Economics of the Free Society

Though the business method is in itself ethically neutral, business income may be used for ethically positive (altruistic) ends. The concept “individual increase of well-being” must, therefore, be understood in a broad sense, one which embraces all the possible objectives which the individual fixes for himself, including altruistic objectives. Certain Western peoples are noted as much for their charity and generosity as for their shrewd business insight. Money as an end in itself holds less attraction for them than it does for many Orientals who, while despising Western “business methods,” take a miser’s joy in accumulating treasure for its own sake. Experience shows that business is only a method of acquiring means which may be then employed for every imaginable object. Even charitable institutions find it necessary to use purely commercial methods to raise needed funds. Heinrich Schliemann, the ingenious discoverer of ancient Troy, amassed a fortune in business with the sole object of paying for the costs of his excavations. On this and related questions see the comprehensive study by P. Hennipman, Economisch Motief en Economisch Principe (Amsterdam, 1945). Other significant contributions to the literature on this subject include: L. von Wiese, Ethik in der Schauweise der Wissenschaften vom Menschen und von der Gesellschaft (Berne, 1947); F. H. Knight, The Ethics of Competition and other Essays (London, 1935); F. H. Knight, Freedom and Reform (New York, 1947). The role of ethics in economics is considered in detail in my own book, A Humane Economy (Chicago, 1960).

The question of the origin of the modern economic spirit (spirit of capitalism) is one that has long interested students of economic history. Investigation has shown that the causes are many and complex and that they cannot be reduced to simple formulations, such as those advanced by Sombart, for example. The question can be studied only in connection with the intellectual history of Europe, in particular, the great movements of the Renaissance, of Humanism, of the Reformation, of nationalism, and of the Age of Enlightment. Max Weber has drawn attention to the especial influence of Calvinism on the growth of the business spirit in his celebrated and still much discussed work, The Protestant Ethic and the Spirit of Capitalism (New York, 1930). See also R. H. Tawney, Religion and the Rise of Capitalism (London, 1926); A. Rüstow, “Die Konfession in der Wirtschaftsgeschichte,” Revue de la Faculté des Sciences Economiques de l’Université d’Istanbul (1942, nos. 3,4); for more comprehensive discussion of this theme, see Rüstow’s major opus, Ortsbestimmung der Gegenwart (Vol. III, Zurich, 1957).

What has been described in the text as the fusion of the method of exploitation with the method of business is a standard fixture of Marxist theory. Marxists argue that an economic system reposing on the business principle (capitalism) necessarily impels the capitalist countries to expand their political power for purposes of economic exploitation. The truth is that political expansionism undertaken for the purpose of economic exploitation (economic imperialism) is a phenomenon as old as history itself. Moreover, it is precisely such exploitation to which our economic system is opposed. Economic imperialism exists today as at every other period in history and as under every other economic system. Nothing would be more false than to regard it as a necessary element of our economic system. The causes of imperialism have their locus in quite another world than that of business. Moreover, the theory which seeks to prove that “capitalism” cannot exist without the incessant conquest of overseas markets will be found upon close examination to be untenable. See J. Schumpeter, Social Classes and Imperialism: Two Essays (New York, 1955); S. Rubinstein, Herrschaft und Wirtschaft (Munich, 1930); R. Behrendt, “Wirtschaft und Politik im Kapitalismus,” Schmollers Jahrbuch (Vol. 57, 1933); W. Sulzbach, National Consciousness (Washington, D.G., 1943); W. Sulzbach, Capitalistic Warmongers, A Modern Superstition (Public Policy Pamphlet No. 35, University of Chicago Press, 1942); L. Robbins, The Economic Causes of War (London, 1939); W. Röpke, International Order and Economic Integration (Dordrecht, Holland, 1959).

The interpretation of costs as a loss of utility (“opportunity cost”) sheds light on what has long been one of the most baffling problems of economics. What are the “real” costs behind the money costs which we encounter initially in the market economy? One of the most important and least contested contributions of modern marginal theory was its discovery of the answer to this question. Prior to the application of the marginal analysis—and Marshall himself had held to this view—costs had been regarded as primarily the expression of and the compensation for the pain and sacrifice entailed in production (“pain cost”). This was a conception which found in Marx’s labor theory of value its purest and most radical formulation. There is some evidence that this interpretation of costs reflects the moral climate in which the English bourgeoisie of the eighteenth and nineteenth centuries lived, a climate in which every honest gain was thought to require a corresponding sacrifice. This tendency, and the economic errors which developed from it, are especially evident in W. N. Senior’s (1790-1864) attempt to describe and to justify the price of capital (interest) as an appropriate reward made to the saver for his sacrifice (“abstinence”). Doubtless, it was this attempt which inspired Ferdinand Lassalle to utter the well-known jest: “The profit from capital is the reward for privation! Admirable maxim, worth its weight in gold! The European millionaires, the ascetics, the penitent Hindus, the stylites perched on one leg on the tops of their pillars, arms outstretched, the body bent over, the face pale, proffering their cups to the faithful in order to collect the reward for their privations 1 In the midst of them, and overshadowing all the penitents, the penitent of penitents, the House of Rothschild!” The thought expressed here is indeed a disquieting one, for it is obvious that the so-called “sacrifice” of the saver (lender) diminishes with increasing wealth, to the point where saving among millionaires takes place in a quasi-automatic fashion. In due course, we shall see why interest must be detached completely from notions such as “sacrifice” and “reward.” The phenomenon of interest is independent of the concept of saving as a sacrifice or a pleasure, just as an author’s income from a novel is independent of the pleasure or lack of it the writing of the novel gave him. An author’s income is in reality contingent on his writing a good novel and on the fact that good novels are rare. Likewise, interest results from the fact that capital is at once useful and rare. There is simply not enough capital to supply the demands of all those who should like to use it. In the level of the interest rate, which must be entered on the ledger along with the other costs as the “cost of capital,” is reflected the utility of an alternative but rejected use of capital. What is true for capital costs is true, also, for all other costs. Costs, as reflected in prices, do not represent a compensation we are compelled to pay for a sacrifice someone has incurred, for often it is precisely the most laborious work and the dirtiest which is the least well paid. The function of costs is to compel us to compare the utility of our use of productive factors with the utility of some other alternative use of the same factors.

The interpretation of costs as a renunciation of alternative utilities involves a number of difficulties which we cannot deal with here. But it may be observed in passing that this interpretation is valid only when a means of production can be used in more than one way (“general” as opposed to “specific” means of production in Wieser’s terminology). These and other aspects of cost theory are the subject of lively discussion by present-day economists. See F. von Wieser, Theorie der gesellschaftlichen Wirtschaft, (2nd ed. 1924, pp. 61ff.; published in English as Social Economics, trans, by A. Ford, London, 1927); O. Morgenstern, “Offene Probleme der Kosten- und Ertragstheorie,” Zeitschrift für Nationalökonomie, (Vol. 2, 1934), 481-522; F. H. Knight, “Cost of Production and Price over Long and Short Periods,” Journal of Political Economy (Vol. XXIV, 1921), reprinted, together with other pertinent material, in Knight’s The Ethics of Competition (London, 1935); G. J. Stigler, The Theory of Price (2nd ed., New York, 1953); and finally the extended discussion of these matters in The Economic Journal, beginning in 1926 (by Sraffa, Pigou, Shove, Robertson, Robbins, et al).

The interesting lessons of a pure system of rationing operating under conditions of war, and the economic implications thereof, are presented in detail in R. A. Radford, “The Economic Organization of a P.O.W. Camp,” Economica (November, 1948).

The essential difference between the price system and the system of collective economy consists in this: in the price system, the equilibration of supply and demand occurs automatically in the market; in the collective economy, it is established as the result of conscious political decision. In the price system, individual preferences are directly manifested; their manifestation in the system of collective economy involves long and complicated detours. The fact that some private persons furnish their homes with Oriental rugs must as a general rule be regarded simply as an expression of their individual preferences. It is something to which no one can take exception, at least within the context of the existing distribution of wealth and income. But where the floors of public buildings are covered with Oriental rugs, we immediately begin to wonder whether waste or graft is being practiced by our public officials. We will have in this case grounds (generally good ones) for suspecting that a collective need is being satisfied at the expense of some more important need of individuals, i.e., of taxpayers. It is obvious that tendencies towards waste are inherent in a system of collective economy, particularly where, as in our age of swollen government budgets, the public sector has been continuously expanded. It is in any case difficult to conceive of any alternative method which would enable governments at all times harmoniously to coordinate the satisfaction of collective wants with the satisfaction of individual wants. Further examination of these problems would carry us deep into the intricacies of public finance. See H. Dalton, Principles of Public Finance (London, 1923); W. Röpke, Finanzwissenschaft (1929); K. Wicksell, Finanztheoretische Untersuchungen (1896); M. Cassel, Die Gemeinwirtschaft (1925); W. Gerloff and F. Neumark, Handbuch der Finanzwissenschaft (2nd ed., Vol I, 1951); O. Pfleiderer, Die Staatswirtschaft und das Sozialprodukt (1930); Ursula K. Hicks, Public Finance, (London, 1947); R. A. Musgrave, The Theory of Public Finance—A Study in Public Economy (New York, 1959).