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Etatism, Protectionism, and the Demand for Lebensraum

February 20, 2004

An Excerpt from Omnipotent Government: The Rise of Total State and Total War, originally published in 1944 by Yale University as the first full-scale examination of German-style National Socialism as a species of socialism in general. The Mises Institute is very pleased to offer the entire text online by special lease arrangement with the copyright holder, Libertarian Press, at a significant fee. The book can be made available so long as the paid lease remains valid. To support this project, please contribute. To buy the hard copy, go here. To download the book or read individual chapters, see the book page.

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.[1]

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-mindedpeoplewouldrealizethateconomic 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.

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.[2]

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.[3]

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.

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.

[1] 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.

[2] 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.

[3] G.L. Schwartz, "Back to Free Enterprise," Nineteenth Century and After, CXXXI (1942), 130. Of course, most of them collapsed very quickly.


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