by Ludwig von Mises
1. THE OPERATION OF THE MARKET MECHANISM
Capitalism or market economy is that system of social cooperation and division of labor that is based on private ownership of the means of production. The material factors of production are owned by individual citizens, the capitalists and the landowners. The plants and the farms are operated by the entrepreneurs and the farmers, that is, by individuals or associations of individuals who either themselves own the capital and the soil or have borrowed or rented them from the owners. Free enterprise is the characteristic feature of capitalism. The objective of every enterpriser—whether businessman or farmer—is to make profit.
The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer.
Neither the capitalists nor the entrepreneurs nor the farmers determine what has to be produced. The consumers do that. The producers do not produce for their own consumption but for the market. They are intent on selling their products. If the consumers do not buy the goods offered to them, the businessman cannot recover the outlays made. He loses his money. If he fails to adjust his procedure to the wishes of the consumers he will very soon be removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.
The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction. They bother neither about the vested interests of capitalists nor about the fate of the workers who lose their jobs if as consumers they no longer buy what they used to buy.
What does it mean when we say that the production of a certain commodity A does not pay? It is indicative of the fact that the consumers are not willing to pay the producers of A enough to cover the prices of the required factors of production, while at the same time other producers will find their incomes exceeding their costs of production. The demand of the consumers is instrumental in the allocation of various factors of production to the various branches of manufacturing consumers’ goods. The consumers thus decide how much raw material and labor should be used for the manufacturing of A and how much for some other merchandise. It is therefore nonsensical to contrast production for profit and production for use. With the profit motive the enterpriser is compelled to supply the consumers with those goods which they are asking for most urgently. If the enterpriser were not forced to take the profit motive as his guide, he could produce more of A, in spite of the fact that the consumers prefer to get something else. The profit motive is precisely the factor that forces the businessman to provide in the most efficient way those commodities the consumers want to use.
Thus the capitalist system of production is an economic democracy in which every penny gives a right to vote. The consumers are the sovereign people. The capitalists, the entrepreneurs, and the farmers are the people’s mandatories. If they do not obey, if they fail to produce, at the lowest possible cost, what the consumers are asking for, they lose their office. Their task is service to the consumer. Profit and loss are the instruments by means of which the consumers keep a tight rein on all business activities.
2. ECONOMIC CALCULATION
The preeminence of the capitalist system consists in the fact that it is the only system of social cooperation and division of labor which makes it possible to apply a method of reckoning and computation in planning new projects and appraising the usefulness of the operation of those plants, farms, and workshops already working. The impracticability of all schemes of socialism and central planning is to be seen in the impossibility of any kind of economic calculation under conditions in which there is no private ownership of the means of production and consequently no market prices for these factors.
The problem to be solved in the conduct of economic affairs is this: There are countless kinds of material factors of production, and within each class they differ from one another both with regard to their physical properties and to the places at which they are available. There are millions and millions of workers and they differ widely with regard to their ability to work. Technology provides us with information about numberless possibilities in regard to what could be achieved by using this supply of natural resources, capital goods, and manpower for the production of consumers’ goods. Which of these potential procedures and plans are the most advantageous? Which should be carried out because they are apt to contribute most to the satisfaction of the most urgent needs? Which should be postponed or discarded because their execution would divert factors of production from other projects the execution of which would contribute more to the satisfaction of urgent needs?
It is obvious that these questions cannot be answered by some calculation in kind. One cannot make a variety of things enter into a calculus if there is no common denominator for them.
In the capitalist system all designing and planning is based on the market prices. Without them all the projects and blueprints of the engineers would be a mere academic pastime. They would demonstrate what could be done and how. But they would not be in a position to determine whether the realization of a certain project would really increase material well-being or whether it would not, by withdrawing scarce factors of production from other lines, jeopardize the satisfaction of more urgent needs, that is, of needs considered more urgent by the consumers. The guide of economic planning is the market price. The market prices alone can answer the question whether the execution of a project P will yield more than it costs, that is, whether it will be more useful than the execution of other conceivable plans which cannot be realized because the factors of production required are used for the performance of project P.
It has been frequently objected that this orientation of economic activity according to the profit motive, i.e., according to the yardstick of a surplus of yield over costs, leaves out of consideration the interests of the nation as a whole and takes account only of the selfish interests of individuals, different from and often even contrary to the national interests. This idea lies at the bottom of all totalitarian planning. Government control of business, it is claimed by the advocates of authoritarian management, looks after the nation’s well-being, while free enterprise, driven by the sole aim of making profits, jeopardizes national interests.
The case is exemplified nowadays by citing the problem of synthetic rubber. Germany, under the rule of Nazi socialism, has developed the production of synthetic rubber, while Great Britain and the United States, under the supremacy of profit-seeking free enterprise, did not care about the unprofitable manufacture of such an expensive ersatz. Thus they neglected an important item of war preparedness and exposed their independence to a serious danger.
Nothing can be more spurious than this reasoning. Nobody ever asserted that the conduct of a war and preparing a nation’s armed forces for the emergency of a war are a task that could or should be left to the activities of individual citizens. The defense of a nation’s security and civilization against aggression on the part both of foreign foes and of domestic gangsters is the first duty of any government. If all men were pleasant and virtuous, if no one coveted what belongs to another, there would be no need for a government, for armies and navies, for policemen, for courts, and prisons. It is the government’s business to make the provisions for war. No individual citizen and no group or class of citizens is to blame if the government fails in these endeavors. The guilt rests always with the government and consequently, in a democracy, with the majority of voters.
Germany armed for war. As the German General Staff knew that it would be impossible for warring Germany to import natural rubber, they decided to foster domestic production of synthetic rubber. There is no need to inquire whether or not the British and American military authorities were convinced that their countries, even in case of a new World War, would be in a position to rely upon the rubber plantations of Malaya and the Dutch Indies. At any rate they did not consider it necessary to pile up domestic stocks of natural rubber or to embark upon the production of synthetic rubber. Some American and British businessmen examined the progress of synthetic rubber production in Germany. But as the cost of the synthetic product was considerably higher than that of the natural product, they could not venture to imitate the example set by the Germans. No entrepreneur can invest money in a project which does not offer the prospect of profitability. It is precisely this fact that makes the consumers sovereign and forces the enterpriser to produce what the consumers are most urgently asking for. The consumers, that is, the American and the British public, were not ready to allow for synthetic rubber prices which would have rendered its production profitable. The cheapest way to provide rubber was for the Anglo‑Saxon countries to produce other merchandise, for instance, motor cars and various machines, to sell these things abroad, and to import foreign natural rubber.
If it had been possible for the Governments of London and Washington to foresee the events of December, 1941, and January and February, 1942, they would have turned toward measures securing a domestic production of synthetic rubber. It is immaterial with regard to our problem which method they would have chosen for financing this part of defense expenditure. They could subsidize the plants concerned or they could raise, by means of tariffs, the domestic price of rubber to such a level that home production of synthetic rubber would have become profitable. At any rate the people would have been forced to pay for what was done.
If the government does not provide for a defense measure, no capitalist or entrepreneur can fill the gap. To reproach some chemical corporations for not having taken up production of synthetic rubber is no more sensible than to blame the motor industry for not, immediately after Hitler’s rise to power, converting its plants into plane factories. Or it would be as justifiable to blame a scholar for having wasted his time writing a book on American history or philosophy instead of devoting all his efforts to training himself for his future functions in the Expeditionary Force. If the government fails in its task of equipping the nation to repel an attack, no individual citizen has any way open to remedy the evil but to criticize the authorities in addressing the sovereign—the voters—in speeches, articles, and books.
Many doctors describe the ways in which their fellow citizens spend their money as utterly foolish and opposed to their real needs. People, they say, should change their diet, restrict their consumption of intoxicating beverages and tobacco, and employ their leisure time in a more reasonable manner. These doctors are probably right. But it is not the task of government to improve the behavior of its “subjects.” Neither is it the task of businessmen. They are not the guardians of their customers. If the public prefers hard to soft drinks, the entrepreneurs have to yield to these wishes. He who wants to reform his countrymen must take recourse to persuasion. This alone is the democratic way of bringing about changes. If a man fails in his endeavors to convince other people of the soundness of his ideas, he should blame his own disabilities. He should not ask for a law, that is, for compulsion and coercion by the police.
The ultimate basis of economic calculation is the valuation of all consumers’ goods on the part of all the people. It is true that these consumers are fallible and that their judgment is sometimes misguided. We may assume that they would appraise the various commodities differently if they were better instructed. However, as human nature is, we have no means of substituting the wisdom of an infallible authority for people’s shallowness.
We do not assert that the market prices are to be considered as expressive of any perennial and absolute value. There are no such things as absolute values, independent of the subjective preferences of erring men. Judgments of value are the outcome of human arbitrariness. They reflect all the shortcomings and weaknesses of their authors. However, the only alternative to the determination of market prices by the choices of all consumers is the determination of values by the judgment of some small groups of men, no less liable to error and frustration than the majority, notwithstanding the fact that they are called “authority.” No matter how the values of consumers’ goods are determined, whether they are fixed by a dictatorial decision or by the choices of all consumers—the whole people—values are always relative, subjective, and human, never absolute, objective, and divine.
What must be realized is that within a market society organized on the basis of free enterprise and private ownership of the means of production the prices of consumers’ goods are faithfully and closely reflected in the prices of the various factors required for their production. Thus it becomes feasible to discover by means of a precise calculation which of the indefinite multitude of thinkable processes of production are more advantageous and which less. “More advantageous” means in this connection: an employment of these factors of production in such a way that the production of the consumers’ goods more urgently asked for by the consumers gets a priority over the production of commodities less urgently asked for by the consumers. Economic calculation makes it possible for business to adjust production to the demands of the consumers. On the other hand, under any variety of socialism, the central board of production management would not be in a position to engage in economic calculation. Where there are no markets and consequently no market prices for the factors of production, they cannot become elements of a calculation.
For a full understanding of the problems involved we must try to grasp the nature and the origin of profit.
Within a hypothetical system without any change there would not be any profits and losses at all. In such a stationary world, in which nothing new occurs and all economic conditions remain permanently the same, the total sum that a manufacturer must spend for the factors of production required would be equal to the price he gets for the product. The prices to be paid for the material factors of production, the wages and interest for the capital invested, would absorb the whole price of the product. Nothing would be left for profit. It is obvious that such a system would not have any need for entrepreneurs and no economic function for profits. As only those things are produced today which were produced yesterday, the day before yesterday, last year, and ten years ago, and as the same routine will go on forever, as no changes occur in the supply or demand either of consumers’ or of producers’ goods or in technical methods, as all prices are stable, there is no room left for any entrepreneurial activity.
But the actual world is a world of permanent change. Population figures, tastes, and wants, the supply of factors of production and technological methods are in a ceaseless flux. In such a state of affairs there is need for a continuous adjustment of production to the change in conditions. This is where the entrepreneur comes in.
Those eager to make profits are always looking for an opportunity. As soon as they discover that the relation of the prices of the factors of production to the anticipated prices of the products seem to offer such an opportunity, they step in. If their appraisal of all the elements involved was correct, they make a profit. But immediately the tendency toward a disappearance of such profits begins to take effect. As an outcome of the new projects inaugurated, the prices of the factors of production in question go up and, on the other hand, those of the products begin to drop. Profits are a permanent phenomenon only because there are always changes in market conditions and in methods of production. He who wants to make profits must be always on the watch for new opportunities. And in searching for profit, he adjusts production to the demands of the consuming public.
We can view the whole market of material factors of production and of labor as a public auction. The bidders are the entrepreneurs. Their highest bids are limited by their expectation of the prices the consumers will be ready to pay for the products. The co-bidders competing with them, whom they must outbid if they are not to go away empty-handed, are in the same situation. All these bidders are, as it were, acting as mandatories of the consumers. But each of them represents a different aspect of the consumers’ wants, either another commodity or another way of producing the same commodity. The competition among the various entrepreneurs is essentially a competition among the various possibilities open to individuals to remove as far as possible their state of uneasiness by the acquisition of consumers’ goods. The resolution of any man to buy a refrigerator and to postpone the purchase of a new car is a determining factor in the formation of the prices of cars and of refrigerators. The competition between the entrepreneurs reflects these prices of consumers’ goods in the formation of the prices of the factors of production. The fact that the various wants of the individual, which conflict because of the inexorable scarcity of the factors of production, are represented on the market by various competing entrepreneurs results in prices for these factors that make economic calculation not only feasible but imperative. An entrepreneur who does not calculate, or disregards the result of the calculation, would very soon go bankrupt and be removed from his managerial function.
But within a socialist community in which there is only one manager there are neither prices of the factors of production nor economic calculation. To the entrepreneur of capitalist society a factor of production through its price sends out a warning: Don’t touch me, I am earmarked for the satisfaction of another, more urgent need. But under socialism these factors of production are mute. They give no hint to the planner. Technology offers him a great variety of possible solutions for the same problem. Each of them requires the outlay of other kinds and quantities of various factors of production. But as the socialist manager cannot reduce them to a common denominator, he is not in a position to find out which of them is the most advantageous.
It is true that under socialism there would be neither discernible profits nor discernible losses. Where there is no calculation, there is no means of getting an answer to the question whether the projects planned or carried out were those best fitted to satisfy the most urgent needs; success and failure remain unrecognized in the dark. The advocates of socialism are badly mistaken in considering the absence of discernible profit and loss an excellent point. It is, on the contrary, the essential vice of any socialist management. It is not an advantage to be ignorant of whether or not what one is doing is a suitable means of attaining the ends sought. A socialist management would be like a man forced to spend his life blindfolded.
It has been objected that the market system is at any rate quite inappropriate under the conditions brought about by a great war. If the market mechanism were to be left alone, it would be impossible for the government to get all the equipment needed. The scarce factors of production required for the production of armaments would be wasted for civilian uses which, in a war, are to be considered as less important, even as luxury and waste. Thus it was imperative to resort to the system of government-established priorities and to create the necessary bureaucratic apparatus.
The error of this reasoning is that it does not realize that the necessity for giving the government full power to determine for what kinds of production the various raw materials should be used is not an outcome of the war but of the methods applied in financing the war expenditure.
If the whole amount of money needed for the conduct of the war had been collected by taxes and by borrowing from the public, everybody would have been forced to restrict his consumption drastically. With a money income (after taxes) much lower than before, the consumers would have stopped buying many goods they used to buy before the war. The manufacturers, precisely because they are driven by the profit motive, would have discontinued producing such civilian goods and would have shifted to the production of those goods which the government, now by virtue of the inflow of taxes the biggest buyer on the market, would be ready to buy.
However, a great part of the war expenditure is financed by an increase of currency in circulation and by borrowing from the commercial banks. On the other hand, under price control, it is illegal to raise commodity prices. With higher money incomes and with unchanged commodity prices people would not only not have restricted but have increased their buying of goods for their own consumption. To avoid this, it was necessary to take recourse to rationing and to government-imposed priorities. These measures were needed because previous government interference that paralyzed the operation of the market resulted in paradoxical and highly unsatisfactory conditions. Not the insufficiency of the market mechanism but the inadequacy of previous government meddling with market phenomena made the priority system unavoidable. In this as in many other instances the bureaucrats see in the failure of their preceding measures a proof that further inroads into the market system are necessary.
3. MANAGEMENT UNDER THE PROFIT SYSTEM
All business transactions are examined by shrewdly calculating profit and loss. New projects are subject to a precise scrutiny of the chances they offer. Every step toward their realization is reflected in entries in the books and accounts. The profit-and-loss account shows whether or not the whole business, or any of its parts, was profitable. The figures of the ledger serve as a guide for the conduct of the whole business and of each of its divisions. Branches which do not pay are discontinued, those yielding profit are expanded. There cannot be any question of clinging to unprofitable lines of business if there is no prospect of rendering them profitable in a not-too-distant future.
The elaborate methods of modern bookkeeping, accountancy, and business statistics provide the enterpriser with a faithful image of all his operations. He is in a position to learn how successful or unsuccessful every one of his transactions was. With the aid of these statements he can check the activities of all departments of his concern no matter how large it may be. There is, to be sure, some amount of discretion in determining the distribution of overhead costs. But apart from this, the figures provide a faithful reflection of all that is going on in every branch or department. The books and the balance sheets are the conscience of business. They are also the businessman’s compass.
The devices of bookkeeping and accountancy are so familiar to the businessman that he fails to observe what a marvelous instrument they are. It needed a great poet and writer to appreciate them at their true value. Goethe called bookkeeping by double-entry “one of the finest inventions of the human mind.” By means of this, he observed, the businessman can at any time survey the general whole, without needing to perplex himself with the details.
Goethe’s characterization hit the core of the matter. The virtue of commercial management lies precisely in the fact that it provides the manager with a method of surveying the whole and all its parts without being enmeshed in details and trifles.
The entrepreneur is in a position to separate the calculation of each part of his business in such a way that he can determine the role that it plays within his whole enterprise. For the public every firm or corporation is an undivided unity. But for the eye of its management it is composed of various sections, each of which is viewed as a separate entity and appreciated according to the share it contributes to the success of the whole enterprise. Within the system of business calculation each section represents an integral being, a hypothetical independent business as it were. It is assumed that this section “owns” a definite part of the whole capital employed in the enterprise, that it buys from other sections and sells to them, that it has its own expenses and its own revenues, that its dealings result either in a profit or a loss which is imputed to its own conduct of affairs as separate from the results achieved by the other sections. Thus the general manager of the whole enterprise can assign to each section’s management a great deal of independence. There is no need for the general manager to bother about the minor details of each section’s management. The managers of the various sections can have a free hand in the administration of their sections’ “internal” affairs. The only directive that the general manager gives to the men whom he entrusts with the management of the various sections, departments, and branches is: Make as much profit as possible. And an examination of the accounts shows him how successful or unsuccessful they were in executing the directive.
In a large-scale enterprise many sections produce only parts or half-finished products which are not directly sold but are used by other sections in manufacturing the final product. This fact does not alter the conditions described. The general manager compares the costs incurred by the production of such parts and half-finished products with the prices he would have to pay for them if he had to buy them from other plants. He is always confronted by the question: Does it pay to produce these things in our own workshops? Would it not be more satisfactory to buy them from other plants specializing in their production?
Thus within the framework of a profit-seeking enterprise responsibility can be divided. Every sub-manager is responsible for the working of his department. It is to his credit if the accounts show a profit, and it is to his disadvantage if they show a loss. His own selfish interests push him toward the utmost care and exertion in the conduct of his section’s affairs. If he incurs losses, he will be their victim. He will be replaced by another man whom the general manager expects to be more successful, or the whole section will be discontinued. At any rate he will be discharged and lose his job. If he succeeds in making profits, he will see his income increased or at least he will not be in danger of losing it. Whether or not a departmental manager is entitled to a share in the profit of his department is not so important with regard to the personal interest he takes in the results of his department’s dealings. His fate is at any rate closely connected with that of his department. In working for it, he works not only for his boss but also for himself.
It would be impracticable to restrict the discretion of such a responsible sub-manager by too much interference with detail. If he is efficient, such meddling would at best be superfluous, if not harmful by tying his hands. If he is inefficient, it would not render his activities more successful. It would only provide him with a lame excuse that the failure was caused by his superior’s inappropriate instructions. The only instruction required is self-understood and does not need to be especially mentioned: seek profit. Moreover, most of the details can and must be left to the head of every department.
This system was instrumental in the evolution of modern business. Large-scale production in great production aggregates and the establishment of subsidiaries in distant parts of the country and in foreign countries, the department stores, and the chain stores are all built upon the principle of the subordinate managers’ responsibility. This does not in any way limit the responsibility of the general manager. The subordinates are responsible only to him. They do not free him from the duty of finding the right man for every job.
If a New York firm establishes branch shops or plants in Los Angeles, in Buenos Aires, in Budapest, and in Calcutta, the chief manager establishes the auxiliary’s relation to the head office or parental company only in fairly general terms. All minor questions are to be within the range of the local manager’s duties. The auditing department of headquarters carefully inspects the branch’s financial transactions and informs the general manager as soon as any irregularities appear. Precautions are taken to prevent irreparable waste of the capital invested in the branch, a squandering of the whole concern’s good will and reputation and a collision between the branch’s policy and that of headquarters. But a free hand is left to the local management in every other regard. It is practicable to place confidence in the chief of a subsidiary, a department, or a section because his interests and those of the whole concern coincide. If he were to spend too much for current operations or to neglect an opportunity for profitable transactions, he would imperil not only the concern’s profits but his own position as well. He is not simply a hired clerk whose only duty is the conscientious accomplishment of an assigned, definite task. He is a businessman himself, a junior partner as it were of the entrepreneur, no matter what the contractual and financial terms of his employment are. He must to the best of his abilities contribute to the success of the firm with which he is connected.
Because this is so, there is no danger in leaving important decisions to his discretion. He will not waste money in the purchase of products and services. He will not hire incompetent assistants and workers; he will not discharge able collaborators in order to replace them by incompetent personal friends or relatives. His conduct is subject to the incorruptible judgment of an unbribable tribunal: the account of profit and loss. In business there is only one thing that matters: success. The unsuccessful department manager is doomed no matter whether the failure was caused by him or not, or whether it would have been possible for him to attain a more satisfactory result. An unprofitable branch of business—sooner or later—must be discontinued, and its manager loses his job.
The sovereignty of the consumers and the democratic operation of the market do not stop at the doors of a big business concern. They permeate all its departments and branches. Responsibility to the consumer is the lifeblood of business and enterprise in an unhampered market society. The profit motive through the instrumentality of which the entrepreneurs are driven to serve the consumers to the best of their ability is at the same time the first principle of any commercial and industrial aggregate’s internal organization. It joins together utmost centralization of the whole concern with almost complete autonomy of the parts, it brings into agreement full responsibility of the central management with a high degree of interest and incentive of the subordinate managers of sections, departments, and auxiliaries. It gives to the system of free enterprise that versatility and adaptability which result in an unswerving tendency toward improvement.
4. PERSONNEL MANAGEMENT UNDER AN UNHAMPERED LABOR MARKET
The staff of a modern large-scale enterprise sometimes includes many hundreds of thousands of clerks and workers. They form a highly differentiated body from the general manager or president down to the scrubwomen, messenger boys, and apprentices. The handling of such a huge body raises many problems. However, they can be solved.
No matter how big a concern may be, the central management deals only with sections, departments, branches, and subsidiaries, the role of which can be precisely determined from the evidence provided by the accounts and statistics. Of course, the accounts do not always demonstrate what may be wrong with a section. They show only that something is wrong, that it does not pay, and must be either reformed or discontinued. The sentences they pass are unappealable. They reveal each department’s cash value. And it is cash value alone that matters on the market. The consumers are merciless. They never buy in order to benefit a less efficient producer and to protect him against the consequences of his failure to manage better. They want to be served as well as possible. And the working of the capitalist system forces the entrepreneur to obey the orders issued by the consumers. He does not have the power to distribute bounties at the expense of the consumers. He would waste his funds if he were to use his own money for such a purpose. He simply cannot pay anybody more than he can realize in selling the product.
The same relation that exists between the general manager and his immediate subordinates, the heads of the various sections, pervades the whole business hierarchy. Every section head values his immediate subordinates according to the same principle by which the chief manager values him, and the foreman applies similar methods in appraising his subordinates. The only difference is that under the simpler conditions of the lower units no elaborate accountancy schemes are required for the establishment of each man’s cash value. It does not matter whether piece wages or hourly wages are paid. In the long run the worker can never get more than the consumer allows.
No man is infallible. It often happens that a superior errs in judging a subordinate. One of the qualifications required for any higher position is precisely the ability to judge people correctly. He who fails in this regard jeopardizes his chances of success. He hurts his own interests no less than those of the men whose efficiency he has underrated. Things being so, there is no need to look for special protection for the employees against arbitrariness on the part of their employers or their employer’s mandatories. Arbitrariness in dealing with personnel is, under the unhampered profit system, an offense that strikes home to its author.
Under an unhampered market economy the appraisal of each individual’s effort is detached from any personal considerations and can therefore be free both from bias and dislike. The market passes judgment on the products, not on the producers. The appraisal of the producer results automatically from the appraisal of his product. Each co-operator is valued according to the value of his contribution to the process of production of goods and services. Salaries and wages do not depend on arbitrary decisions. On the labor market every quantity and quality of work is prized to the amount the consumers are ready to pay for the products. It is not a favor on the part of the employer to pay wages and salaries, it is a business transaction, the purchase of a factor of production. The price of labor is a market phenomenon determined by the consumers’ demands for goods and services. Virtually every employer is always in search of cheaper labor and every employee in search of a job with higher remuneration.
The very fact that labor is, under capitalism, a commodity and is bought and sold as a commodity makes the wage earner free from any personal dependence. Like the capitalists, the entrepreneurs, and the farmers, the wage earner depends on the arbitrariness of the consumers. But the consumers’ choices do not concern the persons engaged in production; they concern things and not men. The employer is not in a position to indulge in favoritism or in prejudice with regard to personnel. As far as he does, the deed itself brings about its own penalty.
It is this fact, and not only constitutions and bills of rights, that make the receivers of salaries and wages within an unhampered capitalist system free men. They are sovereign in their capacity as consumers, and as producers they are, like all other citizens, unconditionally subject to the law of the market. In selling a factor of production, namely, their toil and trouble, on the market at the market price to everybody who is ready to buy it, they do not jeopardize their own standing. They do not owe their employer thanks and subservience, they owe him a definite quantity of labor of a definite quality. The employer, on the other hand, is not in search of sympathetic men whom he likes but efficient workers who are worth the money he pays them.
This cool rationality and objectivity of capitalist relations is, of course, not realized to the same degree in the whole field of business. The nearer a man’s function brings him to the consumers, the more personal factors interfere. In the service trades some role is played by sympathies and antipathies; relations are more “human.” Stubborn doctrinaires and adamant baiters of capitalism are prepared to call this an advantage. In fact it curtails the businessman’s and his employees’ personal freedom. A small shopkeeper, a barber, an innkeeper, and an actor are not so free in expressing their political or religious convictions as the owner of a cotton mill or a worker in a steel plant.
But these facts do not invalidate the general characteristics of the market system. It is a system which automatically values every man according to the services he renders to the body of sovereign consumers, i.e., to his fellow men.
These observations do not imply any criticism of the prewar policies pursued by the British and American authorities. Only a man who had knowledge of the military events of 1941‑43 many years before they occurred would have the right to blame other people for their lack of foresight. Governments are not omniscient, as the planners would have us believe.