Tuesday, 17 November 2015

Mises on Capitalism

Economic Policy by MisesThis book, ‘Economic Policy: Thoughts for Today and Tomorrow’, might be Mises's best-selling book.
    It is a very clear explanation of the basics of economic policy: private property, free trade, exchange, prices, interest, money and inflation, socialism, fascism, investment, and much more. As Mises discusses each topic, he addresses the many merits of market institutions and the dangers of intervention.
    These chapters [partially excerpted below] were originally delivered as lectures in Argentina in 1958, at the University of Buenos Aires, and later written up in prose. Mises had urged Argentina to turn from dictatorship and socialism toward full liberty, so there is a special urgency behind the cool logic employed here. The book's continued popularity is due to its clarity of exposition on the ways in which economic policy affects everyone.
    It is a very good text for undergraduates studying economic policy, and for anyone who wants to gain a fundamental understanding of the interaction between market forces and government intervention. [Free legal download here]

Introduction to Ludwig Von Mises’ Economic Policy [excerpt] 
~ by Bettina Bien Greaves

Professor Mises (1881–1973) was one of the 20th century’s foremost economists. He was the author of profound theoretical books such a Human Action, Socialism, Theory and History, and a dozen other works. However, in these lectures, delivered in Argentina in 1959, he spoke in nontechnical terms suitable for his audience of business professionals, professors, teachers, and students. He illustrates theory with homespun examples. He explains simple truths of history in terms of economic principles. He describes how capitalism destroyed the hierarchical order of European feudalism, and discusses the political consequences of various kinds of government. He analyses the failures of socialism and the welfare state and shows what consumers and workers can accomplish when they are free under capitalism to determine their own destinies.
    When government protects the rights of individuals to do as they wish, so long as they do not infringe on the equal freedom of others to do the same, they will do what comes naturally—work, cooperate, and trade with one another. They will then have the incentive to save, accumulate capital, innovate, experiment, take advantage of opportunities, and produce. Under these conditions, capitalism will develop. The remarkable economic improvements of the 18th and 19th centuries and Germany’s post-World War II “economic miracle” were due, as Professor Mises explains, to capitalism:

[I]n economic policies, there are no miracles. You have read in many newspapers and speeches, about the so-called German economic miracle—the recovery of Germany after its defeat and destruction in the Second World War. But this was no miracle. It was the application of the principles of the free market economy, of the methods of capitalism, even though they were not applied completely in all respects. Every country can experience the same “miracle” of economic recovery, although I must insist that economic recovery does not come from a miracle; it comes from the adoption of—and is the result of—sound economic policies. (p. 15)

So we see that the best economic policy is to limit government to creating the conditions which permit individuals to pursue their own goals and live at peace with their neighbours. Government’s obligation is simply to protect life and property and to allow people to enjoy the freedom and opportunity to cooperate and trade with one another. In this way government creates the economic environment that permits capitalism to flourish…

Capitalism: Mass Production and the Standard of Living (1 of 3) [excerpt] 
~ Ludwig Von Mises

Descriptive terms which people use are often quite misleading. In talking about modern captains of industry and leaders of big business, for instance, they call a man a “chocolate king” or a “cotton king” or an “automobile king.” Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all, he serves. He does not reign over conquered territory, independent of the mar­ket, independent of his customers. The chocolate king–or the steel king or the automobile king or any other king of modern industry–depends on the industry he operates and on the customers he serves. This “king” must stay in the good graces of his subjects, the consumers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete….
    Today, in discussing similar conditions in places like India or other developing countries, we must not forget that, in eighteenth-century England, conditions were much worse. At that time, England had a population of six or seven million people, but of those six or seven million people, more than one million, probably two million, were simply poor outcasts for whom the existing social system made no provision. What to do with these outcasts was one of the great problems of eighteenth-­century England.
image    Another great problem was the lack of raw materials. The British, very seriously, had to ask themselves this question: what are we going to do in the future, when our forests will no longer give us the wood we need for our industries and for heating our houses? For the ruling classes it was a desperate situation. The statesmen did not know what to do, and the ruling gentry were absolutely without any ideas on how to improve conditions.
    Out of this serious social situation emerged the beginnings of modern capitalism. There were some persons among those outcasts, among those poor people, who tried to organize others to set up small shops which could produce something. This was an innovation. These innovators did not produce expensive goods suitable only for the upper classes; they produced cheaper products for everyone’s needs. And this was the origin of capitalism as it operates today. It was the beginning of mass production, the fundamental principle of capitalistic industry. Whereas the old processing industries serving the rich people in the cities had existed almost exclusively for the demands of the upper classes, the new capitalist industries began to produce things that could be purchased by the general population. It was mass production to satisfy the needs of the masses.
    This is the fundamental principle of capitalism as it exists today in all of those countries in which there is a highly developed system of mass production: Big business, the target of the most fanatic attacks by the so-called leftists, produces almost exclusively to satisfy the wants of the masses. Enterprises producing luxury goods solely for the well-to-do can never attain the magnitude of big businesses. And today, it is the people who work in large factories who are the main consumers of the products made in those factories. This is the fundamental difference between the capitalistic principles of production and the feudalistic principles of the preceding ages…

Capitalism: Opposition from the Intellectuals (2 of 3) [excerpt]
In spite of all its benefits, capitalism has been furiously attacked and criticized. It is necessary that we understand the origin of this antipathy. It is a fact that the hatred of capitalism originated not with the masses, not among the workers themselves, but among the landed aristocracy–the gentry, the nobility, of England and the European continent. They blamed capitalism for some­thing that was not very pleasant for them: at the beginning of the nineteenth century, the higher wages paid by industry to its workers forced the landed gentry to pay equally higher wages to their agricultural workers. The aristocracy attacked the industries by criticizing the standard of living of the masses of the workers.
    Of course–from our viewpoint, the workers’ standard of living was extremely low; conditions under early capitalism were absolutely shocking, but not because the newly developed capitalistic industries had harmed the workers. The people hired to work in factories had already been existing at a virtually subhuman level…
    The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into factories because they had no kitchens, and if they had a kitchen they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying. And all the talk about the so-called unspeakable horror of early capitalism can be refuted by a single statistic: precisely in these years in which British capitalism developed, precisely in the age called the Industrial Revolution in England, in the years from 1760 to 1830, precisely in those years the population of England doubled, which means that hundreds or thousands of children–who would have died in preceding times–survived and grew to become men and women.
image    There is no doubt that the conditions of the preceding times were very unsatisfactory. It was capitalist business that improved them. It was precisely those early facto­ries that provided for the needs of their workers, either directly or indirectly by exporting products and importing food and raw materials from other countries. Again and again, the early historians of capitalism have–one can hardly use a milder word—falsified history…
    Today, in the capitalist countries, there is relatively little difference between the basic life of the so-called higher and lower classes; both have food, clothing, and shelter. But in the eighteenth century and earlier, the difference between the man of the middle class and the man of the lower class was that the man of the middle class had shoes and the man of the lower class did not have shoes. In the United States today the difference between a rich man and a poor man means very often only the difference between a Cadillac and a Chevrolet. The Chevrolet may be bought secondhand, but basically it renders the same services to its owner: he, too, can drive from one point to another. More than fifty percent of the people in the United States are living in houses and apartments they own themselves.
    The attacks against capitalism–especially with respect to the higher wage rates–start from the false assumption that wages are ultimately paid by people who are different from those who are employed in the factories. Now it is all right for economists and for students of economic theories to distinguish between the worker and the consumer and to make a distinction between them. But the fact is that every consumer must, in some way or the other, earn the money he spends, and the immense majority of the consumers are precisely the same people who work as employees in the enterprises that produce the things which they consume. Wage rates under capitalism are not set by a class of people different from the class of people who earn the wages; they are the same people. It is not the Hollywood film corporation that pays the wages of a movie star; it is the people who pay admission to the movies. And it is not the entrepreneur of a boxing match who pays the enormous demands of the prize fighters; it is the people who pay admission to the fight. Through the distinction between the employer and the employee, a distinction is drawn in economic theory, but it is not a distinction in real life; here, the employer and the employee ultimately are one and the same person…

Capitalism: Capital and Wages (3 of 3) [excerpt]
The capitalist system was termed “capitalism” not by a friend of the system, but by an individual who considered it to be the worst of all historical systems, the greatest evil that had ever befallen mankind. That man was Karl Marx. Nevertheless, there is no reason to reject Marx’s term, because it describes clearly the source of the great social improvements brought about by capitalism. Those improvements are the result of capital accumulation; they are based on the fact that people, as a rule, do not consume everything they have produced, that they save–and invest—a part of it. There is a great deal of misunderstanding about this problem and–in the course of these lectures–I will have the opportunity to deal with the most fundamental misapprehensions which people have concerning the accumulation of capital, the use of capital, and the universal advantages to be gained from such use. I will deal with capitalism particularly in my lectures about foreign investment and about that most critical problem of present-day politics, inflation. You know, of course, that inflation exists not only in this country. It is a problem all over the world today.
    An often unrealized fact about capitalism is this: savings mean benefits for all those who are anxious to produce or to earn wages. When a man has accrued a certain amount of money–let us say, one thousand dollars–and, instead of spending it, entrusts these dollars to a savings bank or an insurance company, the money goes into the hands of an entrepreneur, a businessman, enabling him to go out and embark on a project which could not have been embarked on yesterday, because the required capital was unavailable.
    What will the businessman do now with the additional capital? The first thing he must do, the first use he will make of this additional capital, is to go out and hire workers and buy raw materials–in turn causing a further demand for workers and raw materials to develop, as well as a tendency toward higher wages and higher prices for raw materials. Long before the saver or the entrepreneur obtains any profit from all of this, the unemployed worker, the producer of raw materials, the farmer, and the wage-earner are all sharing in the benefits of the additional savings.
image    When the entrepreneur will get something out of the project depends on the future state of the market and on his ability to anticipate correctly the future state of the market. But the workers as well as the producers of raw materials get the benefits immediately. Much was said, thirty or forty years ago, about the “wage policy,” as they called it, of Henry Ford. One of Mr. Ford’s great accomplishments was that he paid higher wages than did other industrialists or factories. His wage policy was described as an “invention,” yet it is not enough to say that this new “invented” policy was the result of the liberality of Mr. Ford. A new branch of business, or a new factory in an already existing branch of business, has to attract workers from other employments, from other parts of the country, even from other countries. And the only way to do this is to offer the workers higher wages for their work. This is what took place in the early days of capitalism, and it is still taking place today…
    We must realize, however, that this higher standard of living depends on the supply of capital. This explains the difference between conditions in the United States and conditions in India; modern methods of fighting contagious diseases have been introduced in India–at least, to some extent–and the effect has been an unprecedented increase in population but, since this increase in population has not been accompanied by a corresponding increase in the amount of capital invested, the result has been an increase in poverty. A country becomes more prosperous in proportion to the rise in the invested capital per unit of its population.
    I hope that in my other lectures I will have the opportunity to deal in greater detail with these problems and will be able to clarify them, because some terms-such as “the capital invested per capita”–require a rather detailed explanation.
    But you have to remember that, in economic policies, there are no miracles. You have read in many news­papers and speeches, about the so-called German economic miracle–the recovery of Germany after its defeat and destruction in the Second World War. But this was no miracle. It was the application of the principles of the free market economy, of the methods of capitalism, even though they were not applied completely in all respects. Every country can experience the same “miracle” of economic recovery, although I must insist that economic recovery does not come from a miracle; it comes from the adoption of–and is the result of–sound economic policies.

Part II tomorrow: Mises on Socialism.

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