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Introduction
The ideal economic policy, both for today and tomorrow, is very
simple. Government should protect and defend against domestic and foreign
aggression the lives and property of the persons under its jurisdiction, settle
disputes that arise, and leave the people otherwise free to pursue their various
goals and ends in life. This is a radical 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 to lower the prices of others,
to fix wages, to help some businesses 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, and so on and on and on.
Ideally government should be a sort of caretaker, not of the people
themselves, but of the conditions which will allow individuals, producers,
traders, workers, entrepreneurs, savers, and consumers to pursue their own
goals in peace. If government does that, and no more, the people will be able to
provide for themselves much better than the government possibly could. This in
essence is the message of Professor Ludwig von Mises in this small
volume.
Professor Mises (1881-1973) was one of the 20th century's foremost
economists. He was the author of profound theoretical books such as
Human Action, Socialism, Theory and History, and a dozen other works.
However, in these lectures, delivered in Argentina in 1959, he spoke in
nontechnical terms suitable for his audience of business professionals,
professors, teachers, and students. He illustrates theory with homespun
examples. He explains simple truths of history in terms of economic
principles. He describes how capitalism destroyed the hierarchical order of
European feudalism, and discusses the political consequences of various
kinds of government. He analyzes the failures of socialism and the welfare state
and shows what consumers and workers can accomplish when they are free
under capitalism to determine their own destinies.
When government protects the rights of individuals to do as they wish, so
long as they do not infringe on the equal freedom of others to do the same, they
will do what comes naturally-work, cooperate, and trade with one 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 economic improvements of the 18th and
19th centuries and Germany'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 in many newspapers and
speeches, about the so-called German economic miracle-the recovery of Germany
after its defeat and destruction in the Second World War. But this was no
miracle. It was the application of the principles of the free market
economy, of the methods of capitalism, even though they were not applied
completely in all respects. Every country can experience the same "miracle"
of economic recovery, although I must insist that economic recovery does not
come from a miracle; it comes from the adoption of-and is the result
of-sound economic policies. (p. 15)
So we see that the best economic policy is to limit government to
creating the conditions which permit individuals to pursue their own goals
and live at peace with their neighbors. Government's obligation is simply to
protect life and property and to allow people to enjoy the freedom and
opportunity to cooperate and trade with one another. In this way government
creates the economic environment that permits capitalism to
flourish:
The
development of capitalism consists in everyone's having the right to serve the
customer better and/or more cheaply. And this method, this principle, has,
within a comparatively short time, transformed the whole world. It has made
possible an unprecedented increase in world population. (p. 5)
When government assumes authority and power to do more than this, and
abuses that authority and power, as it has many times throughout history-notably
in Germany under Hitler, in the U.S.S.R. under Stalin, and in Argentina
under Per?n-it hampers the capitalistic system and becomes destructive of
human freedom.
Dictator Juan Per?n, elected President in 1946, was in exile when Mises
visited Argentina in 1959, having been forced out of the country in 1955. His
wife, the popular Eva, had died earlier, in 1952. Although Per?n was out of the
country, he had many supporters and was still a force to be reckoned with. He
returned to Argentina in 1973, was again elected President and, with his new
wife Isabelita as Vice President, ruled until he died ten months later. His
widow, Isabelita, then took over until her administration, charged with corruption, was finally ousted in 1976.
Argentina has had a series of Presidents since then and has made some strides
toward improving her economic situation. Life and property have been
accorded greater respect, some nationalized industries have been sold to
private buyers, and the inflation has been 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. Newcomers to his ideas would do well, however, to start with
some of his simpler books such as Bureaucracy, or The
Anti-Capitalistic Mentality. With this background, readers will find
it easier to grasp the
principles of the free market and the economic theories of the Austrian school
that Mises presents in his major works.
--BETTINA BIEN GREAVES,
February 1995
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1st Lecture
Capitalism
Descriptive terms which people use are often quite misleading. In
talking about modern captains of industry and leaders of big business, for
instance, they call a man a "chocolate king" or a "cotton king" or an
"automobile king." Their use of such terminology implies that they see
practically no difference between the modern heads of industry and those feudal
kings, dukes or lords of earlier days. But the difference is in fact very great,
for a chocolate king does not rule at all, he serves. He does not reign
over conquered territory, independent of the market, independent of his
customers. The chocolate king-or the steel king or the automobile king or any
other king of modern industry-depends on the industry he operates and on the
customers he serves. This "king" must stay in the good graces of his subjects,
the consumers; he loses his "kingdom" as soon as he is no longer in a
position to give his customers better service and provide it at lower cost
than others with whom he must compete.
Two hundred
years ago, before the advent of capitalism, a man's social status was fixed
from the beginning to the end of his life; he inherited it from his ancestors, and it never changed. If he was
born poor, he always remained poor, and if he was born rich-a lord or a duke-he
kept his dukedom and the property that went with it for the rest of his
life.
As for manufacturing, the primitive processing industries of those
days existed almost exclusively for the benefit of the wealthy. Most of the
people (ninety percent or more of the European population) worked the land
and did not come in contact with the city-oriented processing industries. This
rigid system of feudal society prevailed in the most developed areas of Europe
for many hundreds of years.
However, as the rural population expanded, there developed a surplus
of people on the land. For this surplus of population without inherited land or
estates, there was not enough to do, nor was it possible for them to work in the
processing industries; the kings of the cities denied them access. The numbers
of these "outcasts" continued to grow, and still no one knew what to do with
them They were, in the full sense of the word, "proletarians," outcasts whom the
government could only put into the workhouse or the poorhouse. In some sections
of Europe, especially in the Netherlands and in England, they became so numerous
that, by the eighteenth 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 forget that, in eighteenth-century England,
conditions were much worse. At that time, England had a population of six or
seven million people, but of those six or seven million people, more than one
million, probably two million, were simply poor outcasts for whom the
existing social system made no provision. What to do with these outcasts was one
of the great problems of eighteenth-century England.
Another great problem was the lack of raw materials. The British, very
seriously, had to ask themselves this question: what are we going to do in the
future, when our forests will no longer give us the wood we need for our
industries and for heating our houses? For the ruling classes it was a desperate
situation. The statesmen did not 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 persons among those outcasts, among those
poor people, who tried to organize others to set up small shops which could
produce something. This was an innovation. These innovators did not produce
expensive goods suitable only for the upper classes; they produced cheaper
products for everyone's needs. And this was the origin of capitalism as it
operates today. It was the beginning of mass production, the fundamental
principle of capitalistic industry. Whereas the old processing industries
serving the rich people in the cities had existed almost exclusively for
the demands of the upper classes, the new capitalist industries began to produce
things that could be purchased by the general population. It was mass production
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 a highly developed system of mass
production: Big business, the target of the most fanatic attacks by the
so-called leftists, produces almost exclusively to satisfy the wants of the
masses. Enterprises producing luxury goods solely for the well-to-do can never
attain the magnitude of big businesses. And today, it is the people who
work in large factories who are the main consumers of the products made in those
factories. This is the fundamental difference between the capitalistic
principles of production 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 the products of big businesses, they are badly
mistaken. In American department stores you hear the slogan, "the customer is
always right." And this customer is the same man who produces in the factory
those things which are sold in the department stores. The people who think that
the power of big business is enormous are mistaken also, since big business
depends entirely on the patronage of those who buy its products: the biggest
enterprise loses its 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 big and too powerful; they had a
monopoly; it was impossible to compete with them. It was alleged that, in
the field of transportation, capitalism had already reached a stage at which it
had destroyed itself, for it had eliminated competition. What people
overlooked was the fact that the power of the railroads depended on their
ability to serve people better than any other method of transportation. Of
course it would have been ridiculous to compete with one of these big railroad
companies by building another railroad parallel to the old line, since the old
line was sufficient to serve existing needs. But very soon there came other
competitors. Freedom of competition does not mean that you can succeed simply by
imitating or copying precisely what someone else has done. Freedom of the press
does not mean that you have the right to copy what another man has written and
thus to acquire the success which this other man has duly merited on account of
his achievements. It means that you have the right to write something different.
Freedom of competition concerning railroads, for example, means that you are
free to invent something, to do something, which will challenge the railroads
and place them in a very precarious competitive situation.
In the United States the competition to the railroads-in the form of
buses, automobiles, trucks, and airplanes-has caused the railroads to
suffer and to be almost completely defeated, as far as passenger
transportation is concerned.
The development of capitalism consists in everyone's having the right to
serve the customer better and/or more cheaply. And this method, this principle,
has, within a comparatively short time, transformed the whole world. It has made
possible an unprecedented increase in world population.
In eighteenth-century England, the land could support only six
million people at a very low standard of living. Today more than fifty million
people enjoy a much higher standard of living than even the rich enjoyed
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 been wasted in what were, from various points of view, 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 is opposed to capitalism, there is a wonderful way to
answer him: "You know that the population of this planet is now ten times
greater than it was in the ages preceding capitalism; you know that all men
today enjoy a higher standard of living than your ancestors did before the age
of capitalism. But how do you know that you are the one out of ten who would
have lived in the absence of capitalism? The mere fact that you are living today
is proof that capitalism has succeeded, whether or not you consider your
own life very valuable."
In spite of all its benefits, capitalism has been furiously attacked and
criticized. It is necessary that we understand the origin of this
antipathy. It is a fact that the hatred of capitalism originated not with the
masses, not among the workers themselves, but among the landed aristocracy-the
gentry, the nobility, of England and the European continent. They blamed
capitalism for something that was not very pleasant for them: at the
beginning of the nineteenth century, the higher wages paid by industry to
its workers forced the landed gentry to pay equally higher wages to their
agricultural workers. The aristocracy attacked the industries by
criticising the standard of living of the masses of the workers.
Of course-from our viewpoint, the workers' standard of living was
extremely low; conditions under early capitalism were absolutely shocking, but
not because the newly developed capitalistic industries had harmed the workers.
The people hired to work in factories had already been existing at a
virtually subhuman level.
The famous old story, repeated hundreds of times, that the factories
employed women and children and that these women and children, before they were
working in factories, had lived under satisfactory conditions, is one of
the greatest falsehoods of history. The mothers who worked in the factories had
nothing to cook with; they did not leave their homes and their kitchens to go
into the factories, they went into factories because they had no kitchens, and
if they had a kitchen they had no food to cook in those kitchens. And the
children did not come from comfortable nurseries. They were starving and dying.
And all the talk about the so-called unspeakable horror of early capitalism
can be refuted by a single statistic: precisely in these years in which British
capitalism developed, precisely in the age called the Industrial Revolution
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 preceding times were very
unsatisfactory. It was capitalist business that improved them. It was precisely
those early factories that provided for the needs of their workers, either
directly or indirectly by exporting products and importing food and raw
materials from other countries. Again and again, the early historians of
capitalism have-one can hardly use a milder word-falsified history.
One anecdote they used to tell, quite possibly invented, involved
Benjamin Franklin. According to the story, Ben Franklin visited a cotton mill in
England, and the owner of the mill told him, full of pride: "Look, here are
cotton goods for Hungary." Benjamin Franklin, looking around, seeing that
the workers were shabbily dressed, said: "Why don't you produce also for your
own workers?"
But those exports of which the owner of the mill spoke really 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 continental Europe.
There was a shortage of food in England, and food had to be imported from
Poland, from Russia, from Hungary. These exports were the payment for the
imports of the food which made the survival of the British population
possible. Many examples from the history of 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 all workers who did not get the minimum wage
(determined by the government) the difference between the wages they
received and this minimum wage. This saved the landed aristocracy the trouble of
paying higher wages. The gentry would pay the traditionally low
agricultural wage, and the government would supplement it, thus keeping
workers from leaving rural occupations to seek urban factory
employment.
Eighty years later, after capitalism's expansion from England to
continental Europe, the landed aristocracy again reacted against the new
production system. In Germany the Prussian Junkers, having lost many
workers to the higher-paying capitalistic industries, invented a special
term for the problem: "flight from the countryside"-Landflucht. And
in the German Parliament, they discussed what might be done against this
evil, as it was seen 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 Berlin who once had worked on my estate, and I
asked this man, 'Why did you leave the estate; why did you go away from the
country; why are you now living in Berlin?'" And according to Bismarck, this man
answered, "You don't have such a nice Biergarten in the village as we
have here in Berlin, where you can sit, drink beer, and listen to music." This
is, of course, a story told from the point of view of Prince Bismarck, the
employer. It was not the point of view of all his employees. They went into
industry because industry paid them higher wages and raised their standard
of living to an unprecedented degree.
Today, in the capitalist countries, there is relatively little difference
between the basic life of the so-called higher 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 and the man of the lower class
was that the man of the middle class had shoes and the man of the lower class
did not have shoes. In the United States today the difference between a
rich man and a poor man means very often only the difference between a Cadillac
and a Chevrolet. 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. More than fifty percent of the people in the United States are living
in houses and apartments they own themselves.
The attacks against capitalism-especially with respect to the higher
wage rates-start from the false assumption that wages are ultimately paid
by people who are different from those who are employed in the factories.
Now it is all right for economists and for students of economic theories to
distinguish between the worker and the consumer and to make a distinction
between them. But the fact is that every consumer must, in some way or the
other, earn the money he spends, and the immense majority of the consumers are
precisely the same people who work as employees in the enterprises that produce
the things which they consume. Wage rates under capitalism are not set by a
class of people different from the class of people who earn the wages; they are
the same people. It is not the Hollywood film corporation that
pays the wages of a movie star; it is the people who pay admission to the
movies. And it is not the entrepreneur of a boxing match who pays
the enormous demands of the prize fighters; it is the people who pay
admission to the fight. Through the distinction between the employer and the
employee, a distinction is drawn in economic theory, but it is not a distinction
in real life; here, the employer and the employee ultimately are one and the
same person.
There are people in many countries who consider it very unjust that a man
who has to support a family with several children will receive the same salary
as a man who has only himself to take care of. But the question is not 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, as an individual,
prepared to pay more for something, let us say, a loaf of bread, if you
are told that the man who produced this loaf of bread has six children? The
honest man will certainly answer in the negative and say, "In principle I would,
but in fact if it costs less I would rather buy the bread produced by a man
without any children." The fact is that, if the buyers do not pay the employer
enough to enable him to pay his workers, it becomes impossible for the employer
to remain in business.
The capitalist system was termed "capitalism" not by a 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 was Karl Marx. Nevertheless, there is no reason to reject Marx's term,
because it describes clearly the source of the great social improvements brought
about by capitalism. Those improvements are the result of capital
accumulation; they are based on the fact that people, as a rule, do not
consume everything they have produced, that they save-and invest-a part of it.
There is a great deal of misunderstanding about this problem and-in the course
of these lectures-I will have the opportunity to deal with the most fundamental
misapprehensions which people have concerning the accumulation of capital,
the use of capital, and the universal advantages to be gained from such use. I
will deal with capitalism particularly in my lectures about foreign
investment and about that most critical problem of present-day politics,
inflation. You know, of course, that inflation exists not only in this country.
It is a problem all over the world today.
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 certain amount of money-let us say, one thousand dollars-and,
instead of spending it, entrusts these dollars to a savings bank or an insurance
company, the money goes into the hands of an entrepreneur, a businessman,
enabling him to go out and embark on a project which could not have been
embarked on yesterday, because the required capital was unavailable.
What will the businessman do now with the additional capital? The
first thing he must do, the first use he will make of this additional capital,
is to go out and hire workers and buy raw materials-in turn causing a
further demand for workers and raw materials to develop, as well as
a tendency toward higher wages and higher prices for raw materials. Long before
the saver or 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 the benefits of the additional
savings.
When the entrepreneur will get something out of the project depends on
the future state of the market and on his ability to anticipate correctly the
future state of the market. But the workers as well as the producers of raw
materials get the benefits immediately. Much was said, thirty or forty years
ago, about the "wage policy," as they called it, of Henry Ford. One of Mr.
Ford's great accomplishments was that he paid higher wages than did other
industrialists or factories. His wage policy was described as an "invention,"
yet it is not enough to say that this new "invented" policy was the result of
the liberality of Mr. Ford. A new branch of business, or a new factory in an
already existing branch of business, has to attract workers from other
employments, from other parts of the country, even from other countries. And the
only way to do this is to offer the workers higher wages for their work. This is
what took place in the early days of capitalism, and it is still taking place
today.
When the manufacturers in Great Britain first began to produce cotton
goods, they paid their workers more than 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 were offered. But after a short
time-when more and more capital was accumulated and more and more new
enterprises were developed-wage rates went up, and the result was the
unprecedented increase in British population which I spoke of
earlier.
The scornful depiction of capitalism by some people as a system designed
to make the rich become richer and the poor become poorer is wrong from
beginning to end. Marx's thesis regarding the coming of socialism was based on
the assumption that workers were getting poorer, that the masses
were becoming more destitute, and that finally all the wealth of a
country would be concentrated in a few hands or in the hands of one man only.
And then the masses of impoverished workers would finally rebel and expropriate
the riches of the wealthy proprietors. According to this doctrine of Karl Marx,
there can be no opportunity, no possibility within the capitalistic system for
any improvement of the conditions of the workers.
In 1864, speaking before the International Working-men's Association in
England, Marx said the belief that labor unions could improve conditions for the
working population was "absolutely in error." The union policy of asking for
higher wage rates and shorter work hours he called
conservative-conservatism being, of course, the most condemnatory term
which Karl Marx could use. He suggested that the unions set themselves a new,
revolutionary goal: that they "do away with the wage system
altogether," that they substitute "socialism"-government ownership of the
means of production-for the system of private ownership.
If we look upon the history of the world, and especially upon the
history of England since 1865, we realize that Marx was wrong in every respect.
There is no western, capitalistic country in which the conditions of the
masses have not improved in an unprecedented way. All these improvements of the
last eighty or ninety years were made in spite of the prognostications of
Karl Marx. For the Marxian socialists believed that the conditions of 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: if the workers' wage
rates go up, raising wages above the subsistence level, they will have more
children; and these children, when they enter the labor force, will
increase the number of workers to the point where the wage rates will drop,
bringing the workers once more down to the subsistence level-to that minimal
sustenance level which will just barely prevent the working population from
dying out. But this idea of Marx, and of many other socialists, is a concept of
the working man precisely 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 animal organisms
or for microbes, then more of them will survive. And if you restrict their food,
then you will restrict their numbers. But man is different. Even the worker-in
spite of the fact that Marxists do not acknowledge it-has human wants other
than food and reproduction of his species. An increase in real wages results not
only in an increase in population, it results also, and first of all, in an
improvement in the average standard of living. That is why today we have
a higher standard of living in Western Europe and in the United States 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 explains the difference between conditions in the
United States and conditions in India; modern methods of fighting contagious
diseases have been introduced in India-at least, to some extent-and the effect
has been an unprecedented increase in population but, since this
increase in population has not been accompanied by a corresponding increase
in the amount of capital invested, the result has been an increase in
poverty. A country becomes more prosperous in proportion to the rise in the
invested capital per unit of its population.
I hope that in my other lectures I will have the opportunity to deal
in greater detail with these problems and will be able to clarify them, because
some terms-such as "the capital invested per capita"-require a rather detailed
explanation.
But you have to remember that, in economic policies, there are no
miracles. You have read in many newspapers and speeches, about the
so-called German economic miracle-the recovery of Germany after its defeat
and destruction in the Second World War. But this was no miracle. It was the
application of the principles of the free market economy, of the methods
of capitalism, even though they were not applied completely in all respects.
Every country can experience the same "miracle" of economic recovery,
although I must insist that economic recovery does not come from a
miracle; it comes from the adoption of-and is the result of-sound economic
policies.
2nd Lecture
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Let us take one freedom, the freedom of the press. If the government owns
all the printing presses, it will determine what is to be printed and what is
not to be printed. And if the government owns all the printing presses and
determines what shall or shall not be printed, then the possibility of printing
any kind of opposing arguments against the ideas of the government becomes
practically nonexistent. Freedom of the press disappears. And it is the same
with all the other freedoms.
In a market economy, the individual has the freedom to choose whatever
career he wishes to pursue, to choose his own way of integrating himself into
society. But in a socialist system, that is not so: his career is decided by
decree of the government. The government can order people whom it dislikes, whom
it does not want to live in certain regions, to move into other regions and to
other places. And the government is always in a position to justify and to
explain such procedure by declaring that the governmental plan requires the
presence of this eminent citizen five thousand miles away from the place in
which he could be disagreeable to those in power.
It is true that the freedom a man may have in a market economy is not a
perfect freedom from the metaphysical point 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 of everyone who was stronger than they
were. The famous words of Rousseau: "Man is born free and everywhere he is in
chains" may sound good, but man is in fact not born free. Man is born a very weak
suckling. Without the protection of his parents, without the protection given to
his parents by society, he would not be able to preserve his life.
Freedom in society means that a man depends as much upon other people as
other people depend upon him. Society under the market economy, under the
conditions of "econom?a libre," means a state of affairs in which
everybody serves his fellow citizens and is served by them in return. People
believe that there are in the market economy bosses who are independent of the
good will and support of other people. They believe that the captains of
industry, the businessmen, the entrepreneurs are the real bosses in the
economic system. But this is an illusion. The real bosses in the economic system
are the consumers. And if the consumers stop patronizing a branch of
business, these businessmen are either forced to abandon their eminent position
in the economic system or to adjust their actions to the wishes and to the
orders of the consumers.
One of the best-known propagators of communism was Lady Passfield, under
her maiden name Beatrice Potter, 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 served as her father's secretary. In her memoirs
she writes: "In the business of my father everybody had to obey the orders
issued by my father, the boss. He alone had to give orders, but to him nobody
gave any orders." This is a very short-sighted view. Orders were given to her father by the consumers,
by the buyers. Unfortunately, she could not see these orders; she could not see what goes
on in a market economy, because she was interested only in the orders given
within her father's office or his factory.
In all economic problems, we must bear in mind the words of the great
French economist Fr?d?ric 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 is not seen"). In order to comprehend the operation of an
economic system, we must deal not only with the things that can be seen, but we
also have to give our attention to the things which cannot be perceived
directly. For instance, an order issued by a boss to an office boy can be heard
by everybody who is present in the room. What cannot be heard are the orders
given to the boss by his customers.
The fact is that, under the capitalistic system, the ultimate bosses
are the consumers. The sovereign is not the state, it is the people. And the
proof that they are the sovereign is borne out by the fact that they have
the right to be
foolish. This is the
privilege of the sovereign. He has the right to make mistakes, no one can
prevent him from making them, but of course he has to pay for his mistakes.
If we say the consumer is supreme or that the consumer is sovereign, we do not
say that the consumer is free from faults, that the consumer is a man who
always knows what would be best for him. The consumers very often buy
things or consume things they ought not to buy or ought not to
consume.
But the notion that a capitalist form of government can prevent people
from hurting themselves by controlling their consumption is false. The idea
of government as a paternal authority, as a guardian for everybody, is the idea
of those who favor socialism. In the United States some years ago, the
government tried what was called "a noble experiment." This noble experiment was
a law making it illegal to buy or sell intoxicating beverages. It is
certainly true that many people drink too much brandy and whiskey, and that they
may hurt themselves by doing so. Some authorities in the United States are even
opposed to smoking. Certainly there are many people who smoke too much and who
smoke in spite of the fact that it would be better for them not to smoke. This
raises a question which goes far beyond economic discussion: it shows what
freedom really means.
Granted, that it is good to keep people from hurting themselves by
drinking or smoking too much. But once you have admitted this, other people will
say: Is the body everything? Is not the mind of man much more important? 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 the human
body, to determine whether one should smoke or not smoke, drink or not drink,
there is no good reply you can give to people who say: "More important than the
body is the mind and the soul, and man hurts himself much more by reading bad
books, by listening to bad music and looking at bad movies. Therefore it is the
duty of the government to prevent people from committing these
faults."
And, as you know, for many hundreds of years governments and
authorities believed that this really was their duty. Nor did this happen in
far distant ages only; not long ago, there was a government in Germany that
considered it a governmental duty to distinguish between good and bad
paintings-which of course meant good and bad from the point of view of a man
who, in his youth, had failed the entrance examination at the Academy of Art in
Vienna; good and bad from the point of view of a picture-postcard painter, Adolf
Hitler. And it became illegal for people to utter other views about art and
paintings than his, the Supreme F?hrer's.
Once you begin to admit that it is the duty of the government to control
your consumption of alcohol, what can you reply to those who say the control of
books and ideas is much more important?
Freedom really means the freedom to make mistakes. This we have to realize. We may be
highly critical with regard to the way in which our fellow citizens are spending
their money and living their lives. We may believe that what they are doing is
absolutely foolish and bad, but in a free society, there are many ways for
people to air their opinions on how their fellow citizens should change their
ways of life. They can write books; they can write articles; they can make
speeches; they can even preach at street corners if they want-and they do this
in many countries. But they must not try to police other people in order
to prevent them from doing certain things simply because they themselves do not
want these other 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-is in a position to choose his own way of life. Certainly this
capitalistic system can be abused, and is abused, by some people. It is
certainly possible to do things which ought not to be done. But if these things
are approved by a majority of the people, a disapproving person always has
a way to attempt to change the minds of his fellow citizens. He can try to
persuade them, to convince them, but he may not try to force them by the use of
power, of governmental police power.
In the market economy, everyone serves his fellow citizens by serving
himself. This is what the liberal authors of the eighteenth century had in mind
when they spoke of the harmony of the rightly understood interests of all groups
and of all individuals of the population. And it was this doctrine of the
harmony of interests which the socialists opposed. They spoke of an
"irreconcilable conflict of interests" between various groups.
What does this mean? When Karl Marx-in the first chapter of the Communist Manifesto, that small pamphlet which
inaugurated his socialist movement-claimed that there was an irreconcilable
conflict between classes, he could not illustrate his thesis by any examples
other than those drawn from the conditions of precapitalistic society. In
precapitalistic ages, society was divided into hereditary 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 the French aristocracy or of the
French bourgeoisie or of the French peasantry. In the greater part of the Middle
Ages, he was simply a serf. And serfdom, in France, did not disappear completely
until after the American Revolution. In other parts of Europe it
disappeared even later.
But the worst form in which serfdom existed-and continued to exist even
after the abolition of slavery- was in the British colonies abroad. The
individual inherited his status from his parents, and he retained it
throughout his life. He transferred it to his children. Every group had
privileges and disadvantages. The highest groups had only privileges, the lowest
groups only disadvantages. And there was no way a man could rid himself of the
legal disadvantages placed upon him by his status other than by fighting a
political struggle against the other classes. Under such conditions, you could
say that there was an "irreconcilable conflict of interests 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 question that there had to be
this irreconcilable conflict of interests between the members of the various
classes.
One must not forget that in those ages-in which the status societies were
predominant in Europe, as well as in the colonies which the Europeans later
founded in America-people did not consider themselves to be connected in
any special way with the other classes of their own nation; they felt much more
at one with the members of their own class in other countries. A French
aristocrat did not look upon lower class Frenchmen as his fellow citizens;
they were the "rabble," which he did not like. He regarded only the aristocrats
of other countries-those of Italy, England, and Germany, for instance, as
his equals.
The most visible effect of this state of affairs was the fact that the
aristocrats all over Europe used the same language. And this language was
French, a language which was not understood, outside France, by other groups of
the population. The middle classes-the bourgeoisie-had their own language,
while the lower classes-the peasantry-used local dialects which very often were
not understood by other groups of the population. The same was true with
regard to the way people dressed. When you travelled in 1750 from one country to
another, you found that the upper classes, the aristocrats, were usually
dressed in the same way all over Europe, and you found that the lower classes
dressed differently. When you met someone in the street, you could see
immediately-from the way he dressed-to which class, to which status he
belonged.
It is difficult to imagine how different these conditions were from
present-day conditions. When I come from the United States to Argentina and I
see a man on the street, I cannot know what his status is. I only assume that he
is a citizen of Argentina and that he is not a member of some legally restricted
group. This is one thing that capitalism has brought about. Of course, there are
also differences within capitalism. There are differences in wealth,
differences which Marxians mistakenly consider to be equivalent to the old
differences that existed between men in the status society.
The differences within a capitalist society are not the same as those in
a socialist society. In the Middle Ages-and in many countries even much later-a
family could be an aristocrat family and possess great wealth, it could be a
family of dukes for hundreds and hundreds of years, whatever its qualities, its
talents, its character or morals. But, under modern capitalistic conditions,
there is what has been technically described by sociologists as "social
mobility." The operating principle of this social mobility, according to the
Italian sociologist and economist Vilfredo Pareto, is "la circulation des
?lites" (the circulation of the elites). This means that there are always
people who are at the top of the social ladder, who are wealthy, who are
politically important, but these people-these elites-are continually
changing.
This is perfectly true in a capitalist society. It was not true
for a precapitalistic status society. The families who were considered the great
aristocratic families of Europe are still the same families today or, let us
say, they are the descendants of families that were foremost in Europe, 800 or
1000 or more years ago. The Capetians of Bourbon-who for a very long time ruled
here in Argentina-were a royal house as early as the tenth century. These
kings ruled the territory which is known now as the Ile-de-France, extending
their reign from generation to generation. But in a capitalist society,
there is continuous mobility-poor people becoming rich and the descendants of
those rich people losing their wealth and becoming poor.
Today I saw in a bookshop in one of the central streets of Buenos Aires
the biography of a businessman who was so eminent, so important, so
characteristic of big business in the nineteenth century in Europe that, even in
this country, far away from Europe, the bookshop carried copies of his
biography. I happen to know the grandson of this man. He has the same name his
grandfather had, and he still has a right to wear the title of nobility
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 is free to change his status. That is the
difference between the status system and the capitalist system of economic
freedom, in which everyone has only himself to blame if he does not reach the
position he wants to reach.
The most famous industrialist of the twentieth century up to now is Henry
Ford. He started with a few hundred dollars which he had borrowed from his
friends, and within a very short time he developed one of the most important big
business firms of the world. And one can discover hundreds of such cases every
day.
Every day, the New York Times prints long notices of people who
have died. If you read these biographies, you may come across the name of an
eminent businessman, who started out as a seller of newspapers at street
corners in New York. Or he started as an office boy, and at his death he was the
president of the same banking firm where he started on the lowest rung of the
ladder. Of course, not all people can attain these positions. Not all people
want to attain them. There are people who
are more interested in other problems and, for these people, other ways are open
today which were not open in the days 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 socialist conditions, there is only
one economic authority, and it has the right to determine all matters concerning
production.
One of the characteristic features of our day is that people use many
names for the same thing. One synonym for socialism and communism is
"planning." If people speak of "planning" they mean, of course,
central planning, which means one plan made by the
government-one plan
that prevents planning by anyone except the government.
A British lady, who also is a member of the Upper House, wrote a book
entitled Plan or No Plan, a book which was quite popular around the
world. What does the title of her book mean? When she says "plan," she means
only the type of plan envisioned by Lenin and Stalin and their successors, the
type which governs all the activities of all the people of a nation. Thus, this
lady means a central plan which excludes all the personal plans that individuals
may have. Her title Plan or No Plan is therefore an illusion, a
deception; the alternative is not a central plan or no plan, it is the total
plan of a central governmental authority or freedom for
individuals to make their own plans, to do their own planning. The
individual plans his life, every day, changing his daily plans whenever he
will.
The free man plans daily for his needs; he says, for
example: "Yesterday I planned to work all my life in C?rdoba." Now he learns
about better conditions in Buenos Aires and changes his plans, saying:
"Instead of working in C?rdoba, I want to go to Buenos Aires." And that is what
freedom means. It may be that he is mistaken, it may be that his going to
Buenos Aires will turn out to have been a mistake. Conditions may have been
better for him in C?rdoba, but he himself made his plans.
Under government planning, he is like a soldier in an army. The soldier
in the army does not have the right to choose his garrison, to choose the place
where he will serve. He has to obey orders. And the socialist system-as Karl
Marx, Lenin, and all socialist leaders knew and admitted-is the transfer of army
rule to the whole production system. Marx spoke of "industrial armies," and
Lenin called for "the organization of everything-the postoffice, the factory,
and other industries, according to the model of the army.
Therefore, in the socialist system everything depends on the wisdom, the
talents, and the gifts of those people who form the supreme authority. That
which the supreme dictator-or his committee-does not know, is not taken into account. But
the knowledge which mankind has accumulated in its long history is not
acquired by everyone; we have accumulated such an enormous amount of scientific
and technical knowledge over the centuries that it is humanly impossible for one
individual to know all these things, even though he be a most gifted
man.
And people are different, they are unequal. They always will be.
There are some people who are more gifted in one subject and less in another
one. And there are people who have the gift to find new paths, to change the
trend of knowledge. In capitalist societies, technological progress and
economic progress are gained through such people. If a man has an idea, he will
try to find a few people who are clever enough to realize the value of his idea.
Some capitalists, who dare to look into the future, who realize the possible
consequences of such an idea, will start to put it to work. Other people, at
first, may say: "They are fools"; but they will stop saying so when they
discover that this enterprise, which they called foolish, is flourishing, and
that people are happy to buy its products.
Under the Marxian system, on the other hand, the supreme government body
must first be convinced of the value of such an idea before it can be pursued
and developed. This can be a very difficult thing to do, for only the group of
people at the head-or the supreme dictator himself-has the power to make
decisions. And if these people-because of laziness or old age, or because
they are not very bright and learned-are unable to grasp the importance of the
new idea, then the new project will not be undertaken.
We can think of examples from military history. Napoleon was
certainly a genius in military affairs; he had one serious problem, however, and
his inability to solve that problem culminated, finally, in his defeat and exile
to the loneliness of St. Helena. Napoleon's problem was: "How to conquer
England?" In order to do that, he needed a navy to cross the English Channel,
and there were people who told him they had a way to accomplish that 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 Generalstab, the famous German general
staff. Before the First World War, it was universally considered to be
unsurpassed in military wisdom. A similar reputation was held by the staff of
General Foch in France. But neither the Germans nor the French-who, under the
leadership of General Foch, later defeated the Germans-realized the importance
of aviation for military purposes., The German general staff said: "Aviation is
merely for pleasure, flying is good for idle people. From a military point of
view, only the Zeppelins are important" and the French general staff was of the
same opinion.
Later, during the period between World War I and World War II, there was
a general in the United States who was convinced that aviation would be very
important in the next war. But all other experts in the United States were
against him. He could not convince them. If you have to convince a group of
people who are not directly dependent on the solution of a problem, you will
never succeed. This is true also of noneconomic problems.
There have been painters, poets, writers, composers, who complained that
the public did not acknowledge their work and caused them to remain poor. The
public may certainly have had poor judgment, but when these artists said: "The
government ought to support great artists, painters, and writers," they were
very much in the wrong. Whom should the government entrust with the task of deciding whether a
newcomer is really a great painter or not? It would have to rely on the judgment
of the critics, and the professors of the history of art who are always looking
back into the past yet who very rarely have shown the talent to discover new
genius. This is the great difference between a system of "planning" and a system
in which everyone can plan and act for himself.
It is true, of course, that great painters and great writers have
often had to endure great hardships. They might have succeeded in their art, but
not always in getting money. Van Gogh was certainly a great painter. He had to
suffer unbearable hardship and, finally, when he was thirty-seven years old, he
committed suicide. In all his life he sold only one painting and the
buyer of it was his cousin. Apart from this one sale, he lived from the money of
his brother, who was not an artist nor a painter. But van Gogh's brother
understood a painter's needs. Today you cannot buy a van Gogh for less than
hundred or two hundred thousand dollars.
Under a socialist system, van Gogh's fate might have been different. Some
government official would have asked some well-known painters (whom van Gogh
certainly would not have regarded as artists at all) whether this young
man, half or completely crazy, was really a painter worthy to be supported. And
they without a doubt, 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 into a home for the insane. Therefore all this enthusiasm in
favor of socialism by the rising generation of painters, poets, musicians,
journalists, actors, is based on an illusion. I mention this because
these groups are among the most fanatical supporters of the socialist
idea.
When it comes to choosing between socialism and capitalism as an economic
system, the problem is somewhat different. The authors of socialism never
suspected that modern industry, and all the operations of modern business, are
based on calculation. Engineers are by no means the only ones who make plans on
the basis of calculations, businessmen also must do so. And businessmen's
calculations are all based on the fact that, in the market economy, the money
prices of goods inform not only the consumer, they also provide vital
information to businessmen about the factors of production, the main
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, but the cost of those steps leading up to it. The whole market
system is bound up with the fact that there is a mentally calculated division of
labor between the various businessmen who vie with each other in bidding
for the factors of production-the raw materials, the machines, the
instruments-and for the human factor of production, the wages paid to labor.
This sort of calculation by the businessman cannot be accomplished in the
absence of prices supplied by the market.
At the very instant you abolish the market-which is what the socialists
would like to do-you render useless all the computations and calculations of the
engineers and technologists. The technologists can give you a great number of
projects which, from the point of view of the natural sciences, are equally
feasible, but it takes the market-based calculations of the businessman
to make clear 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 only
if there are money prices, not only for consumer goods but also for the factors
of production. This means there has to be a market for raw materials, for all
half-finished goods, for all tools and machines, and for all kinds of human
labor and human services.
When this fact was discovered, the socialists did not know how to
respond. For 150 years they had said: "All the evils in the world come from the
fact that there are markets 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 markets." They wanted to abolish
what Marx called the "commodity character" of commodities and of
labor.
When faced with this new problem, the authors of socialism, having no
answer, finally said: "We will not abolish the market altogether; we will
pretend that a market exists; we will play market like children who play
school." But everyone knows that when children play 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 complicated problem and in order to deal
with it in full one needs a little more time than I have here. I have explained
it in detail in my writings. In six lectures I cannot enter into an
analysis of all its aspects. Therefore, I want to advise you, if you are
interested in the fundamental problem of the impossibility of calculation and
planning under socialism, read my book Human Action, which is
available in an excellent Spanish translation.
But read other books, too, like the book of the Norwegian economist
Trygve Hoff, who wrote on economic calculation. And if you do not want to be
one-sided, I recommend that you read the highly-regarded socialist book on this
subject by the eminent Polish economist Oskar Lange, who at one time was a
professor at an American university, then became a Polish ambassador, and later
returned to Poland.
You will probably ask me: "What about Russia? How do the Russians handle
this question?" This changes the problem. The Russians operate their socialistic
system within 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 certain differences between conditions in Russia and those in United
States, the result is very often that the Russians consider something to be
justified and advisable-from their economic point of view-that the Americans
would not consider economically justifiable at all.
The "Soviet experiment," as it was called, does not prove anything. It
does not tell us anything about the fundamental 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 scientific experiment in
the field of human action and economics. You cannot make laboratory experiments
in the field of human action because a scientific experiment requires that you
do the same thing under various conditions, or that you maintain the same
conditions, changing perhaps only one factor. For instance, if you inject
into a cancerous animal some experimental medication, the result may be
that the cancer will disappear. You can test this with various animals of the
same kind which suffer from the same malignancy. If you treat some of them with
the new method and do not treat the rest, then you can compare the result. You
cannot do this within the field of human action. There are no laboratory
experiments in human action.
The so-called Soviet "experiment" merely shows that the standard of
living is incomparably lower in Soviet Russia than it is in the country that is
considered, by the whole world, as the paragon of capitalism: the United
States.
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 of living is much lower." Then he will answer: "Yes, but remember how
terrible it was for the Russians under the tsars and how terrible a war we had
to fight."
I do not want to enter into discussion of whether this is or is not a
correct explanation, but if you deny that the conditions are the same, you deny
that it was an experiment. You must then say this (which would be much more
correct): "Socialism in Russia has not brought about an improvement in the
conditions of the average man which can be compared with the improvement of
conditions, during the same period, in the United States."
In the United States you hear of something new, of some improvement,
almost every week. These are improvements that business has generated,
because thousands and thousands of business people are trying day and night
to find some new product which satisfies the consumer better or is less
expensive to produce, or better and less expensive than the existing
products. They do not do this out of altruism, they do it because they want to
make money. And the effect is that you have an improvement in the standard
of living in the United States which is almost miraculous, when compared with
the conditions that existed fifty or a hundred years ago. But in Soviet Russia,
where you do not have such a system, you do not have a comparable improvement.
So those people who tell us that we ought to adopt the Soviet system are badly
mistaken.
There is something else that should be mentioned. The American consumer,
the individual, is both a buyer and a boss. When you leave a store in America,
you may find a sign saying: "Thank you for your patronage. Please come again."
But when you go into a shop in a totalitarian country-be it in present-day
Russia, or in Germany as it was under the regime of Hitler-the shopkeeper tells
you: "You have to be thankful to the great leader for giving you
this."
In socialist countries, it is not the seller who has to be grateful, it
is the buyer. The citizen is not the boss; the boss is the Central
Committee, the Central Office. Those socialist committees and leaders and
dictators are supreme, and the people simply have to obey them.
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3rd Lecture
Interventionism
A famous, very often quoted phrase says: "That government is best,
which governs least." I do not believe this to be a correct description of the
functions of a good government. Government ought to do all the things for which
it is needed and for which it was established. Government ought to protect the
individuals within the country against the violent and fraudulent attacks of
gangsters, and it should defend the country against foreign enemies. These
are the functions of government within a free system, within the system of the
market economy.
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 task
of the government is to protect the smooth functioning of the market economy
against fraud or violence from within and from outside the
country.
People who do not agree with this definition of the functions of
government may say: "This man hates the government." Nothing could be farther
from the truth. If I should say that gasoline is a very useful liquid, useful
for many purposes, but that I would nevertheless not drink gasoline because I
think that would not be the right use for it, I am not an enemy of gasoline, and
I do not hate gasoline. I only say that gasoline is very useful for certain
purposes, but not fit for other purposes. If I say it is the government's duty
to arrest murderers and other criminals, but not its duty to run the railroads
or to spend money for useless things, then I do not hate the government by
declaring that it is fit to do certain things but not fit to do other
things.
It has been said that under present-day conditions we no longer have a
free market economy. Under present-day conditions we have something called the
"mixed economy." And for evidence of our "mixed economy", people point to the
many enterprises which are operated and owned by the government. The economy is
mixed, people say, because there are, in many countries, certain
institutions-like the telephone, telegraph, and railroads-which are owned
and operated by the government.
That some of these institutions and enterprises are operated by the
government is certainly true. But this fact alone does not change the
character of our economic system. It does not even mean there is a "little
socialism" within the otherwise nonsocialist, free market economy. For the
government, in operating these enterprises, is subject to the supremacy of the
market, which means it is subject to the supremacy of the consumers. The
government-if it operates, let us say, post offices or railroads-has
to hire people who have to work in these enterprises. It also has to buy the raw
materials and other things that are needed for the conduct of these enterprises.
And on the other hand, it "sells" these services or commodities to the
public. Yet, even though it operates these institutions using the methods of the
free economic system, the result, as a rule, is a deficit. The government,
however, is in a position to finance such a deficit-at least the members of the
government and of the ruling party believe so.
It is certainly different for an individual. The individual's power
to operate something with a deficit is very limited. If the deficit is not very
soon eliminated, and if the enterprise does not become profitable (or at least
show that no further deficit losses are being incurred), the individual goes
bankrupt and the enterprise must come to an end.
But for the government, conditions are different. The government can run
at a deficit, because it has the power to tax people. And if the
taxpayers are prepared to pay higher taxes in order to make it possible for the
government to operate an enterprise at a loss-that is, in a less efficient
way than it would be done by a private institution-and if the public will
accept this loss, then of course the enterprise will continue.
In recent years, governments have increased the number of
nationalized institutions and enterprises in most countries to such an extent
that the deficits have grown far beyond the amount that could be collected in
taxes from the citizens. What happens then is not the subject of today's
lecture. It is inflation, and I shall deal with that tomorrow. I mentioned this
only because the mixed economy must not be confused with the problem of
interventionism, about which I want to talk tonight.
What is interventionism? Interventionism means that the government does
not restrict its activity to the preservation of order, or-as people used
to say a hundred years ago-to "the production of security." Interventionism
means that the government wants to do more. It wants to interfere with market
phenomena.
If one objects and says the government should not interfere with
business, people very often answer: "But the government necessarily always
interferes. If there are policemen on the street, the government interferes. It
interferes with a robber looting a shop or it prevents a man from stealing a
car." But when dealing with interventionism and defining what is meant by
interventionism, we are speaking about government interference with the
market. (That the government and the police are expected to protect the
citizens, which includes businessmen, and of course their employees,
against attacks on the part of domestic or foreign gangsters, is in fact a
normal, necessary expectation of any government. Such protection is not an
intervention, for the government's only legitimate function is, precisely, to
produce security.)
What we have in mind when we talk about interventionism is the
government's desire to do more than prevent assaults and fraud.
Interventionism means that the government not only fails to protect the smooth
functioning of the market economy, but that it interferes with the various
market phenomena; it interferes with prices, with wage rates, interest rates,
and profits.
The government wants to interfere in order to force businessmen to
conduct their affairs in a different way than they would have chosen if they had
obeyed only the consumers. Thus, all the measures of interventionism by the
government are directed toward restricting the supremacy 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 the
consumers.
Let us consider one example of interventionism, very popular in many
countries and tried again and again by many governments, especially in times of
inflation. I refer to price control.
Governments usually resort to price control when they have inflated the
money supply and people have begun to complain about the resulting rise in
prices. There are many famous historical examples of price control methods
that failed, but I shall refer to only two of them because, in both these cases,
the governments were really very energetic in enforcing or trying to enforce
their price controls.
The first famous example is the case of the Roman Emperor Diocletian,
very well-known as the last of those Roman emperors who persecuted the
Christians. The Roman emperor in the second part of the third century had only
one financial method, and this was currency debasement. 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 more copper into the silver until the color of the
silver coins was changed and the weight was reduced considerably. The result of
this coinage debasement and the associated increase in the quantity of money was
an increase in prices, followed by an edict to control prices. And Roman
emperors were not very mild when they enforced a law; they did not consider
death too mild a punishment for a man who had asked for a higher price.
They enforced price control, but they failed to maintain the society. The result
was the disintegration of the Roman Empire and the system of the division of
labor.
Then, 1500 years later, the same currency debasement took place during
the French Revolution. But this time a different method was used. The technology
for producing money was considerably improved. It was no longer necessary
for the French to resort to debasement of the coinage: they had the printing
press. And the printing press was very efficient. Again, the result was an
unprecedented rise in prices. But in the French Revolution maximum prices
were not enforced by the same method of capital punishment which the Emperor
Diocletian had used. There had also been an improvement in the technique of
killing citizens. You all remember the famous Doctor J. I. Guillotin
(1738-1814), who advocated the use of the guillotine. Despite the guillotine the
French also failed with their laws of maximum prices. When Robespierre himself
was carted off to the guillotine the people shouted, "There goes the dirty
Maximum."
I wanted to mention this, because people often say: "What is needed in
order to make price control effective and 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 milk has gone up. And milk is certainly very
important, especially for the rising generation, for children.
Consequently, the government declares a maximum price for milk, a maximum
price that is lower than the potential market price would be. Now the government
says: "Certainly we have done everything needed in order to make it
possible for poor parents to buy as much milk as they need to feed their
children."
But what happens? On the one hand, the lower price of milk increases the
demand for milk; people who could not 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 other hand some of the producers, those producers of milk who are
producing at the highest cost-that is, the marginal producers-are now
suffering losses, because the price which the government has 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
long run. And as he cannot take losses in milk, he restricts the production of
milk for the market. He may sell some of his cows for the slaughter house, or
instead of milk he may sell some products made out of milk, for instance sour
cream, butter or cheese.
Thus the government's interference with the price of milk will result in
less milk than there was before, and at the same time there will be a greater
demand. Some people who are prepared to pay the government-decreed price
cannot buy it. Another result will be that anxious people will hurry to be first
at the shops. They have to wait outside. The long lines of people waiting at
shops always appear as a familiar phenomenon in a city in which the government
has decreed maximum prices for commodities that the government considers as
important. This has happened everywhere when the price of milk was
controlled. This was always prognosticated by 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 actually it has dissatisfied them. Before the government
interfered, milk was expensive, but people could buy it. Now there 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 measure
to which the government now resorts, is rationing. But rationing only means that
certain people are privileged and are getting milk while other people are
not getting any at all. Who gets milk and who does not, of course, is
always very arbitrarily determined. One order may determine, for example, that
children under four years old should get milk, and that children over four
years, or between the age of four and six should get only half the ration which
children under four years receive.
Whatever the government does, the fact remains, there is only a smaller
amount of milk available. Thus people are still more dissatisfied than they were
before. Now the government asks the milk producers (because the government does
not have enough imagination to find out for itself): "Why do you not produce the
same amount of milk you produced before?" The government gets the answer: "We
cannot do it, since the costs of production are higher than the maximum price
which the government has established." Now the government studies the costs of
the various items of production, and it discovers one of the items is
fodder.
"Oh," says the government, "the same control we applied to milk we
will now apply to fodder. We will determine a maximum price for fodder, and
then you will be able to feed your cows at a lower price, at a lower
expenditure. Then everything will be all right; you will be able to produce
more milk and you will sell more milk."
But what happens now? The same story repeats itself with fodder, and as
you can understand, for the same reasons. The production of fodder drops and the
government is again faced with a dilemma. So the government arranges new
hearings, to find out what is wrong with fodder production. And it gets an
explanation from the producers of fodder precisely like the one it got from the
milk producers. So the government must go a step farther, since it does not
want to abandon the principle of price control. It determines maximum prices for
producers' goods which are necessary for the production of fodder. And the same
story happens again.
The government at the same time starts controlling not 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 government
fixes a maximum price for consumer goods, it has to go farther back to
producers' goods, and limit the prices of the producers' goods required for the
production of the price-controlled consumer goods. And so the government,
having started with only a few price controls, goes farther and farther
back in the process of production, fixing maximum prices for all kinds of
producers' goods, including of course the price of labor, because without
wage control, the government's "cost control" would be meaningless.
Moreover, the government cannot limit its interference into the
market to only those things which it views as vital necessities, like milk,
butter, eggs, and meat. It must necessarily include luxury goods, because if it
did not limit their prices, capital and labor would abandon the
production of vital necessities and would turn to producing those things which
the government considers unnecessary luxury goods. Thus, the isolated
interference with one or a few prices of consumer goods always brings about
effects-and this is important to realize- which are even less
satisfactory than the conditions that prevailed before.
Before the government interfered, milk and eggs were expensive; after the
government interfered they began to disappear from the market. The government
considered those items to be so important that it interfered; it wanted to
increase the quantity and improve the supply. The result was the opposite: the
isolated interference brought about a condition which-from the point of view of
the government-is even more undesirable than the previous state of
affairs which the government wanted to alter. And as the government goes farther
and farther, it will finally arrive at a point where all prices, all wage rates,
all interest rates, in short everything in the whole economic system, is
determined by the government. And this, clearly, is
socialism.
What I have told you here, this schematic and theoretical
explanation, is precisely what happened in those countries which tried to
enforce a maximum price control, where governments were stubborn enough to
go step by step until they came to the end. This happened in the First World War
in Germany and England.
Let us analyze th |