by Ludwig von Mises
5. Socialism in Russia and in Germany
The attempts of the Russian Bolsheviks and of the German Nazis to transform socialism from a program into reality have not had to meet the problem of economic calculation under socialism. These two socialist systems have been working within a world the greater part of which still clings to a market economy. The rulers of these socialist states base the calculations on which they make their decisions on the prices established abroad. Without the help of these prices their actions would be aimless and planless. Only in so far as they refer to this price system are they able to calculate, keep books, and prepare their plans. With this fact in mind we may agree with the statement of various socialist authors and politicians that socialism in only one or a few countries is not yet true socialism. Of course these men attach a quite different meaning to their assertions. They are trying to say that the full blessings of socialism can be reaped only in a world‑embracing socialist community. The rest of us, on the contrary, must recognize that socialism will result in complete chaos precisely if it is applied in the greater part of the world.
The German and the Russian systems of socialism have in common the fact that the government has full control of the means of production. It decides what shall be produced and how. It allots to each individual a share of consumer's goods for his consumption. These systems would not have to be called socialist if it were otherwise.
But there is a difference between the two systems—though it does not concern the essential features of socialism.
The Russian pattern of socialism is purely bureaucratic. All economic enterprises are departments of the government, like the administration of the army or the postal system. Every plant, shop, or farm stands in the same relation to the superior central organization as does a post office to the office of the postmaster general.
The German pattern differs from the Russian one in that it (seemingly and nominally) maintains private ownership of the means of production and keeps the appearance of ordinary prices, wages, and markets. There are, however, no longer entrepreneurs but only shop managers (Betriebsführer). These shop managers do the buying and selling, pay the workers, contract debts, and pay interest and amortization. There is no labor market; wages and salaries are fixed by the government. The government tells the shop managers what and how to produce, at what prices and from whom to buy, at what prices and to whom to sell. The government decrees to whom and under what terms the capitalists must entrust their funds and where and at what wages laborers must work. Market exchange is only a sham. All the prices, wages, and interest rates are fixed by the central authority. They are prices, wages, and interest rates in appearance only; in reality they are merely determinations of quantity relations in the government's orders. The government, not the consumers, directs production. This is socialism in the outward guise of capitalism. Some labels of capitalistic market economy are retained but they mean something entirely different from what they mean in a genuine market economy.
The execution of the pattern in each country is not so rigid as not to allow for some concessions to the other pattern. There are, in Germany too, plants and shops directly managed by government clerks; there is especially the national railroad system; there are the government's coal mines and the national telegraph and telephone lines. Most of these institutions are remnants of the nationalization carried out by the previous governments under the regime of German militarism. In Russia, on the other hand, there are some seemingly independent shops and farms left. But these exceptions do not alter the general characteristics of the two systems.
It is not an accident that Russia adopted the bureaucratic pattern and Germany the Zwangswirtschaft pattern. Russia is the largest country in the world and is thinly inhabited. Within its borders it has the richest resources. It is much better endowed by nature than any other country. It can without too great harm to the well-being of its population renounce foreign trade and live in economic self-sufficiency. But for the obstacles which Czarism first put in the way of capitalist production, and for the later shortcomings of the Bolshevik system, the Russians even without foreign trade could have long enjoyed the highest standard of living in the world. In such a country the application of the bureaucratic system of production is not impossible, provided the management is in a position to use for economic calculation the prices fixed on the markets of foreign capitalist countries, and to apply the techniques developed by the enterprise of foreign capitalism. Under these circumstances socialism results not in complete chaos but only in extreme poverty. A few years ago in the Ukraine, the most fertile land of Europe, many millions literally died of starvation.
In a predominantly industrial country conditions are different. The characteristic feature of a predominantly industrial country is that its population must live to a great extent on imported food and imported raw materials. It must pay for these imports by the export of manufactured goods, which it produces mainly from imported raw materials. Its vital strength lies in its factories and in its foreign trade. Jeopardizing the efficiency of industrial production is equivalent to imperiling the basis of sustenance. If the plants produce worse or at higher cost they cannot compete in the world market, where they must outdo commodities of foreign origin. If exports drop, imports of food and other necessities drop correspondingly; the nation loses its main source of living.
Now Germany is a predominantly industrial country. It did very well when, in the years preceding the first World War, its entrepreneurs steadily expanded their exports. There was no other country in Europe in which the standard of living of the masses improved faster than in imperial Germany. For German socialism there could be no question of imitating the Russian model. To have attempted this would have immediately destroyed the apparatus of German export trade. It would have suddenly plunged into misery a nation pampered by the achievements of capitalism. Bureaucrats cannot meet the competition of foreign markets; they flourish only where they are sheltered by the state, with its compulsion and coercion. Thus the German socialists were forced to take recourse to the methods which they called German socialism. These methods, it is true, are much less efficient than that of private initiative. But they are much more efficient than the bureaucratic system of the Soviets.
This German system has an additional advantage. The German capitalists and the Betriebsführer, the former entrepreneurs, do not believe in the eternity of the Nazi regime. They are, on the contrary, convinced that the rule of Hitler will collapse one day and that then they will be restored to the ownership of the plants which in pre-Nazi days were their property. They remember that in the first World War too the Hindenburg program had virtually dispossessed them, and that with the breakdown of the imperial government they were de facto reinstated. They believe that it will happen again. They are therefore very careful in the operation of the plants whose nominal owners and shop managers they are. They do their best to prevent waste and to maintain the capital invested. It is only thanks to these selfish interests of the Betriebsführer that German socialism secured an adequate production of armaments, planes, and ships.
Socialism would be impracticable altogether if established as a world-wide system of production, and thus deprived of the possibility of making economic calculations. When confined to one or a few countries in the midst of a world capitalist economy it is only an inefficient system. And of the two patterns for its realization the German is less inefficient than the Russian one.
All civilizations have up to now been based on private ownership of the means of production. In the past civilization and private ownership have been linked together. If history could teach us anything, it would be that private property is inextricably linked with civilization.
Governments have always looked askance at private property. Governments are never liberal from inclination. It is in the nature of the men handling the apparatus of compulsion and coercion to overrate its power to work, and to strive at subduing all spheres of human life to its immediate influence. Etatism is the occupational disease of rulers, warriors, and civil servants. Governments become liberal only when forced to by the citizens.
From time immemorial governments have been eager to interfere with the working of the market mechanism. Their endeavors have never attained the ends sought. People used to attribute these failures to the inefficacy of the measures applied and to the leniency of their enforcement. What was wanted, they thought, was more energy and more brutality; then success would be assured. Not until the eighteenth century did men begin to understand that interventionism is necessarily doomed to fail. The classical economists demonstrated that each constellation of the market has a corresponding price structure. Prices, wages, and interest rates are the result of the interplay of demand and supply. There are forces operating in the market which tend to restore this—natural—state if it is disturbed. Government decrees, instead of achieving the particular ends they seek, tend only to derange the working of the market and imperil the satisfaction of the needs of the consumers.
In defiance of economic science the very popular doctrine of modern interventionism asserts that there is a system of economic coöperation, feasible as a permanent form of economic organization, which is neither capitalism nor socialism. This third system is conceived as an order based on private ownership of the means of production in which, however, the government intervenes, by orders and prohibitions, in the exercise of ownership rights. It is claimed that this system of interventionism is as far from socialism as it is from capitalism; that it stands midway between socialism and capitalism; and that while retaining the advantages of both it escapes the disadvantages inherent in each of them. Such are the pretensions of interventionism as advocated by the older German school of etatism, by the American Institutionalists, and by many groups in other countries. Interventionism is practiced—except for socialist countries like Russia and Nazi Germany—by every contemporary government. The outstanding examples of interventionist policies are the Sozialpolitik of imperial Germany and the New Deal policy of present-day America.
Marxians do not support interventionism. They recognize the correctness of the teachings of economics concerning the frustration of interventionist measures. In so far as some Marxian doctrinaires have recommended interventionism they have done so because they consider it an instrument for paralyzing and destroying the capitalist economy, and hope thereby to accelerate the coming of socialism. But the consistent orthodox Marxians scorn interventionism as idle reformism detrimental to the interests of the proletarians. They do not expect to bring about the socialist utopia by hampering the evolution of capitalism; on the contrary, they believe that only a full development of the productive forces of capitalism can result in socialism. Consistent Marxians abstain from doing anything to interfere with what they deem to be the natural evolution of capitalism. But consistency is a very rare quality among Marxians. So most Marxian parties and the trade‑unions operated by Marxians are enthusiastic in their support of interventionism.
A mixture of capitalist and socialist principles is not feasible. If, within a society based on private ownership of the means of production, some of these means are publicly owned and operated, this does not make for a mixed system which combines socialism and capitalism. The enterprises owned and operated by the state or by municipalities do not alter the characteristic features of a market economy. They must fit themselves, as buyers of raw materials, of equipment and of labor, and as sellers of goods and services, into the scheme of the market economy. They are subject to the laws determining production for the needs of consumers. They must strive for profits or, at least, to avoid losses. When the government tries to eliminate or to mitigate this dependence by covering the losses of its plants and shops by drawing on the public funds, the only result is that this dependence is shifted to another field. The means for covering the losses must be raised by the imposition of taxes. But this taxation has its effect on the market. It is the working of the market mechanism, and not the government collecting the taxes, that decides upon whom the incidence of the taxes falls and how it affects production and consumption. The market, not the government, determines the working of those publicly operated enterprises.
Nor should interventionism be confused with the German pattern of socialism. It is the essential feature of interventionism that it does not aim at a total abolition of the market; it does not want to reduce private ownership to a sham and the entrepreneurs to the status of shop managers. The interventionist government does not want to do away with private enterprise; it wants only to regulate its working through isolated measures of interference. Such measures are not designed as cogs in an all‑round system of orders and prohibitions destined to control the whole apparatus of production and distribution; they do not aim at replacing private ownership and a market economy by socialist planning.
In order to grasp the meaning and the effects of interventionism it is sufficient to study the working of the two most important types of intervention: interference by restriction and interference by price control.
Interference by restriction aims directly at a diversion of production from the channels prescribed by the market and the consumers. The government either forbids the manufacture of certain goods or the application of certain methods of production, or makes such methods more difficult by the imposition of taxes or penalties. It thus eliminates some of the means available for the satisfaction of human needs. The best-known examples are import duties and other trade barriers. It is obvious that all such measures make the people as a whole poorer, not richer. They prevent men from using their knowledge and ability, their labor and material resources as efficiently as they can. In the unhampered market forces are at work tending to utilize every means of production in a way that provides for the highest satisfaction of human wants. The interference of the government brings about a different employment of resources and thereby impairs the supply.
We do not need to ask here whether some restrictive measures could not be justified, in spite of the diminution of supply they cause, by advantages in other fields. We do not need to discuss the problem of whether the disadvantage of raising the price of bread by an import duty on wheat is outweighed by the increase in income of domestic farmers. It is enough for our purpose to realize that restrictive measures cannot be considered as measures of increasing wealth and welfare, but are instead expenditures. They are, like subsidies which the government pays out of the revenue collected by taxing the citizens, not measures of production policy but measures of spending. They are not parts of a system of creating wealth but a method of consuming it.
The aim of price control is to decree prices, wages, and interest rates different from those fixed by the market. Let us first consider the case of maximum prices, where the government tries to enforce prices lower than the market prices.
The prices set on the unhampered market correspond to an equilibrium of demand and supply. Everybody who is ready to pay the market price can buy as much as he wants to buy. Everybody who is ready to sell at the market price can sell as much as he wants to sell. If the government, without a corresponding increase in the quantity of goods available for sale, decrees that buying and selling must be done at a lower price, and thus makes it illegal either to ask or to pay the potential market price, then this equilibrium can no longer prevail. With unchanged supply there are now more potential buyers on the market, namely, those who could not afford the higher market price but are prepared to buy at the lower official rate. There are now potential buyers who cannot buy, although they are ready to pay the price fixed by the government or even a higher price. The price is no longer the means of segregating those potential buyers who may buy from those who may not. A different principle of selection has come into operation. Those who come first can buy; others are too late in the field. The visible outcome of this state of things is the sight of housewives and children standing in long lines before the groceries. a spectacle familiar to everybody who has visited Europe in this age of price control. If the government does not want only those to buy who come first (or who are personal friends of the salesman), while others go home empty handed, it must regulate the distribution of the stocks available. It has to introduce some kind of rationing.
But price ceilings not only fail to increase the supply, they reduce it. Thus they do not attain the ends which the authorities wish. On the contrary, they result in a state of things which from the point of view of the government and of public opinion is even less desirable than the previous state which they had intended to alter. If the government wants to make it possible for the poor to give their children more milk, it has to buy the milk at the market price and sell it to these poor parents with a loss, at a cheaper rate. The loss may be covered by taxation. But if the government simply fixes the price of milk at a lower rate than the market, the result will be the contrary of what it wants. The marginal producers, those with the highest costs, will, in order to avoid losses, go out of the business of producing and selling milk. They will use their cows and their skill for other, more profitable purposes. They will, for example, produce cheese, butter, or meat. There will be less milk available for the consumers, not more. Then the government has to choose between two alternatives: either to refrain from any endeavors to control the price of milk and to abrogate its decree, or to add to its first measure a second one. In the latter case it must fix the prices of the factors of production necessary for the production of milk at such a rate that the marginal producers will no longer suffer losses and will abstain from restricting the output. But then the same problem repeats itself on a remoter plane. The supply of the factors of production necessary for the production of milk drops, and again the government is back where it started, facing failure in its interference. If it keeps stubbornly on pushing forward its schemes, it has to go still further. It has to fix the prices of the factors of production necessary for the production of those factors of production which are needed for the production of milk. Thus the government is forced to go further and further, fixing the prices of all consumer goods and of all factors of production—both human (i.e., labor) and material—and to force every entrepreneur and every worker to continue work at these prices and wages. No branch of industry can be omitted from this all-round fixing of prices and wages and from this general order to produce those quantities which the government wants to see produced. If some branches were to be left free, the result would be a shifting of capital and labor to them and a corresponding fall of the supply of goods whose prices the government has fixed. However, it is precisely these goods which the government considers especially important for the satisfaction of the needs of the masses.[i]
But when this state of all-round control of business is achieved, the market economy has been replaced by the German pattern of socialist planning. The government's board of production management now exclusively controls all business activities and decides how the means of production—men and material resources—must be used.
The isolated measures of price fixing fail to attain the ends sought. In fact, they produce effects contrary to those aimed at by the government. If the government, in order to eliminate these inexorable and unwelcome consequences, pursues its course further and further, it finally transforms the system of capitalism and free enterprise into socialism.
Many American and British supporters of price control are fascinated by the alleged success of Nazi price control. They believe that the German experience has proved the practicability of price control within the framework of a system of market economy. You have only to be as energetic, impetuous, and brutal as the Nazis are, they think, and you will succeed. These men who want to fight Nazism by adopting its methods do not see that what the Nazis have achieved has been the building up of a system of socialism, not a reform of conditions within a system of market economy.
There is no third system between a market economy and socialism. Mankind has to choose between those two systems—unless chaos is considered an alternative.[ii]
It is the same when the government takes recourse to minimum prices. Practically the most important case of fixing prices at a higher level than that established on the unhampered market is the case of minimum wages. In some countries minimum wage rates are decreed directly by the government. The governments of other countries interfere only indirectly with wages. They give a free hand to the labor unions by acquiescing in the use of compulsion and coercion by unions against reluctant employers and employees. If it were otherwise strikes would not attain the ends which the trade-unions want to attain. The strike would fail to force the employer to grant higher wages than those fixed by the unhampered market, if he were free to employ men to take the place of the strikers. The essence of labor-union policy today is the application or threat of violence under the benevolent protection of the government. The unions represent, therefore, a vital part of the state apparatus of compulsion and coercion. Their fixing of minimum wage rates is equivalent to a government intervention establishing minimum wages.
The labor unions succeed in forcing the entrepreneurs to grant higher wages. But the result of their endeavors is not what people usually ascribe to them. The artificially elevated wage rates cause permanent unemployment of a considerable part of the potential labor force. At these higher rates the marginal employments for labor are no longer profitable. The entrepreneurs are forced to restrict output, and the demand on the labor market drops. The unions seldom bother about this inevitable result of their activities; they are not concerned with the fate of those who are not members of their brotherhood. But it is different for the government, which aims at the increase of the welfare of the whole people and wants to benefit not only union members but all those who have lost their jobs. The government wants to raise the income of all workers; that a great many of them cannot find employment is contrary to its intentions.
These dismal effects of minimum wages have become more and more apparent the more trade-unionism has prevailed. As long as only one part of labor, mostly skilled workers was unionized, the wage rise achieved by the unions did not lead to unemployment but to an increased supply of labor in those branches of business where there were no efficient unions or no unions at all. The workers who lost their jobs as a consequence of union policy entered the market of the free branches and caused wages to drop in those branches. The corollary of the rise in wages for organized workers was a drop in wages for unorganized workers. But with the spread of unionism conditions have changed. Workers now losing their jobs in one branch of industry find it harder to get employment in other lines. They are victimized.
There is unemployment even in the absence of any government or union interference. But in an unhampered labor market there prevails a tendency to make unemployment disappear. The fact that the unemployed are looking for jobs must result in fixing wage rates at a height which makes it possible for the entrepreneurs to employ all those eager to work and to earn wages. But if minimum wage rates prevent an adjustment of wage rates to the conditions of demand and supply, unemployment tends to become a permanent mass phenomenon.
There is but one means to make market wage rates rise for all those eager to work: an increase in the amount of capital goods available which makes it possible to improve technological methods of production and thereby to raise the marginal productivity of labor. It is a sad fact that a great war, in destroying a part of the stock of capital goods, must result in a temporary fall in real wage rates, when the shortage of man power brought about by the enlistment of millions of men is once overcome. It is precisely because they are fully aware of this undesirable consequence that liberals consider war not only a political but also an economic disaster.
Government spending is not an appropriate means to brush away unemployment. If the government finances its spending by collecting taxes or by borrowing from the public, it curtails the private citizens' power to invest and to spend to the same extent that it increases its own spending capacity. If the government finances its spending by inflationary methods (issue of additional paper money or borrowing from the commercial banks) it brings about a general rise of commodity prices. If then money wage rates do not rise at all or not to the same extent as commodity prices, mass unemployment may disappear. But it disappears precisely because real wage rates have dropped.
Technological progress increases the productivity of human effort. The same amount of capital and labor can now produce more than before. A surplus of capital and labor becomes available for the expansion of already existing industries and for the development of new ones. "Technological unemployment" may occur as a transitory phenomenon. But very soon the unemployed will find new jobs either in the new industries or in the expanding old ones. Many millions of workers are today employed in industries which were created in the last decades. And the wage earners themselves are the main buyers of the products of these new industries.
There is but one remedy for lasting unemployment of great masses: the abandonment of the policy of raising wage rates by government decree or by the application or the threat of violence.
Those who advocate interventionism because they want to sabotage capitalism and thereby finally to achieve socialism are at least consistent. They know what they are aiming at. But those who do not wish to replace private property by German Zwangswirtschaft or Russian Bolshevism are sadly mistaken in recommending price control and labor-union compulsion.
The more cautious and sophisticated supporters of interventionism are keen enough to recognize that government interference with business fails in the long run to attain the ends sought. But, they assert, what is needed is immediate action, a short-run policy. Interventionism is good because its immediate effects are beneficial, even if its remoter consequences may be disastrous. Do not bother about tomorrow; only today counts. With regard to this attitude two points must be emphasized: (1) today, after years and decades of interventionist policies, we are already confronted with the long-run consequences of interventionism; (2) wage interventionism is bound to fail even in the short run, if not accompanied by corresponding measures of protectionism.
7. Etatism and Protectionism
Etatism—whether interventionism or socialism—is a national policy. The national governments of various countries adopt it. Their concern is whatever they consider favors the interests of their own nations. They are not troubled about the fate or the happiness of foreigners. They are free from any inhibitions which would prevent them from inflicting harm on aliens.
We have dealt already with how the policies of etatism hurt the well-being of the whole nation and even of the groups or classes which they are intended to benefit. For the purpose of this book it is still more important to emphasize that no national system of etatism can work within a world of free trade. Etatism and free trade in international relations are incompatible, not only in the long run but even in the short run. Etatism must be accompanied by measures severing the connections of the domestic market with foreign markets. Modern protectionism, with its tendency to make every country economically self-sufficient as far as possible, is inextricably linked with interventionism and its inherent tendency to turn into socialism. Economic nationalism is the unavoidable outcome of etatism.
In the past various doctrines and considerations induced governments to embark upon a policy of protectionism. Economics has exposed all these arguments as fallacious. Nobody tolerably familiar with economic theory dares today to defend these long since unmasked errors. They still play an important role in popular discussion; they are the preferred theme of demagogic fulminations; but they have nothing to do with present-day protectionism. Present-day protectionism is a necessary corollary of the domestic policy of government interference with business. Interventionism begets economic nationalism. It thus kindles the antagonisms resulting in war. An abandonment of economic nationalism is not feasible if nations cling to interference with business. Free trade in international relations requires domestic free trade. This is fundamental to any understanding of contemporary international relations.
It is obvious that all interventionist measures aiming at a rise in domestic prices for the benefit of domestic producers, and all measures whose immediate effect consists in a rise in domestic costs of production, would be frustrated if foreign products were not either barred altogether from competition on the domestic market or penalized when imported. When, other things being unchanged, labor legislation succeeds in shortening the hours of work or in imposing on the employer in another way additional burdens to the advantage of the employees, the immediate effect is a rise in production costs. Foreign producers can compete under more favorable conditions, both on the home market and abroad, than they could before.
The acknowledgment of this fact has long since given impetus to the idea of equalizing labor legislation in different countries. These plans have taken on more definite form since the international conference called by the German Government in 1890. They led finally in 1919 to the establishment of the International Labor Office in Geneva. The results obtained were rather meager. The only efficient way to equalize labor conditions all over the world would be freedom of migration. But it is precisely this which unionized labor of the better-endowed and comparatively underpopulated countries fights with every means available.
The workers of those countries where natural conditions of production are more favorable and the population is comparatively thin enjoy the advantages of a higher marginal productivity of labor. They get higher wages and have a higher standard of living. They are eager to protect their advantageous position by barring or restricting immigration.[iii] On the other hand, they denounce as "dumping" the competition of goods produced abroad by foreign labor remunerated at a lower scale; and they ask for protection against the importation of such goods.
The countries which are comparatively overpopulated—i.e., in which the marginal productivity of labor is lower than in other countries—have but one means to compete with the more favored countries: lower wages and a lower standard of living. Wage rates are lower in Hungary and in Poland than in Sweden or in Canada because the natural resources are poorer and the population is greater in respect to them. This fact cannot be disposed of by an international agreement, or by the interference of an international labor office. The average standard of living is lower in Japan than in the United States because the same amount of labor produces less in Japan than in the United States.
Such being the conditions, the goal of international agreements concerning labor legislation and trade-union policies cannot be the equalization of wage rates, hours of work, or other such "pro-labor" measures. Their only aim could be to coördinate these things so that no changes in the previously prevailing conditions of competition resulted. If, for example, American laws or trade-union policies resulted in a 5 per cent rise in construction costs, it would be necessary to find out how much this increased the cost of production in the various branches of industry in which America and Japan are competing or could compete if the relation of production costs changed. Then it would be necessary to investigate what kind of measures could burden Japanese production to such an extent that no change in the competitive power of both nations would take place. It is obvious that such calculations would be extremely difficult. Experts would disagree with regard both to the methods to be used and the probable results. But even if this were not the case an agreement could not be reached. For it is contrary to the interests of Japanese workers to adopt such measures of compensation. It would be more advantageous for them to expand their export sales to the disadvantage of American exports; thus the demand for their labor would rise and the condition of Japanese workers improve effectively. Guided by this idea, Japan would be ready to minimize the rise in production costs effected by the American measures and would be reluctant to adopt compensatory measures. It is chimerical to expect that international agreements concerning socio-economic policies could be substituted for protectionism.
We must realize that practically every new pro-labor measure forced on employers results in higher costs of production and thereby in a change in the conditions of competition. If it were not for protectionism such measures would immediately fail to attain the ends sought. They would result only in a restriction of domestic production and consequently in an increase of unemployment. The unemployed could find jobs only at lower wage rates; if they were not prepared to acquiesce in this solution they would remain unemployed. Even narrow-minded people would realize that economic laws are inexorable, and that government interference with business cannot attain its ends but must result in a state of affairs which—from the point of view of the government and the supporters of its policy—is even less desirable than the conditions which it was designed to alter.
Protectionism, of course, cannot brush away the unavoidable consequences of interventionism. It can only improve conditions in appearance; it can only conceal the true state of affairs. Its aim is to raise domestic prices. The higher prices provide a compensation for the rise in costs of production. The worker does not suffer a cut in money wages but he has to pay more for the goods he wants to buy. As far as the home market is concerned the problem is seemingly settled.
But this brings us to a new problem: monopoly.
8. Economic Nationalism and Domestic Monopoly Prices
The aim of the protective tariff is to undo the undesired consequences of the rise in domestic costs of production caused by government interference. The purpose is to preserve the competitive power of domestic industries in spite of the rise in costs of production.
However, the mere imposition of an import duty can attain this end only in the case of those commodities whose domestic production falls short of domestic demand. With industries producing more than is needed for domestic consumption a tariff alone would be futile unless supplemented by monopoly.
In an industrial European country, for example Germany, an import duty on wheat raises the domestic price to the level of the world market price plus the import duty. Although the rise in the domestic wheat price results in an expansion of domestic production on the one hand and a restriction of domestic consumption on the other hand, imports are still necessary for the satisfaction of domestic demand. As the costs of the marginal wheat dealer include both the world market price and the import duty, the domestic price goes up to this height.
It is different with those commodities that Germany produces in such quantities that a part can be exported. A German import duty on manufactures which Germany produces not only for the domestic market but for export too would be, as far as export trade is concerned, a futile measure to compensate for a rise in domestic costs of production. It is true that it would prevent foreign manufacturers from selling on the German market. But export trade must continue to be hampered by the rise in domestic production costs. On the other hand the competition between the domestic producers on the home market would eliminate those German plants in which production no longer paid with the rise in costs due to government interference. At the new equilibrium the domestic price would reach the level of the world market price plus a part of the import duty. Domestic consumption would now be lower than it was before the rise in domestic production costs and the imposition of the import duty. The restriction of domestic consumption and the falling off of exports mean a shrinking of production with consequent unemployment and an increased pressure on the labor market resulting in a drop in wage rates. The failure of the Sozialpolitik becomes manifest.[iv]
But there is still another way out. The fact that the import duty has insulated the domestic market provides domestic producers with the opportunity to build up a monopolistic scheme. They can form a cartel and charge the domestic consumers monopoly prices which can go up to a level only slightly lower than the world market price plus the import duty. With their domestic monopoly profits they can afford to sell at lower prices abroad. Production goes on. The failure of the Sozialpolitik is skillfully concealed from the eyes of an ignorant public. But the domestic consumers must pay higher prices. What the worker gains by the rise in wage rates and by pro‑labor legislation burdens him in his capacity as consumer.
But the government and the trade-union leaders have attained their goal. They can then boast that the entrepreneurs were wrong in predicting that higher wages and more labor legislation would make their plants unprofitable and hamper production.
Marxian myths have succeeded in surrounding the problem of monopoly with empty babble. According to the Marxian doctrines of imperialism, there prevails within an unhampered market society a tendency toward the establishment of monopolies. Monopoly, according to these doctrines, is an evil originating from the operation of the forces working in an unhampered capitalism. It is, in the eyes of the reformers, the worst of all drawbacks of the laissez-faire system; its existence is the best justification of interventionism; it must be the foremost aim of government interference with business to fight it. One of the most serious consequences of monopoly is that it begets imperialism and war.
There are, it is true, instances in which a monopoly—a world monopoly—of some products could possibly be established without the support of governmental compulsion and coercion. The fact that the natural resources for the production of mercury are very few, for example, might engender a monopoly even in the absence of governmental encouragement. There are instances, again, in which the high cost of transportation makes it possible to establish local monopolies for bulky goods, e.g., for some building materials in places unfavorably located. But this is not the problem with which most people are concerned when discussing monopoly. Almost all the monopolies that are assailed by public opinion and against which governments pretend to fight are government made. They are national monopolies created under the shelter of import duties. They would collapse with a regime of free trade.
The common treatment of the monopoly question is thoroughly mendacious and dishonest. No milder expression can be used to characterize it. It is the aim of the government to raise the domestic price of the commodities concerned above the world market level, in order to safeguard in the short run the operation of its pro-labor policies. The highly developed manufactures of Great Britain, the United States, and Germany would not need any protection against foreign competition were it not for the policies of their own governments in raising costs of domestic production. But these tariff policies, as shown in the case described above, can work only when there is a cartel charging monopoly prices on the domestic market. In the absence of such a cartel domestic production would drop, as foreign producers would have the advantage of producing at lower costs than those due to the new pro-labor measure. A highly developed trade-unionism, supported by what is commonly called "progressive labor legislation," would be frustrated even in the short run if domestic prices were not maintained at a higher level than that of the world market, and if the exporters (if exports are to be continued) were not in a position to compensate the lower export prices out of the monopolistic profits drawn on the home market. Where the domestic cost of production is raised by government interference, or by the coercion and compulsion exercised by trade-unions, export trade will need to be subsidized. The subsidies may be openly granted as such by the government, or they may be disguised by monopoly. In this second case the domestic consumers pay the subsidies in the form of higher prices for the commodities which the monopoly sells at a lower price abroad. If the government were sincere in its antimonopolistic gestures, it could find a very simple remedy. The repeal of the import duty would brush away at one stroke the danger of monopoly. But governments and their friends are eager to raise domestic prices. Their struggle against monopoly is only a sham.
The correctness of the statement that it is the aim of the governments to raise prices can easily be demonstrated by referring to conditions in which the imposition of an import duty does not result in the establishment of a cartel monopoly. The American farmers producing wheat, cotton, and other agricultural products cannot, for technical reasons, form a cartel. Therefore the administration developed a scheme to raise prices through restriction of output and through withholding huge stocks from the market by means of government buying and government loans. The ends arrived at by this policy are a substitute for an infeasible farming cartel and farming monopoly.
No less conspicuous are the endeavors of various governments to create international cartels. If the protective tariff results in the formation of a national cartel, international cartelization could in many cases be attained by agreements between the national cartels. Such agreements are often very well served by another pro-monopoly activity of governments, the patents and other privileges granted to new inventions. However, where technical obstacles prevent the construction of national cartels—as is almost always the case with agricultural production—no such international agreements can be built up. Then the governments interfere again. History between the two world wars is an open record of state intervention to foster monopoly and restriction by international agreements. There were schemes for wheat pools, rubber and tin restrictions, and so on.[v]Of course, most of them collapsed very quickly.
Such is the true story of modern monopoly. It is not an outcome of unhampered capitalism and of an inherent trend of capitalist evolution, as the Marxians would have us believe. It is, on the contrary, the result of government policies aiming at a reform of market economy.
Interventionism aims at state control of market conditions. As the sovereignty of the national state is limited to the territory subject to its supremacy and has no jurisdiction outside its boundaries, it considers all kinds of international economic relations as serious obstacles to its policy. The ultimate goal of its foreign trade policy is economic self-sufficiency. The avowed tendency of this policy is, of course, only to reduce imports as far as possible; but as exports have no purpose but to pay for imports, they drop concomitantly.
The striving after economic self-sufficiency is even more violent in the case of socialist governments. In a socialist community production for domestic consumption is no longer directed by the tastes and wishes of the consumers. The central board of production management provides for the domestic consumer according to its own ideas of what serves him best; it takes care of the people but it no longer serves the consumer. But it is different with production for export. Foreign buyers are not subject to the authorities of the socialist state; they have to be served; their whims and fancies have to be taken into account. The socialist government is sovereign in purveying to the domestic consumers, but in its foreign-trade relations it encounters the sovereignty of the foreign consumer. On foreign markets it has to compete with other producers producing better commodities at lower cost. We have mentioned earlier how the dependence on foreign imports and consequently on exports influences the whole structure of German socialism.[vi]
The essential goal of socialist production, according to Marx, is the elimination of the market. As long as a socialist community is still forced to sell a part of its production abroad—whether to foreign socialist governments or to foreign business—it still produces for a market and is subject to the laws of the market economy. A socialist system is defective as such as long as it is not economically self-sufficient.
The international division of labor is a more efficient system of production than is the economic autarky of every nation. The same amount of labor and of material factors of production yields a higher output. This surplus production benefits everyone concerned. Protectionism and autarky always result in shifting production from the centers where conditions are more favorable—i e., from where the output for the same amount of physical input is higher—to centers where they are less favorable. The more productive resources remain unused while the less productive are utilized. The effect is a general drop in the productivity of human effort, and thereby a lowering of the standard of living all over the world.
The economic consequences of protectionist policies and of the trend toward autarky are the same for all countries. But there are qualitative and quantitative differences. The social and political results are different for comparatively overpopulated industrial countries and for comparatively underpopulated agricultural countries. In the predominantly industrial countries the prices of the most urgently needed foodstuffs are going up. This interferes more and sooner with the well-being of the masses than the corresponding rise in the prices of manufactured goods in the predominantly agricultural countries. Besides, the workers in the industrial countries are in a better position to make their complaints heard than the farmers and farm hands in the agricultural countries. The statesmen and economists of the predominantly industrial countries become frightened. They realize that natural conditions are putting a check on their country's endeavors to replace imports of food and raw materials by domestic production. They clearly understand that the industrial countries of Europe can neither feed nor clothe their population out of domestic products alone. They foresee that the trend toward more protection, more insulation of every country, and finally self-sufficiency will bring about a tremendous fall in the standard of living, if not actual starvation. Thus they look around for remedies.
German aggressive nationalism is animated by these considerations. For more than sixty years German nationalists have been depicting the consequences which the protectionist policies of other nations must eventually have for Germany. Germany, they pointed out, cannot live without importing food and raw materials. How will it pay for these imports when one day the nations producing these materials have succeeded in the development of their domestic manufactures and bar access to German exports? There is, they told themselves, only one redress: We must conquer more dwelling space, more Lebensraum.
The German nationalists are fully aware that many other nations—for example, Belgium—are in the same unfavorable position. But, they say, there is a very important difference. These are small nations. They are therefore helpless. Germany is strong enough to conquer more space. And, happily for Germany, they say today, there are two other powerful nations, which are in the same position as Germany, namely, Italy and Japan. They are the natural allies of Germany in these wars of the have-nots against the haves.
Germany does not aim at autarky because it is eager to wage war. It aims at war because it wants autarky—because it wants to live in economic self-sufficiency.
10. German Protectionism
The second German Empire, founded at Versailles in 1871, was not only a powerful nation; it was—in spite of the depression which started in 1873—economically very prosperous. Its industrial plants were extremely successful in competing—abroad and at home—with foreign products. Some grumblers found fault with German manufactures; German goods, they said, were cheap but inferior. But the great foreign demand was precisely for such cheap goods. The masses put more stress upon cheapness than upon fine quality. Whoever wanted to increase sales had to cut prices.
In those optimistic 1870s everybody was fully convinced that Europe was on the eve of a period of peace and prosperity. There were to be no more wars; trade barriers were doomed to disappear; men would be more eager to build up and to produce than to destroy and to kill each other. Of course, farsighted men could not overlook the fact that Europe's cultural preëminence would slowly vanish. Natural conditions for production were more favorable in overseas countries. Capitalism was on the point of developing the resources of backward nations. Some branches of production would not be able to stand the competition of the newly opened areas. Agricultural production and mining would drop in Europe; Europeans would buy such goods by exporting manufactures. But people did not worry. Intensification of the international division of labor was in their eyes not a disaster but on the contrary a source of richer supply. Free trade was bound to make all nations more flourishing.
The German liberals advocated free trade, the gold standard, and freedom of domestic business. German manufacturing did not need any protection. It triumphantly swept the world market. It would have been nonsensical to bring forward the infant-industry argument. German industry had reached its maturity.
Of course, there were still many countries eager to penalize imports. However, the inference from Ricardo's free-trade argument was irrefutable. Even if all other countries cling to protection, every nation serves its own interest best by free trade. Not for the sake of foreigners but for the sake of their own nation, the liberals advocated free trade. There was the great example set by Great Britain, and by some smaller nations, like Switzerland. These countries did very well with free trade. Should Germany adopt their policies? Or should it imitate half-barbarian nations like Russia?
But Germany chose the second path. This decision was a turning point in modern history.
There are many errors current concerning modern German protectionism.
It is important to recognize first of all that the teachings of Frederick List have nothing to do with modern German protectionism. List did not advocate tariffs for agricultural products. He asked for protection of infant industries. In doing this he underrated the competitive power of contemporary German manufacturing. Even in those days, in the early 1840s, German industrial production was already much stronger than List believed. Thirty to forty years later it was paramount on the European continent and could very successfully compete on the world market. List's doctrines played an important role in the evolution of protectionism in Eastern Europe and in Latin America. But the German supporters of protectionism were not justified in referring to List. He did not unconditionally reject free trade; he advocated protection of manufacturing only for a period of transition, and he nowhere suggested protection for agriculture. List would have violently opposed the trend of German foreign-trade policy of the last sixty-five years.
The representative literary champion of modern German protectionism was Adolf Wagner. The essence of his teachings is this: All countries with an excess production of foodstuffs and raw materials are eager to develop domestic manufacturing and to bar access to foreign manufactures; the world is on the way to economic self-sufficiency for each nation. In such a world what will be the fate of those nations which can neither feed nor clothe their citizens out of domestic foodstuffs and raw materials? They are doomed to starvation.
Adolf Wagner was not a keen mind. He was a poor economist. The same is true of his partisans. But they were not so dull as to fail to recognize that protection is not a panacea against the dangers which they depicted. The remedy they recommended was conquest of more space—war. They asked for protection of German agriculture in order to encourage production on the poor soil of the country, because they wanted to make Germany independent of foreign supplies of food for the impending war. Import duties for food were in their eyes a short-run remedy only, a measure for a period of transition. The ultimate remedy was war and conquest.
It would be wrong, however, to assume that the incentive to Germany's embarking upon protectionism was a propensity to wage war. Wagner, Schmoller, and the other socialists of the chair, in their lectures and seminars, long preached the gospel of conquest. But before the end of the 1890s they did not dare to propagate such views in print. Considerations of war economy, moreover, could justify protection only for agriculture; they were not applicable in the case of protection for the processing industries. The military argument of war preparedness did not play an important role in the protection of Germany's industrial production.
The main motive for the tariff on manufactures was the Sozialpolitik. The pro-labor policy raised the domestic costs of production and made it necessary to safeguard the policy's short-run effects. Domestic prices had to be raised above the world market level in order to escape the dilemma of either lower money wages or a restriction of exports and increase of unemployment. Every new progress of the Sozialpolitik, and every successful strike, disarranged conditions to the disadvantage of the German enterprises and made it harder for them to outdo foreign competitors both on the domestic and on the foreign markets. The much glorified Sozialpolitik was only possible within an economic body sheltered by tariffs.
Thus Germany developed its characteristic system of cartels. The cartels charged the domestic consumers high prices and sold cheaper abroad. What the worker gained from labor legislation and union wages was absorbed by higher prices. The government and the trade-union leaders boasted of the apparent success of their policies: the workers received higher money wages. But real wages did not rise more than the marginal productivity of labor.
Only a few observers saw through all this, however. Some economists tried to justify industrial protectionism as a measure for safeguarding the fruits of Sozialpolitik and of unionism; they advocated social protectionism (den sozialen Schutzzoll). They failed to recognize that the whole process demonstrated the futility of coercive government and union interference with the conditions of labor. The greater part of public opinion did not suspect at all that Sozialpolitik and protection were closely linked together. The trend toward cartels and monopoly was in their opinion one of the many disastrous consequences of capitalism. They bitterly indicted the greediness of capitalists. The Marxians interpreted it as that concentration of capital which Marx had predicted. They purposely ignored the fact that it was not an outcome of the free evolution of capitalism but the result of government interference, of tariffs and—in the case of some branches, like potash and coal—of direct government compulsion. Some of the less shrewd socialists of the chair (Lujo Brentano, for example) went so far in their inconsistency as to advocate at the same time free trade and a more radical pro-labor policy.
In the thirty years preceding the first World War Germany could eclipse all other European countries in pro-labor policies because it above all indulged in protectionism and subsequently in cartelization.
When, later, in the course of the depression of 1929 and the following years, unemployment figures went up conspicuously because trade-unions would not accept a reduction of boom wage rates, the comparatively mild tariff protectionism turned into the hyper-protectionist policies of the quota system, monetary devaluation, and foreign exchange control. At that time Germany was no longer ahead in pro-labor policies; other countries had surpassed it. Great Britain, once the champion of free trade, adopted the German idea of social protection. So did all other countries. Up-to-date hyper-protectionism is the corollary of present-day Sozialpolitik.
There cannot be any doubt that for nearly sixty years Germany set the example in Europe both of Sozialpolitik and of protectionism. But the problems involved are not Germany's problems alone.
The most advanced countries of Europe have poor domestic resources. They are comparatively overpopulated. They are in a very unlucky position indeed in the present trend toward autarky, migration barriers, and expropriation of foreign investments. Insulation means for them a severe fall in standards of living. After the present war Great Britain—with its foreign assets gone—will be in the same position as Germany. The same will be true for Italy, Belgium, Switzerland. Perhaps France is better off because it has long had a low birth rate. But even the smaller, predominantly agricultural countries of the European East are in a critical position. How should they pay for imports of cotton, coffee, various minerals, and so on? Their soil is much poorer than that of Canada or the American wheat belt; its products cannot compete on the world market.
Thus the problem is not a German one; it is a European problem. It is a German problem only to the extent that the Germans tried—in vain—to solve it by war and conquest.
[i]For the two situations in which price-control measures can be used effectively within a narrowly confined sphere, the reader is referred to Mises' Nationalökonomie, pp. 674–675.
[ii]We pass over the fact that, because of the impossibility of economic calculation under it, socialism too must result in chaos.
[iii]Many Americans are not familiar with the fact that, in the years between the two world wars, almost all European nations had recourse to very strict anti-immigration laws. These laws were more rigid than the American laws, since most of them did not provide for any immigration quotas. Every nation was eager to protect its wage level—a low one when compared with American conditions—against the immigration of men from other countries in which wage rates were still lower. The result was mutual hatred and—in face of a threatening common danger—disunion.
[iv]We need not consider the case of import duties so low that only a few or none of the domestic plants can continue production for the home market. In this case foreign competitors could penetrate the domestic market, and prices would reach the level of the world market price plus the whole import duty. The failure of the tariff would be even more manifest.
[v]G. L. Schwartz, "Back to Free Enterprise," Nineteenth Century and After, CXXXI (1942), 130.