food available for animal organisms or for microbes, then more of them wills urvive. And i f y o u r e st rict their fo od, then you w i l lrestrict thei r numbers. But man i s d i ff erent. Even theworker in spite of the fact that Marxists do not acknowledge 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 average standard o f 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 standard

of living depends on the supply of capital. This explainsthe difference between conditions in the United Statesand conditi ons in I n d ia ; mo dern me thods of fi gh tin gcontagious diseases have been introduced in India atleast, to some extent and the effect has been an unprecedented increase in population but, since this increase in population has not been accompanied by ac orresponding i n cr ease in th e a m ou nt of c a pi tal i nvested, the result has been an increase in poverty. Acountry becomes more prosperous in proportion to the rise inthe invested capital per unit o f its population.

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


29/122

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 explanat ion .

But you have to remember that, in economic policies,there are no m i r ac les. You have read in m an y n e w s papers and speeches, about the so-called German economic 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 the free market economy, of the methods of capitalism, eventhough they were not applied completely in all respects.Every country can experience the same "miracle" of economic recovery, al tho ugh I m u s t i n sist that economicrecovery does not come from a miracle; it comes from theadoption of and is the result of sound economic policies.


30/122


31/122

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 answer is simple: it is the market economy, it is the systemin which the cooperation of individuals in the social division 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 individuals contribute to the total workings of society.

In dealing with this system of economic organization the market economy we employ the term "economic freedom." Very often, people misunderstand

what it means, believing that economic freedom is something quite apart from other freedoms, and that theseo ther freedoms which they ho ld t o b e m or e i m p o rtant can be preserved even in the absence of economic

freedom. 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 cou rse not mean t in an y se nse wh ich so

'Later the Centro de Estudios sobre la Libertad

17


32/122

18 ECONOMIC POLICY

m any peopl e att ach to th e w or d f r eedom to day; it i smeant rather in the sense that, through economic freedom, 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 beings, 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 precisely the opposite of those policies which the liberals ofthe nineteenth century advocated in their liberal programs. 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 d irects 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 ow ns al l th e p r i nt ing presses, it wi lldetermine what is to be printed and what is not to beprinted. And i f t h e g ov ernm ent own s all the pr in tin gp resses and d e te rmi nes w ha t s hal l o r s h al l no t beprinted, then the possibility of printing any kind of opposing arguments against the ideas of the governmentbecomes practically nonexistent. Freedom of the pressdisappears. And i t i s th e same wit h al l th e other fr eedoms.

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


33/122

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 order

people whom it dislikes, whom it does not want to livei n certain re gions, to mov e int o o the r re gions and t oother 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 freedom. Freedom means something only within the framework of society. The eighteenth-century authors of

"natural law" above all, Jean Jacques Rousseau believed that once, in the remote past, men enjoyed something 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 not

born 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 s oci ety means tha t a ma n d epe nds asmuch upon other people as other people depend uponhim. Society under the market economy, under the conditions of "economia libre," means a state of affairs inwhich everybody serves his fellow citi zens and is servedby them in return. People believe that there are in them arket economy b osses who are i nde pendent of t h egood will and support of other people. They believe that


34/122

20 ECONOMIC POLICY

the captains of industry, the businessmen, the entrepreneurs are the real bosses in the economic system. Butthis is an illus ion. The real bosses in the economic systemare the consumers. And if the consumers stop patronizing a branch of business, these businessmen are eitherforced to abandon their eminent position in the economic 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 Sidney Webb. This lady was the daughter of a wealthy businessman 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 the

orders issued by my f a ther, 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 th e great French economist Frederic Bastiat,who titled one of his brilliant essays: "Ce qu'on voit et ce qu'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 attention

to 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


35/122

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 right to 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 mistakes. If we sa y th e co nsumer is supreme or that th econsumer is sovereign, we do not say that the consumeris free from faults, that the consumer is a man who always 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 controlling their consumption is false. The idea of government as a paternal authority, as a guardian for everybody, isthe idea of t h ose wh o f av or socialism. In th e U n i te dStates some years ago, the government tried what wascalled "a noble experiment." This noble experiment was

a law making it illegal to buy or sell intoxicating bevera ges. It is ce rtainly tr ue th at m any pe ople dr in k t o omuch 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


36/122

22 ECONOMIC POLICY

themselves by drinking or smoking too much. But onceyou have ad mi tted th is, other people wi ll say : Is th ebody every thing? Is not the min d of ma n m uc h mor eimportant? Is not the mind of man the real human endowment, the real human quality? If you give the government 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 governments 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 between good and bad paintings which of course meantgood and bad from the point of view of a man who, inhis youth, had f a il ed th e en trance examination at th e

Academy 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 Fuhrer's.

O nce you begi n to a d mi t th at i t i s th e du ty of t h egovernment to c o nt rol y ou r c on sum ption of al cohol,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 i n w h i c h ou r f e llo w ci ti zens are spendingtheir money and living their lives. We may believe that


37/122

Socialism 23

what they are doing is absolutely foolish and bad, butin a free society, there are many ways for people to airtheir op in ions o n ho w th ei r f e l l ow c i t i zens shouldchange their ways of life. They can write books; they canwrite articl es; 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 always 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 se rv ing h i ms elf. Thi s is w ha t th e l i be ralauthors 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 w a s t hi s do ctr ine of the ha rm ony of i n te restswhich the socialists opposed. They spoke of an "irreconcilable conflict of interests" between various groups.

What does this mean? When Karl Marx in the firstchapter of the Communist Manifesto, that small pamphletwhich i n au gu rated h i s s o ci alist m ovem ent claimedthat there was an irreconcilable conflict between classes,


38/122

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 st atus gr ou ps, w h ic h i n I n di a ar e ca lled"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 Revolution. In other parts of Europe it disappeared even later.

But the wors t for m i n w h i ch se rfdom ex isted andcontinued to exist even after the abolition of slaverywas in the British colonies abroad. The individual inheri ted his st atus f ro m h i s p a r ents, and h e r et ained i t

throughout hi s l i fe. He t r ansferred it t o hi s ch il dren.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, you

could say that there was an "irreconcilable conflict ofinterests between the slave owners and the slaves," because what the slaves wanted was to be rid of their slavery, 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 connected in any special way with the other classes of their


39/122

Socialism 25

own nation; they felt much more at one with the members of their own c lass in other countr ies. A French aristocrat did not look upon lower class Frenchmen as hisfellow citizens; they were the "rabble," which he did notlike. He r eg arded on ly th e a r is tocrats of ot her co untries 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 t hi s l an guage was French, a la ngu agewhich wa s no t u n d er stood, ou tside France, by o th ergroups of the population. The middle classes the bourg eoisie had their o w n la n g ua ge, w h il e t h e l o w e rclasses the peasantry used local di alects 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 aristoc rats, were us ual ly d ressed in th e sam e wa y al l ov erEurope, and you found that the lower classes dresseddifferently. When yo u met so meone in the st reet, youcould see immed ia tely from the way h e d ressed 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 c i ti zen of A r ge ntina and th at 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 differences in weal th, di fferences which Marxians mistakenlyconsider to be equivalent to the old differences that existed between men in the status society.


40/122


41/122

Socialism 27

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

Other people, who were poor at the time this photographer's grandfather became one of Europe's biggest industrialists, 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 wh ich he ha d bo r ro wed fr om hi s fr ie nds, 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 fundamental freedom to choose one's own career. Under socialistconditions, there is only one economic authority, and it


42/122

ECONOMIC POLICY

has the right to determine all matters concerning production.

One of the characteristic features of our day is thatpeople use many names for the same thing. One synonym for socialism and communism is "planning." If people speak of " p l ann ing " the y m ean , of co urse, central planning, which means one plan made by the government-one plan that prevents planning by anyone except thegovernment.

A British lady, wh o al so is a mem ber of the Up pe rHouse, 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 all

the activities of all the people of a nation. Thus, this ladymeans a cent ral pl an w h ich ex cludes all th e pe rsonalplans that individuals may have. Her title Plan or No Plan is therefore an illusion, a deception; the alternativeis not a cen tral plan or no p l an , it is the total plan of acentral governmental authority or freedom for individuals 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, fore xample: "Yesterday I p l an ned to w or k a l l m y l i f e i nCordoba." Now he learns about better conditions in Buenos Aires and cha nges his pl ans, saying: "I nstead ofworking in Cordoba, I want to go to Buenos Aires." Andthat is what freedom means. It may be that he is mistaken, 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.


43/122

Sociatism 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 systemas Karl Marx, Lenin, and all socialist leaders knew andadmitted is the transfer of army ru le to the whole production system. Marx spoke of "industrial armies," andLenin cal led fo r " t h e o rga nization of ev er yt hing 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 th e su pr eme author ity. That w hi ch the supreme d ict ator or his co mmittee does not know, isnot taken into account. But the knowledge which mankind 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 individual 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 kn ow led ge. In capit alist societies, technological 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


44/122

30 ECONOMIC POLICY

when the y d i sc over th at t hi s en ter prise, wh ich th eycalled 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 because 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. Napoleon 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 c on quer En gland?" In o r der to d o t h at, 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 Napoleon did not understand their proposal.Then there was Germany's Genera1stab, the famous

German general staff. Before the First World War, it wasuniversally con sidered to b e u n su rpassed in m i l i ta rywisdom. A similar reputation was held by the staff ofGeneral Foch in France. But neither the Germans nor theFrench who, under th e l eadership of G eneral 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


45/122

SociaIism 31

pelins are important," and the French general staff wasof the same opinion.Later, during the period between World War I and

World War II, there was a general in the United Stateswho was convinced that aviation would be very important 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 ne ver su cceed. This is t ru e al so of n on economicproblems.

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 these

artists 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 rarely

have 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 writers have of ten ha d t o e n d ur e gr eat ha rdships. 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


46/122

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 certainly would not have regarded as artists at all) whetherthis young man, half or completely crazy, was really apainter wo rt hy t o b e s up por ted. And th ey w i th out 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 it!u

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 somewhat 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, bus inessmen also must do so . An d b us inessmen'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 information to businessmen about the factors of production, themain function of the market being not merely to determine the cost of the last part of the process of production

and 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


47/122

Socialism 33

nessmen who vie with each other in bidding for the factors 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 useless

all 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 sc iences, are equa lly fe asible, but i t t akes th emarket-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 fundamental issue of capitalistic economic calculation as opposed 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 market and with it, of course, the market economy, and substitute for it a system without prices and without mar

kets." They w a nt ed t o ab ol ish w ha t M ar x c al led th e"commodity character" of commodities and of labor.

When faced w it h t hi s new pr ob lem, the authors ofsocialism, having no answer, finally said: "We will not


48/122

34 ECONO MIC POLICY

abolish the ma rket al together; we w i l l p r et end th at amarket exists; we wil l p la y m ar ket, lik e chi ldren wh oplay school." But everyone knows that when childrenplay school, they do not learn anything. It is just an exercise, a game, and you can "play" at many things.

This is a very difficult and compl icated p roblem andin order to dea l w it h i t i n f ul l on e needs a li ttle mor etime than I have here. I have explained it in detail inmy writings. In six lectures I cannot enter into an analysis of all its aspects. Therefore, I want to advise you, ifyou are interested in the fundamental problem of theimpossibility of calculation and planning under socialism, 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 Tr ygve H of f, wh o w r ot e 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 economistQskar Lange, wh o a t on e t im e was a p r ofessor 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 factors of production, for all raw materials, for everything.They can therefore employ, for their planning, the foreign prices of the world market. And because there are certaindifferences between conditions in Russia and those in

United States, the result is very often that the Russiansconsider something to be justified and advisable fromtheir economic point of v iew that the Americans wouldnot consider economically justifiable at all.


49/122

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 calculation. But are we entitled to speak of it as an experiment? 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 requires

that you do the same thing under various conditions, orthat you maintain the same conditions, changing perhaps only one factor. For instance, if you inject into acancerous animal some experimental medication, the result 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 them

with 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 experiments 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 yo u t el l thi s to a so cialist, he wi ll say :" Things are w on de rfu l i n R us sia." An d yo u t el l h i m :"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 experiment. You mus t t hen say th is (w hic h wo ul d be m u ch


50/122


51/122

3rd Lecture

Interventionism

A famous, very often quoted phrase says: "That government is best, which governs least." I do not believe thisto be a co rrect description of th e func tions of a goodgovernment. Government ought to do all the things forwhich it i s n ee ded and fo r w h ic h i t w a s established.

Government ought to protect the individuals within thecountry ag ainst the vi ol ent and f r au du lent attacks ofgangsters, and it should defend the country against foreign enemies. These are the functions of governmentwithin a free system, within the system of the marketeconomy.

Under socialism, of course, the government is totalitarian, and there is nothing outside its sphere and its

jurisdiction. 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 no t ag ree wi th th is def ini tion of th efunctions 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 p u r po ses, but tha t I w o ul d ne ver theless notd rink gasoline because I th in k th at w o ul d n o t b e th eright use for it, I am not an enemy of gasoline, and I do

37


52/122

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 presentday 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 government.That some of these institutions and enterprises are

operated 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 railroads has to hire people who have to work in theseenterprises. It al so ha s to bu y th e ra w ma ter ials 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


53/122

Interventionism 39

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

It is certainly different for an individual. The individual's power to operate something with a deficit is verylimited. If the deficit is not very soon eliminated, and ifthe enterprise does not become pr of itable (or at l ea stshow 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 government to operate an enterprise at a loss that is, in a lessefficient way than it would be done by a private institu

t ion and if th e p u b li c w i l l a ccept th is loss, then ofcourse the enterprise will continue.In recent years, governments have increased the num

ber of nationali zed inst itu tions 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? Interventionism means thatthe government does not restrict its activity to the preservation of order, or as people used to say a hundredyears ago to "the production of security." Interventionism means that the gover nment wa nts to do m o re . Itwants to interfere with market phenomena.

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


54/122

40 ECONOMIC POLICY

the government necessarily always interferes. If there arepolicemen on th e st reet, the gover nment int erferes. Itinterferes with a robber looting a shop or it prevents aman from stealing a car." But when dealing with interventionism and defining what is meant by interventionism, we ar e sp eak ing ab out gove rnment int erferencewith 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 securityy.)

What we have in mind when we talk about interven

tionism is the government's desire to do ntore than prevent assaults and fraud. Interventionism means that thegovernment no t onl y f a il s to protect the smooth functioning of the market economy, but that it interferes withthe various market phenomena; it interferes with prices,with wage ra tes, interest rates, and profi ts.

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 arrogate 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 refer to price control.


55/122

Interventionism 41

G overnments usu ally re sort to p r ic e co ntrol w h enthey have inflated the money supply and people havebegun to co mp lai n ab out th e re sulting ri se in p r i ces.There are many famous historical examples of price control methods that failed, but I shall refer to only two ofthem because, in both these cases, the governments werereally very en ergetic in en forcing or t r yi ng to en fo rcetheir 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 invention of the printing press, even inflation was, let us say,

primitive. It involved debasement of the coinage, especially 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 quan ti ty of m o ney was an incr ease inprices, followed by an edict to control prices. And Roman emperors were not very mild when they enforceda law; they did not consider death too mild a punishment 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 time

a different method was used. The technology for producing 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


56/122

42 ECONOMIC POLICY

press was very efficient. Again, the result was an unprecedented 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 technique of killing citizens. You all remember the famousDoctor J. I. Guillotin (1738-1814), who advocated the useof the guillotine. Despite the guillotine the French alsofailed with their laws of maximum prices. When Robespierre 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 was

the French Revolution. Nevertheless, price control measures in both ages failed entirely.Now let us analyze the reasons for this failure. The

government hears people complain that the price of milkhas gone up. And milk is certainly very important, especially for the rising generation, for children. Consequently, the government declares a maximum price formilk, a maximum price that is lower than the potentialmarket price would be. Now the government says: "Certainly 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 to

buy it at the lower price which the government has decreed. And on the ot her hand some of the pr od ucers,those producers of milk who are producing at the highest cost that is, the marginal producers are now suf


57/122

interventionism 43

fering losses, because the price which the governmenthas decreed is lower than their costs. This is the important point in the market economy. The private entrepreneur, 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 ot 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-decreed price cannot buy it . A n ot her result w il l be thatanxious people will hurry to be first at the shops. They

have to wait outside. The long lines of people waiting atshops always appear as a famil iar phenomenon in a cityin which the government has decreed maximum pricesfor commodities that the government considers as important. 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 control? The government is disappointed. It wanted to increase the satisfaction of the milk drinkers. But actuallyit has dissatisfied them. Before the government interfered, 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 children 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


58/122

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 th e g ov er nment d oes , the f act r em ains,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 answ er: "W e cannot do i t , s ince the costs ofproduction are higher than the maximum

Economic Policy Thoughts for Today and Tomorrow-OCR

Documents

Transcript of Economic Policy Thoughts for Today and Tomorrow-OCR