Mises Daily Articles
How Capitalists Help Build Socialism
In the century since Marx propounded the theories on which he based the inevitability of the coming of socialism, every one of these theories has been proven fallacious, until now when even the avowed socialists avoid mentioning them. And yet, socialism is with us. It has come not by way of Marx but by methods of which he took no note.
Here it might be well to attempt a definition of socialism. The task would be hopeless if it involved the inclusion of every doctrine extant among the multitudinous sects or individuals who lay claim to the name. At one time there was agreement among all of them as to the means for bringing about the "good society" of which they spoke (but not on the ingredients of that "good society"); it was simply public ownership and operation of the means of production and exchange. In other words, the nationalization of industry.
But, of recent years nationalization has itself lost favor with many socialists, particularly in England and Germany, simply because the proletariat have seen nationalization at work and do not think well of it. Their wages have risen under private ownership of capital to such an extent that they have no interest in changing the system.
So the leadership is playing down nationalization in their programs, and are rather stressing the need of the government's intervening in the economic affairs of the nation. They are for government control and regulation, for heavy taxation and for "welfarism." In short, socialism has simmered down to the advocacy of strong government, with this proviso: that that government is best which is run by socialists. Though they speak of the ideal society and promise to bring it about, their main interest is in getting control of the reins of government.
Only in communistic countries, like Russia and China, is state capitalism — state ownership and operation of all capital — in full bloom. In all other countries — republican or monarchical, "free" or compulsive — intervention is the rule, although, to be sure, there is a marked inclination of their ruling regimes to take over certain forms of capital. Whether the inclination can be contained only experience will tell. The odds are against it, simply because in a highly integrated economy every industry impinges on many others, and the state may be obliged to extend its operations to fields contiguous to those in which it has taken a hand.
Thus, when the Tennessee Valley Authority undertook to furnish subsidized electricity to its clients, its clients increased in such numbers that the management had to supplement its original hydroelectric plant with steam-generated electricity. The government monopoly of the letter-carrying business led naturally to its invasion of the parcel-post industry, as well as to the transmission of money. In France, the state monopoly of the railroads has been extended to other and competitive forms of transportation, while in England the state monopoly of doctoring has led to intrusion into the pharmaceutical industries.
In America, where the tradition of individualism relucts at admitting the fact, state capitalism is making headway. What else would you call the government ownership of vast hydroelectric plants, or the government's entry into the housing business, or its extensive banking operations?
If the government has not yet taken over the railroads, its regulation of them bids fair to drive them into bankruptcy, when the government will be forced to enter the field as owner and operator; the prototype of this eventuality is the New York City subway system.
The government's ownership of 40 percent of the land of the country will in due time be augmented by the foreclosure of homes, factories and office buildings in which it has guaranteed mortgages, and the government will then be knee deep in the real-estate business.
Many industries are so dependent on government contracts, or subsidies, that the private ownership of them is a mere formality; in effect, the government really owns them and hires the ostensible owners to run them. So that, even in this country, state capitalism is a lusty baby that promises to grow up.
But, it is not state capitalism that identifies socialism. That may be its ultimate character, but for the present, socialism is confined to state regulation or control of industry and intervention in the private affairs of the people. If that is socialism — and the socialists themselves declare it to be — then we have plenty of it, even in this country.
Well, then, if the fulfillment of Marx's prophecy cannot be attributed to his theories, how can it be explained? It is the end result of practices instituted by the capitalists. It is they who are to blame.
Capital consists of labor products set aside to facilitate greater production, and capitalists are those who own and operate such accumulations. In that capacity, they can only benefit society. But the owners of capital have never been satisfied to reap the profits of production. In addition, they have since the beginning of capitalism sought to augment their income by securing from the ruling regime some enforceable special privilege.
The task of producing goods and services for exchange was accepted as a necessity, but the summum bonum was the acquisition from the king of grants, patents and subsidies that would yield them monopoly profits, that is, profits over and above what might be garnered in a competitive market. Their aim was to live like nobles who rendered no service for the rents they collected from their tenants.
Since land was hard to come by, capitalists devised ways and means whereby with the aid of the law and the king they could get themselves into a monopoly position. Patents and franchises which prohibited others from going into certain lines of business, cartels by which none but members could enter given markets, thus reducing the risks of competition, and protective tariffs and subsidies were the favorite devices.
The practice of seeking special privilege from the political establishment was transported to this country and was integrated into the economy as soon as government was organized. Take, for instance, the post-office business. In the beginning, when it was in the hands of the colonial congress, contracts were granted to postriders (capitalists) to transport mail from one town to another. The contracts called for the carrying of a certain number of letters in each saddle pouch; if there were more than the given number to be delivered, the postriders refused to handle the excess, thus forcing the government to contract for a second horse. There was not enough mail to fill the pouches of the second horse, so the capitalists augmented their income by carrying parcels for merchants; but the second horse was available, and it was for this availability that the government paid.
This practice has continued to the present day, in the payment to airlines for the availability of space on their ships, not for the actual carrying of mail. It is a subsidy, a special privilege, which the taxpayer must meet, and it has nothing to do with capitalism.
Railroad magnates were not content with a franchise to run trains between given points, but had to be bribed with large grants of land abutting their routes, which put them, with no capital investment, into the often lucrative real-estate business. The manufacture and sale of spirits was almost from the beginning put under license from the government, thus limiting competition. The shipping business has been highly subsidized, mainly through mail contracts, on the excuse that a merchant marine is necessary in the event of war.
Sugar quotas are imposed by the government for the purpose of favoring native beet-sugar growers. Tariff protection was a "right" acquired by manufacturers even before the Constitution was ratified. And, in recent years, farmers have been granted huge bounties for not planting. In various ways, the producers, called capitalists, have been favored by the government at the expense of the consumers.
Now, the point is that the State does not grant privileges without a quid pro quo. Every privilege involves the getting of something for nothing; it is never an honorable exchange, and therefore has to be enforced. The coercive power of the political establishment is involved.
The State, far from being an impersonal fiction, consists of men who are called politicians but whose inclinations are not unlike those of other men. The only difference between the politician and the rest of mankind is that he is invested with the power to compel other men to do what they do not want to do, or to refrain from doing what they want to do.
The politician is interested in the prerogatives of office. Therefore, when he uses the power vested in him to favor the interests of some particular person or group, he demands in exchange an extension of his prerogatives.
Indeed, the very privilege he grants calls for an enlargement of his powers, for the privilege has to be enforced. Patents require a patent office, tariffs call for an extensive custom service and a sizable navy, cartels must be regulated, farm subsidies and controls must be administered by a department, bounties have to be doled out by agents. Every privilege granted by the state demands an enlargement of its personnel, its prestige and its power — and its income by way of taxes.
Capitalists — so-called — have never quibbled over the price. In fact, in exchange for the profitable privileges they have supported the state in its demand for additional regulatory powers, for without these powers their privileges would have meant nothing.
However, in this business of dispensing privileges, the State could not forever confine its clientele to the owners of the means of production. In the beginning, in feudalistic times, everything was held in ship-shape order by limiting privileges to the land-owning class. But, soon a rising entrepreneurial class came upon the scene; and they, seeking privileges, asked for a place in the government. They got in, not by reason of the "rights of man," but by offering the king their financial support in his struggles with rival lords or foreign princes. Once in the government these capitalists took care of themselves.
Pretty soon the vociferous and turbulent masses, who pay for the privileges, began to make their presence felt, and they demanded a say in government by way of the vote. The vote is, by definition, a piece of sovereignty; the theory is that sovereignty resides in the citizen, who transfers it to agents, whose exercise of authority thus gains moral sanction. But the demand for the vote was never motivated by an abstract principle; it has come from an economically depressed class, and the lure has been the promise of betterment. Since land owners and capitalists had done well by themselves by cooperating with the State, it seemed reasonable to suppose that the proletariat would likewise benefit by digging their snouts into the trough.
Never has the vote been used to abolish privilege; it has always been used to demand new ones or to effect a change in beneficiaries. The pressure-group technique is nothing but the clubbing together of many minuscule pieces of sovereignty into an effective instrument of trade. Privilege is an over-the-counter proposition.
The trade of privilege for power appealed mostly to the State. The proletariat really never approached the State for privilege; it was actually handed to them by the power-hungry politicians in exchange for their suffrage. Every subsidy to the "poor" (in a democracy) was thought up by a bureaucrat or a candidate for office, the candidate to achieve political preferment, the bureaucrat to improve his prerogatives and his perquisites.
The "poor", being human, as even the capitalists are, voted for something-for-nothing; it is questionable whether the "poor", unlike the capitalists, knew that in so doing they were augmenting the power of the State.
The power of the State is in exact proportion to its tax income. The police — the bureaucracy — have to be paid for their services, and the larger the tax income the greater will be the bureaucracy.
In fact, the size of the bureaucracy can be used as a measure of State power. The founding fathers were well aware of this phenomenon, and sought to limit the area of State intervention by putting strict limits on its taxing powers. But all that was done away with when the income-tax amendment was added to the Constitution. Without income taxation, socialism is impossible; with it, socialism is inevitable.
Now, the "poor" pay most of the taxes. This is necessarily so, because the national payroll contains most of the wealth of the country and is therefore the most fruitful source of taxation.
The State is not concerned with the welfare of the "poor" — or even of the "rich" — but takes where the getting is good; and the wages of the country is a cornucopia the State could not overlook. So that those who have nothing but their labor to sell pay for the bounties handed to them, as well as for the administration of the handouts, although, to be sure, they believe (and are told) that they are getting something for nothing, that the "rich" pay all the taxes.
Capitalists, on the other hand, gain something by the privileges they enjoy. In the first place, there are loopholes in the tax laws that enable them to avoid paying taxes in proportion to their income. These loopholes are necessarily put into the laws, for the State recognizes that the accumulation of capital must be encouraged or there will be no production to levy on; that is, if there is no capital there cannot be any wages to tax.
In the second place, many capitalists profit directly or indirectly from the acquisition of power by the State. When the state becomes the biggest buyer of goods and services in the country (as it must because of its depletion of the buying power of the public), it is a customer worth catering to. Some capitalists work entirely for the State, and their profits are in fact derived from taxes; they cannot object to the State's accumulation of power. Even the small capitalist, the merchant, rakes in his profits from the purchasing power put into the hands of workers in factories operating for the State, or from handouts given to malingerers.
No matter how much the State takes from the capitalist there is something left for him to replenish his capital and something to get by on. Under the circumstances, while he might object to State intervention in his business, his objection is based on personal inconvenience, not on principle; on principle, he is all for the State.
In point of fact, so is the proletarian who thrives on the bounty of the State. His only objection to the State is that it does not give him enough; he always wants more. As the suffrage was extended, the demand for special privilege increased, and the State to gain its ends met the demand with alacrity; in fact, the State put the idea into the head of the proletarian in the first place.
Now, every privilege amounts to an economic advantage, and an advantage is accompanied by a disadvantage; somebody has to pay for the advantage. When, in due time, the demand for something for nothing exceeds the tax income of the State — or the point at which it is politically unwise for the moment to increase the rate of taxation — the State goes in for printing money (or bonds, which is practically the same thing). This is inflation. Inflation is a hidden tax, for it robs the saver of his savings. It is, indeed, a tax on capital.
A society of all thieves is an impossibility; somebody has to produce something for others to steal. But the State does not know that and continues to take as much as it can lay its hands on, through increased taxation or inflation, to assuage its insatiable appetite for power. At long last it levies directly on capital — not satisfied with its take from inflation — and at that point both labor and capital lie down on the job. Why work when there is nothing in it?
It is then that socialism comes into its own; the State takes over the capital structure of the country, or parts of it, in an effort to keep production going so that it will have something to tax. The State must live in its accustomed style. When the State takes over capital it abolishes all privileges, for both capitalists and workers, and its minions then constitute the only privileged class; everybody works for them. Socialism is the end-product of an economy sucked dry by privilege.
Is this inevitable? It is, if capitalists continue to make common cause with the State. In doing so, they unwittingly are digging the grave of capitalism.