Economic Policy .Ludwig

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Economic PolicyThoughts for Today and Tomorrow

Third Edition

Ludwig von Mises

von MisesInstitute

AUBURN,ALABAMA


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Originally published 1979 by R egn ery/G atew ay, Inc., Chicago(ISBN 0-89526-899-X). Copyright by Margit von Mises.

Second edition copyright 1995 by Bettina Bien Greaves.

Third edition copyright 2006 by Bettina Bien Greaves.

All rights reserved. No p art of this book m ay be reprod uced inany ma nner w hatsoever w ithout w rit ten permission except inthe case of reprin ts in the context of review s. For informa tionwrite the Lud w ig von M ises Institute, 518 West MagnoliaAvenue, Auburn, Alabama 36832.

ISBN 13: 978-1-933550-01-5

ISBN 10: 1-933550-01-5


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Contents

Introduction by Bettina Bien Greaves vii

Foreword by Margit von Mises xiii

1st Lecture Capi ta l i sm 1

2nd Lecture Socialism 17

3rd Lecture In te rvent ion ism 37

4th Lecture Inflation 55

5th Lecture Foreign Inv estm ent 75

6th Lecture Policies an d Idea s 93

Index 107


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Introduction

The ideal economic policy, both for today and tomor-row, is very simple. Government should protect and de-fend against domestic and foreign aggression the livesand property of the persons under its jurisdiction, settledisputes that arise, and leave the people otherwise free

to pursue their various goals and ends in life. This is aradical idea in our interventionist age. Governments to-day are often asked to regulate and control production,to raise the prices of some goods and services and tolower the prices of others, to fix wages, to help somebusinesses get started and to keep others from failing,to encourage or hamper imports and exports, to care for

the sick and the elderly, to support the profligate, andso on and on and on.Ideally government should be a sort of caretaker, not

of the people themselves, but of the conditions whichwill allow individuals, producers, traders, workers, en-trepreneurs, savers, and consumers to pursue their owngoals in peace. If government does that, and no more,the people will be able to provide for themselves muchbetter than the government possibly could. This in es-sence is the message of Professor Ludwig von Mises inthis small volum e.

Professor Mises (1881-1973) was one of the 20th cen-

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tury's foremost economists. He was the author of pro-found theoretical books such aHum an Action, Socialism,Theory and H istory, and a dozen other works. However,in these lectures, delivered in Argentina in 1959, hespoke in nontechnical terms suitable for his audience ofbusiness professionals, professors, teachers, and stu-dents. He illustrates theory with homespun examples.He explains simple truths of history in terms of eco-nom ic principles. He describes how capitalism destroyedthe hierarchical order of European feudalism, and dis-cusses the political consequences of various kinds ofgovernment. He analyzes the failures of socialism andthe welfare state and shows what consumers and work-ers can accomplish when they are free under capitalismto determine their own destinies.

When government protects the rights of individualsto do as they w ish, so long as they do not infringe on theequal freedom of others to do the same, they will dowhat comes naturallywork, cooperate, and trade withone another. They will then have the incentive to save,accumulate capital, innovate, experiment, take advan-tage of opportunities, and produce. Under these condi-

tions, capitalism will dev elop . The remarkable economicimprovements of the 18th and 19th centuries and Ger-m an y's post-World War II "economic miracle" we re due,as Professor Mises exp lains, to capitalism:

[I]n economic policies, there are no miracles. You have read inmany newspapers and speeches, about the so-called Germaneconomic miraclethe recovery of Germany after its defeat

and destruction in the Second World War. But this was nomiracle. It was the application of theprinciples of the free marketeconomy, of the methods of capitalism, even though they werenot applied completely in all respects. Every country can expe-rience the same "miracle" of economic recovery, although I


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Introduction ix

must insist that economic recovery does not come from a mir-acle; it comes from the adoption ofand is the result ofsoundeconomic policies, (p. 15)

So we see that the best economic policy is to limitgovernment to creating the conditions which permit in-dividuals to pursue their own goals and live at peacewith their neighbors. Government's obligation is simply

to protect life and property and to allow people to enjoythe freedom and opportunity to cooperate and tradewith one another. In this way government creates theeconomic environment that permits capitalism to flour-ish:

The development of capitalism consists in everyone's havingthe right to serve the customer better and /o r more cheaply.And this method, this principle, has, within a comparativelyshort time, transformed the whole world. It has made possiblean unprec edented increase in world population, (p. 5)

When government assumes authority and power to domore than this, and abuses that authority and power, asit has many times throughout historynotably in Ger-many under Hitler, in the U.S.S.R. under Stalin, and inArgentina under Peronit hampers the capitalistic sys-tem and becomes destructive of human freedom.

Dictator Juan Peron, elected President in 1946, was inexile when Mises visited Argentina in 1959, having beenforced out of the country in 1955. His wife, the popularEva, had died earlier, in 1952. Although Peron was outof the country, he had many supporters and was still a

force to be reckoned with. He returned to Argentina in1973, w as again elected P resident and, with his new wifeIsabelita as Vice President, ruled until he died tenmonths later. His widow, Isabelita, then took over until


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her administration, charged with corruption, was finallyousted in 1976. Argentina has had a series of Presidentssince then and has made some strides toward improvingher economic situation. Life and property have been ac-corded greater respect, some nationalized industrieshave been sold to private buyers, and the inflation hasbeen slowed.

The present work is a felicitous introduction to Mises'ideas. They are, of course, elaborated more fully inHu-man Action and his other scholarly works. Newcomersto his ideas would do well, however, to start with someof his simpler books such asBureaucracy, or The Anti-Capitalistic Mentality. With this background, readers willfind it easier to grasp the principles of the free marketand the economic theories of the Austrian school thatMises presents in his major works.

BETTINA BIEN GREAVESFebruary 1995


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Introduction xi

Mises' Major Works(Date of first publication in parentheses)

The Theory of Money and Credit (1912)Nation, State and Economy (1919)Socialism (1922)Liberalism (1927; 1st English translation titled,

The Free and Prosperous Commonwealth)Critique of Interventionism (1929)Epistemological Problems ofEconomics (1933)Nationalokonomie (1940) Predecessor to

Hum an Action; no English translation.Bureaucracy (1944)Omnipotent Government (1944)Hum an Action (1949)

Planning for Freedom (1952)The Anti-Capitalistic Mentality (1956)Theory and History (1957)The Ultimate Foundation of Economic Science (1962)

Posthumous Publications:Notes and Recollections (1978)On the Man ipulation of Money and Credit (1978)

Economic Policy (1979)Money, Method, and the Market Process (1990)Economic Freedom and Interventionism (1990)Interventionism: An Econom ic Analysis (1998)


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ForewordThe present boo k fully reflects tlieauthor's fundamental posi-tion for which he wasand still isadm ired by followers a ndreviled by oppon ents.... Wh ile each of tlw six lectures canstand alone as an independ ent essay, the harmo ny of the seriesgives an aesthetic pleasure similar to tltat derived from lookingat the architecture of a well-designed edifice.

Fritz MachlupPrinceton, 1979

Late in 1958, when my husband was invited by Dr. Al-berto Benegas-Lynch to come to Argentina and delivera series of lectures, I w as asked to accom pany him . Thisbook contains, in written word, what my husband saidto hundreds of Argentinian students in those lectures.

We arrived in Argentina several years after Peron hadbeen forced to leave the country. He had governed de-structively and completely destroyed Argentina's eco-nom ic found ations. H is successors w ere not much better.The nation was ready for new ideas, and my husbandwas equally ready to provide them.

His lectures were delivered in English, in the enor-mous lecture hall of the University of Buenos Aires. Intwo neighboring rooms his words were simultaneouslytranslated into Spanish for students who listened withearphones. Ludwig von Mises spoke without any re-

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straint abou t capitalism, socialism, interventionism, com-munism, fascism, economic policy and the dangers ofdictatorship. These young people, who listened to myhusband, did not know much about freedom of the mar-ket or ind ividua l freedom. As I wrote about this occasionin My Years withLudzvig von M ises,"If anyone in thosetimes would have dared to attack communism and fas-cism as m y hu sba nd did, the police would have come inand taken hold of him immediately, and the assemblyw ould h ave been broken u p."

The audien ce reacted as if a w indow had been openedand fresh air allowed to breeze through the rooms. Hespoke w ithou t any notes. As always, his thoughts weregu ided by just a few w ord s, written on a scrap of paper.He knew exactly what he wanted to say, and by using

comparatively simple terms, he succeeded in communi-cating his ideas to an audience not familiar with hiswork, so that they could understand exactly what hewas saying.

The lectures were taped , and the tapes were later tran-scribed by a Spanish-speaking secretary whose typedmanuscript I found among my husband's posthumous

papers. On reading the transcript, I remembered vividlythe singular enthusiasm with which those Argentinianshad responded to my husband's words. And it seemedto me, as a non-economist, that these lectures, deliveredto a lay audience in South America, were much easierto understand than many of Ludwig von Mises' moretheoretical writings. I felt they contained so much valu-able material, so many though ts important for today andthe future, that they should be made available to thepublic.

Since my husband had never revised the transcriptsof his lectures for book publication, that task remained


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Foreword xv

for me. I have been very careful to keep intact the m ean-ing of every sentence, to change nothing of the contentand to preserve all the expressions my husband oftenused w hich are so familiar to his read ers. My only contri-bution has been to pull the sentences together and takeout some of the little words one uses when talking infor-m ally. If my a ttem pt to convert these lectures into a bookhas succeeded, it is only due to the fact that, with everysentence, I heard my husband's voice, I heard him talk.He wa s alive to me, alive in how clearly he dem ons tratedthe evil and danger of too much government; how com-prehensibly and lucidly he described the differences be-tween dictatorship and interventionism; with how m uchwit he talked a bou t im por tant historic personalities; withhow few remarks he succeeded in making bygone timescome alive.

I want to use this opportunity to thank my goodfriend George Koether for assisting me with this task.His editorial experience and his understanding of myhusband's theories were a great help to this book.

I hope these lectures will be read not only by scholarsbut also by my husband's many admirers among non-

economists. And I earnestly hope that this book will bemade available to younger audiences, especially highschool and college students around the world.

MARGIT VON MISESNew YorkJune 1979


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1st Lecture

Capitalism

Descriptive terms which people use are often quite mis-leading. In talking about modern captains of industryand leaders of big business, for instance, they call a mana "chocolate king" or a "cotton king" or an "automobileking." Their use of such terminology implies that theysee practically no difference between the modern headsof industry and those feudal kings, dukes or lords ofearlier days. But the difference is in fact very great, for achocolate king does not rule at all, heserves. He does notreign over conquered territory, independent of the mar-ket, independent of his customers. The chocolate kingor the steel king or the automobile king or any other

king of modern industrydepends on the industry heoperates and on the customers he serves. This "king"must stay in the good graces of his subjects, the consum -ers; he loses his "kingdom" as soon as he is no longer ina position to give his customers better service and pro-vide it at lower cost than others with whom he mustcompete.

Two hundred years ago, before the advent of capital-ism, a man's social status was fixed from the beginningto the end of his life; he inherited it from his ancestors,and it never changed. If he was born poor, he alwaysremained poor, and if he was born richa lord or a


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dukehe kept his dukedom and the property that wentwith it for the rest of his life.A s for m anufacturing, the primitive processing indu s-

tries of those days existed almost exclusively for thebenefit of the wealthy. Most of the people (ninety per-cent or more of the European population) worked theland and did not come in contact with the city-orientedprocessing industries. This rigid system of feudal societyprevailed in the most developed areas of Europe formany hundreds of years.

However, as the rural population expanded, there de-ve lop ed a surp lus of peop le on the land. For this surplu sof population without inherited land or estates, therewas not enough to do, nor was it possible for them towork in the processing industries; the kings of the citiesdenied them access. The numbers of these "outcasts"continued to grow, and sti l l no one knew what to dowith them. They were, in the full sense of the word,"proletarians," outcasts whom the government couldonly put into the workhouse or the poorhouse. In somesections of Europe, especially in the Netherlands and inEngland, they became so numerous that, by the eight-

eenth century, they were a real menace to the preserva-tion of the prevailing social system.Today, in discussing similar conditions in places like

India or other developing countries, we must not forgetthat, in eighteenth-century England, conditions weremuch worse. At that time, England had a population ofsix or seven million people, but of those six or sevenm illion pe op le, m ore than on e million, probably tw o m il-lion, were simply poor outcasts for whom the existingsocial system made no provision. What to do with theseoutcasts was one of the great problems of eighteenth-century England.


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Capitalism 3

Another great problem was the lack of raw materials.The British, very seriously, had to ask themselves thisquestion: what are we going to do in the future, whenour forests will no longer give us the wood we need forour ind ustr ies an d for heating our houses? For the rulingclasses it was a desperate situation. The statesmen didnot know what to do, and the ruling gentry were abso-lutely without any ideas on how to improve conditions.

Out of this serious social situation emerged the begin-nings of modern capitalism. There were some personsamong those outcasts, among those poor people, whotried to organize others to set up small shops whichcould p rodu ce som ething. This was an innovation. Theseinnovators did not produce expensive goods suitableonly for the upper classes; they produced cheaper prod-

ucts for everyone's needs. And this was the origin ofcapitalism as it operates today. It wasthe beginning ofmass production, the fundamental principle of capitalisticindustry. Whereas the old processing industries servingthe rich people in the cities had existed almost exclu-sively for the demands of the upper classes, the newcapitalist industries began to produce things that couldbe purchased by the general population. It was massproduction to satisfy the needs of the masses.

This is the fundamental principle of capitalism as itexists today in all of those countries in which there is ahighly developed system of mass production: Big busi-ness, the target of the most fanatic attacks by the so-called leftists, produces almost exclusively to satisfy thewants of the masses. Enterprises producing luxurygoods solely for the well-to-do can never attain the mag-nitu de of big businesses. And today, it is the people w howork in large factories who are the main consumers ofthe products made in those factories. This is the funda-


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mental difference between the capitalistic principles ofproduction and the feudalistic principles of the preced-ing ages.

When people assume, or claim, that there is a differ-ence between the producers and the consumers of theproducts of big businesses, they are badly mistaken. InAmerican department stores you hear the slogan, "thecustom er is alw ay s right." An d this customer is the sameman who produces in the factory those things which aresold in the departm ent stores. The people w h o think thatthe p ow er of big bu siness is enor m ous are m istaken also,since big business depends entirely on the patronage ofthose who buy its products: the biggest enterprise losesits power and its influence when it loses its customers.

Fifty or sixty years ago it was said in almost all capital-

ist countries that the railroad companies were too bigand too powerful; they had a monopoly; i t was impos-sible to compete with them. It was alleged that, in thefield of transportation, capitalism had already reached astage at which it had destroyed itself, for it had elimi-nated competition. What people overlooked was the factthat the power of the railroads depended on their ability

to serve people better than any other method of trans-portation. Of course it would have been ridiculous tocompete with one of these big railroad companies bybuilding another railroad parallel to the old line, sincethe old line was sufficient to serve existing needs. Butvery soon there came other competitors. Freedom ofcompetit ion does not mean that you can succeed simplyby imitating or copying precisely what someone else hasdone. Freedom of the press does not mean that you havethe right to cop y w ha t another m an has written and thusto acquire the success which this other man has dulymerited on account of his achievements. It means that


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Capitalism 5

you have the right to write something different. Freedomof competition concerning railroads, for example, meansthat you are free to invent something, to do something,which will challenge the railroads and place them in avery precarious competitive situation.

In the United States the competition to the railroadsin the form of buses, automobiles, trucks, and air-planeshas caused the railroads to suffer and to be al-most completely defeated, as far as passenger transpor-tation is concerned.

The development of capitalism consists in everyone'shaving the right to serve the customer better and /ormore cheaply. And this method, this principle, has,within a comparatively short time, transformed thewhole world. It has made possible an unprecedented

increase in world population.In eighteenth-century England, the land could sup-

port only six million people at a very low standard ofliving. Today more than fifty million people enjoy amuch higher standard of living than even the rich en-joyed during the eighteenth-century. And today's stan-dard of living in England would probably be still higher,

had not a great deal of the energy of the British beenwasted in what were, from various points of view,avoidable political and military "adventures."

These are the facts about capitalism. Thus, if an Eng-lishmanor, for that matter, any other man in any coun-try of the worldsays today to his friends that he isopposed to capitalism, there is a wonderful way to an-swer him: "You know that the population of this planetis now ten times greater than it was in the ages precedingcapitalism; you know that all men today enjoy a higherstandard of living than your ancestors did before the ageof capitalism. But how do you know that you are the one


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out of ten who would have lived in the absence of capi-talism? The mere fact that you are living today is proofthat capitalism has succeeded, whether or not you con-sider your own life very valuable."

In sp ite of all its benefits, cap italism has been furious lyattacked and criticized. It is necessary that we under-stand the origin of this antipathy. It is a fact that thehatred of capitalism originated not with the masses,notamong the workers themselves, but among the landedaristocracythe gentry, the nobility, of England and theEuropean continent. They blamed capitalism for some-thing that was not very pleasant for them: at the begin-ning of the nineteenth century, the higher wages paidby industry to its workers forced the landed gentry topay equally higher wages to theiragricultural workers.

The aristocracy attacked the industries by criticising thestandard of living of the masses of the workers.

Of coursefrom our viewpoint, the workers ' stan-dard of livin g w as extrem ely low ; cond itions und er earlycapitalism were absolutely shocking, but not because thenewly developed capitalistic industries had harmed theworkers. The people hired to work in factories had al-

ready been existing at a virtually subhuman level.The famous old story, repeated hundreds of times,that the factories employed women and children andthat these women and children, before they were work-ing in factories, had lived under satisfactory conditions,is one of the greatest falsehoods of history. The motherswho worked in the factories had nothing to cook with;they did not leave their homes and their kitchens to gointo the factories, they went into factories because theyhad no kitchens, and if they had a kitchen they had nofood to cook in those kitchens. And the children did notcome from comfortable nurseries. They were starving


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Capitalism 7

and dying. And all the talk about the so-called unspeak-able horror of early capitalism can be refuted by a singlestatistic: precisely in these years in which British capital-ism developed, precisely in the age called the IndustrialRevolution in England, in the years from 1760 to 1830,precisely in those years the population of England dou-bled, which means that hundreds or thousands of chil-drenwho would have died in preceding timessur-vived and grew to become m en and women.

There is no doubt that the conditions of the precedingtimes were very unsatisfactory. It was capitalist businessthat improved them. It was precisely those early facto-ries that provided for the needs of their workers, eitherdirectly or indirectly by exporting products and import-ing food and raw materials from other countries. Again

and again, the early historians of capitalism haveonecan hardly use a milder wordfalsified history.One anecdote they used to tell, quite possibly in-

vented, involved Benjamin Franklin. According to thestory, Ben Franklin visited a cotton mill in England, andthe owner of the mill told him, full of pride: "Look, hereare cotton g oo ds for Hungary." Benjamin Franklin, look-

ing around, seeing that the workers were shabbilydressed, said: "Why don't you produce also for yourown workers?"

But those exports of which the owner of the mill spokereally meant that he did produce for his own workers,because England had to import all its raw materials.There was no cotton either in England or in continentalEurope. There was a shortage of food in England, andfood had to be imported from Poland, from Russia, fromHungary. These exports were the payment for the im-ports of the food which made the survival of the Britishpopulation possible. Many examples from the history of


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those ages will show the attitude of the gentry and aris-tocracy toward the workers. I want to cite only two ex-amples. One is the famous British "Speenhamland" sys-tem. By this system, the British government paid allworkers who did not get the minimum wage (deter-mined by the government) the difference between thew a ge s they received and this m inimu m wa ge. This savedthe landed aristocracy the trouble of paying higherwages. The gentry would pay the traditionally low agri-cultural wage, and the government would supplementit , thus keeping workers from leaving rural occupationsto seek urban factory employment.

Eighty years later, after capitalism's expansion fromEngland to continental Europe, the landed aristocracyagain reacted against the new production system. InGermany the Prussian Junkers, having lost many work-ers to the higher-paying capitalistic industries, inventeda special term for the problem: "flight from the country-side"Landflucht. And in the German Parliament, theydiscu ssed w ha t m ight be don e against thisevil, as it wasseen from the point of view of the landed aristocracy.

Prince Bismarck, the fam ous chancellor of the Germ an

Reich, in a speech one day said, "I met a man in Berlinw h o once had wo rked on m y estate, andI asked this m an,'W hy did y ou leave the estate; w h y did you go aw ay fromthe country; why are you now living in Berlin?'" And,according to Bismarck, this man answered, "You don'thav e such a niceBiergarten in the village as we have herein Berlin, where you can sit, drink beer, and listen tomusic." This is, of course, a story told from the point ofview of Prince Bismarck, the employer. It was not thepo int of vi ew of all his em plo yee s. They wen t into ind us-try because industry paid them higher wages and raisedtheir standa rd of living to an unp receden ted degree.


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Capitalism 9

Today, in the capitalist countries, there is relativelylittle difference between the basic life of the so-calledhigher 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 andthe man of the lower class was that the man of themiddle class had shoes and the man of the lower classdid not have shoes. In the United States today thedifference between a rich man and a poor man meansvery often only the difference between a Cadillac and aChevrolet. 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. Morethan fifty percent of the people in the United Statesare living in houses and apartments they own them-selves.

The attacks against capitalismespecially with re-spect to the higher wage ratesstart from the false as-sumption that wages are ultimately paid by people whoare different from those who are employed in the facto-ries. Now it is all right for economists and for studentsof economic theories to distinguish between the worker

and the consumer and to make a distinction betweenthem. But the fact is that every consumer must, in someway or the other, earn the money he spends, and theimmense majority of the consumers are precisely thesame people who work as employees in the enterprisesthat produce the things which they consume. Wage ratesun de r cap italism are not set by a class of people differentfrom the class of people who earn the wages; they arethe same people. It is not the Hollywood film corporationthat pays the wa ges of a mov ie star; it is the people w hopay admission to the movies. And it isnot the entrepre-neur of a boxing match who pays the enormous de-


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mands of the prize fighters; it is the people who payadmission to the fight. Through the distinction betweenthe employer and the employee, a distinction is drawnin econ om ic theory, but it is not a distinction in real life;here, the employer and the employee ultimately are oneand the same person.

There are people in many countries who consider itvery unjust that a m an w h o has to support a family w ithseveral children will receive the same salary as a manwho has only himself to take care of. But the question isnot whether the employer should bear greater responsi-bility for the size of a worker's family.

The question we must ask in this case is: Are you, asan individual, prepared to pay more for something, letus say, a loaf of bread, if you are told that the man who

produced this loaf of bread has six children? The honestman will certainly answer in the negative and say, "Inprinciple I w o u ld , but in fact if it costs les sI would ratherbu y the bread produced by a m an witho ut any children / 'The fact is that, if the buyers do not pay the employerenough to enable him to pay his workers, i t becomesimpossible for the employer to remain in business.

The capitalist system was termed "capitalism" not bya friend of the system, but by an individual who consid-ered it to be the w orst of all historical syste m s, the great-est evil that had ever befallen mankind. That man wasKarl Marx. Nevertheless, there is no reason to rejectMarx's term, because it describes clearly the source ofthe great social improvements brought about by capital-ism. Those improvements are the result of capital accu-mulation; they are based on the fact that people, as arule, do not consume everything they have produced,that they saveand investa part of it. There is a greatdeal of misunderstanding about this problem andin


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Capitalism 11

the course of these lecturesI w ill have the opportunityto deal with the most fundamental misapprehensionswhich people have concerning the accumulation of capi-tal, the use of capital, and the universal advantages tobe gained from such use. I will deal with capitalism par-ticularly in my lectures about foreign investment andabout that most critical problem of present-day politics,inflation. You know, of course, that inflation exists notonly in this country. It is a problem all over the worldtoday.

An often unrealized fact about capitalism is this: sav-ings mean benefits for all those who are anxious to pro-duce or to earn wages. W hena man has accrued a certainamount of moneylet us say, one thousand dollarsand, instead of spending it, entrusts these dollars to asavings bank or an insurance company, the money goesinto the hands of an entrepreneur, a businessman, en-abling him to go out and embark on a project whichcould not have been embarked on yesterday, because therequired capital was unavailable.

What will the businessman do now with the addi-tional capital? The first thing he must do, the first use

he will make of this additional capital, is to go out andhire workers and buy raw materialsin turn causing afurther demand for workers and raw materials to de-velop, as well as a tendency toward higher wages andhigher prices for raw materials. Long before the saveror 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 thebenefits of the additional savings.

When the entrepreneur will get something out of theproject depends on the future state of the market andon his ability to anticipate correctly the future state of


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the market. But the workers as well as the producers ofraw materials get the benefits immediately. Much wassaid, thirty or forty years ago, about the "wage policy/'as they called it, of Henry Ford. One of Mr. Ford's greataccomplishments was that he paid higher wages thandid other industrialists or factories. His wage policy wasdescribed as an "invention," yet it is not enough to saythat this new "invented" policy was the result of theliberality of Mr. Ford. A new branch of business, or anew factory in an already existing branch of business,has to attract workers from other employments, fromother parts of the country, even from other countries.And the only way to do this is to offer the workershigher wages for their work. This is what took place inthe early days of capitalism, and it is still taking placetoday.

When the manufacturers in Great Britain first beganto produce cotton goods, they paid their workers morethan they had earned before. Of course, a great percent-age of these new workers had earned nothing at all be-fore that and were prepared to take anything they wereoffered. But after a short timewhen more and more

capital w as accumulated and m ore and m ore new enter-prises were developedwage rates went up, and theresult w as the unp reced ented increase in British popula-tion which I spoke of earlier.

The scornful depiction of capitalism by some peopleas a system designed to make the rich become richer andthe po or becom e poorer is wrong from beginning to end .Marx's thesis regarding the coming of socialism wasbased on the assumption that workerswere gettingpoorer, that the masses were becoming more destitute,and that finally all the wealth of a country would beconcentrated in a few hands or in the hands of one man


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Capitalism 13

only. And then the masses of impoverished workerswould finally rebel and expropriate the riches of thewealthy proprietors. According to this doctrine of KarlMarx, there can be no opportunity , no possibility w ithinthe capitalistic system for any improvement of the condi-tions of the workers.

In 1864, speaking before the International Working-men's Association in England, Marx said the belief thatlabor unions could improve conditions for the workingpopulation was "absolutely in error." The union policyof asking for higher wage rates and shorter work hourshe called conservative conservatism being, of course, themost condemnatory term which Karl Marx could use.He suggested that the un ions set themselves a new ,revo-lutionary goal: that they ' 'do away with the wage system

altogether," that they substitute "socialism"govern-ment ownership of the means of productionfor thesystem of private ownership.

If we look upon the history of the world, and espe-cially upon the history of England since 1865, we realizethat Marx w as w ron g in every respect. There is no w est-ern, capitalistic country in which the conditions of the

masses have not improved in an unprecedented way.All these im provem en ts of the last eighty or ninety yearswere made in sp ite of the prognostications of Karl Marx.For the Marxian socialists believed that the conditionsof the workers could never be ameliorated. They fol-lowed a false theory, the famous "iron law of wages"the law which stated that a worker's wages, under capi-talism, would not exceed the amount he needed to sus-tain his life for service to the enterprise.

The Marxians formulated their theory in this way: ifthe workers' wage rates go up, raising wages above thesubsistence level, they will have more children; and


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these children, when they enter the labor force, will in-crease the number of workers to the point where thewage rates will drop, bringing the workers once moredown to the subsistence levelto that minimal suste-nance level which will just barely prevent the workingpopulation from dying out. But this idea of Marx, andof m an y other socialists, is a concept of the working m anprec isely like that w hich b iologists use and rightly so in studying the life of animals. Of mice, for instance.

If you increase the quantity of food available for ani-mal organisms or for microbes, then more of them willsurvive. And if you restrict their food, then you willrestrict their numbers. But man is different. Even theworkerin spite of the fact that Marxists do not ac-knowledge ithas human wants other than food and

reproduction of his species. An increase in real wagesresults not only in an increase in population, it resultsalso, and first of all, in an improvement in the averagestandard of living. That is why today we have a higherstandard of living in Western Europe and in the UnitedStates than in the developing nations of, say, Africa.

We must realize, however, that this higher standard

of living depends on the supply of capital. This explainsthe difference between conditions in the United Statesand conditions in India; modern methods of fightingcontagious diseases have been introduced in Indiaatleast, to some extentand the effect has been an un-precedented increase in population but, since this in-crease in population has not been accompanied by acorresponding increase in the amount of capital in-vested, the result has been an increase in poverty.Acountry becom es more prosperous in proportion to the rise inthe invested capital per unit of its population.

I hope that in my other lectures I will have the oppor-


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tunity to deal in greater detail with these problems andwill be able to clarify them, because some termssuchas "the capital invested per capita"require a ratherdetailed explanation.

But you have to remember that, in economic policies,there are no miracles. You have read in many news-papers and speeches, about the so-called German eco-nomic miraclethe recovery of Germany after its defeatand destruction in the Second World War. But this wasno miracle. It was the application of theprinciples of thefree market econom y, of the methods of capitalism, eventhough they were not applied completely in all respects.Every country can experience the same "m iracle" of eco-nomic recovery, although I must insist that economicrecovery doesnot com e from a miracle; it comes from the

adoption ofand is the result ofsound economic poli-cies.


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2nd Lecture

Socialism

I am here in Buenos Aires as a guest of the Centro deDifusion Economia Libre.* W hat iseconomia libre? Whatdoes this system of economic freedom mean? The an-swer is simple: it is the market economy, it is the systemin which the cooperation of indiv iduals in the social divi-sion of labor is achieved by the market. This market isnot a p lace ; it is aprocess, it is the way in w hich, by sellingand buying, by producing and consuming, the individu-als contribute to the total work ings of society.

In dealing with this system of economic organiza-tionthe market economywe employ the term "eco-nomic freedom." Very often, people misunderstand

w ha t it m ean s, believing that economic freedom is som e-thing quite apart from other freedoms, and that theseother freedomswhich they hold to be more impor-tantcan be preserved even in the absence of economicfreedom. The meaning of economic freedom is this: thatthe individual is in a position tochoose the way in whichhe wants to integrate himself into the totality of society.The individual is able to choose his career, he is free todo what he wants to do.

This is of course not meant in any sense which so

"Later the Centro de Estudios sobre la Libertad

17


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many people attach to the word freedom today; it ismeant rather in the sense that, through economic free-dom, man is freed from natural conditions. In nature,there is no thing that can be termed freedom, there is onlythe regularity of the laws of nature, which man mustobey if he w an ts to attain something.

In using the term freedom as applied to human be-ings, we think only of freedomwithin society. Yet, today,social freedoms are considered by many people to beindependent of one another. Those who call themselves"liberals" today are asking for policies which are pre-cisely the opposite of those policies which the liberals ofthe nineteenth century advocated in their liberal pro-grams. The so-called liberals of today have the verypopular idea that freedom of speech, of thought, of thepress, freedom of religion, freedom from imprisonmentwithout trialthat all these freedoms can be preservedin the absence of w hat is called economic freedom. Theydo no t realize that, in a system w here there is no market,w he re the governm en t directs everything, all those otherfreedoms are illusory, even if they are made into lawsand written up in constitutions.

Let us take one freedom, the freedom of the press. Ifthe government owns all the printing presses, it willdetermine what is to be printed and what is not to beprinted. And if the government owns all the printingpresses and determines what shall or shall not beprinted, then the possibility of printing any kind of op-posing arguments against the ideas of the government

becomes practically nonexistent. Freedom of the pressdisappears. And it is the same with all the other free-doms.

In a market economy, the individual has the freedomto choose w ha teve r career he w ishes to pursue , to choose


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the captains of industry, the businessmen, the entrepre-neurs are the real bosses in the economic system. Butthis is an i l lusion. Th e real bos ses in the econ om ic s ystemare the consumers . And i f the consumers s top pa t ron iz -ing a branch of business , these businessmen are e i therforced to abandon their eminent posi t ion in the eco-no m ic sys tem or to adjust thei r actions to the w ishes andto the orders of the consumers .

One of the bes t -known propaga tors of communismwas Lady Passf ie ld , under her maiden name Beatr icePot te r, and wel l -known a l so th rough her husband S id-ney W ebb. This lady w as the dau gh ter o f a wea l thy b us i -nessman and , when she was a young adul t , she se rvedas her fa ther ' s secretary. In her memoirs she wri tes : " Inthe business of my fa ther everybody had to obey the

or de rs iss ued b y m y fa ther, the boss . H e a lone ha d tog ive orders , bu t to h im nobody gave any orders . " Thisi s a very shor t - s igh ted v iew. Orderswere given to herfa ther by the consumers , by the buyers . Unfor tunate ly,she could no t see these orders ; she could not see whatgoe s on in a m ar ke t econo m y, becau se she w as in teres tedonly in the orders given within her father 's off ice or hisfactory.

In a l l economic problems, we mus t bear in mind thewords of the great French economist Freder ic Bast ia t ,who t i t led one of his bri l l iant essays:"Ce qu'on voit et cequ'on ne voit pas" ("That w hic h is seen and that w hic h isnot seen") . In order to comprehend the operat ion of aneconomic system, we must deal not only wi th the th ingsthat can be seen, but we a lso have to give our a t tent ionto the things which cannot be perceived direct ly. Forinstance, an order issued by a boss to an office boy canbe he ard b y every bo dy w h o is p resen t in the room . W hat


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themselves by drinking or smoking too much. But onceyou have admitted this, other people will say: Is thebody everything? Is not the mind of man much moreimportant? Is not the mind of man the real human en-dowment, the real human quality? If you give the gov-ernment the right to determine the consumption of thehuman body, to determine whether one should smokeor not smoke, drink or not drink, there is no good replyyou can give to people who say: "More important thanthe b od y is the m ind and the soul, and m an hurts himselfmuch more by reading bad books, by listening to badmusic and looking at bad movies. Therefore it is the dutyof the government to prevent people from committingthese faults/ '

And, as you know, for many hundreds of years gov-

ernments and authorities believed that this reallywastheir duty. Nor did this happen in far distant ages only;not long ago, there was a government in Germany thatconsidered it a governmental duty to distinguish be-tween good and bad paintingswhich of course meantgood and bad from the point of view of a man who, inhis youth, had failed the entrance examination at the

A ca de m y of Art in Vienna; go od and bad from the pointof view of a picture-postcard painter, Adolf Hitler. Andit became illegal for people to utter other views aboutart and paintings than his, the Supreme Fiihrer's.

Once you begin to admit that it is the duty of thegovernment to control your consumption of alcohol,w ha t can yo u reply to those w h o say the control of booksand ideas is much more important?

Freedom really m eans the freedom to make mistakes. Thisw e have to realize. We m ay be highly critical with regardto the way in which our fellow citizens are spendingtheir money and living their lives. We may believe that


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Socialism 23

what they are doing is absolutely foolish and bad, butin a free society, there are many ways for people to airtheir opinions on how their fellow citizens shouldcha nge their w a ys of life. They can write books; they canwrite articles; they can make speeches; they can evenpreach at street corners if they wantand they do thisin many countries. But they mustnot try to police otherpeople in order to prevent them from doing certainthings sim ply because they them selves do not w ant theseother people to have the freedom to do it.

This is the difference between slavery and freedom.The slave must do what his superior orders him to do,but the free citizenand this is what freedom meansisin a position to choose his own way of life., Certainlythis capitalistic system can be abused, and is abused, by

some people. It is certainly possible to do things whichought not to be done. But if these things are approvedby a majority of the people, a disapproving person al-ways has a way to attempt to change the minds of hisfellow citizens. He can try to persu ade them , to con vincethem, but he may not try to force them by the use ofpower, of governmental police power.

In the market economy, everyone serves his fellowcitizens by serving himself. This is what the liberalauthors of the eightee nth century had in m ind wh e n theysp ok e of the harm ony of the rightly und erstood interestsof all groups and of all individuals of the population.And it was this doctrine of the harmony of interestswhich the socialists opposed. They spoke of an "irrecon-cilable conflict of interests" be tw een various gro up s.

What does this mean? When Karl Marxin the firstchapter of the Communist Manifesto, that small pamphletwhich inaugurated his socialist movementclaimedthat there was an irreconcilable conflict between classes,


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he could not i l lustrate his thesis by any examples otherthan those drawn from the condi t ions of precapi ta l is t icsociety. In precapital is t ic ages, society was divided intoheredi tary s ta tus groups, which in India are cal led"castes / ' In a s ta tus socie ty a man was not , for example ,born a Frenchman; he was born as a member of theFrench aristocracy or of the French bourgeoisie or of theFrench p ea san try . In the greater p ar t of the M iddle A ges,he was s imply a serf. And serfdom, in France, did notdisappear complete ly unt i l af ter the American Revolu-t ion. In other parts of Europe i t disappeared even later.

But the worst form in which serfdom exis tedandcontinued to exist even after the abolition of slaverywas in the Bri t ish colonies abroad. The individual inher-i ted his status from his parents, and he retained i tthroughout his l i fe . He transferred i t to his children.Every group had pr iv i leges and d isadvantages . Thehighes t g roups had only pr iv i leges , the lowes t g roupsonly d i sadvantages . And there was no way a man couldr id himself of the legal d isadvantages placed upon himby his status other than by f ighting a poli t ical s truggleagainst the other c lasses . Under such condi t ions , you

could say that there was an "irreconcilable confl ict ofinteres ts between the s lave owners and the s laves ," be-cau se w h a t the s laves w an ted w as to be rid of their s lav-ery, of their quali ty of being slaves. This meant a loss,ho w ev er, for the ow ne rs . Therefore , there is no quest ionthat there had to be this irreconcilable conflict of interestsbetween the members of the var ious c lasses .

One must not forget that in those agesin which thesta tus socie t ies were predominant in Europe, as wel l asin the colonies which the Europeans la ter founded inA m e r i c a p e o p l e did no t cons ider themselves to be con-nected in any special way with the other classes of their


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Socialism 25

own nat ion; they fe l t much more a t one with the mem-bers of their own class in other countries. A French aris-tocrat d id not look upon lower c lass Frenchmen as hisfe l low ci t izens; they were the "rabble/ ' which he did notl ike. He regarded only the ar is tocrats of o ther coun-t r ies those of I taly, En gland ,and G erm any , for ins tance,as h i s equ a ls .

The most visible effect of this state of affairs was thefact that the aristocrats al l over Europe used the samelanguage . And th i s l anguage was French , a l anguagewh ich w as no t un der s too d , ou ts ide France , by o thergroups of the popula t ion . The middle c lassesthe bour-geois iehad their own language, whi le the lowerclassesthe peasantryused local d ia lects which veryof ten were not unders tood by other groups of the popu-

la t ion. The same was t rue wi th regard to the way peopledressed. When you t ravel led in 1750 from one countryto another, you found that the upper c lasses , the ar is to-crats , were usual ly dressed in the same way al l overEurope, and you found that the lower c lasses dresseddifferently. When you met someone in the street , youcould see imm edia te lyfrom the w ay he dressed towhich c lass , to which s ta tus he belonged.

It is diff icult to ima gin e h o w different these c on dit io nsw ere f rom p resen t -day con di t ions . W hen I com e f romthe Un ited States to A rge ntin a a nd I see a m an on thest reet, I can no t kn ow w ha t his s ta tus is. I only as su m ethat he is a citizen of Argentina and that he is not amember of some legal ly res t r ic ted group. This is onething that capi ta l ism has brought about . Of course , thereare also differences within capital ism. There are differ-ences in weal th , d i fferences which Marxians mis takenlyconsider to be equivalent to the old differences that ex-isted between men in the status society.


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The differences within a capitalist society are not thesam e as tho se in a socialist society. In the Midd le A ges and in many countries even much latera family couldbe an aristocrat family and possess great wealth, it couldbe a family of dukes for hundreds and hundreds ofyears, whatever its qualities, its talents, its character ormorals. But, under modern capitalistic conditions, thereis what has been technically described by sociologists as"social mobility." The operating principle of this socialmobility, according to the Italian sociologist and econo-mist Vilfredo Pareto, is "la circulation des elites" (thecirculation of the elites). This means that there are al-ways people who are at the top of the social ladder, whoare wealthy, who are politically important, but thesepeoplethese eli tesare continually changing.

This is perfectly true in a capitalist society. It wasnottrue for a precapitalistic status society. The families whowere considered the great aristocratic families of Europeare still the same families today or, let us say, they arethe descendants of families that were foremost inEurope, 800 or 1000 or more years ago. The Capetiansof Bourbonwho for a very long time ruled here inA rgen tina w ere a royal ho us e as early as the tenth cen-tury. These kings ruled the territory which is knownnow as the Ile-de-France, extending their reign from gen-eration to generation. But in a capitalist society, there iscontinuous mobili typoor people becoming rich andthe descendants of those rich people losing their wealthand becoming poor.

To day I sa w in a bo ok shop in on e of the central streetsof Buenos Aires the biography of a businessman whowas so eminent, so important, so characteristic of bigbusiness in the nineteenth century in Europe that, evenin this country, far away from Europe, the bookshop


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Socialism 27

carried copies of his biography. I happen to know thegrandson of this man. He has the same name his grand-father had, and he still has a right to wear the title ofnobility which his grandfatherwho started as a black-smithhad received eighty years ago. Today this grand-son is a poor photographer in New York City.

Other people, who were poor at the time this photog-rapher's grandfather became one of Europe's biggest in-dustrialists, are today captains of industry. Everyone isfree to change his status. That is the difference betweenthe status system and the capitalist system of economicfreedom, in which everyone has only himself to blameif he does not reach the position he wants to reach.

The most famous industrialist of the twentieth centuryup to now is Henry Ford. He started with a few hundred

dollars which he had borrowed from his friends, andwithin a very short time he developed one of the mostimportant big business firms of the world. And one candiscover hundreds of such cases every day.

Every day, the New York Times prints long notices ofpeople who have died. If you read these biographies,you may come across the name of an eminent business-

man, who started out as a seller of newspapers at streetcorners in New York. Or he started as an office boy, andat his death he was the president of the same bankingfirm where he started on the lowest rung of the ladder.Of course, not all people can attain these positions. Notall people want to attain them. There are people who aremore interested in other problems and, for these people,other ways are open today which were not open in thedays of feudal society, in the ages of the status society.

The socialist system, however, forbids this fundamen-tal freedom to choose one's own career. Under socialistconditions, there is only one economic authority, and it


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has the r ight to determine a l l mat ters concerning pro-duc t ion .One of the characteristic features of our day is that

people use many names for the same th ing . One syno-nym for social ism and communism is "planning." I f peo-ple speak of "planning" they mean, of course ,centralp l a n n i n g , w h i c h m e a n sone plan made by the governmentone plan that prevents planning by anyone except thegovernment.

A British lady, who also is a member of the UpperHouse, wrote a book entitled Plan or No Plan, a bookwhich was quite popular around the world. What doesthe title of her book mean? When she says "plan," shemeans only the type of plan envisioned by Lenin andStalin and their successors, the type which governs all

the activities of all the peop le of a na tion. Thus, this ladymeans a central plan which excludes all the personalplans that individuals may have. Her titlePlan or NoPlan is therefore an illusion, a deception; the alternativeis not a central plan or no plan, it isthe total plan of acentral governmental authority orfreedom for individu-als to make their own plans, to do their own planning.The individual plans his life, every day, changing hisdaily plan s when ever he will.

The free man plans daily for his needs; he says, forexample: "Yesterday I planned to work all my life inCo rdoba." N ow he learns abou t better conditions in Bue-nos Aires and changes his plans, saying: "Instead ofw orkin g in Cordoba, I w an t to go to Buenos Aires." Andthat is what freedom means. It may be that he is mis-taken, it may be that his going to Buenos Aires will turnout to have been a mistake. Conditions may have beenbetter for him in Cordoba , but he himself made his plans.


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Socialism 29

Under government planning, he is like a soldier in anarmy. The soldier in the army does not have the right tochoose his garrison, to choose the place where he willserve. He has to obey orders. And the socialist systemas Karl Marx, Lenin, and all socialist leaders knew andadmittedis the transfer of army rule to the whole pro-duction system. Marx spoke of "industrial armies/ ' andLenin called for "the organization of everythingthepostoffice, the factory, and other industries, accordingto the model of the army."

Therefore, in the socialist system everything dependson the wisdom, the talents, and the gifts of those peoplewho form the supreme authority. That which the su-preme dictatoror his committeedoesnot know, isnot taken into account. But the knowledge which man-

kind has accumulated in its long history is not acquiredby everyone; we have accumulated such an enormousamount of scientific and technical knowledge over thecenturies that it is humanly impossible for one individ-ual to know all these things, even though he be a mostgifted man.

And people are different, they are unequal. They al-

w a ys w ill be. There are som e peop le w h o are m ore giftedin one subject and less in another one. And there arepeople who have the gift to find new paths, to changethe trend of knowledge. In capitalist societies, techno-logical progress and economic progress are gainedthrough such people. If a man has an idea, he will try tofind a few people who are clever enough to realize thevalue of his idea. Some capitalists, who dare to look intothe future, w h o realize the possible conseq uen ces of su chan idea, will start to put it to work. Other people, at first,may say: "They are fools"; but they will stop saying so


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when they discover that this enterprise, which theycalled foolish, is flourishing, and that people are happyto bu y its products.

Under the Marxian system, on the other hand, thesupreme government body must first be convinced ofthe value of such an idea before it can be pursued anddeveloped. This can be a very difficult thing to do, foronly the group of people at the heador the supremedictator himselfhas the power to make decisions. Andif these peoplebecause of laziness or old age, or be-cause they are not very bright and learnedare unableto grasp the importance of the new idea, then the newproject will not be undertaken.

We can think of examples from military history. Na-poleon was certainly a genius in military affairs; he hadone se rious prob lem , however, and his inability to solvethat problem culminated, finally, in his defeat and exileto the loneliness of St. Helena. Napoleon's problem was:"How to conquer England?" In order to do that, heneeded a navy to cross the English Channel, and therew ere people w ho told him they had a way to accomplishthat crossing, people whoin an age of sailing ships

had come up with the new idea of steam ships. But Na-poleon did not understand their proposal.Then there was Germany's Generalstab, the famous

German generalstaff. Before the First World War, it wasuniversally considered to be unsurpassed in militarywisdom. A similar reputation was held by the staff ofGeneral Foch in France. But neither the Germans nor theFrenchwho, under the leadership of General Foch,later defeated the Germansrealized the importance ofavia tion for military purp ose s., The German general staffsaid: "Aviation is merely for pleasure, flying is good foridle people. From a military point of view, only the Zep-


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Socialism 31

pelins are important/' and the French general staff wasof the same opinion.Later, during the period between World War I and

World War II, there was a general in the United Stateswho was convinced that aviation would be very impor-tant in the next war. But all other experts in the UnitedStates were against him. He could not convince them. Ifyou have to convince a group of people who are notdirectly dependent on the solution of a problem, youwill never succeed. This is true also of noneconomicproblems.

There have been painters, poets, writers, composers,who complained that the public did not acknowledgetheir work and caused them to remain poor. The publicmay certainly have had poor judgment, but when these

artists said: "The government ought to support greatartists, painters, and writers/ ' they were very much inthe wrong. Whom should the government entrust withthe task of dec idin g w he ther a new com er is really a greatpainter or not? It would have to rely on the judgment ofthe critics, and the professors of the history of art whoare alw ay s look ing back into the past yet wh o very rarelyha ve s h ow n the talent to discover ne w genius. This is thegreat difference between a system of "planning" and asystem in which everyone can plan and act for himself.

It is true, of course, that great painters and great writ-ers have often had to endure great hardships. Theymight have succeeded in their art, but not always ingetting money. Van Gogh was certainly a great painter.He had to suffer unbearable hardship and, finally, whenhe was thirty-seven years old, he committed suicide. Inall his life he sold onlyone painting and the buyer of itwas his cousin. Apart from this one sale, he lived fromthe money of his brother, who was not an artist nor a


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painter. But van Gogh's brother understood a painter'sneeds . Today you cannot buy a van Gogh for less thanhundred or two hundred thousand dollars.

Under a socialist system, van Gogh's fate might havebeen different. Some government official would haveasked some well-known painters (whom van Gogh cer-tainly would not have regarded as artists at all) whetherthis young man, half or completely crazy, was really apainter worthy to be supported. And they without adoubt, would have answered: "No, he is not a painter;he is not an artist; he is just a man who wastes paint;"and they w ou ld ha ve sent him into a milk factory or intoa home for the insane. Therefore all this enthusiasm infavor of socialism by the rising generation of painters,poets, musicians, journalists, actors, is based on anillu-

sion. I mention this because these groups are among themost fanatical supporters of the socialist idea.When it comes to choosing between socialism and

capitalism as an econom ic system , the problem is som e-what different. The authors of socialism never suspectedthat modern industry, and all the operations of modernbusiness, are based on calculation. Engineers are by nomeans the only ones who make plans on the basis ofcalculations, businessmen also must do so. And busi-nessmen's calculations are all based on the fact that, inthe market economy, the money prices of goods informnot only the consumer, they also provide vital informa-tion to businessmen about the factors of production, themain function of the market being not merely to deter-mine the cost of thelast part of the process of pro ductionand transfer of goods to the hands of the consumer, butthe cost of those st eps leading u p to it. The wh ole marketsystem is bound up with the fact that there is a mentallycalculated division of labor between the various busi-


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Socialism 33

nessmen who vie with each other in bidding for the fac-tors of productionthe raw materials, the machines, theinstrumentsand for the human factor of production,the wages paid to labor. This sort of calculation by thebusinessman cannot be accomplished in the absence ofprices supplied by the market.

At the very instant you abolish the marketwhich iswhat the socialists would like to doyou render useless

all the computations and calculations of the engineersand technologists. The technologists can give you a greatnumber of projects which, from the point of view of thenatural sciences, are equally feasible, but it takes themarket-based calculations of the businessman to makeclear which of those projects is the most advantageous,from the economic point of view.

The problem with which I am dealing here is the fun-damental issue of capitalistic economic calculation as op-posed to socialism. The fact is that economic calculation,and therefore all technological planning, is possible onlyif there are money prices, not only for consumer goodsbut also for the factors of production. This means therehas to be a market for raw materials, for all half-finishedgoods, for all tools and machines, and for all kinds ofhuman labor and human services.

When this fact was discovered, the socialists did notknow how to respond. For 150 years they had said: "Allthe evils in the world come from the fact that there aremarkets and market prices. We want to abolish the mar-ket and with it, of course, the market economy, and sub-stitute for it a system without prices and without mar-

kets." They wanted to abolish what Marx called the"commodity character" of commodities and of labor.

When faced with this new problem, the authors ofsocialism, having no answer, finally said: "We will not


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The "Soviet experiment/' as it was called, does notprove anything. It does not tell us anything about thefundamental problem of socialism, the problem of calcu-lation. But are we entitled to speak of it as an experi-ment? I do not believe there is such a thing as a scientificexperiment in the field of human action and economics.You cannot make laboratory experiments in the field ofhuman action because a scientific experiment requires

that you do the same thing under various conditions, orthat you maintain the same conditions, changing per-haps only one factor. For instance, if you inject into acancerous animal some experimental medication, the re-sult may be that the cancer will disappear. You can testthis with various animals of the same kind which sufferfrom the same malignancy. If you treat some of them

with the new method and do not treat the rest, then youcan compare the result. You cannot do this within thefield of human action. There are no laboratory experi-ments in human action.

The so-called Soviet "experiment" merely shows thatthe standard of living is incomparably lower in SovietRussia than it is in the country that is considered, by thewhole world, as the paragon of capitalism: the UnitedStates.

Of course, if you tell this to a socialist, he will say:"Things are wonderful in Russia." And you tell him:"They may be wonderful, but the average standard ofliving is much lower." Then he will answer: "Yes, butremember how terrible it was for the Russians under thetsars and how terrible a war we had to fight."

I do not want to enter into discussion of whether this isor is not a correct explanation, but if you deny that theconditions are the same, you deny that it was an experi-ment. You must then say this (which would be much


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m ore correct): ''Socialism in Russia has not brough t aboutan improvement in the conditions of the average manwhich can be compared with the improvement of condi-tions, du ring the sam e period , in the United States."

In the United States you hear of something new, ofsome improvement, almost every week. These are im-provements that business has generated, because thou-sands and thousands of business people are trying day

and night to find some new product which satisfies theconsu m er better or is less exp ensive to pro du ce, or betterand less expensive than the existing products. They donot do this out of altruism, they do it because they wantto make money. And the effect is that you have an im-provement in the standard of living in the United Stateswhich is almost miraculous, when compared with the

conditions that existed fifty or a hundred years ago. Butin Soviet Russia, where you do not have such a system,you do not have a comparable improvement. So thosepeople who tell us that we ought to adopt the Sovietsystem are badly mistaken.

There is som eth ing else that shou ld be m entioned . TheAmerican consumer, the individual, is both a buyer anda bo ss. W hen y ou leave a store in Am erica, yo u m ay finda sign saying: 'Thank you for your patronage. Pleaseco m e again." But w h en yo u go into a sho p in a totalitar-ian countrybe it in present-day Russia, or in Germanyas it was under the regime of Hitlerthe shopkeepertells you: "You have to be thankful to the great leaderfor giving you this."

In socialist countries, it is not the seller who has to be

grateful, it is the buyer. The citizen isnot the boss; theboss is the Central Committee, the Central Office. Thosesocialist committees and leaders and dictators are su-preme, and the people simply have to obey them.


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3rd Lecture

Interventionism

A famous, very often quoted phrase says: 'That govern-ment is best, which governs least." I do not believe thisto be a correct description of the functions of a goodgovernment. Government ought to do all the things forwhich it is needed and for which it was established.

Government ought to protect the individuals within thecountry against the violent and fraudulent attacks ofgangsters, and it should defend the country against for-eign enemies. These are the functions of governmentwithin a free system, within the system of the marketeconomy.

Under socialism, of course, the government is totali-tarian, and there is nothing outside its sphere and itsjurisdiction. But in the market economy the main taskof the government is to protect the smooth functioningof the market economy against fraud or violence fromwithin and from outside the country.

People who do not agree with this definition of thefunctions of government may say: "This man hates thegovernment." Nothing could be farther from the truth.

If I should say that gasoline is a very useful liquid, usefulfor m any purpo ses , but that I would nevertheless notdrink gasoline because I think that would not be theright use for it, I am not an enemy of gasoline, and I do

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not hate gasoline. I only say that gasoline is very usefulfor certain purposes, but not fit for other purposes. If Isay it is the government's duty to arrest murderers andother criminals, but not its duty to run the railroads orto sp en d m on ey for use less things, then I do not hate thego ve rn m en t b y declar ing that it is fit to do certain thingsbut not fit to do other things.

It has bee n said that und er present-day cond itions w e

no longer have a free market economy. Under present-day conditions we have something called the "mixedeconomy." And for evidence of our "mixed economy,"people point to the many enterprises which are operatedand owned by the government . The economy is mixed,people say, because there are, in many countries, certaininstitutionslike the telephone, telegraph, and rail-roadswhich are owned and operated by the govern-ment.

That some of these institutions and enterprises areoperated by the government is certainly true. But thisfact alone does not change the character of our economicsystem . It does not ev en m ea n there is a "little socialism "within the otherwise nonsocialist, free market economy.For the government, in operating these enterprises, issubject to the supremacy of the market, which means itis subject to the supremacy of the consumers. The gov-ernmentif it operates, let us say, post offices or rail-roadshas to hire people who have to work in theseenterprises. It also has to buy the raw materials andother things that are needed for the conduct of theseenterprises. And on the other hand, it "sells" these serv-

ices or commodities to the public. Yet, even though itoperates these institutions using the methods of the freeeconomic system, the result, as a rule, is a deficit. Thegovernment, however, is in a position to finance such a


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lnterventionism 39deficitat least the members of the government and ofthe ruling party believe so.

It is certainly different for an individual. The individ-ual's power to operate something with a deficit is verylimited. If the deficit is not very soon eliminated, and ifthe enterprise does not become profitable (or at leastshow that no further deficit losses are being incurred),the individual goes bankrupt and the enterprise mustcome to an end.

But for the government, conditions are different. Thegovernment can run at a deficit, because it has the pow erto tax people. And if the taxpayers are prepared to payhigher taxes in order to make it possible for the govern-ment to operate an enterprise at a lossthat is, in a lessefficient way than it would be done by a private institu-

tionand if the public will accept this loss, then ofcourse the enterprise will continue.In recent years, governments have increased the num-

ber of nationalized institutions and enterprises in mostcountries to such an extent that the deficits have grownfar beyond the amount that could be collected in taxesfrom the citizens. What happens then is not the subjectof today's lecture. It is inflation, and I shall deal withthat tomorrow. I mentioned this only because the mixedeconomy must not be confused with the problem ofin -terventionism, about which I want to talk tonight.

What is interventionism? lnterventionism means thatthe government does not restrict its activity to the pres-ervation of order, oras people used to say a hundredyears ago to "the production of security/' Intervention-ism means that the government wants to do more. Itwants to interfere with market phenomena.

If one objects and says the government should notinterfere with business, people very often answer: "But


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the government necessarily always interferes. If there arepolicemen on the street, the government interferes. Itinterferes with a robber looting a shop or it prevents aman from stealing a car." But when dealing with inter-ventionism and defining what is meant by intervention-ism, we are speaking about government interferencewith the market. (That the government and the policeare expected to protect the citizens, which includes busi-

nessmen, and of course their employees, against attackson the part of domestic or foreign gangsters, is in fact anormal, necessary expectation of any government. Suchprotection is not an intervention, for the government'sonly legitimate function is, precisely, to produce secu-rity.)

What we have in mind when we talk about interven-

tionism is the government's desire to do more than pre-vent assaults and fraud. Interventionism means that thegovernment not only fails to protect the smooth func-tioning of the market economy, but that it interferes withthe various market phenomena; it interferes with prices,with wage rates, interest rates, and profits.

The government wants to interfere in order to forcebusinessmen to conduct their affairs in a different waythan they would have chosen if they had obeyed onlythe consumers. Thus, all the measures of interventionismby the government are directed toward restricting thesupremacy of consumers. The government wants to ar-rogate to itself the power, or at least a part of the power,which, in the free market economy, is in the hands of theconsumers.

Let us consider one example of interventionism, verypopular in many countries and tried again and again bymany governments, especially in times of inflation. I re-fer to price control.


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Interventionism 41Governments usually resort to price control when

they have inflated the money supply and people havebegun to complain about the resulting rise in prices.There are many famous historical examples of price con-trol methods that failed, but I shall refer to only two ofthem because, in both these cases, the governm ents werereally very energetic in enforcing or trying to enforcetheir price controls.

The first famous example is the case of the RomanEm pero r D iocletian, very well-known as the last of thoseRoman emperors who persecuted the Christians. TheRoman emperor in the second part of the third centuryhad only one financial method, and this was currencydebasement. In those primitive ages, before the inven-tion of the printing press, even inflation was, let us say,

primitive. It involved debasement of the coinage, espe-cially the silver. The government mixed more and morecopper into the silver until the color of the silver coinswas changed and the weight was reduced considerably.The result of this coinage debasement and the associatedincrease in the quantity of money was an increase inprices, followed by an edict to control prices. And Ro-man emperors were not very mild when they enforceda law; they did not consider death too mild a punish-ment for a man who had asked for a higher price. Theyenforced price control, but they failed to maintain thesociety. The result was the disintegration of the RomanEmpire and the system of the division of labor.

Then, 1500 years later, the same currency debasementtook place during the French Revolution. But this time

a different m etho d was used. The technology for p rod uc -ing money was considerably improved. It was no longernecessary for the French to resort to debasement of thecoinage: they had the printing press. And the printing


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press was very efficient. Again, the result was an un-precedented rise in prices. But in the French Revolutionm axim um prices we re not enforced by the same methodof capital pu nish m ent w hic h the Emperor Diocletian hadused. There had also been an improvement in the tech-nique of killing citizens. You all remember the famousDoctor J. L G uillotin (1738-1814), w h o a dvocated the useof the guillotine. Despite the guillotine the French alsofailed with their laws of maximum prices. When Robes-pierre himself was carted off to the guillotine the peopleshouted, "There goes the dirty Maximum."

I wanted to mention this, because people often say:"What is nee ded in order to m ake price control effectiveand efficient is m erely m ore brutality and m ore energy."Now certainly, Diocletian was very brutal, and so was

the French Revolution. Nevertheless, price control meas-ures in both ages failed entirely.Now let us analyze the reasons for this failure. The

gov ern m en t hears peop le com plain that the price of milkha s go n e u p. A n d milk is certainly very important, espe -cially for the rising generation, for children. Conse-quently, the government declares a maximum price formilk, a maximum price that is lower than the potentialmarket price w o u ld b e. N o w the govern m ent says: "Cer-tainly w e ha ve do ne everything n eed ed in order to makeit possible for poor parents to buy as much milk as theyneed to feed their children."

But what happens? On the one hand, the lower priceof milk increases the de m an d for milk; peop le w h o cou ldnot afford to buy milk at a higher price are now able tobuy it at the lower price which the government has de-creed. And on the other hand some of the producers,those producers of milk who are producing at the high-est costthat is, the marginal producersare now suf-


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Interventionism 43

fering losses, because the price which the governmenthas decreed is lower than their costs. This is the impor-tant point in the market economy. The private entrepre-neur, the private producer, cannot take losses in the longrun. And as he cannot take losses in milk, he restricts theproduction of milk for the market. He may sell some ofhis cows for the slaughter house, or instead of milk hemay sell some products made out of milk, for instancesour cream, butter or cheese.

Thus the government's interference with the price ofmilk will result in less milk than there was before, andat the same time there will be a greater demand. Somepeople who are prepared to pay the government-de-creed price cannot buy it. Another result will be thatanxious people will hurry to be first at the shops. They

have to wait outside. The long lines of people waiting atshops always appear as a familiar phenomenon in a cityin which the government has decreed maximum pricesfor commodities that the government considers as im-portant. This has happened everywhere when the priceof milk was controlled. This was always prognosticatedby economists. Of course, only by sound economists,and their number is not very great.

But what is the result of the government's price con-trol? The government is disappointed. It wanted to in-crease the satisfaction of the milk drinkers. But actuallyit has dissatisfied them. Before the government inter-fered, milk w as expensive, but people could buy it. Nowthere is only an insufficient quantity of milk available.Therefore, the total consumption of milk drops. The chil-dren are getting less milk, not more. The next measureto which the government now resorts, is rationing. Butrationing only means that certain people are privilegedand are getting milk while other people arenot getting


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any at all. Who gets milk and who does not, of course,is always very arbitrarily determined. One order maydetermine, for example, that children under four yearsold should get milk, and that children over four years,or between the age of four and six should get only halfthe ration which children under four years receive.

Whatever the government does, the fact remains,there is only a smaller amount of milk available. Thuspeople are still more dissatisfied than they were before.Now the government asks the milk producers (becausethe government does not have enough imagination tofind out for itself): "Why do you not produce the sameam oun t of milk you p roduced before?" The governm entgets the answer: "We cannot do it, since the costs ofproduction are higher than the maximum price which

the government has established." Now the governmentstud ies the costs of the variou s items of produ ction, andit discovers one of the items is fodder.

"Oh," says the government, "the same control we ap-plied to milk w e will no w app ly to fodder. W e w ill deter-mine a maximum price for fodder, and then you will beable to feed your cows at a lower price, at a lower ex-penditure. Then everything will be all right; you will beable to produce more milk and you will sell more milk."

But what happens now? The same story repeats itselfwith fodder, and as you can understand, for the samereasons. The prod uction of fodder drop s and the gov ern-ment is again faced with a dilemma. So the governmentarranges new hearings, to find out what is wrong withfodder production. And it gets an explanation from theproducers of fodder precisely like the one it got from themilk producers. So the government must go a step far-ther, since it does not want to abandon the principle ofprice control. It determ ines m axim um prices for produ c-


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Interventionism 45ers ' goods which are necessary for the production offodder. And the same story happens again.

The government at the same time starts controllingnot only milk, but also eggs, meat, and other necessities.And every time the government gets the same result,everywhere the consequence is the same. Once the gov-ernment fixes a maximum price for consumer goods, ithas to go farther back to producers' goods, and limit theprices of the producers' goods required for the produc-tion of the price-controlled consumer goods. And so thegovernment, having started with only a few price con-trols, goes farther and farther back in the process of pro-duction, fixing maximum prices for all kinds of produc-ers ' goods, including of course the price of labor, becausewithout wage control, the government's "cost control"

would be meaningless.Moreover, the government cannot limit its interfer-ence into the m arke t to only those things which it viewsas vital necessities, like milk, butter, eggs, and meat. Itmust necessarily include luxury goods, because if it didnot limit their prices, capital and labor would abandonthe production of vital necessities and would turn toprod ucing those things which the governm ent considersunnecessary luxury goods. Thus, the isolated interfer-ence w ith one or a few prices of consum er goods alwaysbrings about effectsand this is important to realizewhich are even less satisfactory than the conditions thatprevailed before.

Before the gov ernm ent interfered, m ilk and eggs wereexpensive; after the government interfered they began

to disappear from the market. The government consid-ered those items to be so important that it interfered; itw anted to increase the qua ntity and im prove the sup ply.The result was the opposite: the isolated interference


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46 ECONOMIC POLICYbrought about a condition whichfrom, the point ofview of the governmentis evenmore undesirable thanthe previous state of affairs which the governmentwanted to alter. And as the government goes farther andfarther, it will final

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Economic Policy .Ludwig