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Nationalism and Socialism

March 5, 2008

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[This article originally appears as chapter 8 in Essentials of Economics.]

Nationalism appears to be a modern phenomenon having its origin in the nationalities constituted in Europe between the 16th and the 19th century concomitantly with the disappearance of feudalism and of the Romano-Germanic Empire that came into being with Charlemagne and was totally liquidated with the unification of Italy.

In fact, however, the spirit of nationalism is very ancient.[1] It has been and still is present as a factor in both political and economic history. The only thing that has changed is its form. It was this spirit that animated the absolutist and totalitarian regime of the Egyptians, that of the decadent Roman Empire, and the mercantilism of the 17th and 18th centuries, and, after a brief eclipse that lasted from the Congress of Vienna to the First World War, revived in the form of the so-called controlled or planned economy under the combined influence of war and socialism.

The latter system arose as an international movement of the working class, having as its slogan, "Proletarians of all countries, unite!" but it has since passed to the opposite side and now says, "Proletarians of all countries, don't come to my country and take my job away from me!"

In its economic aspect, nationalism is based on two fallacies: the belief in the existence of national economies and the doctrine that a nation can prosper economically only at the expense of the rest of the world. These convictions were among the first to be combated by the classical economists, but they were unable to free themselves entirely from the myth of the national economy. Thus, Adam Smith entitled his book The Wealth of Nations, and until very recently treatises on economics bore the title "political economy," even when they were antinationalistic in content.

Nothing is more illusory than the existence of a national economy and national wealth. Nations do not own any property (the resources at the disposal of governments consist of what they need to perform their functions) and are neither rich nor poor; this is possible only for individuals. In recent years the bureaucratic organs of the League of Nations and latterly of the United Nations have spent vast sums of money on calculating machines, writing materials, books, travel expenses, and salaries for "economists" engaged in computing the wealth and income of nations. All these calculations are utterly fantastic and lead absolutely nowhere, because there is no possible way, no matter how many laws are passed or how powerful a police organization is created, of knowing what each individual who lives in a particular country owns or earns. Each case is unique; the peoples' lack of confidence in their governments is inveterate and founded on bitter experience; and the majority refuse to divulge all that they have hidden in the house or outside the country or to reveal what their true earnings are, even when they are assured that this information is being sought purely for "statistical purposes," because they fear that sooner or later these statistical purposes will turn out to be tax collectors, if not outright expropriators.

After the last war, France — the France of the statisticians — was totally ruined, because the Germans had plundered everything they could lay their hands on. And yet France has revived and is today, in spite of the statistics, a rich country, not because of the American aid provided by the Marshall Plan, much of which was used for bureaucratic expenses and armaments, but simply because the French have made use of their reserves of gold and their foreign assets, which, in spite of the decrees and threats of Marshal Petain and the Germans, they succeeded in preserving from the general pillage. The country has saved itself by virtue of the refusal of its citizens to allow themselves to be expropriated, by their disobedience of the decrees of stupid or traitorous governments.

And the example of France is by no means unique.

No less illusory is the myth of the economic solidarity of the citizens of one country as opposed to the inhabitants of other countries. From what we have already observed of the economic interdependence of all people everywhere, it becomes manifest that it is absurd and impossible for a country to attempt to live in autarky exclusively on its own resources. No country, however extensive and diversified it may be, not even Russia or the United States, has at its disposal all the natural resources needed for its production and consumption. All countries have to import, and not on a small scale, food and raw materials as well as manufactured goods, if they are not prepared to content themselves with a miserable subsistence dearly paid for, because there are branches of industry that can produce at low cost only on a large scale or under especially favorable conditions. (As we know from the law of comparative cost and the law of returns, few countries are in a position to produce economically heavy machinery, automobiles, etc.) They need to export in order to pay for their imports.

For this reason, the only really integral economic whole is the international, or rather, the worldwide, market, because, in fact, trade takes place, not between nations, but among men and across national frontiers. This universal economic community can be realized only when every entrepreneur buys and sells in the markets of the whole world. In this way, demand and supply are allowed free play and brought into equilibrium; income and expenses balance each other everywhere quite insensibly, without difficulties or conflicts; and everyone adjusts himself smoothly and imperceptibly to his possibilities. But as soon as national groups, rather than individuals, seek to enter the market, the whole mechanism of commercial intercourse becomes sluggish as well as dangerous, because covetous ambitions, rivalries, and conflicts arise among armed powers.

The slogan, "Buy what the fatherland produces; produce what the fatherland needs," has not been and cannot be of any avail at all, because whoever is in want of a commodity buys it however and wherever he finds it. This, indeed, is the very essence of man's innate faculty of economic judgment and choice. On the other hand, for a country to produce what it needs, natural conditions have to be favorable, and there must be a sufficient demand to make production profitable, for no one will undertake to produce a commodity, no matter how much the country may need it, that economic calculation shows to be unprofitable and incapable of competing on the world market.

But most absurd of all is the obsession that a country can prosper only when it has a favorable balance of trade, that is, when it exports more than it imports and receives in income more than it pays out — which is tantamount to saying that a country can prosper only at the expense of other countries. This was, indeed, the favorite argument of the supporters of mercantilism, a policy whose disastrous consequences are very well described in the book by Conrad previously cited. What the exponents of this doctrine fail to realize is that it is impossible to be rich in the midst of poverty, because wealth consists in the possibility of making exchanges.

Suppose, for example, that the United States keeps on exporting year after year more than it imports, until it finally accumulates virtually all the money of the other countries, which have been spending all this time in importing more than they have exported and paying the difference in gold. Either the United States will have to use this gold to make further purchases and thereby render its balance of payments "unfavorable," or international commerce will have to be reduced to barter transactions in which the people of the United States will give more than they receive. A country prospers economically when it increases its production of goods that, by their quality and price, are in demand in the world market, and, with the proceeds from such sales, buys in the same market other products which it needs and which are offered for sale by those capable of producing them in abundance at attractive prices.

It is easy to understand that this is possible only when both buyer and seller enjoy full liberty to exercise their initiative, not merely within each country, but across political boundaries. Nations are not economic, but political, communities of men who agree among themselves on the way in which they are to live together. Exercising what the Declaration of Independence calls the right to "the pursuit of happiness," each man in every country undertakes to offer his fellow men all over the world those commodities that suit them by their quality and price, in exchange for which he obtains money; with this he and those who have assisted him in the process of production (for they all receive their share of the remuneration, whether for labor or for capital) buy from other entrepreneurs on the national or international market the commodities they need or want. This freedom of initiative and this desire for constant improvement in well-being is what makes for individual progress and thereby for the progress of national groups, for the latter is nothing but the sum of the advances made by their individual components. When, on the other hand, the activity and initiative of individuals are regulated in view of a supposed national interest, stagnation ensues, the rhythm of economic life diminishes, conflicts arise among different groups, force is invoked, and an armed struggle results.

In the period of great economic prosperity that comprised almost the whole of the 19th century and the first years of the 20th, no one concerned himself about the national economy or the balance of payments, a concept first given currency apparently by David Ricardo (previously one spoke only of a commercial balance). Everyone was busy producing goods or services that would find acceptance in the world market; and this multilateral network of productive efforts resulted in a situation in which everything produced was bought and sold, everyone raised his standard of living, and there never was a lack of foreign exchange.

Indeed, up to 1914, there was not a single case in which anyone in any country wanted to import something and could not do so because he did not have the foreign money needed to pay a reasonable price for it. But one day some German economists, who were more or less in the service of the militarist and imperialist faction, described the existence of what they called the national economy (Volkswirtschaft), began to question whether Germany was receiving a just compensation for the productive efforts of her people, and created a psychological "complex" with regard to international exploitation that led to the war of 1914 and later to that of 1939.

Thereafter, day and night one began to speak of the balance of payments, the statisticians set to work, and we learned that for a long time all countries had been importing more than they exported. This belief led to government intervention in international commerce, import quotas, "dumping" (i.e., subsidized exports), and foreign-exchange controls. The result was that as the intervention was extended and intensified, the deficit in the balance of payments kept on increasing.

Whoever has the patience to peruse the statistics of the various nations will be surprised to find that, all told, more merchandise is imported in the world today than is exported, and that more gold is exported than is imported. Naturally, this is impossible, and the explanation for it is to be found in the fact that these statistics are all incorrect. In the first place, they calculate the value only of those imports and exports that are under control and visible, using the arbitrary prices fixed by the governments for customs purposes. In the second place, these statistics record the movements of foreign exchange (generally today dollars, Swiss francs, or pounds sterling) made through controlled or visible channels; no account is taken of the fact that this movement of goods and money is not the whole of the actual movement, but only a part. This part becomes all the smaller, the greater the extent of government intervention, for the latter creates and feeds the black market — that is to say, the true market, since it is the free market. Yet it is on the basis of these statistics that the economic policy of the governments is founded — a mistaken policy that multiplies the very evils it is designed to avoid. In fact, actual economic life continues to take its course, but in a form more burdensome to the consumers, who must now pay not only the expenses of the government's intervention, but a premium for the risks incurred on the black market. Thus, the result of the policy of economic nationalism is to make the countries that adopt it, not richer, but poorer, because it inhibits economic activity and raises prices.

Another enemy of the worldwide free market is socialism. The labor movement[2] began and developed under the banner of socialism, however many may have been the names — social democracy, syndicalism, collectivism, communism, etc. — given, in the course of the years, to the diverse tendencies that represent but variant expressions of the same fundamental thesis. The word itself seems to have been coined by Robert Owen (1771–1858), an Englishman, to signify that economic activity ought to be inspired exclusively by altruism, and that the economy ought to be social, rather than individualistic.

In this connection, one may cite an interesting observation by the Italian economist Pantaleoni, an adherent of the mathematical school, who, in rebutting a criticism that accused him of founding his economic calculations on individual egoism, wrote these words:

You say that we start from the assumption that man is egoistic; but, from the economic point of view, it would make no difference whatsoever if we were to start from the assumption that man is altruistic. Nothing more would be required than a change of sign. For egoistic rivalry will be substituted rivalry in the spirit of sacrifice, and free competition will continue to exist.

The leitmotif of socialism, which runs through all the different variants of proletarian orthodoxy, was expressed in masterly fashion, albeit in terms perhaps not altogether accurate in point of fact, by the German poet Heinrich Heine in the following verses:

Ein neues Lied, ein beßres Lied,
Oh Freunde, will ich Euch dichten;
Wir wollen hier auf Erden schon
Das Himmelreich errichten.

Wir wollen auf Erden glücklich sein
Und wollen nicht mehr darben;
Verschlemmen soll nicht der faule Bauch
Was fleißige
Händen erwarben.

Es gibt auf Erden Brot genug
Für alle Menschenkinder
Und Tulpen und Lilien und Schönheit und Lust
Und Zuckererbsen nicht minder.

Literally translated, these lines may be rendered thus:

I wish to compose a new, a better song for you, my friends. We want to attain to the kingdom of heaven while we are yet here on earth. We want to be happy in this life and not to be in need any more. No lazy wastrel should consume what hard-working hands have acquired. There is enough bread on earth for all mankind, and tulips and lilies and beauty and joy and sugarplums too.

This leitmotif consists, as we see, of two themes: abundance and exploitation. There is, we are told, enough bread and even "sugarplums" on earth for all men, but the "lazy wastrel" is depriving "hard-working hands" of their rightful produce. Nevertheless:

1. The possibilities of acquiring goods, services, and commodities of every kind in a country within a definite period of time — a year, for example — are represented by the total amount of money that its inhabitants have earned in that period. This sum represents the production of the country in the same period of time. The amount spent on things and services, in general, is the price of these things and services. The annual income of each individual is the numerical expression of his part of the supply of the commodities that are available in that year for the whole population.

Now, according to the annual report of the UN for 1953, the most recent date for which we have found comparative statistics, the average annual income per head of the population was $1,800 in the United States, $957 in Switzerland, $705 in Great Britain, $620 in France, $234 in Brazil, and $160 in Japan. In Mexico (according to the book entitled El desarollo economico de Mexico compiled by government experts, both Mexican and American, and published by the Fondo de Cultura Economica), the average annual income per head of the population in 1950 was $180 in terms of the money of that year, which was then worth half of what it had been worth in 1930. Recent figures for India are not available, but in 1930 the average annual income per head of the population was less than one-tenth that of Switzerland, which would come to about $70. This would be what each inhabitant of these countries could buy if the national income were divided equally among all, and if it were expended entirely on consumption, without any deduction for taxes or for maintaining the factors of production and increasing them at least in proportion to the increase in the population. In the light of these figures, Heinrich Heine could hardly say today that there is in the world enough for everybody to have not only bread but "sugarplums." Instead, he would agree with the statement of the late Charles Gide, the French economist, that Adam Smith should have entitled his book, not The Wealth of Nations, but The Poverty of Nations.

2. The United States has the reputation of being the capitalist country par excellence and the one in which the national wealth is most inequitably distributed. Nevertheless, according to the statistics of the Federal Reserve System, 70 percent of the national income goes to wages and salaries, 20 percent to professional people, tradesmen, and independent artisans, and only 10 percent to those receiving interest, dividends, and rents.

Around 1953, the American Economic Review published a study made by the National Bureau of Economic Research which showed that, after taxes, the average annual income of the richest 7 percent of the population was $3,267 per person and of the remaining 93 percent of the population $1,124 per person. If the income of the upper 7 percent were divided equally among the whole population after taxes, each individual of the remaining 93 percent of the population would receive an additional $150 per year; that is, the average American per capita income would be $1,274 per year instead of $1,124 — an increase of somewhat more than 10 percent.

Professor Lewis[3] comes to the same conclusion in regard to England. If the same coefficient is applied to the rest of the countries mentioned above, the increase in the absolute income of the average Frenchman or Mexican would be even less. With this, they would not only have to live, but they would also have to make provision for industrial investments, and the latter, in a country as little industrialized as Mexico, have amounted in the last few years, according to the book cited above, to around 14 percent of the national income. In order to maintain these investments, the Mexican, after the division of the total annual output, would be left with an average income less than he actually has at his disposal today, and it is by no means certain that the beneficiaries of such a redistribution in the other countries for which we have cited statistics would not find, in the final analysis, their total income available for consumption likewise diminished.

3. The facts, then, belie the two fundamental theses of the socialist critique of the so-called capitalist economy. The latter, indeed, is no more particularly "capitalist" than any other, for capital, or a stock of producers' goods, on however rudimentary a scale, is and always has been a necessity in every economic system. The domestic silk-spinner and the weaver require distaffs and hand looms; craftsmen and artisans need more or less expensive tools and machines. The same is true of the communist countries. Socialized industries also need fixed and circulating capital; they too have to calculate and adjust their prices, at least of their exports, to those of the world market. It is only in regard to wages that the communist countries can avoid being made subject to the laws of the market, because wage rates are prescribed by the government, and not exactly in favor of the workers; for, as Joseph E. Davies, the quondam American ambassador to Russia,[4] and Walter Lippman[5] demonstrate, the differences between the wages of the workers and those of the managers are much greater there than in the United States.

In short, the actual economic situation today is characterized, not by abundance, but by scarcity; not by an unjust distribution of wealth, but by inequalities corresponding to differences in productivity.

4. For the alleged unjust distribution of wealth socialism, in all its various forms, does not seek corrective measures; this is rather the object of the so-called social reform movements, and more especially of the "planned" or "controlled" economy. Marx formulated the aim of socialism as the expropriation of the expropriators. With the so-called surplus value that they allegedly withhold for themselves from the total proceeds of the labor of those whom they employ, the capitalists have made themselves owners of the means of production. They have to be deprived of their ownership of the means of production; i.e., their mills and factories have to be taken away from them.

On whose behalf? On behalf of the people, who will then consist exclusively of workers.

How is this to be accomplished? This is the great problem of socialism that Kautsky discusses, without solving it, in his pamphlet entitled The Day after the Revolution.[6] In general, two tendencies have manifested themselves. The so-called social democrats advocate that the property of private enterprise pass into the hands of the state as the representative of the people; the followers of Bakunin (the anarchosyndicalists) want it to pass directly into the hands of the workers' councils. The communists envision two distinct stages: a preparatory socialist stage, consisting of the dictatorship of the proletariat, with production centralized by the state, and true communism, in which the state will "wither away," leaving only the workers' councils.

What is not seen clearly and has not been explained by anybody is what difference all this would make in comparison with the system of free enterprise or what advantage the workers would derive from such a change. Production would continue to be capitalistic and subject to the laws of the market, which, in an economy operated by the state, would condition the prices of imported and exported products, and consequently of all the rest. In a syndicalist economy the free play of competition would be even more complete. From the prices imposed by the market would have to be deducted costs of production, financial charges, and reinvestments for the maintenance and expansion of the capital structure. The direction of commerce and technology would require a differential compensation such as is, in fact, demanded and received in Russia.

The remainder would be left for the workers, as at present, but with these two differences in their disfavor. In the first place, those responsible for the conduct of business, not being entrepreneurs, would neither reap profits nor suffer losses; they would be assured their own salaries, and the remainder would be left for the ordinary workers. This is precisely the opposite of what happens under present conditions, in which the fixed remuneration is that of the worker, and the boss keeps the remainder, if there is any.

In the second place, under a socialist system, freedom of labor would disappear. In the absence of a labor market, wages would be fixed by the ukase of the monopolistic employer. The right of workingmen to form unions and to go on strike would be suppressed, and the worker would become a slave. This is what is happening in Russia today, where the worker cannot choose even his place of employment, and every effort on his part to improve his condition is punished as high treason.

A very peculiar variety of socialism is agrarian socialism, known also as Georgism and as the agrarian reform movement.[7] It bases itself on the theory of ground rent, already in germinal form in the works of Adam Smith, Anderson, and Malthus, and developed by David Ricardo. According to this doctrine, when fertile land is abundant, it does not produce any profit, and the prices of the products are measured by the costs of production. But when the population increases, land of the first quality is no longer sufficient to produce the food needed, and recourse has to be taken to land of increasingly inferior quality. The prices of the products then rise by an amount equivalent to the cost of cultivating the poorer land. Those who retain possession of the better land profit from this situation by obtaining prices greater than their costs of production and gain a profit that includes, over and above the normal revenue, a premium, called ground rent, in consideration of the superior quality of their own land.

Shortly after the death of Ricardo, an American, Henry George, made full use of this doctrine and developed it in his famous book, Progress and Poverty, which has been translated into many languages. He contended that the poverty of the masses is due, not to the exploitation of the industrial worker, but to the monopoly of ground rent enjoyed by the landlords. He therefore proposed, by means of a single tax, to confiscate this rent. No country has actually made this attempt, although progressive taxation and differences in tax rates based on ownership of real property have been founded on this theory.

The attempts at agrarian reform made in almost all the countries of Europe after the First World War were directed chiefly against the owners of large landed estates and consisted in the expropriation of the landlords, with or without compensation, and the division of the land so as to increase small holdings. Nevertheless, Henry George had and still has many adherents, and, up to the last world war, there were in several countries agrarian reform movements. Very important among them was that headed by Adolf Damaschke, who was the candidate opposing Hindenberg for the presidency of the German Republic. Damaschke, whose book has been cited above, extended the theory of Henry George to urban property and succeeded in having a surplus-value tax imposed on owners of cultivated land that was sold at a high price for the expansion of urban centers. This tax was later adopted by several countries. In recent years Dr. Carlos P. Carranza has defended and developed this theory in a very interesting way.[8]

The doctrine of ground rent is based on two errors, one factual and the other theoretical. The first is the scarcity of land of first-rate quality. This scarcity has become especially noticeable in Europe as a result of overpopulation and the restrictions imposed on immigration in the comparatively less intensively cultivated countries. In reality, there are still in the world vast areas of land of first-rate quality that have not yet been cultivated, as the famous explorer Earl Parker Hanson shows in his very interesting book, New Worlds Emerging;[9] and, as a French economist has recently observed, it is absurd that these lands are still not under cultivation, and that large sums of money are being spent on freight costs to supply the overpopulated countries, when it would be better for everybody if the excess population of these countries could migrate to the idle lands, cultivate them, and live off their produce. In the second place, as Ludwig von Mises has pointed out,[10] land is nothing but a factor of production like machinery or tools. One may not speak simply of land in general, but of land of different quality and productivity, just as one must take account of machines or tools of different quality, and the owner of a superior machine or tool also can be said to derive a differential "rent" from it in comparison with the returns yielded by inferior equipment. This is why they command different prices in the market, and it cannot be said that the owner of land of good quality whose rent has already been capitalized in the higher price paid for it derives an unearned increment from its exploitation.


[1] Riedmatten, L'Économie dirigee, experiences depuis les pharaons jusqu'a nos jours (Versailles: Edition l'Observateur, 1948).

[2] For a rapid survey of the doctrines and the history of the labor movement, see Heinrich Herkner, Die Arbeiterfrage. Eine Einfiihrung (Berlin: W. de Gruyter and Co., 1921); Ramsay MacDonald, Socialism: Critical and Constructive (London: Cassell and Co., Ltd., 1921); and, for what concerns the international movement, my own El socialismo y la guerra (Barcelona: Estudio, 1915).

[3] Op. cit.

[4] Op. cit.

[5] The Good Society (Boston: Little, Brown and Co., 1937).

[6] Karl Kautsky, Das Weitertreiben der Revolution (Berlin: Arbeitsgemeinschaft fur staatsbiirgerliche und wirtschaftsliche Bildung, 1920).

[7] Adolf Wilhelm Ferdinand Damaschke, Die Bodenreform (Jena: G. Fischer, 1913).

[8] Op. cit

[9] New York: Duell, Sloan and Pearce, 1949.

[10] Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949), pp. 631 ff.

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