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Hayek and von Mises on Liberty, Socialism, and Interventionism

This reading list explores the ideas of the Austrian School economists Friedrich Hayek and Ludwig von Mises on liberty, socialism, and interventionism. Mises entered the debate as early as 1920, soon after the Bolshevik Revolution broke out in Russia, with his book Socialism in which he argued that rational economic planning and the efficient allocation of resources was impossible without free pricing and the private ownership of property. Hence central planning and thus socialism was impossible. As regards the kind of economic interventionism practiced in western economies both Hayek and Mises argued that it was inherently unstable and that its internal logic must lead to the repeal of interventionist laws (deregulation) or to a society’s steady progress towards further interventionism (as Mises experienced in Nazi Germany and Hayek in Britain during WW2 and the building of the welfare state).

Two of the readings are not available online at this time:

• Mises, “Economic Calculation in the Socialist Commonwealth” (1920)
• Mises, A Critique of Interventionsm (1929)

For further reading see:

• Ludwig von Mises (1881-1973)
• Friedrich von Hayek (1899-1992)
• School of Thought: The Austrian School of Economics
• The essays on Mises and Hayek in The Forum

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  1: Session I Reading 1: Understanding Collectivism and Socialism

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: INTRODUCTION

  Accessed from oll.libertyfund.org/title/1060/103772 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  INTRODUCTION

  1

  The Success of Socialist Ideas

  Socialism is the watchword and the catchword of our day. The socialist idea dominates the modem spirit. The masses approve of it. It expresses the thoughts and feelings of all; it has set its seal upon our time. When history comes to tell our story it will write above the chapter “The Epoch of Socialism.”

  As yet, it is true, Socialism has not created a society which can be said to represent its ideal. But for more than a generation the policies of civilized nations have been directed towards nothing less than a gradual realization of Socialism.17 In recent years the movement has grown noticeably in vigour and tenacity. Some nations have sought to achieve Socialism, in its fullest sense, at a single stroke. Before our eyes Russian Bolshevism has already accomplished something which, whatever we believe to be its significance, must by the very magnitude of its design be regarded as one of the most remarkable achievements known to world history. Elsewhere no one has yet achieved so much. But with other peoples only the inner contradictions of Socialism itself and the fact that it cannot be completely realized have frustrated socialist triumph. They also have gone as far as they could under the given circumstances. Opposition in principle to Socialism there is none. Today no influential party would dare openly to advocate Private Property in the Means of Production. The word “Capitalism” expresses, for our age, the sum of all evil. Even the opponents of Socialism are dominated by socialist ideas. In seeking to combat Socialism from the standpoint of their special class interest these opponents—the parties which particularly call themselves “bourgeois” or “peasant”—admit indirectly the validity of all the essentials of socialist thought. For if it is only possible to argue against the socialist programme that it endangers the particular interests of one part of humanity, one has really affirmed Socialism. If one complains that the system of economic and social organization which is based on private property in the means of production does not sufficiently consider the interests of the community, that it serves only the purposes of single strata, and that it limits productivity; and if therefore one demands with the supporters of the various “social-political” and “social-reform” movements, state interference in all fields of economic life, then one has fundamentally accepted the principle of the socialist programme. Or again, if one can only argue against socialism that the imperfections of human nature make its realization impossible, or that it is inexpedient under existing economic conditions to proceed at once to socialization, then one merely confesses that one has capitulated to socialist ideas. The nationalist, too, affirms socialism, and objects only to its Internationalism. He wishes to combine Socialism with the ideas of Imperialism and the struggle against foreign nations. He is a national, not an international socialist; but he, also, approves of the essential principles of Socialism.18

  The supporters of Socialism therefore are not confined to the Bolshevists and their friends outside Russia or to the members of the numerous socialist parties: all are socialists who consider the socialistic order of society economically and ethically superior to that based on private ownership of the means of production, even though they may try for one reason or another to make a temporary or permanent compromise between their socialistic ideal and the particular interests which they believe themselves to represent. If we define Socialism as broadly as this we see that the great majority of people are with Socialism today. Those who confess to the principles of Liberalism19 and who see the only possible form of economic society in an order based on private ownership of the means of production are few indeed.

  One striking fact illustrates the success of socialist ideas: namely, that we have grown accustomed to designating as Socialism only that policy which aims to enact the socialist programme immediately and completely, while we call by other names all the movements directed towards the same goal with more moderation and reserve, and even describe these as the enemies of Socialism. This can only have come about because few real opponents of Socialism are left. Even in England, the home of Liberalism, a nation which has grown rich and great through its liberal policy, people no longer know what Liberalism really means. The English “Liberals” of today are more or less moderate socialists.20 In Germany, which never really knew Liberalism and which has become impotent and impoverished through its anti-liberal policy, people have hardly a conception of what Liberalism may be.

  It is on the complete victory of the socialist idea in the last decades that the great power of Russian Bolshevism rests. What makes Bolshevism strong is not the Soviets’ artillery and machine-guns but the fact that the whole world receives its ideas sympathetically. Many socialists consider the Bolshevists’ enterprise premature and look to the future for the triumph of Socialism. But no socialist can fail to be stirred by the words with which the Third International summons the peoples of the world to make war on Capitalism. Over the whole earth is felt the urge towards Bolshevism. Among the weak and lukewarm sympathy is mixed with horror and with the admiration which the courageous believer always awakens in the timid opportunist. But bolder and more consistent people greet without hesitation the dawn of a new epoch.

  2

  The Scientific Analysis of Socialism

  The starting-point of socialist doctrine is the criticism of the bourgeois order of society. We are aware that socialist writers have not been very successful in this respect. We know that they have misconceived the working of the economic mechanism, and that they have not understood the function of the various institutions of the social order which is based on division of labour and on private ownership of the means of production. It has not been difficult to show the mistakes socialistic theorists have made in analysing the economic process: critics have succeeded in proving their economic doctrines to be gross errors. Yet to ask whether the capitalist order of society is more or less defective is hardly a decisive answer to the question whether Socialism would be able to provide a better substitute. It is not sufficient to have proved that the social order based on private ownership of the means of production has faults and that it has not created the best of all possible worlds; it is necessary to show further that the socialistic order is better. This only a few socialists have tried to prove, and these have done so for the most part in a thoroughly unscientific, some even in a frivolous, manner. The science of Socialism is rudimentary, and just that kind of Socialism which calls itself “Scientific” is not the last to be blamed for this. Marxism has not been satisfied to present the coming of Socialism as an inevitable stage of social evolution. Had it done only this it could not have exerted that pernicious influence on the scientific treatment of the problems of social life which must be laid to its charge. Had it done nothing except describe the socialistic order of society as the best conceivable form of social life it could never have had such injurious consequences. But by means of sophistry it has prevented the scientific treatment of sociological problems and has poisoned the intellectual atmosphere of the time.

  According to the Marxist conception, one’s social condition determines one’s way of thought. His membership of a social class decides what views a writer will express. He is not able to grow out of his class or to free his thoughts from the prescriptions of his class interests.21 Thus the possibility of a general science which is valid for all men, whatever their class, is contested. It was only another step for Dietzgen to proceed to the construction of a special proletarian logic.22 But truth lies with the proletarian science only: “the ideas of proletarian logic are not party ideas, but the consequences of logic pure and simple.“23 Thus Marxism protects itself against all unwelcome criticism. The enemy is not refuted: enough to unmask him as a bourgeois.24 Marxism criticizes the achievements of all those who think otherwise by representing them as the venal servants of the bourgeoisie. Marx and Engels never tried to refute their opponents with argument. They insulted, ridiculed, derided, slandered, and traduced them, and in the use of these methods their followers are not less expert. Their polemic is directed never against the argument of the opponent, but always against his person. Few have been able to withstand such tactics. Few indeed have been courageous enough to oppose Socialism with that remorseless criticism which it is the duty of the scientific thinker to apply to every subject of inquiry. Only thus is to be explained the fact that supporters and opponents of Socialism have unquestioningly obeyed the prohibition which Marxism has laid on any closer discussion of the economic and social conditions of the socialist community. Marxism declares on the one hand that the socialization of the means of production is the end towards which economic evolution leads with the inevitability of a natural law; on the other hand it represents such socialization as the aim of its political effort. In this way he expounded the first principle of socialist organization. The purpose of the prohibition to study the working of a socialist community, which was justified by a series of threadbare arguments, was really intended to prevent the weaknesses of Marxist doctrines from coming clearly to light in discussions regarding the creation of a practicable socialist society. A clear exposition of the nature of socialist society might have damped the enthusiasm of the masses, who sought in Socialism salvation from all earthly ills. The successful suppression of these dangerous inquiries, which had brought about the downfall of all earlier socialistic theories, was one of Marx’s most skillful tactical moves. Only because people were not allowed to talk or to think about the nature of the socialist community was Socialism able to become the dominant political movement of the late nineteenth and early twentieth centuries.

  These statements can hardly be illustrated better than by a quotation from the writings of Hermann Cohen, one of those who, in the decades immediately preceding the world war,25 exerted the strongest influence on German thought. “Today,” says Cohen, “no want of understanding prevents us from recognizing the kernel of the social question and therefore, even if only furtively, the necessity of social reform policy, but only the evil, or the not sufficiently good, will. The unreasonable demand that it should unveil the picture of the future state for the general view, with which attempts are made to embarrass party Socialism, can be explained only by the fact that such defective natures exist. The state presupposes law, but these people ask what the state would look like rather than what are the ethical requirements of law. By thus reversing the concepts one confuses the ethics of Socialism with the poesy of the Utopias. But ethics are not poetry and the idea has truth without image. Its image is the reality which is only to arise according to its prototype. The socialist idealism can to-day be looked upon as a general truth of public consciousness, though as one which is still, nevertheless, an open secret. Only the egoism implicit in ideals of naked covetousness, which is the true materialism, denies it a faith.”26 The man who wrote and thought thus was widely praised as the greatest and most daring German thinker of his time, and even opponents of his teaching respected him as an intellect. Just for that reason it is necessary to stress that Cohen not only accepts without criticism or reserve the demands of Socialism and acknowledges the prohibition against attempts to examine conditions in the socialist community, but that he represents as a morally inferior being anyone who tries to embarrass “party-Socialism” with a demand for light upon the problems of socialist economies. That the daring of a thinker whose criticism otherwise spares nothing should stop short before a mighty idol of his time is a phenomenon which may be observed often enough in the history of thought—even Cohen’s great exemplar, Kant, is accused of this.27 But that a philosopher should charge with ill-will, defective disposition, and naked covetousness not merely all those of a different opinion but all who even touch on a problem dangerous to those in authority—this, fortunately, is something of which the history of thought can show few examples.

  Anyone who failed to comply unconditionally with this coercion was proscribed and outlawed. In this way Socialism was able from year to year to win more and more ground without anyone being moved to make a fundamental investigation of how it would work. Thus, when one day Marxian Socialism assumed the reins of power, and sought to put its complete programme into practice, it had to recognize that it had no distinct idea of what, for decades, it had been trying to achieve.

  A discussion of the problems of the socialist community is therefore of the greatest importance, and not only for understanding the contrast between liberal and socialist policy. Without such a discussion it is not possible to understand the situations which have developed since the movement towards nationalization and municipalization commenced. Until now economics—with a comprehensible but regrettable onesidedness—has investigated exclusively the mechanism of a society based on private ownership of the means of production. The gap thus created must be filled.

  The question whether society ought to be built up on the basis of private ownership of the means of production or on the basis of public ownership of the means of production is political. Science cannot decide it; Science cannot pronounce a judgment on the relative values of the forms of social organization. But Science alone, by examining the effects of institutions, can lay the foundations for an understanding of society. Though the man of action, the politician, may sometimes pay no attention to the results of this examination, the man of thought will never cease to inquire into all things accessible to human intelligence. And in the long run thought must determine action.

  3

  Alternative Modes of Approach to the Analysis of Socialism

  There are two ways of treating the problems which Socialism sets to Science.

  The cultural philosopher may deal with Socialism by trying to place it in order among all other cultural phenomena. He inquires into its intellectual derivation, he examines its relation to other forms of social life, he looks for its hidden sources in the soul of the individual, he tries to understand it as a mass phenomena. He examines its effects on religion and philosophy, on art and literature. He tries to show the relation in which it stands to the natural and mental sciences of the time. He studies it as a style of life, as an utterance of the psyche, as an expression of ethical and aesthetic beliefs. This is the cultural-historical-psychological way. Ever trodden and retrodden, it is the way of a thousand books and essays.

  We must never judge a scientific method in advance. There is only one touchstone for its ability to achieve results: success. It is quite possible that the cultural-historical-psychological method will also contribute much towards a solution of the problems which Socialism has set to Science. That its results have been so unsatisfactory is to be ascribed not only to the incompetence and political prejudices of those who have undertaken the work, but above all to the fact that the sociological28 -economical treatment of the problems must precede the cultural-historical-psychological. For Socialism is a programme for transforming the economic life and constitution of society according to a defined ideal. To understand its effects in other fields of mental and cultural life one must first have seen clearly its social and economic significance. As long as one is still in doubt about this it is unwise to risk a cultural-historical-psychological interpretation. One cannot speak of the ethics of Socialism before one has cleared up its relation to other moral standards. A relevant analysis of its reactions on religion and public life is impossible when one has only an obscure conception of its essential reality. It is impossible to discuss Socialism at all without having first and foremost examined the mechanism of an economic order based on public ownership of the means of production.

  This comes out clearly at each of the points at which the cultural-historical-psychological method usually starts. Followers of this method regard Socialism as the final consequences of the democratic idea of equality without having decided what democracy and equality really mean or in what relation they stand to each other, and without having considered whether Socialism is essentially or only generally concerned with the idea of equality. Sometimes they refer to Socialism as a reaction of the psyche to the spiritual desolation created by the rationalism inseparable from Capitalism; sometimes again they assert that Socialism aims at the highest rationalization of material life, a rationalization which Capitalism could never attain.29 Those who engulf their cultural and theoretical exposition of Socialism in a chaos of mysticism and incomprehensible phrases need not be discussed here.

  The researches of this book are to be directed above all to the sociological and economic problems of Socialism. We must treat these before we can discuss the cultural and psychological problems. Only on the results of such research can we base studies of the culture and psychology of Socialism. Sociological and economic research alone can provide a firm foundation for those expositions—so much more attractive to the great public—which present a valuation of Socialism in the light of the general aspirations of the human race.

  [17. ]“It may now fairly be claimed that the socialist philosophy of today is but the conscious and explicit assertion of principles of social organization which have been already in great part unconsciously adopted. The economic history of the century is an almost continuous record of the progress of Socialism.” (Sidney Webb, Fabian Essays [1889], p. 30.)

  [18. ]Foerster points out particularly that the labour movement has attained its real triumph “in the hearts of the possessing classes”; through this “the moral force for resistance has been taken away from these classes.” (Foerster, Christentum und Klassenkampf [Zurich, 1908], p. 111 ff.) In 1869 Prince-Smith had noted the fact that the socialist ideas had found supporters among employers. He mentions that amongst business men, “however strange this may sound, there are some who understand their own activity in the national economy with so little clarity that they hold the socialist ideas as more or less founded, and, consequently, have a bad conscience really, as if they had to admit to themselves that their profits were actually made at the cost of their workmen. This makes them timid and even more muddled. It is very bad. For our economic civilization would be seriously threatened if its bearers could not draw, from the feeling of complete justification, the courage to defend its foundations with the utmost resolution.” (Prince-Smith’s Gesammelte Schriften [Berlin, 1877], vol. 1, p. 362.) Prince-Smith, however, would not have known how to discuss the socialist theories critically.

  [19. ]The term “liberalism” is used by Mises “in the sense attached to it everywhere in the nineteenth century and still today in the countries of continental Europe. This usage is imperative because there is simply no other term available to signify the great political and intellectual movement that substituted free enterprise and the market economy for the precapitalistic methods of production; constitutional representative government for the absolutism of kings or oligarchies; and freedom of all individuals for slavery, serfdom, and other forms of bondage.” Mises, Human Action: A Treatise on Economics, 3rd ed. (Chicago: Regnery, 1966), p. v. (Pub.).

  [20. ]This is shown clearly in the programme of present-day English Liberals: Britain’s Industrial Future, being the Report of the Liberal Industrial Inquiry (London, 1928).

  [21. ]“Science exists only in the heads of the scientists, and they are products of society. They cannot get out of it and beyond it” (Kautsky, Die soziale Revolution, 3rd ed. [Berlin, 1911], vol. 2, p. 39). Publisher’s Note: In English, see The Social Revolution, trans. J. B. Askew (London, 1907).

  [22. ]Dietzgen, “Briefe über Logik, speziell demokratisch-proletarische Logik,” Internationale Bibliothek, 2d ed. (Stuttgart, 1903), vol. 22, p. 112: “Finally logic deserves the epithet ’proletarian’ also for the reason that to understand it one must have overcome all the prejudices which hold the bourgeoisie.”

  [23. ]Ibid, p. 112.

  [24. ]It is a fine irony of history that even Marx suffered this fate. Untermann finds that “even the mental life of typical proletarian thinkers of the Marxist school” contains “remains of past epochs of thought, if only in rudimentary form. These rudiments will appear all the stronger the more the thought stages lived through before the thinker became Marxist were passed in a bourgeois or feudal milieu. This was notoriously so with Marx, Engels, Plekhanov, Kautsky, Mehring, and other prominent Marxists” (Untermann, Die logischen Mängel des engeren Marxismus [Munich, 1910], p. 125). And De Man believes that to understand “the individuality and variety of the theories” one would have to consider, besides the thinker’s general social background, also his own economic and social life—a “bourgeois” life ... “in the case of the college-trained Marx” (De Man, Zur Psychologie des Sozialismus, new ed. [Jena, 1927], p. 17).

  [25. ]World War I (Pub.).

  [26. ]Cohen, Einleitung mit kritischem Nachtrag zur neunten Auflage der Geschichte des Materialismus von Friedrich Albert Lange, 3rd extended ed. (Leipzig, 1914), P. 115. Also Natorp, Sozialpädagogik, 4th ed. (Leipzig, 1920), p. 201.

  [27. ]Anton Menger, Neue Sittenlehre (Jena, 1905), pp. 45, 62.

  [28. ]Throughout the 1920s, Mises continued to refer to the science of human action as “sociology.” However, he later came to prefer the term “praxeology,” derived from the Greek praxis, meaning action, habit or practice. In his “Foreword” to Epistemological Problems of Economics (Princeton: Van Nostrand, 1960; New York: NYU Press, 1981), he commented on his use of the term “sociology” in a 1929 essay included in that volume: “... in 1929, I still believed that it was unnecessary to introduce a new term to signify the general theoretical science of human action as distinguished from the historical studies dealing with human action performed in the past. I thought that it would be possible to employ for this purpose the term sociology, which in the opinion of some authors was designed to signify such a general theoretical science. Only later did I realize that this was not expedient and adopted the term praxeology.” (Pub.)

  [29. ]Muckle, Das Kulturideal des Sozialismus (Munich, 1918) even expects of socialism that it will bring about both “the highest rationalization of economic life” and “redemption from the most terrible of all barbarisms: capitalist rationalism.”

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  2: Session I Reading 2: Understanding Collectivism and Socialism

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: CHAPTER 1: Ownership

  Accessed from oll.libertyfund.org/title/1060/103781 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  CHAPTER 1

  Ownership

  1

  The Nature of Ownership

  Regarded as a sociological category ownership appears as the power to use economic goods. An owner is he who disposes of an economic good.

  Thus the sociological and juristic concepts of ownership are different. This, of course, is natural, and one can only be surprised that the fact is still sometimes overlooked. From the sociological and economic point of view, ownership is the having of the goods which the economic aims of men require.1 This having may be called the natural or original ownership, as it is purely a physical relationship of man to the goods, independent of social relations between men or of a legal order. The significance of the legal concept of property lies just in this—that it differentiates between the physical has and the legal should have. The Law recognizes owners and possessors who lack this natural having, owners who do not have, but ought to have. In the eyes of the Law ’he from whom has been stolen’ remains owner, while the thief can never acquire ownership. Economically, however, the natural having alone is relevant, and the economic significance of the legal should have lies only in the support it lends to the acquisition, the maintenance, and the regaining of the natural having.

  To the Law ownership is a uniform institution. It makes no difference whether goods of the first order or goods of higher order form its subject, or whether it deals with durable consumption goods or non-durable consumption goods. The formalism of the Law, divorced as it is from any economic basis, is clearly expressed in this fact. Of course, the Law cannot isolate itself completely from economic differences which may be relevant. The peculiarity of land as a means of production is, partly, what gives the ownership of real property its special position in the Law. Such economic differences are expressed, more clearly than in the law of property itself, in relationships which are sociologically equivalent to ownership but juristically allied to it only, e.g., in servitudes and, especially, in usufruct. But on the whole, in Law formal equality covers up material differences.

  Considered economically, ownership is by no means uniform. Ownership in consumption goods and ownership in production goods differ in many ways, and in both cases, again, we must distinguish between durable goods and goods that are used up.

  Goods of the first order, the consumption goods, serve the immediate satisfaction of wants. In so far as they are goods that are used up, goods, that is, which in their nature can be used but once, and which lose their quality as goods when they are used, the significance of ownership lies practically in the possibility of consuming them. The owner may also allow his goods to spoil unenjoyed or even permit them to be destroyed intentionally, or he may give them in exchange or give them away. In every case he disposes of their use, which cannot be divided.

  The position is a little different with goods of lasting use, those consumption goods that can be used more than once. They may serve several people successively. Here, again, those are to be regarded as owners in the economic sense who are able to employ for their own purposes the uses afforded by the goods. In this sense, the owner of a room is he who inhabits it at the time in question; the owners of the Matterhorn, as far as it is part of a natural park, are those who set foot on it to enjoy the landscape; the owners of a picture are those who enjoy looking at it.2 The having of the uses which these goods afford is divisible, so that the natural ownership of them is divisible also.

  Production goods serve enjoyment only indirectly. They are employed in the production of consumption goods. Consumption goods emerge finally from the successful combination of production goods and labour. It is the ability to serve thus indirectly for the satisfaction of wants which qualifies a thing as a production good. To dispose of production goods is to have them naturally. The having of production goods is of economic significance only because and in so far as it leads finally to a having of consumption goods.

  Goods to be used up, which are ripe for consumption, can be had but once—by the person who consumes them. Goods of lasting use, which are ripe for consumption, may be had, in temporal succession, by a number of people; but simultaneous use will disturb the enjoyment of others, even though this enjoyment is not quite excluded by the nature of the commodity. Several people may simultaneously look at a picture, even though the proximity of others, who perhaps keep him from the most favorable viewpoint, may disturb the enjoyment of any individual in the group; but a coat cannot be worn simultaneously by two people. In the case of consumption goods the having which leads to the satisfaction of wants by the goods cannot be further divided than can the uses which arise from the goods. This means that with goods to be used up, natural ownership by one individual completely excludes ownership by all others, while with durable goods ownership is exclusive at least at a given point of time and even in regard to the smallest use arising from it. For consumption goods, any economically significant relationship other than that of the natural having by individuals is unthinkable. As goods to be used up absolutely and as durable goods, at least to the extent of the smallest use arising from them, they can be in the natural ownership of one person only. Ownership here is also private ownership, in the sense that it deprives others of the advantages which depend upon the right of disposing of the goods.

  For this reason, also, it would be quite absurd to think of removing or even of reforming ownership in consumption goods. It is impossible in any way to alter the fact that an apple which is enjoyed is used up and that a coat is worn out in the wearing. In the natural sense consumption goods cannot be the joint property of several or the common property of all. In the case of consumption goods, that which one usually calls joint property has to be shared before consumption. The joint ownership ceases at the moment a commodity is used up or employed. The having of the consumer must be exclusive. Joint property can never be more than a basis for the appropriation of goods out of a common stock. Each individual partner is owner of that part of the total stock which he can use for himself. Whether he is already owner legally, or owner only through the division of the stock, or whether he becomes legal owner at all, and whether or not a formal division of the stock precedes consumption—none of these questions is economically material. The fact is that even without division he is owner of his lot.

  Joint property cannot abolish ownership in consumption goods. It can only distribute ownership in a way which would not otherwise have existed. Joint property restricts itself, like all other reforms which stop short at consumption goods, to effecting a different distribution of the existing stock of consumption goods. When this stock is exhausted its work is done. It cannot refill the empty storehouses. Only those who direct the disposal of production goods and labour can do this. If they are not satisfied with what they are offered, the flow of goods which is to replenish stocks ceases. Therefore, any attempt to alter the distribution of consumption goods must in the last resort depend on the power to dispose of the means of production.

  The having of production goods, contrary to that of consumption goods, can be divided in the natural sense. Under conditions of isolated production the conditions of sharing the having of production goods are the same as the conditions of sharing consumption goods. Where there is no division of labour the having of goods can only be shared if it is possible to share the services rendered by them. The having of non-durable production goods cannot be shared. The having of durable production goods can be shared according to the divisibility of the services they provide. Only one person can have a given quantity of grain, but several may have a hammer successively; a river may drive more than one water wheel. So far, there is no peculiarity about the having of production goods. But in the case of production with division of labour there is a two-fold having of such goods. Here in fact the having is always two-fold: there is a physical having (direct), and a social having (indirect). The physical having is his who holds the commodity physically and uses it productively; the social having belongs to him who, unable to dispose physically or legally of the commodity, may yet dispose indirectly of the effects of its use, i.e. he who can barter or buy its products or the services which it provides. In this sense natural ownership in a society which divides labour is shared between the producer and those for whose wants he produces. The farmer who lives self-sufficiently outside exchange society can call his fields, his plough, his draught animals his own, in the sense that they serve only him. But the farmer whose enterprise is concerned with trade, who produces for and buys in the market, is owner of the means of production in quite a different sense. He does not control production as the self-supporting peasant does. He does not decide the purpose of his production; those for whom he works decide it—the consumers. They, not the producer, determine the goal of economic activity. The producer only directs production towards the goal set by the consumers.

  But further owners of the means of production are unable in these conditions to place their physical having directly into the service of production. Since all production consists in combining the various means of production, some of the owners of such means must convey their natural ownership to others, so that the latter may put into operation the combinations of which production consists. Owners of capital, land, and labour place these factors at the disposal of the entrepreneur, who takes over the immediate direction of production. The entrepreneurs, again, conduct production according to the direction set by the consumers, who are no other than the owners of the means of production: owners of capital, land, and labour. Of the product, however, each factor receives the share to which he is economically entitled, according to the value of his productive contribution in the yield.

  In essence, therefore, natural ownership of production goods is quite different from natural ownership of consumption goods. To have production goods in the economic sense, i.e. to make them serve one’s own economic purposes, it is not necessary to have them physically in the way that one must have consumption goods if one is to use them up or to use them lastingly. To drink coffee I do not need to own a coffee plantation in Brazil, an ocean steamer, and a coffee roasting plant, though all these means of production must be used to bring a cup of coffee to my table. Sufficient that others own these means of production and employ them for me. In the society which divides labour no one is exclusive owner of the means of production, either of the material things or of the personal element, capacity to work. All means of production render services to everyone who buys or sells on the market. Hence if we are disinclined here to speak of ownership as shared between consumers and owners of the means of production, we should have to regard consumers as the true owners in the natural sense and describe those who are considered as the owners in the legal sense as administrators of other people’s property.3 This, however, would take us too far from the accepted meaning of the words. To avoid misinterpretation it is desirable to manage as far as possible without new words and never to employ, in an entirely different sense, words habitually accepted as conveying a particular idea. Therefore, renouncing any particular terminology, let us only stress once more that the essence of the ownership of the means of production in a society which divides labour differs from that found where the division of labour does not take place; and that it differs essentially from the ownership of consumption goods in any economic order. To avoid any misunderstanding we will henceforth use the words, ’ownership of the means of production’ in the generally accepted sense, i.e. to signify the immediate power of disposal.

  2

  Violence and Contract

  The physical having of economic goods, which economically considered constitutes the essence of natural ownership, can only be conceived as having originated through Occupation. Since ownership is not a fact independent of the will and action of man, it is impossible to see how it could have begun except with the appropriation of ownerless goods. Once begun ownership continues, as long as its object does not vanish, until either it is given up voluntarily or the object passes from the physical having of the owner against his will. The first happens when the owner voluntarily gives up his property; the latter when he does it involuntarily—e.g. when cattle stray into the wilds—or when some other person forcibly takes the property from him.

  All ownership derives from occupation and violence. When we consider the natural components of goods, apart from the labour components they contain, and when we follow the legal title back, we must necessarily arrive at a point where this title originated in the appropriation of goods accessible to all. Before that we may encounter a forcible expropriation from a predecessor whose ownership we can in its turn trace to earlier appropriation or robbery. That all rights derive from violence, all ownership from appropriation or robbery, we may freely admit to those who oppose ownership on considerations of natural law. But this offers not the slightest proof that the abolition of ownership is necessary, advisable, or morally justified.

  Natural ownership need not count upon recognition by the owners’ fellow men. It is tolerated, in fact, only as long as there is no power to upset it and it does not survive the moment when a stronger man seizes it for himself. Created by arbitrary force it must always fear a more powerful force. This the doctrine of natural law has called the war of all against all. The war ends when the actual relation is recognized as one worthy to be maintained. Out of violence emerges law.

  The doctrine of natural law has erred in regarding this great change, which lifts man from the state of brutes into human society, as a conscious process; as an action, that is, in which man is completely aware of his motives, of his aims and how to pursue them. Thus was supposed to have been concluded the social contract by which the State and the community, the legal order, came into existence. Rationalism could find no other possible explanation after it had disposed of the old belief which traced social institutions back to divine sources or at least to the enlightenment which came to man through divine inspiration.4 Because it led to present conditions, people regarded the development of social life as absolutely purposeful and rational; how then could this development have come about, except through conscious choice in recognition of the fact that it was purposeful and rational? Today we have other theories with which to explain the matter. We talk of natural selection in the struggle for existence and of the inheritance of acquired characteristics, though all this, indeed, brings us no nearer to an understanding of ultimate riddles than can the theologian or the rationalist. We can ’explain’ the birth and development of social institutions by saying that they were helpful in the struggle for existence, by saying that those who accepted and best developed them were better equipped against the dangers of life than those who were backward in this respect. To point out how unsatisfactory is such an explanation nowadays would be to bring owls5 to Athens. The time when it satisfied us and when we proposed it as a final solution of all problems of being and becoming is long since past. It takes us no further than theology or rationalism. This is the point at which the individual sciences merge, at which the great problems of philosophy begin—at which all our wisdom ends.

  No great insight, indeed, is needed to show that Law and the State cannot be traced back to contracts. It is unnecessary to call upon the learned apparatus of the historical school to show that no social contract can anywhere be established in history. Realistic science was doubtless superior to the Rationalism of the seventeenth and eighteenth centuries in the knowledge that can be gained from parchments and inscriptions, but in sociological insight it lagged far behind. For however we may reproach a social philosophy of Rationalism we cannot deny that it has done imperishable work in showing us the effects of social institutions. To it we owe above all our first knowledge of the functional significance of the legal order and of the State.

  Economic action demands stable conditions. The extensive and lengthy process of production is the more successful the greater the periods of time to which it is adapted. It demands continuity, and this continuity cannot be disturbed without the most serious disadvantages. This means that economic action requires peace, the exclusion of violence. Peace, says the rationalist, is the goal and purpose of all legal institutions; but we assert that peace is their result, their function.6 Law, says the rationalist, has arisen from contracts; we say that Law is a settlement, and end to strife, an avoidance of strife. Violence and Law, War and Peace, are the two poles of social life; but its content is economic action.

  All violence is aimed at the property of others. The person—life and health—is the object of attack only in so far as it hinders the acquisition of property. (Sadistic excesses, bloody deeds which are committed for the sake of cruelty and nothing else, are exceptional occurrences. To prevent them one does not require a whole legal system. Today the doctor, not the judge, is regarded as their appropriate antagonist.) Thus it is no accident that it is precisely in the defence of property that Law reveals most clearly its character of peacemaker. In the two-fold system of protection according to having, in the distinction between ownership and possession, is seen most vividly the essence of the law as peacemaker—yes, peacemaker at any price. Possession is protected even though it is, as the jurists say, no title. Not only honest but dishonest possessors, even robbers and thieves, may claim protection for their possession.7

  Some believe that ownership as it shows itself in the distribution of property at a given time may be attacked by pointing out that it has sprung illegally from arbitrary acquisition and violent robbery. According to this view all legal rights are nothing but time-honoured illegality. So, since it conflicts with the eternal, immutable idea of justice, the existing legal order must be abolished and in its place a new one set which shall conform to that idea of justice. It should not be the task of the State “to consider only the condition of possession in which it finds its citizens, without inquiring into the legal grounds of acquisition.” Rather it is “the mission of the State first to give everyone his own, first to put him into his property, and only then to protect him in it.“8 In this case one either postulates an eternally valid idea of justice which it is the duty of the State to recognize and realize; or else one finds the origin of true Law, quite in the sense of the contract theory, in the social contract, which contract can only arise through the unanimous agreement of all individuals who in it divest themselves of a part of their natural rights. At the basis of both hypotheses lies the natural law view of the “right that is born with us.” We must conduct ourselves in accordance with it, says the former; by divesting ourselves of it according to the conditions of the contract the existing legal system arises, says the latter. As to the source of absolute justice, that is explained in different ways. According to one view, it was the gift of Providence to Humanity. According to another, Man created it with his Reason. But both agree that Man’s ability to distinguish between justice and injustice is precisely what marks him from the animal; that this is his “moral nature.”

  Today we can no longer accept these views, for the assumptions with which we approach the problem have changed. To us the idea of a human nature which differs fundamentally from the nature of all other living creatures seems strange indeed; we no longer think of man as a being who has harboured an idea of justice from the beginning. But if, perhaps, we offer no answer to the question how Law arose, we must still make it clear that it could not have arisen legally. Law cannot have begot itself of itself. Its origin lies beyond the legal sphere. In complaining that Law is nothing more or less than legalized injustice, one fails to perceive that it could only be otherwise if it had existed from the very beginning. If it is supposed to have arisen once, then that which at that moment became Law could not have been Law before. To demand that Law should have arisen legally is to demand the impossible. Whoever does so applies to something standing outside the legal order a concept valid only within the order.

  We who only see the effect of Law—which is to make peace—must realize that it could not have originated except through a recognition of the existing state of affairs, however that has arisen. Attempts to do otherwise would have renewed and perpetuated the struggle. Peace can come about only when we secure a momentary state of affairs from violent disturbance and make every future change depend upon the consent of the person involved. This is the real significance of the protection of existing rights, which constitutes the kernel of all Law.

  Law did not leap into life as something perfect and complete. For thousands of years it has grown and it is still growing. The age of its maturity—the age of impregnable peace—may never arrive. In vain have the systematicians of Law sought dogmatically to maintain the division between private and public Law which doctrine has handed down to us and which in practice they think it cannot do without. The failure of these attempts—which indeed has led many to abandon the distinction—must not surprise us. The division is not, as a matter of fact, dogmatic; the system of Law is uniform and cannot comprehend it. The division is historical, the result of the gradual evolution and accomplishment of the idea of Law. The idea of Law is realized at first in the sphere in which the maintenance of peace is most urgently needed to assure economic continuity—that is, in the relations between individuals. Only for the further development of the civilization which rises on this foundation does the maintenance of peace in a more advanced sphere become essential. This purpose is served by Public Law. It does not formally differ from Private Law. But it is felt to be something different. This is because only later does it attain the development vouchsafed earlier to Private Law. In Public Law the protection of existing rights is not yet as strongly developed, as it is in Private Law.9 Outwardly the immaturity of Public Law can most easily be recognized perhaps in the fact that it has lagged behind Private Law in systematization. International Law is still more backward. Intercourse between nations still recognizes arbitrary violence as a solution permissible under certain conditions whereas, on the remaining ground regulated by Public Law, arbitrary violence in the form of revolution stands, even though not effectively suppressed, outside the Law. In the domain of Private Law this violence is wholly illegal except as an act of defence, when it is permitted under exceptional circumstances as a gesture of legal protection.

  The fact that what became Law was formerly unjust or, more precisely expressed, legally indifferent, is not a defect of the legal order. Whoever tries juristically or morally to justify the legal order may feel it to be such. But to establish this fact in no way proves that it is necessary or useful to abolish or alter the system of ownership. To endeavour to demonstrate from this fact that the demands for the abolition of ownership were legal would be absurd.

  3

  The Theory of Violence and the Theory of Contract

  It is only slowly and with difficulty that the idea of Law triumphs. Only slowly and with difficulty does it rebut the principle of violence. Again and again there are reactions; again and again the history of Law has to start once more from the beginning. Of the ancient Germans Tacitus relates: “Pigrum quin immo et iners videtur sudore adquirere quod possis sanguine parare.”10 (It seems feckless, nay more, even slothful, to acquire something by toil and sweat which you could grab by the shedding of blood.) It is a far cry from this view to the views that dominate modern economic life.

  This contrast of view transcends the problems of ownership, and embraces our whole attitude to life. It is the contrast between a feudal and a bourgeois way of thought. The first expresses itself in romantic poetry, whose beauty delights us, though its view of life can carry us away only in passing moments and while the impression of the poetry is fresh.11 The second is developed in the liberal social philosophy into a great system, in the construction of which the finest minds of all ages have collaborated. Its grandeur is reflected in classical literature. In Liberalism humanity becomes conscious of the powers which guide its development. The darkness which lay over the paths of history recedes. Man begins to understand social life and allows it to develop consciously.

  The feudal view did not achieve a similarly closed systematization. It was impossible to think out, to its logical conclusion, the theory of violence. Try to realize completely the principle of violence, even only in thought, and its anti-social character is unmasked. It leads to chaos, to the war of all against all. No sophistry can evade that. All anti-liberal social theories must necessarily remain fragments or arrive at the most absurd conclusions. When they accuse Liberalism of considering only what is earthly, of neglecting, for the petty struggles of daily life, to care for higher things, they are merely picking the lock of an open door. For Liberalism has never pretended to be more than a philosophy of earthly life. What it teaches is concerned only with earthly action and desistance from action. It has never claimed to exhaust the Last or Greatest Secret of Man. The anti-liberal teachings promise everything. They promise happiness and spiritual peace, as if man could be thus blessed from without. Only one thing is certain, that under their ideal social system the supply of commodities would diminish very considerably. As to the value of what is offered in compensation opinions are at least divided.12

  The last resort of the critics of the liberal ideal of society is to attempt to destroy it with the weapons it itself provides. They seek to prove that it serves and wants to serve only the interests of single classes; that the peace, for which it seeks, favours only a restricted circle and is harmful to all others. Even the social order, achieved in the constitutional modern state, is based on violence. The free contracts on which it pretends to rest are really, they say, only the conditions of a peace dictated by the victors to the vanquished, the terms being valid as long as the power from which they sprang continues, and no longer. All ownership is founded on violence and maintained by violence. The free workers of the liberal society are nothing but the unfree of feudal times. The entrepreneur exploits them as a feudal lord exploited his serfs, as a planter exploited his slaves. That such and similar objections can be made and believed will show how far the understanding of liberal theories has decayed. But these objections in no way atone for the absence of a systematic theory for the movement against Liberalism.

  The liberal conception of social life has created the economic system based on the division of labour. The most obvious expression of the exchange economy is the urban settlement, which is only possible in such an economy. In the towns the liberal doctrine has been developed into a dosed system and it is here that it has found most supporters. But the more and the quicker wealth grew and the more numerous therefore were the immigrants from the country into the towns, the stronger became the attacks which Liberalism suffered from the principle of violence. Immigrants soon find their place in urban life, they soon adopt, externally, town manners and opinions, but for a long time they remain foreign to civic thought. One cannot make a social philosophy one’s own as easily as a new costume. It must be earned—earned with the effort of thought. Thus we find, again and again in history, that epochs of strongly progressive growth of the liberal world of thought, when wealth increases with the development of the division of labour, alternate with epochs in which the principle of violence tries to gain supremacy—in which wealth decreases because the division of labour decays. The growth of the towns and of the town life was too rapid. It was more extensive than intensive. The new inhabitants of the towns had become citizens superficially, but not in ways of thought. And so with their ascendancy civic sentiment declined. On this rock all cultural epochs filled with the bourgeois spirit of Liberalism have gone to ruin; on this rock also our own bourgeois culture, the most wonderful in history, appears to be going to ruin. More menacing than barbarians storming the walls from without are the seeming citizens within—those who are citizens in gesture, but not in thought.

  Recent generations have witnessed a mighty revival of the principle of violence. Modern Imperialism, whose outcome was the World War with all its appalling consequences, develops the old ideas of the defenders of the principle of violence under a new mask. But of course even Imperialism has not been able to set in opposition to liberal theory a complete system of its own. That the theory according to which struggle is the motive power of the growth of society should in any way lead to a theory of co-operation is out of the question—yet every social theory must be a theory of co-operation. The theory of modern Imperialism is characterized by the use of certain scientific expressions such as the doctrine of the struggle for existence and the concept of the race. With these it was possible to coin a multitude of slogans, which have proved themselves effective for propaganda but for nothing else. All the ideas paraded by modem Imperialism have long since been exploded by Liberalism as false doctrines.

  Perhaps the strongest of the imperialist arguments is an argument which derives from a total misconception of the essence of the ownership of the means of production in a society dividing labour. It regards as one of its most important tasks the provision of the nation with its own coal mines, own sources of raw material, own ships, own ports. It is clear that such an argument proceeds from the view that natural ownership in these means of production is undivided, and that only those benefit from them who have them physically. It does not realize that this view leads logically to the socialist doctrine with regard to the character of ownership in the means of production. For if it is wrong that Germans do not possess their own German cotton plantations, why should it be right that every single German does not possess his coal mine, his spinning mill? Can a German call a Lorraine iron ore mine his any more when a German citizen possesses it than when a French citizen possesses it?

  So far the imperialist agrees with the socialist in criticism of bourgeois ownership. But the socialist has tried to devise a closed system of a future social order and this the imperialist could not do.

  4

  Collective Ownership of the Means of Production

  The earliest attempts to reform ownership and property can be accurately described as attempts to achieve the greatest possible equality in the distribution of wealth, whether or not they claimed to be guided by considerations of social utility or social justice. All should possess a certain minimum, none more than a certain maximum. All should possess about the same amount--that was, roughly, the aim. The means to this end were always the same. Confiscation of all or part of the property was usually proposed, followed by redistribution. A world populated only by self-sufficient agriculturists, leaving room for at most a few artisans—that was the ideal society towards which one strove. But today we need not concern ourselves with all these proposals. They become impracticable in an economy dividing labour. A railway, a rolling mill, a machine factory cannot be distributed. If these ideas had been put into practice centuries or millenniums ago, we should still be at the same level of economic development as we were then—unless, of course, we had sunk back into a state hardly distinguishable from that of brutes. The earth would be able to support but a small fraction of the multitudes it nourishes today, and everyone would be much less adequately provided for than he is, less adequately even than the poorest member of an industrial state. Our whole civilization rests on the fact that men have always succeeded in beating off the attack of the re-distributors. But the idea of re-distribution enjoys great popularity still, even in industrial countries. In those countries where agriculture predominates the doctrine calls itself, not quite appropriately, Agrarian Socialism, and is the end-all and be-all of social reform movements. It was the main support of the great Russian revolution, which against their will temporarily turned the revolutionary leaders, born Marxists, into the protagonists of its ideal. It may triumph in the rest of the world and in a short time destroy the culture which the effort of millenniums has built up. For all this, let us repeat, one single word of criticism is superfluous. Opinions on the matter are not divided. It is hardly necessary to prove today that it is impossible to found on a “land and homestead communism” a social organization capable of supporting the hundreds of millions of the white race.

  A new social ideal long ago supplanted the naive fanaticism for equality of the distributors, and now not distribution but common ownership is the slogan of Socialism. To abolish private property in the means of production, to make the means of production the property of the community, that is the whole aim of Socialism.

  In its strongest and purest form the socialistic idea has no longer anything in common with the idea of re-distribution. It is equally remote from a nebulous conception of common ownership in the means of consumption. Its aim is to make possible for everyone an adequate existence. But it is not so artless as to believe that this can be achieved by the destruction of the social system which divides labour. True, the dislike of the market, which characterizes enthusiasts of re-distribution, survives; but Socialism seeks to abolish trade otherwise than by abolishing the division of labour and returning to the autarky of the self-contained family economy or at least to the simpler exchange organization of the self-sufficient agricultural district.

  Such a socialistic idea could not have arisen before private property in the means of production had assumed the character which it possesses in the society dividing labour. The interrelation of separate productive units must first reach the point at which production for external demand is the rule, before the idea of common property in the means of production can assume a definite form. The socialist ideas could not be quite clear until the liberal social philosophy had revealed the character of social production. In this sense, but in no other, Socialism may be regarded as a consequence of the liberal philosophy.

  Whatever our view of its utility or its practicability, it must be admitted that the idea of Socialism is at once grandiose and simple. Even its most determined opponents will not be able to deny it a detailed examination. We may say, in fact, that it is one of the most ambitious creations of the human spirit. The attempt to erect society on a new basis while breaking with all traditional forms of social organization, to conceive a new world plan and foresee the form which all human affairs must assume in the future—this is so magnificent, so daring, that it has rightly aroused the greatest admiration. If we wish to save the world from barbarism we have to conquer Socialism, but we cannot thrust it carelessly aside.

  5

  Theories of the Evolution of Property

  It is an old trick of political innovators to describe that which they seek to realize as Ancient and Natural, as something which has existed from the beginning and which has been lost only through the misfortune of historical development; men, they say, must return to this state of things and revive the Golden Age. Thus natural law explained the rights which it demanded for the individual as inborn, inalienable rights bestowed on him by Nature. This was no question of innovation, but of the restoration of the “eternal rights which shine above, inextinguishable and indestructible as the stars themselves.” In the same way the romantic Utopia of common ownership as an institution of remote antiquity has arisen. Almost all peoples have known this dream. In Ancient Rome it was the legend of the Golden Age of Saturn, described in glowing terms by Virgil, Tibullus, and Ovid, and praised by Seneca.13 Those were the carefree, happy days when none had private property and all prospered in the bounty of a generous Nature.14 Modern Socialism, of course, imagines itself beyond such simplicity and childishness, but its dreams differ little from those of the Imperial Romans.

  Liberal doctrine had stressed the important part played in the evolution of civilization by private property in the means of production. Socialism might have contented itself with denying the use of maintaining the institution of ownership any longer, without denying at the same time the usefulness of this ownership in the past. Marxism indeed does this by representing the epochs of simple and of capitalistic production as necessary stages in the development of society. But on the other hand it joins with other socialist doctrines in condemning with a strong display of moral indignation all private property that has appeared in the course of history. Once upon a time there were good times when private property did not exist; good times will come again when private property will not exist.

  In order that such a view might appear plausible the young science of Economic History had to provide a foundation of proof. A theory demonstrating the antiquity of the common land system was constructed. There was a time, it was said, when all land had been the common property of all members of the tribe. At first all had used it communally; only later, while the common ownership was still maintained, were the fields distributed to individual members for separate use. But there were new distributions continually, at first every year, then at longer intervals of time. Private property according to this view was a relatively young institution. How it arose was not quite clear. But one had to assume that it had crept in more or less as a habit through omission in re-distributions—that is, if one did not wish to trace it back to illegal acquisition. Thus it was seen that to give private ownership too much credit in the history of civilization was a mistake. It was argued that agriculture had developed under the rule of common ownership with periodic distribution. For a man to till and sow the fields one needs only to guarantee him the produce of his labour, and for this purpose annual possession suffices. We are told that it is false to trace the origin of ownership in land to the occupation of ownerless fields. The unoccupied land was not for a single moment ownerless. Everywhere, in early times as nowadays, man had declared that it belonged to the State or the community; consequently in early times as little as today the seizing of possession could not have taken place.15

  From these heights of newly-won historical knowledge it was possible to look down with compassionate amusement at the teachings of liberal social philosophy. People were convinced that private property had been proved an historical-legal category only. It had not existed always, it was nothing more than a not particularly desirable outgrowth of culture, and therefore it could be abolished. Socialists of all kinds, but especially Marxists, were zealous in propagating these ideas. They have brought to the writings of their champions a popularity otherwise denied to researches in Economic History.

  But more recent researches have disproved the assumption that common ownership of the agricultural land was an essential stage with all peoples, that it was the primeval form of ownership (“Ureigentum”). They have demonstrated that the Russian Mir arose in modern times under the pressure of serfdom and the head-tax, that the Hauberg co-operatives16 of the Siegen district are not found before the sixteenth century, that the Trier Gehöferschaften17 evolved in the thirteenth, perhaps only in the seventeenth and eighteenth centuries, and that the South Slav Zadruga came about through the introduction of the Byzantine system of taxation.18 The earliest German agricultural history has still not been made sufficiently clear; here, in regard to the important questions, unanimous opinion has not been possible. The interpretation of the scanty information given by Caesar and Tacitus presents special difficulties. But in trying to understand them one must never overlook the fact that the conditions of ancient Germany as described by these two writers had this characteristic feature—good arable land was so abundant that the question of land ownership was not yet economically relevant. “Superest ager,” (Arable land abounds.) that is the basic fact of German agrarian conditions at the time of Tacitus.19

  In fact, however, it is not necessary to consider the proofs adduced by Economic History, which contradict the doctrine of the “Ureigentum,” in order to see that this doctrine offers no argument against private property in the means of production. Whether or not private property was everywhere preceded by common property is irrelevant when we are forming a judgment as to its historical achievement and its function in the economic constitution of the present and the future. Even if one could demonstrate that common property was once the basis of land law for all nations and that all private property had arisen through illegal acquisition, one would still be far from proving that rational agriculture with intensive cultivation could have developed without private property. Even less permissible would it be to conclude from such premises that private property could or should be abolished.

  [1. ]Böhm-Bawerk, Rechte und Verhältnisse vom Standpunkte der volkswirtschaftlichen Güterlehre (Innsbruck, 1881), p. 37. Publisher’s Note: This has been translated into English by George D. Huncke as “Whether Legal Rights and Relationships Are Economic Goods,” in Shorter Classics of Böhm-Bawerk (South Holland, Ill.: Libertarian Press, 1962), vol. 1, pp. 25-138. Passage cited here is on page 58 of this edition.

  [2. ]Fetter, The Principles of Economics, 3rd ed. (New York, 1913), p. 408.

  [3. ]See the verses of Horace:
  
  

  • Si proprium est quod quis libra mercatus et aere est,
  • quaedam, si credis consultis, mancipat usus:
  • qui te pascit ager, tuus est; et vilicus Orbi
  • cum segetes occat tibi mox frumenta daturas,
  • te dominum sentit, das nummos: accipis uvam
  • pullos ova, cadum temeti. [2. Epistol., 2, 158-163]
  • (If that which one buys with formal purchase is one’s own,
  • If usage confers title to things, as the lawyers maintain;
  • Then the farm which feeds you is yours; and the farmer,
  • when he cultivates the field which soon will give you grain, feels you are his master.
  • You pay your money: you get in return grapes, chickens, eggs, a jar of wine.)
  The attention of economists was first drawn to this passage by Effertz (Arbeit und Boden, new ed. [Berlin, 1897], vol. 1, pp. 72, 79).

  [4. ]Etatistic social philosophy, which carries all these institutions back to the “state,” returns to the old theological explanation. In it the state assumes the position which the theologians assign to God.

  [5. ]In Greek mythology, the owl was the favorite bird, and a frequent companion of, Athena, the Goddess of Athens (Pub.).

  [6. ]J.S. Mill, Principles of Political Economy, People’s ed. (London, 1867), p, 124.

  [7. ]Dernburg, Pendekten, 6th ed. (Berlin, 1900), vol. l, pt. 2, p. 12.

  [8. ]Fichte, Der geschlossene Handelsstaat, edited by Medicus (Leipzig, 1910), p. 12.

  [9. ]Liberalism tried to extend the protection of acquired rights by developing the subjective public rights and extending legal protection through the law courts. Etatism and socialism, on the contrary, try to restrict increasingly the sphere of private law in favor of public law.

  [10. ]Tacitus, Germania, p. 14.

  [11. ]A fine poetic mockery of the romantic longing, “Where thou art not, there is happiness,” is to be found in the experience of Counselor Knap in Andersen’s “The Galoshes of Fortune.” Publisher’s Note: (New York: Doubleday, 1974).

  [12. ]Wiese, Der Liberalismus in Vergangenheit und Zukunft (Berlin, 1917), pp. 58 ff.

  [13. ]Poehlmann, Geschichte der sozialen Frage und des Sozialismus in der antiken Welt, 2nd ed. (Munich, 1912), vol. 2, pp. 577 ff.

  [14. ]“Ipsaque tellus omnia liberius nullo poscente ferebat” (Virgil, Georgica, I, 127 ff.) [“And the land itself provided everything spontaneously with a liberal hand.”]

  [15. ]Laveleye, Das Ureigentum, trans. by Bücher from French (Leipzig, 1879), pp. 514 ff.

  [16. ]Hauberg cooperatives were associations of workers in lumbering (Hauberg) and tanning enterprises (Pub.).

  [17. ]Trier Gehöferschaften (German) were rural hereditary associations dating from the Middle Ages, set up to cultivate the lands lying outside the manorial freeholds and maintained until recently in the vicinity of Trier in southwestern Germany (Pub.).

  [18. ]Below, Probleme der Wirtschaftsgeschichte (Tübingen,, 1920), pp. 13 ff.

  [19. ]Germania, 26.

• Back to Top

  3: Session I Reading 3: Understanding Collectivism and Socialism

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: CHAPTER 2: Socialism

  Accessed from oll.libertyfund.org/title/1060/103793 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  CHAPTER 2

  Socialism

  1

  The State and Economic Activity

  It is the aim of Socialism to transfer the means of production from private ownership to the ownership of organized society, to the State.20 The socialistic State owns all material factors of production and thus directs it. This transfer need not be carried out with due observance of the formalities elaborated for property transfers according to the law set up in the historical epoch which is based on private property in the means of production. Still less important in such a process of transfer is the traditional terminology of Law. Ownership is power of disposal, and when this power of disposal is divorced from its traditional name and handed over to a legal institution which bears a new name, the old terminology is essentially unimportant in the matter. Not the word but the thing must be considered. Limitation of the rights of owners as well as formal transference is a means of socialization. If the State takes the power of disposal from the owner piecemeal, by extending its influence over production; if its power to determine what direction production shall take and what kind of production there shall be, is increased, then the owner is left at last with nothing except the empty name of ownership, and property has passed into the hands of the State.

  People often fail to perceive the fundamental difference between the liberal and the anarchistic idea. Anarchism rejects all coercive social organizations, and repudiates coercion as a social technique. It wishes in fact to abolish the State and the legal order, because it believes that society could do better without them. It does not fear anarchical disorder because it believes that without compulsion men would unite for social co-operation and would behave in the manner that social life demands. Anarchism as such is neither liberal nor socialistic: it moves on a different plane from either. Whoever denies the basic idea of Anarchism, whoever denies that it is or ever will be possible to unite men without coercion under a binding legal order for peaceful co-operation, will, whether liberal or socialist, repudiate anarchistic ideals. All liberal and socialist theories based on a strict logical connection of ideas have constructed their systems with due regard to coercion, utterly rejecting Anarchism. Both recognize the necessity of the legal order, though for neither is it the same in content and extent. Liberalism does not contest the need of a legal order when it restricts the field of State activity, and certainly does not regard the State as an evil, or as a necessary evil. Its attitude to the problem of ownership and not its dislike of the “person” of the State is the characteristic of the liberal view of the problem of the State. Since it desires private ownership in the means of production it must, logically, reject all that conflicts with this ideal. As for Socialism, as soon as it has turned fundamentally from Anarchism, it must necessarily try to extend the field controlled by the compulsory order of the State, for its explicit aim is to abolish the “anarchy of production.” Far from abolishing State and compulsion it seeks to extend governmental action to a field which Liberalism would leave free. Socialistic writers, especially those who recommend Socialism for ethical reasons, like to say that in a socialistic society public welfare would be the foremost aim of the State, whereas Liberalism considers only the interests of a particular class. Now one can only judge of the value of a social form of organization, liberal or socialistic, when a thorough investigation has provided a clear picture of what it achieves. But that Socialism alone has the public welfare in view can at once be denied. Liberalism champions private property in the means of production because it expects a higher standard of living from such an economic organization, not because it wishes to help the owners. In the liberal economic system more would be produced than in the socialistic. The surplus would not benefit only the owners. According to Liberalism therefore, to combat the errors of Socialism is by no means the particular interest of the rich. It concerns even the poorest, who would be injured just as much by Socialism. Whether or not one accepts this, to impute a narrow class interest to Liberalism is erroneous. The systems, in fact, differ not in their aims but in the means by which they wish to pursue them.

  2

  The “Fundamental Rights” of Socialist Theory

  The programme of the liberal philosophy of the State was summarized in a number of points which were put forward as the demands of natural law. These are the Rights of Man and of Citizens, which formed the subject of the wars of liberation in the eighteenth and nineteenth centuries. They are written in brass in the constitutional laws composed under the influence of the political movements of this time. Even supporters of Liberalism might well ask themselves whether this is their appropriate place, for in form and diction they are not so much legal principles—fit subject matter for a law of practical life—as a political programme to be followed in legislation and administration. At any rate it is obviously insufficient to include them ceremoniously in the fundamental laws of states and constitutions; their spirit must permeate the whole State. Little benefit the citizen of Austria has had from the fact that the Fundamental Law of the State gave him the right “to express his opinion freely by word, writing, print, or pictorial representation within the legal limits.” These legal limits prevented the free expression of opinion as much as if that Fundamental Law had never been laid down. England has no Fundamental Right of the free expression of opinion; nevertheless in England speech and press are really free because the spirit which expresses itself in the principle of the freedom of thought permeates all English legislation.

  In imitation of these political Fundamental Rights some antiliberal writers have tried to establish basic economic rights. Here their aim is twofold: on the one hand they wish to show the insufficiency of a social order which does not guarantee even these alleged natural Rights of Man; on the other hand they wish to create a few easily remembered, effective slogans to serve as propaganda for their ideas. The view that it might be sufficient to establish these basic rights legally in order to establish a social order corresponding to the ideals they express, is usually far from the minds of their authors. The majority indeed, especially in recent years, are convinced that they can get what they want only by the socialization of the means of production. The economic basic rights were elaborated only to show what requirements a social order had to satisfy, a critique rather than a programme. Considered from this point of view they give us an insight into what, according to the opinion of its advocates, Socialism should achieve.

  According to Anton Menger, Socialism usually assumes three economic basic rights—the right to the full produce of labour, the right to existence, and the right to work.21

  All production demands the co-operation of the material and personal factors of production: it is the purposeful union of land, capital, and labour. How much each of these has contributed physically to the result of production cannot be ascertained. How much of the value of the product is to be attributed to the separate factors is a question which is answered daily and hourly by buyers and sellers on the market, though the scientific explanation of this process has achieved satisfactory results only in very recent years, and these results are still far from final. The formation of market prices for all factors of production attributes to each a weight that corresponds to its part in production. Each factor receives in the price the yield of its collaboration. The labourer receives in wages the full produce of his labour. In the light of the subjective theory of value therefore that particular demand of Socialism appears quite absurd. But to the layman it is not so. The habit of speech with which it is expressed derives from the view that value comes from labour alone. Whoever takes this view of value will see in the demand for the abolition of private ownership in the means of production a demand for the full produce of labour for the labourer. At first it is a negative demand—exclusion of all income not based on labour. But as soon as one proceeds to construct a system on this principle insurmountable obstacles arise, difficulties which are the consequence of the untenable theories of the formation of value which have established the principle of the right to the full produce of labour. All such systems have been wrecked on this. Their authors have had to confess finally that what they wanted was nothing else than the abolition of the income of individuals not based on labour, and that only socialization of the means of production could achieve this. Of the right to the full produce of labour, which had occupied minds for decades, nothing remains but the slogan—effective for propaganda, of course—demanding that “unearned” non-labour income should be abolished.

  The Right to Existence can be defined in various ways. If one understands by this the claim of people, without means and unfit for work and with no relation to provide for them, to subsistence, then the Right to Existence is a harmless institution which was realized in most communities centuries ago. Certainly the manner in which the principle has been carried into practice may leave something to be desired, as for reasons that arise from its origin in charitable care of the poor, it gives to the necessitous no title recoverable by law. By “Right to Existence,” however, the socialists do not mean this. Their definition is: “that each member of society may claim that the goods and services necessary to the maintenance of his existence shall be assigned to him, according to the measure of existing means, before the less urgent needs of others are satisfied.“22 The vagueness of the concept, “maintenance of existence,” and the impossibility of recognizing and comparing how urgent are the needs of different persons from any objective standpoint, make this finally a demand for the utmost possible equal distribution of consumption goods. The form which the concept sometimes takes—that no one should starve while others have more than enough—expresses that intention even more clearly. Plainly, this claim for equality can be satisfied, on its negative side, only when all the means of production have been socialized and the yield of production is distributed by the State. Whether on its positive side it can be satisfied at all is another problem with which the advocates of the Right to Existence have scarcely concerned themselves. They have argued that Nature herself affords to all men a sufficient existence and only because of unjust social institutions is the provisioning of a great part of humanity insufficient; and that if the rich were deprived of all they are allowed to consume over and above what is “necessary,” everyone would be able to live decently. Only under the influence of the criticism based on the Malthusian Law of Population23 has socialist doctrine been amended. Socialists admit that under non-socialist production not enough is produced to supply all in abundance, but argue that Socialism would so enormously increase the productivity of labour that it would be possible to create an earthly paradise for an unlimited number of persons. Even Marx, otherwise so discreet, says that the socialist society would make the wants of each individual the standard measure of distribution.24

  This much is certain, however: the recognition of the Right to Existence, in the sense demanded by the socialist theorists, could be achieved only by the socialization of the means of production. Anton Menger has, it is true, expressed the opinion that private property and the Right to Existence might well exist side by side. In this case claims of citizens of the State to what was necessary for existence would have to be considered a mortgage on the national income, and these claims would have to be met before favoured individuals received an unearned income. But even he has to confess that were the Right to Existence admitted completely, it would absorb such an important part of the unearned income and would strip so much benefit from private ownership that all property would soon be collectively owned.25 If Menger had seen that the Right to Existence necessarily involved a right to the equal distribution of consumption goods, he would not have asserted that it was fundamentally compatible with private ownership in the means of production.

  The Right to Existence is very closely connected with the Right to Work.26 The basis of the idea is not so much a Right to Work as a duty. The laws which allow the unemployable a sort of claim to maintenance exclude the employable from a like favour. He has only a claim to the allotment of work. Naturally the socialist writers and with them the older socialist policy have a different view of this right. They transform it, more or less clearly, into a claim to a task which is agreeable to the inclinations and abilities of the worker, and which yields a wage sufficient for his subsistence needs. Beneath the Right to Work lies the same idea, that engendered the Right to Existence—the idea that in “natural” conditions—which we are to imagine existing before and outside the social order based on private property but which is to be restored by a socialist constitution when private property has been abolished—every man would be able to procure a sufficient income through work. The bourgeois society which has destroyed this satisfactory state of affairs owes to those thus injured the equivalent of what they have lost. This equivalent is supposed to be represented just by the Right to Work. Again we see the old illusion of the means of subsistence which Nature is supposed to provide irrespective of the historical development of society. But the fact is that Nature grants no rights at all, and just because she dispenses only the scantiest means of subsistence and because wants are practically unlimited, man is forced to take economic action. This action begets social collaboration; its origin is due to the realization that it heightens productivity and improves the standard of living. The notion, borrowed from the most naive theories of natural law, that in society the individual is worse off than “in the freer primitive state of Nature” and that society must first, so to speak, buy his toleration with special rights, is the cornerstone of expositions upon the Right to Work as well as upon the Right to Existence.

  Where production is perfectly balanced there is no unemployment. Unemployment is a consequence of economic change, and where production is unhindered by the interferences of authorities and trade unions, it is always only a phenomenon of transition, which the alteration of wage rates tends to remove. By means of appropriate institutions, by the extension, for example, of labour exchanges, which would evolve out of the economic mechanism in the unimpeded market—i.e. where the individual is free to choose and to change his profession and the place where he works—the duration of separate cases of unemployment could be so much shortened that it would no longer be considered a serious evil.27 But the demand that every citizen should have a right to work in his accustomed profession at a wage not inferior to the wage rates of other labour more in demand is utterly unsound. The organization of production cannot dispense with a means of forcing a change of profession. In the form demanded by the socialist, the Right to Work is absolutely impracticable, and this is not only the case in a society based on private ownership in the means of production. For even the socialist community could not grant the worker the right to be active only in his wonted profession; it, also, would need the power to move labour to the places where it was most needed.

  The three basic economic rights—whose number incidentally could easily be increased—belong to a past epoch of social reform movements. Their importance today is merely, though effectively, propagandistic. Socialization of the means of production has replaced them all.

  3

  Collectivism and Socialism

  The contrast between realism and nominalism which runs through the history of human thought since Plato and Aristotle is revealed also in social philosophy.28 The difference between the attitude of Collectivism and Individualism to the problem of social associations, is not different from the attitude of Universalism and Nominalism to the problem of the concept of species. But in the sphere of social science this contrast—to which in philosophy the attitude towards the idea of God has given a significance which extends far beyond the limits of scientific research—has the highest importance. The powers which are in existence and which do not want to succumb, find in the philosophy of Collectivism weapons for the defence of their rights. But even here Nominalism is a restless force seeking always to advance. Just as in the sphere of philosophy it dissolves the old concepts of metaphysical speculation, so here it breaks up the metaphysics of sociological Collectivism.

  The political misuse of the contrast is clearly visible in the teleological form which it assumes in Ethics and Politics. The problem here is stated otherwise than in Pure Philosophy. The question is whether the individual or the community shall be the purpose.29 This presupposes a contrast between the purposes of individuals and those of the social whole, a contrast which only the sacrifice of the one in favour of the other can overcome. A quarrel over the reality or nominality of the concepts becomes a quarrel over the precedence of purposes. Here there arises a new difficulty for Collectivism. As there are various social collectiva, whose purposes seem to conflict just as much as those of the individuals contrast with those of the collectiva, the conflict of their interests must be fought out. As a matter of fact, practical Collectivism does not worry much about this. It feels itself to be only the apologist of the ruling classes and serves, as it were, as scientific policeman, on all fours with political police, for the protection of those who happen to be in power.

  But the individualist social philosophy of the epoch of enlightenment disposed of the conflict between Individualism and Collectivism. It is called individualistic because its first task was to clear the way for subsequent social philosophy by breaking down the ideas of the ruling Collectivism. But it has not in any way replaced the shattered idols of Collectivism with a cult of the individual. By making the doctrine of the harmony of interests the starting point of sociological thought, it founded modem social science and showed that the conflict of purposes upon which the quarrel turned did not exist in reality. For society is only possible on these terms, that the individual finds therein a strengthening of his own ego and his own will.

  The collectivist movement of the present day derives its strength not from an inner want on the part of modern scientific thought but from the political will of an epoch which yearns after Romanticism and Mysticism. Spiritual movements are revolts of thought against inertia, of the few against the many; of those who because they are strong in spirit are strongest alone against those who can express themselves only in the mass and the mob, and who are significant only because they are numerous. Collectivism is the opposite of all this, the weapon of those who wish to kill mind and thought. Thus it begets the “New Idol,” “the coldest of all cold monsters,” the State.30 By exalting this mysterious being into a sort of idol, decking it out in the extravagance of fantasy with every excellence and purifying it of all dross,31 and by expressing a readiness to sacrifice everything on its altar, Collectivism seeks consciously to cut every tie that unites sociological with scientific thought. This is most clearly discernible in those thinkers who exerted the keenest criticism to free scientific thought from all teleological elements, whilst in the field of social cognition they not only retained traditional ideas and teleological ways of thinking but even, by endeavouring to justify this, barred the way by which sociology could have won for itself the liberty of thought already achieved by natural science. No god and no ruler of Nature lives for Kant’s theory of cognition of nature, but history he regards “as the execution of a hidden plan of nature in order to bring about a state-constitution perfect inwardly—and, for this purpose, outwardly as well—as the only condition in which she can develop all her abilities in humanity.”32 In the words of Kant we can see with especial clearness the fact that modern Collectivism has nothing more to do with the old realism of concepts but rather, having arisen from political and not from philosophical needs, occupies a special position outside science which cannot be shaken by attacks based on the theory of cognition. In the second part of his Ideen zu einer Philosophie der Geschichte der Menschheit (Ideas to a Philosophy of the History of Humanity) Herder violently attacked the critical philosophy of Kant, which appeared to him as “Averroic” hypostasization of the general. Anyone who sought to maintain that the race, and not the individual, was the subject of education and civilization, would be speaking incomprehensibly, “as race and species are only general concepts, except in so far as they exist in the individual being.” Even if one attributed to this general concept all the perfections of humanity—culture and highest enlightenment—which an ideal concept permits, one would have “said just as little about the true history of our race, as I would if, speaking of animality, stoneness, metalness, in general, I were to ascribe to them the most glorious, but in single individuals self-conflicting, attributes.“33 In his reply to this Kant completes the divorce of ethical-political Collectivism from the philosophical concept-realism. “Whoever said that no single horse has horns but the species of horses is nevertheless horned would be stating a downright absurdity. For then species means nothing more than the characteristic in which all individuals must agree. But if the meaning of the expression ’the human species’ is—and this is generally the case—the whole of a series of generations going into the infinite (indefinable), and it is assumed that this series is continuously nearing the line of its destiny, which runs alongside of it, then it is no contradiction to say, that in all its parts it is asymptotic to it, yet on the whole meets it-in other words, that no link of all the generations of the human race but only the species attains its destiny completely. Mathematicians can elucidate this. The philosopher would say: the destiny of the human race as a whole is continuous progress, and the completion of this is a mere idea—but in all intention a useful idea—of the aim towards which we, according to the plan of Providence, have to direct our exertions.”34 Here the teleological character of Collectivism is frankly admitted, and there opens up an unbridgeable chasm between it and the way of thought of pure cognition. The cognition of the hidden intentions of Nature lies beyond all experience and our own thought gives us nothing upon which to form a conclusion as to whether it exists or what it contains. Such behaviour of individual man and of social systems as we are able to observe provides no basis for a hypothesis. No logical connection can be forged between experience and that which we shall or may suppose. We are to believe—because it cannot be proved—that against his will man does that which is ordained by Nature, who knows better; that he does what profits the race, not the individual.35 This is not the customary technique of science.

  The fact is that Collectivism is not to be explained as a scientific necessity. Only the needs of politics can account for it. Therefore it does not stop, as conceptual realism stopped, at affirming the real existence of social associations—calling them organisms and living beings in the proper sense of the words—but idealizes them and makes them Gods. Gierke explains quite openly and unequivocally that one must hold fast to the “idea of the real unity of the community,” because this alone makes possible the demand that the individual should stake strength and life for Nation and State.36 Lessing has said that Collectivism is nothing less than “the cloak of tyranny.”37

  If the conflict between the common interests of the whole and the particular interests of the individual really existed, men would be quite incapable of collaborating in society. The natural intercourse between human beings would be the war of all against all. There could be no peace or mutual sufferance, but only temporary truce, which lasted no longer than the weariness of one or all the parts made necessary. The individual would, at least potentially, be in constant revolt against each and all, in the same way as he finds himself in unceasing war with beasts of prey and bacilli. The collective view of history, which is thoroughly asocial, cannot therefore conceive that social institutions could have arisen in any way except through the intervention of a “world shaper” of the Platonic δημιουργὸξ (one who works for the people). This operates in history through its instruments, the heroes, who lead resistant man to where it wants him. Thus the will of the individual is broken. He who wants to live for himself alone is forced by the representatives of God on earth to obey the moral law, which demands that he shall sacrifice his well-being in the interests of the Whole and its future development.

  The science of society begins by disposing of this dualism. Perceiving that the interests of separate individuals within society are compatible and that these individuals and the community are not in conflict, it is able to understand social institutions without calling gods and heroes to its aid. We can dispense with the Demiurge, which forces the individual into the Collectivism against his will, as soon as we realize that social union gives him more than it takes away. Even without assuming a “hidden plan of nature” we can understand the development to a more closely-knit form of society when we see that every step on this way benefits those who take it, and not only their distant great-grandchildren.

  Collectivism had nothing to oppose to the new social theory. Its continually reiterated accusation, that this theory does not apprehend the importance of the collectiva, especially those of State and Nation, only shows that it has not observed how the influence of liberal sociology has changed the setting of the problem. Collectivism no longer attempts to construct a complete theory of social life; the best it can produce against its opponents is witty aphorism, nothing more. In economics as well as in general sociology it has proved itself utterly barren. It is no accident that the German mind, dominated by the social theories of classical philosophy from Kant to Hegel, for a long time produced nothing important in economics, and that those who have broken the spell, first Thünen and Gossen, then the Austrians Carl Menger, Böhm-Bawerk, and Wieser, were free from any influence of the collectivist philosophy of the State.

  How little Collectivism was able to surmount the difficulties in the way of amplifying its doctrine is best shown by the manner in which it has treated the problem of social will. To refer again and again to the Will of the State, to the Will of the People, and to the Convictions of the People is not in any way to explain how the collective will of the social associations comes into being. As it is not merely different from the will of separate individuals but, in decisive points, is quite opposed to the latter, the collective will cannot originate as the sum or resultant of individual wills. Every collectivist assumes a different source for the collective will, according to his own political, religious and national convictions. Fundamentally it is all the same whether one interprets it as the supernatural powers of a king or priest or whether one views it as the quality of a chosen class or people. Friedrich Wilhelm IV and Wilhelm II were quite convinced that God had invested them with special authority, and this faith doubtless served to stimulate their conscientious efforts and the development of their strength. Many contemporaries believed alike and were ready to spend their last drop of blood in the service of the king sent to them by God. But science is as little able to prove the truth of this belief as to prove the truth of a religion. Collectivism is political, not scientific. What it teaches are judgments of value.

  [20. ]The term “Communism” signifies just the same as “Socialism.” The use of these two words has repeatedly changed during the past decades, but always the question that separated socialists from communists was only political tactics. Both aim to socialize the means of production.

  [21. ]Anton Menger, Das Recht auf den vollen Arbeitsertrag in geschichtlicher Darstellung, 4th ed. (Stuttgart and Berlin, 1910), p. 6. Publisher’s Note: For an English translation, see Right to the Whole Produce of Labor, with an introduction by Foxwell, 1899.

  [22. ]Ibid., p.9

  [23. ]Malthus, An Essay on the Principle of Population, 5th ed. (London, 1817), vol. 3, pp. 154 ff.

  [24. ]Marx, Zur Kritik des sozialdemokratischen Parteiprogramms von Gotha, ed. Kreibich (Reichenberg, 1920), p. 17. Publisher’s Note: For an English translation of this passage, see Critique of the Gotha Programme (New York: International Publishers, 1938), p. 10, or pp. 2-7 of Marx, Capital, the Communist Manifesto and Other Writings, ed. and introd. Max Eastman (New York: Random House, Modern Library, 1932). The passage referred to here concludes: “From each according to his abilities, to each according to needs!”

  [25. ]Anton Menger, op. cit., p. 10.

  [26. ]Ibid., pp. 10 ff. Also Singer-Sieghart, Das Recht auf Arbeit in geschichtlicher Darstellung (Jena, 1895), pp. 1 ff.; Mutasoff, Zur Geschichte des Rechts auf Arbeit mit besonderer Rücksicht auf Charles Fourier (Berne, 1897), pp. 4 ff.

  [27. ]My works: Kritik des Interventionismus (Jena, 1929), pp. 22 ff.; Die Ursachen der Wirtschaftskrise (Tübingen, 1931), pp. 15 ff. Publisher’s Note: These references are now available in English. See A Critique of Interventionism, trans. Hans F. Sennholz (New Rochelle, N.Y.: Arlington House, 1977), pp. 26 ff.; “The Causes of the Economic Crisis,” in On the Manipulation of Money and Credit, trans. Bettina Bien Greaves and ed. Percy L. Greaves, Jr. (Dobbs Ferry, N.Y.: Free Market Books, 1978), pp. 186 ff.

  [28. ]Pribram, Die Entstehung der individualistischen Sozialphilosophie (Leipzig, 1912), pp. 3 ff.

  [29. ]Thus Dietzel (“Individualismus,” Handwörterbuch der Staatswissenschaften, 3rd ed., vol. 5, p. 590) formulates the contrast of the individual principle and the social principle. Similarly Spengler, Preussentum und Sozialismus (Munich, 1920), p. 14.

  [30. ]Nietzsche, “Also Sprach Zarathustra,” vol. 6, Werke (Krönersche Klassikerausgabe), p. 69. Publisher’s Note: In English, see Thus Spake Zarathustra, pp. 103-439 in The Portable Nietzsche, ed. Walter Kaufman (New York: Viking Press, 1954). Reference here is to No. 11, “On the New Idol.”

  [31. ]“L’État étant conçu comme un être ideal, on le pare de toutes les qualités que l’on rêve et on le dépouille de toutes les faiblesses que l’on hait” (“The state, being conceived as an ideal being, is endowed with all the qualities of our dreams and stripped of all those qualities we hate”) (P. Leroy-Beaulieu, L’État moderne et ses fonctions, 3rd ed. [Paris, 1900], p. 11); also, Bamberger, Deutschland und der Sozialismus [Leipzig, 1878], pp. 86 ff.

  [32. ]Kant, Idee zu einer allgemeinen Geschichte in weltbürgerlicher Absicht, vol. 1, Sämtliche Werke, Inselausgabe (Leipzig, 1912), p. 235. Publisher’s Note: In English, “Idea for a Universal History from a Cosmopolitan Point of View” (Complete Works, Insel Edition). In On History. Immanuel Kant, ed. Lewis White Beck and trans. Lewis White Beck, Robert E. Anchor and Emil L. Fackenheim (Indianapolis: Bobbs-Merrill, 1963), p. 21.

  [33. ]Herder, Ideen zu einer Philosophie der Geschichte der Menschheit, vol. 13, Sämtliche Werke, ed. Suphan (Berlin, 1887) pp. 345 ff.

  [34. ]Kant, Rezension zum zweiten Teil von Herders Ideen zur Philosophie der Geschichte der Menschheit, vol. 1, Werke, p. 267. On this, see Cassirer, Freiheit und Form (Berlin, 1916), pp. 504 ff. Publisher’s Note: In English, “Review on the Second Part of Herder’s Ideas for a Philosophy on the History of Mankind.” In On History. Immanuel Kant, ed. Lewis White Beck (Indianapolis: Bobbs-Merrill, 1963), p. 51.

  [35. ]Kant, Idee zu einer allgemeinen Geschichte ... p. 228. Publisher’s Note: In English this is page 16 of Idea for a Universal History ... as cited above.

  [36. ]Gierke, Des Wesen der menschlichen Verbände (Leipzig, 1902), pp. 34 ff.

  [37. ]In “Ernst und Falk,” Gespräche für Freimaurer, vol. 5. Werke (Stuttgart, 1873), p. 80.

• Back to Top

  4: Session II Reading 1: Socialism and the Calculation Problem

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: CHAPTER 5: The Nature of Economic Activity

  Accessed from oll.libertyfund.org/title/1060/103831 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  CHAPTER 5

  The Nature of Economic Activity

  1

  A Contribution to the Critique of the Concept “Economic Activity”

  Economic Science originated in discussion of the money price of goods and services. Its first beginnings are to be found in inquiries about coinage, which developed into investigations of price movements. Money, money prices, and everything concerned with calculation in terms of money—these form the problems in the discussion of which the science of Economics emerged. Those attempts at economic inquiry, which are discernible in works on household management and the organization of production—particularly agricultural—did not develop further in this direction. They became merely the starting point for various departments of technology and natural science. And this was no accident. Only through the rationalization inherent in economic calculation based on the use of money could the human mind come to understand and trace the laws of its action.

  The earlier economists did not ask themselves what the “economic” and “economic activity” really were. They had enough to do with the great tasks presented by the particular problems with which they were then concerned. They were not concerned with methodology. It was quite late before they began to grapple with the methods and ultimate aims of economics, and its place in the general system of knowledge. And then an obstacle was encountered which seemed to be insurmountable—the problem of defining the subject matter of economic activity.

  All theoretical inquiries—those of the classical economists, equally with those of the moderns—start from the economic principle. Yet, as was necessarily soon perceived, this provides no basis for clearly defining the subject matter of economics. The economic principle is a general principle of rational action, and not a specific principle of such action as forms the subject of economic inquiry.1 The economic principle directs all rational action, all action capable of becoming the subject matter of a science. It seemed absolutely unserviceable for separating the “economic” from the “non-economic,” so far as the traditional economic problems were concerned.2

  But, on the other hand, it was equally impossible to divide up rational actions according to the immediate end to which they were directed, and to regard as the subject matter of economics only those actions which were directed to providing mankind with the commodities of the external world. Against such a procedure it is a decisive objection that, in the last analysis, the provision of material goods serves not only those ends which are usually termed economic, but also many other ends.

  Such a division of the motives of rational action involves a dual conception of action—action from economic motives, on the one side, action from non-economic motives, on the other—which is absolutely irreconcilable with the necessary unit of will and action. A theory of rational action must conceive such action as unitary.

  2

  Rational Action

  Action based on reason, action therefore which is only to be understood by reason, knows only one end, the greatest pleasure of the acting individual. The attainment of pleasure, the avoidance of pain—these are its intentions. By this, of course, we do not mean “pleasure” and “pain” in the sense in which these terms used to be used. In the terminology of the modern economist, pleasure is to be understood as embracing all those things which men hold to be desirable, all that they want and strive for. There can therefore be no longer any contrast between the “noble” ethics of duty and the vulgar hedonistic ethics. The modern concept of pleasure, happiness, utility, satisfaction and the like includes all human ends, regardless of whether the motives of action are moral or immoral, noble or ignoble, altruistic or egotistical.3

  In general men act only because they are not completely satisfied. Were they always to enjoy complete happiness, they would be without will, without desire, without action. In the land of the lotus-eaters there is no action. Action arises only from need, from dissatisfaction. It is purposeful striving towards something. Its ultimate end is always to get rid of a condition which is conceived to be deficient—to fulfil a need, to achieve satisfaction, to increase happiness. If men had all the external resources of nature so abundantly at their disposal that they were able to obtain complete satisfaction by action, then they could use them heedlessly. They would only have to consider their own powers and the limited time at their disposal. For, compared with the sum of their needs, they would still have only a limited strength and a limited life-time available. They would still have to economize time and labour. But to economy of materials they would be indifferent. In fact, however, materials are also limited, so that they too have to be used in such a way that the most urgent needs are satisfied first, with the least possible expenditure of materials for each satisfaction.

  The spheres of rational action and economic action are therefore co-incident. All rational action is economic. All economic activity is rational action. All rational action is in the first place individual action. Only the individual thinks. Only the individual reasons. Only the individual acts. How society arises from the action of individuals will be shown in a later part of our discussion.

  3

  Economic Calculation

  All human action, so far as it is rational, appears as the exchange of one condition for another. Men apply economic goods and personal time and labour in the direction which, under the given circumstances, promises the highest degree of satisfaction, and they forgo the satisfaction of lesser needs so as to satisfy the more urgent needs. This is the essence of economic activity—the carrying out of acts of exchange.4

  Every man who, in the course of economic activity, chooses between the satisfaction of two needs, only one of which can be satisfied, makes judgments of value.5 Such judgments concern firstly and directly the satisfactions themselves; it is only from these that they are reflected back upon goods. As a rule anyone in possession of his senses is able at once to evaluate goods which are ready for consumption. Under very simple conditions he should also have little difficulty in forming a judgment upon the relative significance to him of the factors of production. When, however, conditions are at all complicated, and the connection between things is harder to detect, we have to make more delicate computations if we are to evaluate such instruments. Isolated man can easily decide whether to extend his hunting or his cultivation. The processes of production he has to take into account are relatively short. The expenditure they demand and the product they afford can easily be perceived as a whole. But to choose whether we shall use a waterfall to produce electricity or extend coal-mining and better utilize the energy contained in coal, is quite another matter. Here the processes of production are so many and so long, the conditions necessary to the success of the undertaking so multitudinous, that we can never be content with vague ideas. To decide whether an undertaking is sound we must calculate carefully.

  But computation demands units. And there can be no unit of the subjective use-value of commodities. Marginal utility provides no unit of value. The worth of two units of a given commodity is not twice as great as one—although it is necessarily greater or smaller than one. Judgments of value do not measure: they arrange, they grade.6 If he relies only on subjective valuation, even isolated man cannot arrive at a decision based on more or less exact computations in cases where the solution is not immediately evident. To aid his calculations he must assume substitution relations between commodities. As a rule he will not be able to reduce all to a common unit. But he may succeed in reducing all elements in the computation to such commodities as he can evaluate immediately, that is to say, to goods ready for consumption and the disutility of labour and then he is able to base his decision upon this evidence. It is obvious that even this is possible only in very simple cases. For complicated and long processes of production it would be quite out of the question.

  In an exchange economy, the objective exchange value of commodities becomes the unit of calculation. This involves a threefold advantage. In the first place we are able to take as the basis of calculation the valuation of all individuals participating in trade. The subjective valuation of one individual is not directly comparable with the subjective valuation of others. It only becomes so as an exchange value arising from the interplay of the subjective valuations of all who take part in buying and selling. Secondly, calculations of this sort provide a control upon the appropriate use of the means of production. They enable those who desire to calculate the cost of complicated processes of production to see at once whether they are working as economically as others. If, under prevailing market prices, they cannot carry through the process at a profit, it is a clear proof that others are better able to turn to good account the instrumental goods in question. Finally, calculations based upon exchange values enable us to reduce values to a common unit. And since the higgling of the market establishes substitution relations between commodities, any commodity desired can be chosen for this purpose. In a money economy, money is the commodity chosen.

  Money calculations have their limits. Money is neither a yardstick of value nor of prices. Money does not measure value. Nor are prices measured in money: they are amounts of money. And, although those who describe money as a “standard of deferred payments” naively assume it to be so, as a commodity it is not stable in value. The relation between money and goods perpetually fluctuates not only on the “goods side,” but on the “money side” also. As a rule, indeed, these fluctuations are not too violent. They do not too much impair the economic calculus, because under a state of continuous change of all economic conditions, this calculus takes in view only comparatively short periods, in which “sound money” at least does not change its purchasing power to any very great extent.

  The deficiencies of money calculations arise for the most part, not because they are made in terms of a general medium of exchange, money, but because they are based on exchange values rather than on subjective use-values. For this reason all elements of value which are not the subject of exchange elude such computations. If, for example, we are considering whether a hydraulic power-works would be profitable we cannot include in the computation the damage which will be done to the beauty of the waterfalls unless the fall in values due to a fall in tourist traffic is taken into account. Yet we must certainly take such considerations into account when deciding whether the undertaking shall be carried out.

  Considerations such as these are often termed “non-economic.” And we may permit the expression for disputes about terminology gain nothing. But not all such considerations should be called irrational. The beauty of a place or of a building, the health of the race, the honour of individuals or nations, even if (because they are not dealt with on the market) they do not enter into exchange relations, are just as much motives of rational action, provided people think them significant, as those normally called economic. That they cannot enter into money calculations arises from the very nature of these calculations. But this does not in the least lessen the value of money calculations in ordinary economic matters. For all such moral goods are goods of the first order. We can value them directly; and therefore have no difficulty in taking them into account, even though they lie outside the sphere of money computations. That they elude such computations does not make it any more difficult to bear them in mind. If we know precisely how much we have to pay for beauty, health, honour, pride, and the like, nothing need hinder us from giving them due consideration. Sensitive people may be pained to have to choose between the ideal and the material. But that is not the fault of a money economy. It is in the nature of things. For even where we can make judgments of value without money computations we cannot avoid this choice. Both isolated man and socialist communities would have to do likewise, and truly sensitive natures will never find it painful. Called upon to choose between bread and honour, they will never be at a loss how to act. If honour cannot be eaten, eating can at least be forgone for honour. Only such as fear the agony of choice because they secretly know that they could not forgo the material, will regard the necessity of choice as a profanation.

  Money computations are only significant for purposes of economic calculation. Here they are used in order that the disposal of commodities may conform to the criterion of economy. And such calculations take account of commodities only in the proportions in which, under given conditions, they exchange for money. Every extension of the sphere of money calculation is misleading. It is misleading when in historical researches, it is employed as a measure of past commodity values. It is misleading when it is employed to evaluate the capital or national income of nations. It is misleading when it is employed to estimate the value of things which are not exchangeable as, for instance, when people attempt to estimate the loss due to emigration or war.7 All these are dilettantisms—even when they are undertaken by the most competent economists.

  But within these limits—and in practical life they are not overstepped—money calculation does all that we are entitled to ask of it. It provides a guide amid the bewildering throng of economic possibilities. It enables us to extend judgments of value which apply directly only to consumption goods—or at best to production goods of the lowest order—to all goods of higher orders. Without it, all production by lengthy and roundabout processes would be so many steps in the dark.

  Two things are necessary if computations of value in terms of money are to take place. First, not only goods ready for consumption but also goods of higher orders must be exchangeable. If this were not so, a system of exchange relationships could not emerge. It is true that if an isolated man is “exchanging” labour and flour for bread within his own house, the considerations he has to take into account are not different from those which would govern his actions if he were to exchange bread for clothes on the market. And it is, therefore, quite correct to regard all economic activity, even the economic activity of isolated man, as exchange. But no single man, be he the greatest genius ever born, has an intellect capable of deciding the relative importance of each one of an infinite number of goods of higher orders. No individual could so discriminate between the infinite number of alternative methods of production that he could make direct judgments of their relative value without auxiliary calculations. In societies based on the division of labour, the distribution of property rights effects a kind of mental division of labour, without which neither economy nor systematic production would be possible.

  In the second place, there must be a general medium of exchange, a money, in use. And this must serve as an intermediary in the exchange of production goods equally with the rest. If this were not so, it would be impossible to reduce all exchange relationships to a common denominator.

  Only under very simple conditions is it possible to dispense with money calculations. In the narrow circle of a closed household, where the father is able to supervise everything, he may be able to evaluate alterations in methods of production without having recourse to money reckoning. For, in such circumstances, production is carried on with relatively little capital. Few roundabout methods of production are employed. As a rule production is concerned with consumption goods, or goods of higher orders not too far removed from consumption goods. Division of labour is still in its earliest stages. The labourer carries through the production of a commodity from beginning to end. In an advanced society all this is changed. It is impossible to argue from the experience of primitive societies that under modern conditions we can dispense with money.

  In the simple conditions of a closed household, it is possible to survey the whole process of production from beginning to end. It is possible to judge whether one particular process gives more consumption goods than another. But, in the incomparably more complicated conditions of our own day, this is no longer possible. True, a socialistic society could see that 1000 litres of wine were better than 800 litres. It could decide whether or not 1000 litres of wine were to be preferred to 500 litres of oil. Such a decision would involve no calculation. The will of some man would decide. But the real business of economic administration, the adaptation of means to ends only begins when such a decision is taken. And only economic calculation makes this adaptation possible. Without such assistance, in the bewildering chaos of alternative materials and processes the human mind would be at a complete loss. Whenever we had to decide between different processes or different centres of production, we would be entirely at sea.8

  To suppose that a socialist community could substitute calculations in kind for calculations in terms of money is an illusion. In a community that does not practice exchange, calculations in kind can never cover more than consumption goods. They break down completely where goods of higher order are concerned. Once society abandons free pricing of production goods rational production becomes impossible. Every step that leads away from private ownership of the means of production and the use of money is a step away from rational economic activity.

  It was possible to overlook all this because such Socialism as we know at first hand exists only, one might say, in socialistic oases in what, for the rest, is a system based upon free exchange and the use of money. To this extent, indeed, we may agree with the otherwise untenable socialist contention—it is only employed for propagandist purposes—that nationalized and municipalized undertakings within an otherwise capitalist system are not Socialism. For the existence of a surrounding system of free pricing supports such concerns in their business affairs to such an extent that in them the essential peculiarity of economic activity under Socialism does not come to light. In State and municipal undertakings it is still possible to carry out technical improvements, because it is possible to observe the effects of similar improvements in similar private undertakings at home and abroad. In such concerns it is still possible to ascertain the advantages of reorganization because they are surrounded by a society which is still based upon private ownership in the means of production and the use of money. It is still possible for them to keep books and make calculations which for similar concerns in a purely socialist environment would be entirely out of the question.

  Without calculation, economic activity is impossible. Since under Socialism economic calculation is impossible, under Socialism there can be no economic activity in our sense of the word. In small and insignificant things rational action might still persist. But, for the most part, it would no longer be possible to speak of rational production. In the absence of criteria of rationality, production could not be consciously economical.

  For some time possibly the accumulated tradition of thousands of years of economic freedom would preserve the art of economic administration from complete disintegration. Men would preserve the old processes, not because they were rational, but because they were sanctified by tradition. In the meantime, however, changing conditions would make them irrational. They would become uneconomical as the result of changes brought about by the general decline of economic thought. It is true that production would no longer be “anarchical.” The command of a supreme authority would govern the business of supply. Instead of the economy of “anarchical” production the senseless order of an irrational machine would be supreme. The wheels would go round, but to no effect.

  Let us try to imagine the position of a socialist community. There will be hundreds and thousands of establishments in which work is going on. A minority of these will produce goods ready for use. The majority will produce capital goods and semi-manufactures. All these establishments will be closely connected. Each commodity produced will pass through a whole series of such establishments before it is ready for consumption. Yet in the incessant press of all these processes the economic administration will have no real sense of direction. It will have no means of ascertaining whether a given piece of work is really necessary, whether labour and material are not being wasted in completing it. How would it discover which of two processes was the more satisfactory? At best, it could compare the quantity of ultimate products. But only rarely could it compare the expenditure incurred in their production. It would know exactly—or it would imagine it knew—what it wanted to produce. It ought therefore to set about obtaining the desired results with the smallest possible expenditure. But to do this it would have to be able to make calculations. And such calculations must be calculations of value. They could not be merely “technical,” they could not be calculations of the objective use-value of goods and services; this is so obvious that it needs no further demonstration.

  Under a system based upon private ownership in the means of production, the scale of values is the outcome of the actions of every independent member of society. Everyone plays a two-fold part in its establishment first as a consumer, secondly as producer. As consumer, he establishes the valuation of goods ready for consumption. As producer, he guides production-goods into those uses in which they yield the highest product. In this way all goods of higher orders also are graded in the way appropriate to them under the existing conditions of production and the demands of society. The interplay of these two processes ensures that the economic principle is observed in both consumption and production. And, in this way, arises the exactly graded system of prices which enables everyone to frame his demand on economic lines.

  Under Socialism, all this must necessarily be lacking. The economic administration may indeed know exactly what commodities are needed most urgently. But this is only half the problem. The other half, the valuation of the means of production, it cannot solve. It can ascertain the value of the totality of such instruments. That is obviously equal to the value of the satisfactions they afford. If it calculates the loss that would be incurred by withdrawing them, it can also ascertain the value of single instruments of production. But it cannot assimilate them to a common price denominator, as can be done under a system of economic freedom and money prices.

  It is not necessary that Socialism should dispense altogether with money. It is possible to conceive arrangements permitting the use of money for the exchange of consumers goods. But since the prices of the various factors of production (including labour) could not be expressed in money, money could play no part in economic calculations.9

  Suppose, for instance, that the socialist commonwealth was contemplating a new railway line. Would a new railway line be a good thing? If so, which of many possible routes should it cover? Under a system of private ownership we could use money calculations to decide these questions. The new line would cheapen the transportation of certain articles, and, on this basis, we could estimate whether the reduction in transport charges would be great enough to counterweigh the expenditure which the building and running of the line would involve. Such a calculation could be made only in money. We could not do it by comparing various classes of expenditure and savings in kind. If it is out of the question to reduce to a common unit the quantities of various kinds of skilled and unskilled labour, iron, coal, building materials of different kinds, machinery and the other things which the building and upkeep of railways necessitate, then it is impossible to make them the subject of economic calculation. We can make systematic economic plans only when all the commodities which we have to take into account can be assimilated to money. True, money calculations are incomplete. True, they have profound deficiencies. But we have nothing better to put in their place. And under sound monetary conditions they suffice for practical purposes. If we abandon them, economic calculation becomes absolutely impossible.

  This is not to say that the socialist community would be entirely at a loss. It would decide for or against the proposed undertaking and issue an edict. But, at best, such a decision would be based on vague valuations. It could not be based on exact calculations of value.

  A stationary society could, indeed, dispense with these calculations. For there, economic operations merely repeat themselves. So that, if we assume that the socialist system of production were based upon the last state of the system of economic freedom which it superseded, and that no changes were to take place in the future, we could indeed conceive a rational and economic Socialism. But only in theory. A stationary economic system can never exist. Things are continually changing, and the stationary state, although necessary as an aid to speculation, is a theoretical assumption to which there is no counterpart in reality. And, quite apart from this, the maintenance of such a connection with the last state of the exchange economy would be out of the question, since the transition to Socialism with its equalization of incomes would necessarily transform the whole “set” of consumption and production. And then we have a socialist community which must cross the whole ocean of possible and imaginable economic permutations without the compass of economic calculation.

  All economic change, therefore, would involve operations the value of which could neither be predicted beforehand nor ascertained after they had taken place. Everything would be a leap in the dark. Socialism is the renunciation of rational economy.

  4

  The Capitalist Economy

  The terms “Capitalism” and “Capitalistic Production” are political catchwords. They were invented by socialists, not to extend knowledge, but to carp, to criticize, to condemn. Today, they have only to be uttered to conjure up a picture of the relentless exploitation of wage-slaves by the pitiless rich. They are scarcely ever used save to imply a disease in the body-politic. From a scientific point of view, they are so obscure and ambiguous that they have no value whatever. Their users agree only in this, that they indicate the characteristics of the modern economic system. But wherein these characteristics consist is always a matter of dispute. Their use, therefore, is entirely pernicious, and the proposal to extrude them altogether from economic terminology, and to leave them to the matadors of popular agitation, deserves serious consideration.10

  If, nevertheless, we do desire to discover for them a precise application, we should start from the idea of capital calculations. And since we are concerned only with the analysis of actual economic phenomena, and not with economic theory—where “capital” is often used in a sense specially extended for particular purposes—we must first ask what significance is attached to the term in business practice. There we find it used only for purposes of economic calculation. It serves to bring the original properties of a concern under one denomination, whether they consisted of money or were only expressed in money.11 The object of its computations is to enable us to ascertain how much the value of this property has altered in the course of business operations. The concept of capital is derived from economic calculation. Its true home is accountancy—the chief instrument of commercial rationality. Calculation in terms of money is an essential element of the concept of capital.12

  If the term capitalism is used to designate an economic system in which production is governed by capital calculations, it acquires a special significance for defining economic activity. Understood thus, it is by no means misleading to speak of Capitalism and capitalistic methods of production, and expressions such as the capitalistic spirit and the anti-capitalistic disposition acquire a rigidly circumscribed connotation. Capitalism is better suited to be the antithesis of Socialism than Individualism, which is often used in this way. As a rule those who contrast Socialism with Individualism proceed on the tacit assumption that there is a contradiction between the interests of the individual and the interest of society, and that, while Socialism takes the public welfare as its object, individualism serves the interests of particular people. And since this is one of the gravest sociological fallacies we must avoid carefully any form of expression which might allow it secretly to creep in.

  According to Passow, where the term Capitalism is used correctly, the association it is intended to convey is usually bound up with the development and spread of large scale undertakings.13 We may admit this—even if it is rather difficult to reconcile with the fact that people customarily speak of “Grosskapital” and “Grosskapitalist” and then of “Kleinkapitalisten.” But, if we recollect that only capital calculation made the growth of giant enterprise and undertakings possible, this does not in any way invalidate the definitions we propose.

  5

  The Narrower Concept of the “Economic”

  The common habit of economists of distinguishing between “economic” or “purely economic” and “non-economic” action is just as unsatisfactory as the old distinction between ideal and material goods. For willing and acting are unitary. All ends conflict among themselves and it is this conflict which ranges them in one scale. Not only the satisfaction of wishes, desires and impulses that can be attained through interaction with the external world, but the satisfaction also of ideal needs must be judged by one criterion. In life we have to choose between the “ideal” and the “material.” It is, therefore, just as essential to make the former subject to a unitary criterion of values as the latter. In choosing between bread and honour, faith and wealth, love and money, we submit both alternatives to one test.

  It is, therefore, illegitimate to regard the “economic” as a definite sphere of human action which can be sharply delimited from other spheres of action. Economic activity is rational activity. And since complete satisfaction is impossible, the sphere of economic activity is coterminous with the sphere of rational action. It consists firstly in valuation of ends, and then in the valuation of the means leading to these ends. All economic activity depends, therefore, upon the existence of ends. Ends dominate economy and alone give it meaning.

  Since the economic principle applies to all human action, it is necessary to be very careful when distinguishing, within its sphere, between “purely economic” and other kinds of action. Such a division is indeed indispensable for many scientifc purposes. It singles out one particular end and contrasts it with all others. This end—at this point we need not discuss whether it is ultimate or not—is the attainment of the greatest possible product measured in money. It is, therefore, impossible to assign it a specially delimited sphere of action. It is true that for each individual it has such a delimited sphere, but this varies in extent according to the general outlook of the individual concerned. It is one thing for the man to whom honour is dear. It is another for him who sells his friend for gold. Neither the nature of the end nor the peculiarity of the means is what justifies the distinction, but merely the special nature of the methods employed. Only the fact that it uses exact calculation distinguishes “purely economic” from other action.

  The sphere of the “purely economic” is nothing more and nothing less than the sphere of money calculation. The fact that in a certain field of action it enables us to compare means with minute exactitude down to the smallest detail means so much both for thought and action that we tend to invest this kind of action with special importance. It is easy to overlook the fact that such a distinction is only a distinction in the technique of thought and action and in no way a distinction in the ultimate end of action—which is unitary. The failure of all attempts to exhibit the “economic” as a special department of the rational and within that to discover still another sharply defined department, the “purely economic,” is no fault of the analytical apparatus employed. There can be no doubt that great subtlety of analysis has been concentrated on this problem, and the fact that it has not been solved clearly indicates that the question is one to which no satisfactory answer can be given. The sphere of the “economic” is plainly the same as the sphere of the rational: and the sphere of the “purely economic” is nothing but the sphere in which money calculation is possible.

  In the last resort the individual can acknowledge one end, and one end only: the attainment of the greatest satisfaction. This expression includes the satisfying of all kinds of human wants and desires, regardless of whether they are “material” or immaterial (moral). In the place of the word “satisfaction” we could employ the word “happiness,” had we not to fear the misunderstandings, for which the controversy on Hedonism and Eudaemonism was responsible.

  Satisfaction is subjective. Modern social philosophy has emphasized this so sharply in contrast to former theories that there is a tendency to forget that the physiological structure of mankind and the unity of outlook and emotion arising from tradition create a far-reaching similarity of views regarding wants and the means to satisfy them. It is precisely this similarity of views which makes society possible. Because they have common aims, men are able to live together. Against this fact that the majority of ends (and those the most important) are common to the great mass of mankind, the fact that some ends are only entertained by a few is of subordinate importance.

  The customary division between economic and non-economic motives is, therefore, invalidated by the fact that on the one hand, the end of economic activity lies outside the range of economics, and on the other, that all rational activity is economic. Nevertheless, there is good justification for separating “purely economic” activities (that is to say, activity susceptible of valuation in money) from all other forms of activity. For, as we have already seen, outside the sphere of money calculation there remain only intermediate ends which are capable of evaluation by immediate inspection: and once this sphere is left, it is necessary to have recourse to such judgments. It is the recognition of this necessity which provides the occasion for the distinction we have been discussing.

  If, for example, a nation desires to make war, it is illegitimate to regard the desire as necessarily irrational because the motive for making war lies outside those customarily considered as “economic”—as might be the case, e.g. with wars of religion. If the nation decides on the war with complete knowledge of all the facts because it judges that the end in view is more important than the sacrifice involved, and because it regards war as the most suitable means of obtaining it, then war cannot be regarded as irrational. It is not necessary at this point to decide whether this supposition is ever true or if it ever can be true. It is precisely this which has to be examined when one comes to choose between war and peace. And it is precisely with a view to introducing clarity into such an examination that the distinction we have been discussing has been introduced.

  [1. ]It was left to the empirical-realistic school, with its terrible confusion of all concepts, to explain the economic principle as a specific of production under a money economy, e.g., Lexis, Allgemeine Volkswirtschaftslehre (Berlin and Leipzig, 1910), p. 15.

  [2. ]Amonn, Objekt und Grundbegriffe der theoretischen Nationalökonomie (Vienna and Leipzig, 1927), p. 185.

  [3. ]Mill, Das Nützlichkeitsprinzip. Trans. Wahrmund, Gesammelte Werke, German ed. Th. Gomperz (Leipzig, 1869), vol, 1, pp. 125-200. Publisher’s Note: This is a German translation of Utilitarianism.

  [4. ]Schumpeter, Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie, (Leipzig, 1908), pp. 50, 80.

  [5. ]The following remarks reproduce parts of my essay “Die Wirtschaftsrechnung im sozialistischen Gemeinwesen” (Archiv für Sozialwissenschaft, Vol. XLVII, pp. 86-121). Publisher’s Note: Mises’ essay was translated into English by S. Adler and included in Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism by N. G. Pierson, Ludwig yon Mises, Georg Halm, and Enrico Barone; edited, with an Introduction and a Concluding Essay by F. A. Hayek. London: Routledge & Kegan Paul Ltd., 1935. 293 pp. bibl. Mises’ essay, titled “Economic Calculation in the Socialist Commonwealth” in English, appears on pages 87-130.

  [6. ]Cuhel, Zur Lehre yon den Bedürfnissen (Innsbruck, 1907), p. 198.

  [7. ]Wieser, Über den Ursprung und die Hauptgesetze des wirtschaftlichen Wertes, Vienna, 1884, pp. 185 ff.

  [8. ]Gottl-Otthlienfeld, “Wirtschaft und Technik,” Grundriss der Sozialökonomik, II (Tübingen, 1914), p. 216.

  [9. ]Neurath too admitted this. (Durch die Kriegswirtschaft zur Naturalwirtschaft [Munich, 1919], pp. 216 ff.) He asserts that every complete administrative economy (planned economy) is ultimately a natural economy (barter system). “To socialize therefore means to advance the natural economy.” Neurath, however, did not recognize the insurmountable difficulties economic calculation would encounter in the socialist community.

  [10. ]Passow, Kapitalismus, eine begrifflich-terminologische Studie (Jena, 1918), pp. 1 ff. In the 2nd edition, published 1927, Passow expressed the opinion (p. 15, note 2), in view of the most recent literature, that the term “Capitalism” might in time gradually lose the moral colouring.

  [11. ]Carl Menger, “Zur Theorie des Kapitals” (Jahrbücher für Nationalökonomie und Statistik, Vol. XVII), p. 41.

  [12. ]Passow, op. cit. (2nd edition), pp. 49 ff.

  [13. ]Passow, op. cit. (2nd edition), pp. 132 ff.

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  5: Session II Reading 2: Socialism and the Calculation Problem

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: CHAPTER 6: The Organization of Production Under Socialism

  Accessed from oll.libertyfund.org/title/1060/103843 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  CHAPTER 6

  The Organization of Production Under Socialism

  1

  The Socialization of the Means of Production

  Under Socialism all the means of production are the property of the community. The community alone disposes of them and decides how to use them in production. The community produces, the products accrue to the community, and the community decides how those products are to be used.

  Modern socialists, espcially those of the Marxian persuasion, lay great emphasis on designating the socialist community as Society, and therefore on describing the transfer of the means of production to the control of the community as the “Socialization of the means of production.” In itself the expression is unobjectionable but in the connection in which it is used it is particularly designed to obscure one of the most important problems of Socialism.

  The word “society,” with its corresponding adjective “social,” has three separate meanings. It implies, first, the abstract idea of social interrelationships, and secondly, the concrete conception of a union of the individuals themselves. Between these two sharply different meanings, a third has been interposed in ordinary speech: the abstract society is conceived as personified in such expressions as “human society,” “civil society.”

  Now Marx uses the term with all these meanings. This would not matter as long as he made the distinction quite clear. But he does just the opposite. He interchanges them with a conjurer’s skill whenever it appears to suit him. When he talks of the social character of capitalistic production he is using social in its abstract sense. When he speaks of the society which suffers during crises he means the personified society of mankind. But when he speaks of the society which is to expropriate the expropriators and socialize the means of production he means an actual social union. And all the meanings are interchanged in the links of his argument whenever he has to prove the unprovable. The reason for all this is in order to avoid using the term State or its equivalent, since this word has an unpleasant sound to all those lovers of freedom and democracy, whose support the Marxian does not wish to alienate at the outset. A programme which would give the State the general responsibility and direction of all production has no prospect of acceptance in these circles. It follows that the Marxist must continually find a phraseology which disguises the essence of the programme, which succeeds in concealing the unbridgeable abyss dividing democracy and Socialism. It does not say much for the perception of men who lived in the decades immediately preceding the World War that they did not see through this sophistry.

  The modern doctrine of the state understands by the word “State” an authoritative unit, an apparatus of compulsion characterized not by its aims but by its form. But Marxism has arbitrarily limited the meaning of the word State, so that it does not include the Socialistic State. Only those states and forms of state organization are called the State which arouse the dislike of the socialist writers. For the future organization to which they aspire the term is rejected indignantly as dishonourable and degrading. It is called “Society.” In this way the Marxian social democracy could at one and the same time contemplate the destruction of the existing State machine, fiercely combat all anarchistic movements, and pursue a policy which led directly to an all powerful state.14

  Now it does not matter in the least what particular name is given to the coercive apparatus of the socialistic community. If we use the word “State” we have a term in common use, except in the quite uncritical Marxian literature, an expression which is generally understood and which evokes the idea it is intended to evoke. But there is no disadvantage in avoiding this term if we wish, since it arouses mixed feelings in many people, and in substituting the expression “community.” The choice of terminology is purely a matter of style, and has no practical importance.

  What is important is the problem of the organization of this socialistic State or community. When dealing with the concrete expression of the will of the State, the English language provides a more subtle distinction by permitting us to use the term government instead of the term state. Nothing is better designed to avoid the mysticism which in this connection has been fostered by Marxian usages to the highest degree. For the Marxists talk glibly about expressing the will of society, without giving the slightest hint how ’society’ can proceed to will and act. Yet of course the community can only act through organs which it has created.

  Now it follows from the very conception of the socialistic community that the organ of control must be unitary. A socialist community can have only one ultimate organ of control which combines all economic and other governmental functions. Of course this organ can be subdivided and there can be subordinate offices to which definite instructions are transmitted. But the unitary expression of the common will, which is the essential object of the socialization of the means of production and of production, necessarily implies that all offices entrusted with the supervision of different affairs shall be subordinate to one office. This office must have supreme authority to resolve all variations from the common purpose and unify the executive aim. How it is constituted, and how the general will succeeds in expressing itself in and by it, is of minor importance in the investigation of our particular problem. It does not matter whether this organ is an absolute prince or an assembly of all citizens organized as a direct or indirect democracy. It does not matter how this organ conceives its will and expresses it. For our purpose we must consider this as accomplished and we need not spend any time over the question how it can be accomplished, whether it can be accomplished or whether Socialism is already doomed because it cannot be accomplished.

  At the outset of our inquiry we must postulate that the socialistic community is without foreign relations. It embraces the whole world and its inhabitants. If we conceive it as limited, so that it comprises only a part of the world and the inhabitants therein, we must assume that it has no economic relations with the territories and peoples outside its boundaries. We are to discuss the problem of the isolated socialistic community. The implications of the contemporaneous existence of several socialistic communities will be dealt with when we have surveyed the problem in complete generality.

  2

  Economic Calculation in the Socialist Community

  The theory of economic calculation shows that in the socialistic community economic calculation would be impossible.

  In any large undertaking the individual works or departments are partly independent in their accounts. They can reckon the cost of materials and labour, and it is possible at any time for an individual group to strike a separate balance and to sum up the results of its activity in figures. In this way it is possible to ascertain with what success each separate branch has been operated and thereby to make decisions concerning the reorganization, limitations or extension of existing branches or the establishment of new ones. Some mistakes are of course unavoidable in these calculations. They arise partly from the difficulty of allocating overhead costs. Other mistakes again arise from the necessity of calculating from insufficiently determined data, as, e.g. when in calculating the profitability of a certain process, depreciation of the machinery employed is determined by assuming a certain working life for the machine. But all such errors can be confined within certain narrow limits which do not upset the total result of the calculation. Whatever uncertainty remains is attributed to the uncertainty of future conditions inevitable in any imaginable state of affairs.

  It seems natural then to ask why individual branches of production in a socialistic community should not make separate accounts in the same manner. But this is impossible. Separate accounts for a single branch of one and the same undertaking are possible only when prices for all kinds of goods and services are established in the market and furnish a basis of reckoning. Where there is no market there is no price system, and where there is no price system there can be no economic calculation.

  Some may think that it is possible to permit exchange between the different groups of undertakings so as to establish a system of exchange relations (prices) and in this way create a basis for economic calculation in the socialistic community. Thus within a framework of a unitary economic system which does not recognize private property in the means of production, individual branches of industry with separate administration could be set up, subject of course, to the supreme economic authority, but able to transfer to each other goods and services for a consideration reckoned in a common medium of exchange. This, roughly, is how people conceive the productive organization of socialistic industry when they speak nowadays of complete socialization and the like. But here again the decisive point is evaded. Exchange relations in productive goods can only be established on the basis of private property in the means of production. If the Coal Syndicate delivers coal to the Iron Syndicate a price can be fixed only if both syndicates own the means of production in the industry. But that would not be Socialism but Syndicalism.

  For those socialist writers who accept the labour theory of value the problem is, of course, quite simple.

  “As soon,” says Engels, “as Society has taken possession of the means of production and applies them to direct social production the labour of everyone, however different its specific use may be, will immediately become direct social labour. The amount of social labour inherent in any product does not require to be ascertained in any roundabout way: everyday experience will show how much of it on the average is necessary. Society can easily reckon how many hours of labour inhere in a steam engine, in a hectolitre of wheat of the last harvest, in a hundred square metres of cloth of a certain quality. Of course society will have to find out how much work is required for the manufacture of every article of consumption. It will have to base its plans on a consideration of the means of production at its disposal—and of course the labour force falls into this category. The utility of the different objects of consumption weighed against one another and against the labour necessary for their production will finally determine the plan. The people will decide everything quite easily without the intervention of the much-vaunted value.”15

  It is not part of our business here to restate the critical arguments against the labour theory of value. They interest us at this point only in so far as they enable us to judge the possibility of making labour the basis of economic calculation in a socialistic community.

  At first sight it would appear that calculations based on labour take into account the natural conditions of production, as well as conditions arising from the human element. The Marxian concept of the socially necessary labour time takes the law of diminishing returns into consideration in so far as it results from different natural conditions of production. If the demand for a commodity increases and less favourable natural conditions have to be exploited, then the average socially necessary time for the production of a unit also increases. If more favourable conditions of production are discovered then the necessary quantum of social labour declines.16 But this is not enough. Computation of changes in marginal labour costs only take account of natural conditions in so far as they influence labour costs. Beyond that, the “labour” calculation breaks down. It leaves, for instance, the consumption of material factors of production entirely out of account. Suppose the socially necessary labour time for producing two commodities P and Q is ten hours, and that the production of a unit both of P and of Q requires material A, one unit of which is produced by one hour of socially necessary labour, and that the production of P involves two units of A and eight hours of labour, and of Q one unit of A and nine hours of labour. In a calculation based on labour time P and Q are equivalent, but in a calculation based on value P must be worth more than Q. The former calculation is false. Only the latter corresponds to the essence and object of economic calculation. It is true that this surplus by which the value of P exceeds that of Q, this material substratum, “is furnished by nature without the help of man,”17 but provided it is present only in such quantities that it becomes an economic factor it must also in some form enter into economic calculation.

  The second deficiency of the labour calculation theory is that it disregards differences in the quality of labour. For Marx all human labour is economically homogeneous, because it is always the “productive expenditure of human brain, muscles, nerves, hands, etc.” “Skilled labour is only intensified, or rather multiplied simple labour, so that a small quantity of skilled labour equals a larger quantity of simple labour. Experience shows that this resolution of skilled into simple constantly happens. A commodity may be the product of highly skilled labour, but its value equates it to the product of simple labour and represents only a certain quantity of simple labour.”18 Böhm-Bawerk was justified in describing this argument as a masterpiece of astounding naivety.19 In criticizing it one may conveniently leave undecided whether one can discover a unitary physiological measure of all human labour, physical as well as “mental.” For it is certain that between men themselves there are differences of capability and skill which result in differing qualities of the goods and services produced. What is ultimately decisive for the solution of the problem of the feasibility of using labour as a basis of economic calculation is the question whether one can assimilate different kinds of work to a common denominator without a valuation of the products by the consumer. It is clear that the argument which Marx brings to bear on this point has failed. Experience does indeed show that commodities enter into exchange regardless of the question whether they are the products of skilled or simple labour. But this would only prove that a definite quantity of simple labour is equal to a definite quantity of skilled labour if it were proved that labour is the source of exchange value. But not only is this unproven; it is exactly what Marx originally set out to prove. The fact that in exchange a substitute relation between simple and skilled labour has arisen in the form of wage rates—a point to which Marx does not here allude—is not in the least a proof of this homogeneity. This process of equating is a result of the working of the market, not its presupposition. Calculations based on labour cost rather than on monetary values would have to establish a purely arbitrary relation by which to resolve skilled into simple labour, and this would make them useless as an instrument for the economic organization of resources.

  It was long thought that the labour theory of value provided a necessary ethical basis for the demand to socialize the means of production. We know now that this was an error. Although the majority of socialists have adopted this view and although even Marx with his professedly non-ethical standpoint could not shake it off, it is clear that, on the one hand, the political demands for the introduction of the socialistic method of production neither need nor receive support from the labour theory of value, and, on the other hand, that those who hold different views on the nature and cause of value can also have socialistic tendencies. But from another point of view, the labour theory of value is still an essential dogma for the advocates of the socialistic method of production. For socialistic production in a society based on division of labour seems practicable only if there is an objective recognizable unit of value which would enable economic calculations to be made in an exchangeless and moneyless community and labour seems the only thing to serve this purpose.

  3

  Recent Socialist Doctrines and the Problems of Economic Calculation

  The problem of economic calculation is the fundamental problem of Socialism. That for decades people could write and talk about Socialism without touching this problem only shows how devastating were the effects of the Marxian prohibition on scientific scrutiny of the nature and working of a socialist economy.20

  To prove that economic calculation would be impossible in the socialist community is to prove also that Socialism is impracticable. Everything brought forward in favour of Socialism during the last hundred years, in thousands of writings and speeches, all the blood which has been spilt by the supporters of Socialism, cannot make socialism workable. The masses may long for it ever so ardently, innumerable revolutions and wars may be fought for it, still it will never be realised. Every attempt to carry it out will lead to syndicalism or, by some other route, to chaos, which will quickly dissolve the society, based upon the division of labour, into tiny autarkous groups.

  The discovery of this fact is clearly most inconvenient for the socialist parties, and socialists of all kinds have poured out attempts to refute my arguments and to invent a system of economic calculation for Socialism. They have not been successful. They have not produced a single new argument which I have not already taken account of.21 Nothing has shaken the proof that under Socialism economic calculation is impossible.22

  The attempt of the Russian Bolsheviks to transfer Socialism from a party programme into real life has not encountered the problem of economic calculation under Socialism, for the Soviet Republics exist within a world which forms money prices for all means of production. The rulers of the Soviet Republics base the calculations on which they make their decisions on these prices. Without the help of these prices their actions would be aimless and planless. Only so far as they refer to this price system, are they able to calculate and keep books and prepare their plans. Their position is the same as the position of the state and municipal Socialism of other countries: the problem of socialist economic calculation has not yet arisen for them. State and municipal enterprises calculate with those prices of the means of production and of consumption goods which are formed on the market. Therefore it would be precipitate to conclude from the fact that municipal and state enterprises exist, that socialist economic calculation is possible.

  We know indeed that socialist enterprises in single branches of production are practicable only because of the help they get from their non-socialist environment. State and municipality can carry on their own enterprises because the taxes which capitalist enterprises pay, cover their losses. In a similar manner Russia, which left to herself would long ago have collapsed, has been supported by finance from capitalist countries. But incomparably more important than this material assistance, which the capitalist economy gives to socialist enterprises, is the mental assistance. Without the basis for calculation which Capitalism places at the disposal of Socialism, in the shape of market prices, socialist enterprises would never be carried on, even within single branches of production or individual countries.

  Socialist writers may continue to publish books about the decay of Capitalism and the coming of the socialist millennium: they may paint the evils of Capitalism in lurid colours and contrast with them an enticing picture of the blessings of a socialist society; their writings may continue to impress the thoughtless—but all this cannot alter the fate of the socialist idea.23 The attempt to reform the world socialistically might destroy civilization. It would never set up a successful socialist community.

  4

  The Artificial Market as the Solution of the Problem of Economic Calculation

  Some of the younger socialists believe that the socialist community could solve the problem of economic calculation by the creation of an artificial market for the means of production. They admit that it was an error on the part of the older socialists to have sought to realize Socialism through the suspension of the market and the abolition of pricing for goods of higher orders; they hold that it was an error to have seen in the suppression of the market and of the price system the essence of the socialistic ideal. And they contend that if it is not to degenerate into a meaningless chaos in which the whole of our civilization would disappear, the socialist community equally with the capitalistic community, must create a market in which all goods and services may be priced. On the basis of such arrangements, they think, the socialist community will be able to make its calculations as easily as the capitalist entrepreneurs.

  Unfortunately the supporters of such proposals do not see (or perhaps will not see) that it is not possible to divorce the market and its functions in regard to the formation of prices from the working of a society which is based on private property in the means of production and in which, subject to the rules of such a society, the landlords, capitalists and entrepreneurs can dispose of their property as they think fit. For the motive force of the whole process which gives rise to market prices for the factors of production is the ceaseless search on the part of the capitalists and the entrepreneurs to maximize their profits by serving the consumers’ wishes. Without the striving of the entrepreneurs (including the shareholders) for profit, of the landlords for rent, of the capitalists for interest and the labourers for wages, the successful functioning of the whole mechanism is not to be thought of. It is only the prospect of profit which directs production into those channels in which the demands of the consumer are best satisfied at least cost. If the prospect of profit disappears the mechanism of the market loses its mainspring, for it is only this prospect which sets it in motion and maintains it in operation. The market is thus the focal point of the capitalist order of society; it is the essence of Capitalism. Only under Capitalism, therefore, is it possible; it cannot be “artificially” imitated under Socialism.

  The advocates of the artificial market, however, are of the opinion that an artificial market can be created by instructing the controllers of the different industrial units to act as if they were entrepreneurs in a capitalistic state. They argue that even under Capitalism the managers of joint stock companies work not for themselves but for the companies, that is to say, for the shareholders. Under Socialism, therefore, it would be possible for them to act in exactly the same way as before, with the same circumspection and devotion to duty. The only difference would be that under socialism the product of the manager’s labours would go to the community rather than to the shareholders. In such a way, in contrast to all socialists who have written on the subject hitherto, especially the Marxians, they think it would be possible to construct a decentralized, as opposed to a centralized, Socialism.

  In order to judge properly such proposals, it is necessary in the first place to realize that these controllers of individual industrial units would have to be appointed. Under Capitalism the managers of the joint stock companies are appointed either directly or indirectly by the shareholders. In so far as the shareholders give to the managers power to produce by the means of the company’s (i.e. the shareholders’) stock they are risking their own property or a part of their own property. The speculation (for it is necessarily a speculation) may succeed and bring profit; it may, however, misfire and bring about the loss of the whole or a part of the capital concerned. This committing of one’s own capital to a business whose outcome is uncertain and to men whose future ability is still a matter of conjecture whatever one may know of their past, is the essence of joint stock company enterprise.

  Now it is a complete fallacy to suppose that the problem of economic calculation in a socialist community relates solely to matters which fall into the sphere of the daily business routine of managers of joint stock companies. It is clear that such a belief can only arise from exclusive concentration on the idea of a stationary economic system—a conception which no doubt is useful for the solution of many theoretical problems but which has no counterpart in fact and which, if exclusively regarded, can even be positively misleading. It is clear that under stationary conditions the problem of economic calculation does not really arise. When we think of the stationary society, we think of an economy in which all the factors of production are already used in such a way as, under the given conditions, to provide the maximum of the things which are demanded by consumers. That is to say, under stationary conditions there no longer exists a problem for economic calculation to solve. The essential function of economic calculation has by hypothesis already been performed. There is no need for an apparatus of calculation. To use a popular but not altogether satisfactory terminology we can say that the problem of economic calculation is of economic dynamics: it is no problem of economic statics.

  The problem of economic calculation is a problem which arises in an economy which is perpetually subject to change, an economy which every day is confronted with new problems which have to be solved. Now in order to solve such problems it is above all necessary that capital should be withdrawn from particular lines of production, from particular undertakings and concerns and should be applied in other lines of production, in other undertakings and concerns. This is not a matter for the managers of joint stock companies, it is essentially a matter for the capitalists—the capitalists who buy and sell stocks and shares, who make loans and recover them, who make deposits in the banks and draw them out of the banks again, who speculate in all kinds of commodities. It is these operations of speculative capitalists which create those conditions of the money market, the stock exchanges and the wholesale markets which have to be taken for granted by the manager of the joint stock company, who, according to the socialist writers we are considering, is to be conceived as nothing but the reliable and conscientious servant of the company. It is the speculative capitalists who create the data to which he has to adjust his business and which therefore gives direction to his trading operations.

  It follows therefore that it is a fundamental deficiency of all these socialistic constructions which invoke the “artificial market” and artificial competition as a way out of the problem of economic calculation, that they rest on the belief that the market for factors of production is affected only by producers buying and selling commodities. It is not possible to eliminate from such markets the influence of the supply of capital from the capitalists and the demand for capital by the entrepreneurs, without destroying the mechanism itself.

  Faced with this difficulty, the socialist is likely to propose that the socialist state as owner of all capital and all means of production should simply direct capital to those undertakings which promise the highest return. The available capital, he will contend, should go to those undertakings which offer the highest rate of profit. But such a state of affairs would simply mean that those managers who were less cautious and more optimistic would receive capital to enlarge their undertakings while more cautious and more skeptical managers would go away empty-handed. Under Capitalism, the capitalist decides to whom he will entrust his own capital. The beliefs of the managers of joint stock companies regarding the future prospects of their undertakings and the hopes of project-makers regarding the profitability of their plans are not in any way decisive. The mechanism of the money market and the capital market decides. This indeed is its main task: to serve the economic system as a whole, to judge the profitability of alternative openings and not blindly to follow what the managers of particular concerns, limited by the narrow horizon of their own undertakings, are tempted to propose.

  To understand this completely, it is essential to realise that the capitalist does not just invest his capital in those undertakings which offer high interest or high profit; he attempts rather to strike a balance between his desire for profit and his estimate of the risk of loss. He must exercise foresight. If he does not do so then he suffers losses—losses that bring it about that his disposition over the factors of production is transferred to the hands of others who know better how to weigh the risks and the prospects of business speculation.

  Now if it is to remain socialistic, the socialist State cannot leave to other hands that disposition over capital which permits the enlargement of existing undertakings, the contraction of others and the bringing into being of undertakings that are completely new. And it is scarcely to be assumed that socialists of whatever persuasion would seriously propose that this function should be made over to some group of people who would “simply” have the business of doing what capitalists and speculators do under capitalistic conditions, the only difference being that the product of their foresight should not belong to them but to the community. Proposals of this sort may well be made concerning the managers of joint stock companies. They can never be extended to capitalists and speculators, for no socialist would dispute that the function which capitalists and speculators perform under Capitalism, namely directing the use of capital goods into that direction in which they best serve the demands of the consumer, is only performed because they are under the incentive to preserve their property and to make profits which increase it or at least allow them to live without diminishing their capital.

  It follows therefore that the socialist community can do nothing but place the disposition over capital in the hands of the State or to be exact in the hands of the men who, as the governing authority, carry out the business of the State. And that signifies elimination of the market, which indeed is the fundamental aim of Socialism, for the guidance of economic activity by the market implies organization of production and a distribution of the product according to that disposition of the spending power of individual members of society which makes itself felt on the market; that is to say, it implies precisely that which it is the goal of Socialism to eliminate.

  If the socialists attempt to belittle the significance of the problem of economic calculation in the Socialist community, on the ground that the forces of the market do not lead to ethically justifiable arrangements, they simply show that they do not understand the real nature of the problem. It is not a question of whether there shall be produced cannons or clothes, dwelling houses or churches, luxuries or subsistence. In any social order, even under Socialism, it can very easily be decided which kind and what number of consumption goods should be produced. No one has ever denied that. But once this decision has been made, there still remains the problem of ascertaining how the existing means of production can be used most effectively to produce these goods in question. In order to solve this problem it is necessary that there should be economic calculation. And economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production. That is to say, there must exist money prices of land, raw materials, semimanufactures; that is to say, there must be money wages and interest rates.

  Thus the alternative is still either Socialism or a market economy.

  5

  Profitability and Productivity

  The economic activity of the socialist community is subject to the same external conditions as govern an economic system based on private property in the means of production or indeed any conceivable economic system. The economic principle applies to it in the same way as to any and to all economic systems: that is to say it recognizes an hierarchy of ends, and must therefore strive to achieve the more important before the less important. This is the essence of economic activity.

  lt is obvious that the production activities of the socialist community will involve not only labour but also material instruments of production. According to a very widespread custom, these material instruments of production are called capital. Capitalist production is that which adopts wise roundabout methods in contrast with a non-capitalistic production which goes directly to its end in a hand to mouth manner.24 If we adhere to this terminology, we must admit that the socialist community must also work with capital and will therefore produce capitalistically. Capital conceived as the intermediate products, which arise at the different stages of production by indirect methods, would not, at any rate at first25 be abolished by Socialism. It would merely be transferred from individual to common possession.

  But if, as we have suggested above, we wish to understand by capitalistic production that economic system in which money-calculation is employed, so that we can summarize under the term capital a set of goods devoted to production and evaluated in terms of money, and can attempt to estimate the results of economic activity by the variations in the value of capital, then it is clear that socialist methods of production cannot be termed capitalistic. In quite another sense than the Marxians we can distinguish between socialistic and capitalistic methods of production, and between Socialism and Capitalism.

  The characteristic feature of the capitalistic method of production, as it appears to socialists, is that the producer works to obtain a profit. Capitalistic production is production for profit, socialist production will be production for the satisfaction of needs. That capitalistic production aims at profit is quite true. But to achieve a profit, that is a result greater in value than the costs, must also be the aim of the socialist community. If economic activity is rationally directed, that is if it satisfies more urgent before less urgent needs, it has already achieved profits, since the cost, i.e. the value of the most important of the unsatisfied needs, is less than the result attained. In the capitalistic system profits can only be obtained if production meets a comparatively urgent demand. Whoever produces without attending to the relation between supply and demand fails to achieve the result at which he is aiming. To direct production towards profit simply means to direct it to satisfy other people’s demand: in this sense it may be contrasted with isolated man’s production for personal needs. But he also is working for profit in the sense used above. Between production for profit and production for needs there is no contrast.26

  The contrasting of production for profit and production for needs is closely connected with the common practice of contrasting productivity and profitability or the “social” and “private” economic point of view. An economic action is said to be profitable if in the capitalist system it yields an excess of receipts over costs. An economic action is said to be productive when, seen from the point of view of a hypothetical socialist community, the yield exceeds the cost involved. Now in some cases productivity and profitability do not coincide. Some economic acts which are profitable are not productive and, vice versa, some are productive but not profitable. For those naively biased in favour of Socialism, as is the case even with most economists, this fact is sufficient to condemn the capitalistic order of society. Whatever a socialist community would do seems to them undisputably good and reasonable: that anything different can happen in a capitalistic society is, in their opinion, an abuse which cannot be tolerated. But an examination of the cases in which profitability and productivity are alleged not to coincide will show that this judgment is purely subjective, and that the scientific cloak with which it is invested is a sham.27

  In the majority of cases in which it is usually assumed that there is a contrast between profitability and productivity no such contrast exists. This is true, for example, of profits from speculation. Speculation in the capitalist system performs a function which must be performed in any economic system however organized: it provides for the adjustment of supply and demand over time and space. The source of the profit of speculation is enhanced value which is independent of any particular form of economic organization. When the speculator purchases at a low price products which come on the market in comparatively large quantities and sells them at a higher price when the demand has again increased, his gains represent, from a business and from the economic point of view, an increase of value. That in a socialist order the community and not the individual would get this much grudged and maligned profit we do not deny. But that is not the significance of the problem in which we are interested. The point which concerns us here is that the alleged contrast between profitability and productivity does not exist in this case. Speculation performs an economic service which cannot conceivably be eliminated from any economic system. If it is eliminated, as socialists intend to do, then some other organization must take over its functions: the community itself must become a speculator. Without speculation there can be no economic activity reaching beyond the immediate present.

  A contrast between profitability and productivity is sometimes supposed to be discovered by picking out a particular process and considering it by itself. People may perhaps characterize as unproductive certain features peculiar to the constitution of the capitalistic organization of industry, e.g. selling expenses, advertising costs and the like are characterized as unproductive. This is not legitimate. We must consider the result of the complete process, not the individual stages. We must not consider the constituent expenses without setting against them the result to which they contribute.28

  6

  Gross and Net Product

  The most ambitious attempt to contrast productivity and profitability derives from the examination of the relationship between gross product and net product. It is clear that every entrepreneur in the capitalist system aims at achieving the largest net product. But it is asserted that rightly considered the object of economic activity should be to achieve not the largest net product but the largest gross product.

  This belief, however, is a fallacy based upon primitive speculations regarding valuation. But judged by its widespread acceptance even today it is a very popular fallacy. It is implicit when people say that a certain line of production is to be recommended because it employs a large number of workers, or when a particular improvement in production is opposed because it may deprive people of a living.

  If the advocates of such views were logical they would have to admit that the gross product principle applies not only to labour but also to the material instruments of production. The entrepreneur carries production up to the point where it ceases to yield a net product. Let us assume that production beyond this point requires material instruments only and not labour. Is it in the interest of society that the entrepreneur should extend production so as to obtain a larger gross product? Would society do so if it had the control of production? Both questions must be answered with a decided no. The fact that further production does not pay shows that the instruments of production could be applied to a more urgent purpose in the economic system. If, nevertheless, they are applied to the unprofitable line then they will be lacking in places where they are more urgently needed. This is true under both Capitalism and Socialism. Even a socialist community, supposing it acted rationally, would not push certain lines of production indefinitely and neglect others. Even a socialist community would discontinue a particular line of production when further production would not cover the expense, that is to say, at the point where further production would mean failure to satisfy a more urgent need elsewhere.

  But what is true of the increased use of material instruments is true exactly in the same way of the increased use of labour. If labour is devoted to a particular line of production to the point where it only increases the gross product while the net product declines, it is being withheld from some other line where it could perform more valuable service. And here, again, the only result of neglecting the principle of net product is that more urgent wants remain unsatisfied whilst less urgent ones are met. It is this fact, and no other which is made evident in the mechanism of the capitalist system by the decline in the net product. In a socialist community it would be the duty of the economic administration to see that similar misapplications of economic activity did not occur. Here, therefore, is no discrepancy between profitability and productivity. Even from the socialist standpoint, the largest possible net product and not the largest possible gross product must be the aim of economic activity.

  Nevertheless, people continue to maintain the contrary, sometimes of production in general, sometimes of labour alone and sometimes of agricultural production. That capitalist activity is directed solely toward the attainment of the largest net product is adversely criticized and State intervention is called for to redress the alleged abuse.

  This discussion has a lengthy ancestry. Adam Smith maintained that different lines of production should be regarded as more or less productive according to the greater or smaller amount of labour which they set in motion.29 For this he was adversely criticized by Ricardo who pointed out that welfare of the people increased only through an enlargement of the net product and not of the gross product.30 For this Ricardo was severely attacked. Even J. B. Say misunderstood him and accused him of an utter disregard for the welfare of so many human beings.31 While Sismondi, who was fond of meeting economic arguments by sentimental declamations, thought he could dispose of the problem by witticism: he said that a king who could produce net product by pressing a button would, according to Ricardo, make the nation superfluous.32 Bernhardi followed Sismondi on this point.33 Proudhon went as far as to epitomize the contrast between socialistic and private enterprise in the formula: that although society must strive for the largest gross product the aim of the entrepreneur is the largest net product.34 Marx avoids committing himself on this point, but he fills two chapters of the first book of Das Kapital with a sentimental exposition in which the transition from intensive to extensive agricultural methods is depicted in the darkest colour as, in the words of Sir Thomas More, a system “where sheep eat up men,” and manages in the course of this discussion to confuse the large expropriations achieved by the political power of the nobility, which characterized European agrarian history in the first centuries of modern times, with the changes in the methods of cultivation initiated later on by the landowners.35

  Since then declamations on this scheme have formed the stock equipment of the controversial writings and speeches of the socialists. A German agricultural economist, Freiherr von der Goltz, has tried to prove that the attainment of the largest possible gross product is not only productive from the social point of view but is also profitable from the individual point of view. He thinks that a large gross product naturally presupposes a large net product, and to that extent the interests of the individuals whose main object is to achieve a large net product coincide with those of the State which desires a large gross product.36 But he can offer no proof of this.

  Much more logical than these efforts to overcome the apparent contrast between social and private interests by ignoring obvious facts of agricultural accountancy, is the position taken up by followers of the romantic school of economic thought, particularly the German etatists, viz. that the agriculturist has the status of a civil servant, and is therefore obliged to work in the public interest. Since this is said to require the largest possible gross product it follows that the farmer, uninfluenced by commercial spirit, ideas or interests, and regardless of the disadvantages, which may be entailed, must devote himself to the attainment of this end.37 All these writers take it for granted that the interests of the community are served by the largest gross product. But they do not go out of their way to prove it. When they do try, they only argue from the point of view of Machtpolitik (power politics) or Nationalpolitik (national policy). The State has an interest in a strong agricultural population since the agricultural population is conservative; agriculture supplies the largest number of soldiers; provision must be made for feeding the population in time of war and so on.

  In contrast to this an attempt to justify the gross product principle by economic reasoning has been made by Landry. He will only admit that the effort to attain the greatest net product is socially advantageous in so far as the costs which no longer yield a profit arise from the use of material instruments of production. When the application of labour is involved he thinks quite otherwise. Then, from the economic point of view the application of labour costs nothing: social welfare is not thereby diminished. Wage economies which result in a diminution of the gross product are harmful.38 He arrives at this conclusion by assuming that the labour force thus released could find no employment elsewhere. But this is absolutely wrong. The need of society for labour is never satisfied as long as labour is not a “free good.” The released workers find other employment where they have to supply work more urgent from the economic point of view. If Landry were right it would have been better if all the labour-saving machinery had never existed, and the attitude of those workers who resist all technical innovations which economize labour and who destroy such machinery would be justified. There is no reason why there should be a distinction between the employment of material instruments and of labour. That, in view of the price of the material instruments and the price of their products, an increase of production in the same line is not profitable, is due to the fact that the material instruments are required in some other line to satisfy more urgent needs. But this is equally true of labour. Workers who are employed in unprofitably increasing the gross product are withheld from other lines of production in which they are more urgently required. That their wages are too high for an increase in production involving a larger gross product to be profitable, results indeed from the fact that the marginal productivity of labour in general is higher than in the particular line of production in question, where it is applied beyond the limits determined by the net product principle. There is no contrast whatever here between social and private interests: a socialist organization would not act differently from an entrepreneur in the capitalist organization.

  Of course there are plenty of other arguments which can be adduced to show that adherence to the net product principle may be harmful. They are common to all nationalist-militarist thinking, and are the well-known arguments used to support every protectionist policy. A nation must be populous because its political and military standing in the world depends upon numbers. It must aim at economic self-sufficiency or at least it must produce its food at home and so on. In the end Landry has to fall back on such arguments to support his theory.39 To examine such arguments would be out of place in a discussion of the isolated socialist community.

  But if the arguments we have examined are untrue it follows that the socialist community must adopt net product and not gross product as the guiding principle of economic activity. The socialist community equally with the capitalist society will also transform arable into grass land, if it is possible to put more productive land under the plough elsewhere. In spite of Sir Thomas More, “sheep will eat up men” even in Utopia, and the rulers of the socialist community will act no differently from the Duchess of Sutherland, that “economically instructed person,” as Marx once jeeringly called her.40

  The net product principle is true for every line of production. Agriculture is no exception. The dictum of Thaer, the German pioneer of modern agriculture, that the aim of the agriculturist must be a high net yield “even from the standpoint of the public welfare” still holds good.41

  [14. ]See the critique of Kelsen, “Staat und Gesellschaft,” in Sozialismus und Staat (Leipzig, 1923), pp. 11 ff. and pp. 20 ff.

  [15. ]Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft, pp. 335 ff. Publisher’s Note: In the English edition, Anti-Dühring: Herrn Eugen Dühring’s Revolution in Science, pp. 429 ff.

  [16. ]Marx, Das Kapital, Vol. 1, pp. 5 ff. Publisher’s Note: In English, see Marx, Karl. Capital: A Critique of Political Economy. 3 volumes. Vol. I. The Process of Capitalist Production. Translated from the 3rd German edition by Samuel Moore and Edward Aveling. Edited by Frederick Engels. Revised and amplified according to the 4th German edition by Ernest Untermann. Chicago: Charles H. Kerr & Co., 1906. (Note: This Volume I also reprinted by Random House as a Modern Library Giant, with same paging as the Kerr edition.) Vol. II. The Process of Circulation of Capital. Vol. III. The Process of Capitalist Production as a Whole. Both Volumes II and III were translated by Ernest Untermann and edited by Frederick Engels. Both were published by the same Charles H. Kerr & Co. of Chicago in 1909. In this footnote, pp. 5 ff. refers to pp. 45 ff. in the English Vol. I.

  [17. ]Ibid., pp. 9 ff. Publisher’s Note: pp. 50 ff. in English translation.

  [18. ]Ibid., pp. 10 ff. Publisher’s Note: pp. 51-52 in English translation.

  [19. ]Böhm-Bawerk, Kapital und Kapitalzins, Vol. I, 3rd ed. (Innsbruck, 1914), p. 531. Publisher’s Note: Böhm-Bawerk’s three volume work in English is: Böhm-Bawerk, Eugen von. Capital and Interest. 3 volumes. (South Holland, Illinois: Libertarian Press, 1959.) Volume I. History and Critique of Interest Theories. Translated by George D. Huncke and Hans F. Sennholz.

  [20. ]We may point out here that as early as 1854 Gossen knew “that only through private property is the measure found for determining the quantity of each commodity which it would be best to produce under given conditions. Therefore, the central authority, proposed by the communists, for the distribution of the various tasks and their reward, would very soon find that it had taken on a job the solution of which far surpasses the abilities of individual men.” (Gossen, Entwicklung der Gesetze des menschlichen Verkehrs, new ed., [Berlin, 1889] p. 231.) Pareto (Cours d’Économie Politique, Vol. II, Lausanne, 1897, pp. 364 ff.) and Barone (“Il Ministro della Produzione nello Stato Coletivista” in Giornale degli Economisti, Vol. XXXVII, 1908, pp. 409 ff.) did not penetrate to the core of the problem. Pierson clearly and completely recognized the problem in 1902. See his Das Wertproblem in der sozialistischen Gesellschaft (German translation by Hayek, Zeitschrift für Volkswirtschaft, New Series, Vol. IV, 1925, pp. 607 ff.) Publisher’s Note: Both the Barone article (“The Ministry of Production in the Collectivist State,” pp. 245-290) and the Pierson article (“The Problem of Value in the Socialist Society,” pp. 41-85) are included in the Hayek edited Collectivist Economic Planning.

  [21. ]I have briefly discussed the most important of these replies in two short essays—”Neue Beiträge zurn Problem der sozialistischen Wirtschaftsrechnung” (Archiv für Sozialwissenschaft, Vol. LI, pp. 488-500) and “Neue Schriften zum Problem der sozialistischen Wirtschaftsrechnung” (Ibid., Vol. LX, pp. 187-90. Publisher’s Note: “Neue Beiträge zum Problem der sozialistischen Wirtschaftsrechnung” appears in part as the Appendix of this book on p. 473. The second essay mentioned by Mises in this footnote was published in 1928 and has not been translated into English. The essay was a review of recent literature on economic calculations under socialism.

  [22. ]In scientific literature there is no more doubt about this. See Max Weber, “Wirtschaft und Gesellschaft” (Grundriss der Sozialökonomik, Vol. III), Tübingen, 1922, pp. 45-59; Adolf Weber, Allgemeine Volkswirtschaftslehre, 4th ed., Munich and Leipzig, 1932, Vol. II, pp. 369 ff.; Brutzkus, Die Lehren des Marxismus im Lichte der russischen Revolution, Berlin, 1928, pp. 21 ff.; C. A. Verrijn Stuart, “Winstbejag versus behoeftenbevrediging” (Overdruk Economist, Vol, 76 No. 1), pp. 28 ff.; Pohle-Halm, Kapitalismus und Sozialismus, 4th ed., Berlin, 1931, pp. 237 ff.

  [23. ]Characteristic of this branch of literature is the recently published work of C. Landauer, Planwirtschaft und Verkehrswirtschaft (Munich and Leipzig, 1931). Here the writer deals with the problem of economic calculation quite naively, at first by asserting that in a socialist society “the individual enterprises...could buy from each other, just as capitalist enterprises buy from each other” (p. 114). A few pages on he explains that “besides this” the socialist state will “have to set up a control accountancy in kind”; the state will be “the only one able to do this because in contrast to Capitalism it controls production itself” (p. 122). Landauer cannot understand that—and why—one is not permitted to add and subtract figures of different denominations. Such a case is, of course, beyond help.

  [24. ]Böhm-Bawerk, Kapital und Kapitalzins, Vol. II, 3rd ed. (Innsbruck, 1912), p. 21. Publisher’s Note: The page in the English (Sennholz/Huncke) translation of Böhm-Bawerk, referred to here is page 14 in Volume II. Böhm-Bawerk, Eugen von. Capital and Interest. 3 volumes. South Holland, Illinois: Libertarian Press, 1959. [Information re Vol. I above.] Volume II. Positive Theory of Capital. Translated by George D. Huncke; Hans F. Sennholz, Consulting Economist. Volume III. Further Essays on Capital and Interest. Translated by Hans F. Sennholz.

  [25. ]The limitation comprised in the words “at first” is not intended to mean that Socialism will later on, say after attaining a “higher stage of the communist society,” intentionally set about abolishing capital in the sense used here. Socialism can never plan the return to the life from hand to mouth. Rather do I want to point out here that Socialism must, by inner necessity, lead to the gradual consumption of capital.

  [26. ]Pohle-Halm, Kapitalismus und Sozialismus, pp. 12 ff.

  [27. ]On Monopoly see pp. 344 ff. and on “uneconomic” consumption see p. 401 ff.

  [28. ]See pp. 140 ff., 160 ff.

  [29. ]A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book II, Chap. V (London 1776, Vol. I, pp. 437 ff.).

  [30. ]Ricardo, Principles of Political Economy and Taxation, Chap. XXVI (Works, ed. MacCulloch, 2nd ed. [London 1852] pp. 220 ff.).

  [31. ]Say, in his Notes to Constancio’s French Edition of Ricardo’s works, Vol. II (Paris, 1819), pp. 222 ff.

  [32. ]Sismondi, Nouveaux Principes d’Économie Politique (Paris, 1819), Vol. ii, p. 331 footnote.

  [33. ]Bernhardi, Versuch einer Kritik der Grande, die für grosses und kleines Grundeigentum angeführt werden (Petersburg, 1849), pp. 367 ff.; also Cronbach, Das landwirtschaftliche Betriebsproblem in der deutschen Nationalökonomie bis zur Mitte des 19. Jahrhunderts (Vienna, 1907), pp. 292 ff.

  [34. ]“La société recherche le plus grand produit brut, par consequent la plus grande population possible, parce que pour elle produit brut et produit net son identiques. Le monopole, au contraire, vise constamment au plus grand produit net, dût-il ne l’obtenir qu’au prix de l’extermination du genre humain.” (“Society seeks the largest gross product and thus the largest possible population, because for it gross product and net product are the same thing. On the other hand, monopoly continually aims at the highest net product which it can obtain only at the price of exterminating the human race.”) Proudhon, Système des contradictions économiques ou philosophie de la misère (Paris, 1846), Vol. I, p. 270. In Proudhon’s language “Monopoly” means the same as Private Property. Ibid., Vol. i, p. 236; also Landry, L’utilité sociale de la propriété individuelle (Paris, 1901), p. 76.

  [35. ]Marx, Das Kapital, Vol. I, pp. 613-726. The arguments about “the theory of compensation for the workers displaced by machinery” (ibid., pp. 403-12) are vain in view of the Marginal Utility Theory. Publisher’s Note: The page references cited here are pp. 738-821 and 478-488, respectively, in the English edition.

  [36. ]Goltz, Agrarwesen und Agrarpolitik, 2nd ed. (Jena, 1904), p. 53; also Waltz, Vom Reinertrag in der Landwirtschaft (Stuttgart and Berlin, 1904), pp. 27 ff. Goltz contradicts himself in his arguments, for, to the assertion mentioned above, he adds immediately: “Nevertheless the amount remaining as net profit from the gross product after deducting costs varies considerably. On the average it is greater with extensive than with intensive cultivation.”

  [37. ]See Waltz, op. cit. pp. 19 ff. on Adam Müller, Bülow-Cummerow and Phillipp v. Arnim, and pp. 30 ff. on Rudolf Meyer and Adolf Wagner.

  [38. ]Landry, L’utilité sociale de la propriété individuelle, pp. 109, 127 ff.

  [39. ]Landry, L’utilité sociale de la propriété individuelle, pp. 109, 127 ff.

  [40. ]Marx, Das Kapital, Vol. I, p. 695.

  [41. ]Quoted by Waltz, Vom Reinertrag in der Landwirtschaft, p. 29.

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  6: Session II Reading 4: Socialism and the Calculation Problem

  The third reading for Session II is not available online at this moment. Please read Mises, “Economic Calculation in the Socialist Commonwealth” (1920). The link to the 4th reading is below.

  Ludwig von Mises, Liberalism: The Classical Tradition, trans. Ralph Raico, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2005). Chapter: 4: The Impracticability of Socialism

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  4

  The Impracticability of Socialism

  People are wont to consider socialism impracticable because they think that men lack the moral qualities demanded by a socialist society. It is feared that under socialism most men will not exhibit the same zeal in the performance of the duties and tasks assigned to them that they bring to their daily work in a social order based on private ownership of the means of production. In a capitalist society, every individual knows that the fruit of his labor is his own to enjoy, that his income increases or decreases according as the output of his labor is greater or smaller. In a socialist society, every individual will think that less depends on the efficiency of his own labor, since a fixed portion of the total output is due him in any case and the amount of the latter cannot be appreciably diminished by the loss resulting from the laziness of any one man. If, as is to be feared, such a conviction should become general, the productivity of labor in a socialist community would drop considerably.

  The objection thus raised against socialism is completely sound, but it does not get to the heart of the matter. Were it possible in a socialist community to ascertain the output of the labor of every individual comrade with the same precision with which this is accomplished for each worker by means of economic calculation in the capitalist system, the practicability of socialism would not be dependent on the good will of every individual. Society would be in a position, at least within certain limits, to determine the share of the total output to be allotted to each worker on the basis of the extent of his contribution to production. What renders socialism impracticable is precisely the fact that calculation of this kind is impossible in a socialist society.

  In the capitalist system, the calculation of profitability constitutes a guide that indicates to the individual whether the enterprise he is operating ought, under the given circumstances, to be in operation at all and whether it is being run in the most efficient possible way, i.e., at the least cost in factors of production. If an undertaking proves unprofitable, this means that the raw materials, half-finished goods, and labor that are needed in it are employed by other enterprises for an end that, from the standpoint of the consumers, is more urgent and more important, or for the same end, but in a more economical manner (i.e., with a smaller expenditure of capital and labor). When, for instance, hand weaving came to be unprofitable, this signified that the capital and labor employed in weaving by machine yield a greater output and that it is consequently uneconomical to adhere to a method of production in which the same input of capital and labor yields a smaller output.

  If a new enterprise is being planned, one can calculate in advance whether it can be made profitable at all and in what way. If, for example, one has the intention of constructing a railroad line, one can, by estimating the traffic to be expected and its ability to pay the freight rates, calculate whether it pays to invest capital and labor in such an undertaking. If the result of this calculation shows that the projected railroad promises no profit, this is tantamount to saying that there is other, more urgent employment for the capital and the labor that the construction of the railroad would require; the world is not yet rich enough to be able to afford such an expenditure. But it is not only when the question arises whether or not a given undertaking is to be begun at all that the calculation of value and profitability is decisive; it controls every single step that the entrepreneur takes in the conduct of his business.

  Capitalist economic calculation, which alone makes rational production possible, is based on monetary calculation. Only because the prices of all goods and services in the market can be expressed in terms of money is it possible for them, in spite of their heterogeneity, to enter into a calculation involving homogeneous units of measurement. In a socialist society, where all the means of production are owned by the community, and where, consequently, there is no market and no exchange of productive goods and services, there can also be no money prices for goods and services of higher order. Such a social system would thus, of necessity, be lacking in the means for the rational management of business enterprises, viz., economic calculation. For economic calculation cannot take place in the absence of a common denominator to which all the heterogeneous goods and services can be reduced.

  Let us consider a quite simple case. For the construction of a railroad from A to B several routes are conceivable. Let us suppose that a mountain stands between A and B. The railroad can be made to run over the mountain, around the mountain, or, by way of a tunnel, through the mountain. In a capitalist society, it is a very easy matter to compute which line will prove the most profitable. One ascertains the cost involved in constructing each of the three lines and the differences in operating costs necessarily incurred by the anticipated traffic on each. From these quantities it is not difficult to determine which stretch of road will be the most profitable. A socialist society could not make such calculations. For it would have no possible way of reducing to a uniform standard of measurement all the heterogeneous quantities and qualities of goods and services that here come into consideration. In the face of the ordinary, everyday problems which the management of an economy presents, a socialist society would stand helpless, for it would have no possible way of keeping its accounts.

  The prosperity that has made it possible for many more people to inhabit the earth today than in the precapitalist era is due solely to the capitalist method of lengthy chains of production, which necessarily requires monetary calculation. This is impossible under socialism. In vain have socialist writers labored to demonstrate how one could still manage even without monetary and price calculation. All their efforts in this respect have met with failure.

  The leadership of a socialist society would thus be confronted by a problem that it could not possibly solve. It would not be able to decide which of the innumerable possible modes of procedure is the most rational. The resulting chaos in the economy would culminate quickly and irresistibly in universal impoverishment and a retrogression to the primitive conditions under which our ancestors once lived.

  The socialist ideal, carried to its logical conclusion, would eventuate in a social order in which all the means of production were owned by the people as a whole. Production would be completely in the hands of the government, the center of power in society. It alone would determine what was to be produced and how, and in what way goods ready for consumption were to be distributed. It makes little difference whether we imagine this socialist state of the future as democratically constituted or otherwise. Even a democratic socialist state would necessarily constitute a tightly organized bureaucracy in which everyone, apart from the highest officials, though he might very well, in his capacity as a voter, have participated in some fashion in framing the directives issued by the central authority, would be in the subservient position of an administrator bound to carry them out obediently.

  A socialist state of this kind is not comparable to the state enterprises, no matter how vast their scale, that we have seen developing in the last decades in Europe, especially in Germany and Russia. The latter all flourish side by side with private ownership of the means of production. They engage in commercial transactions with enterprises that capitalists own and manage, and they receive various stimuli from these enterprises that invigorate their own operation. State railroads, for instance, are provided by their suppliers, the manufacturers of locomotives, coaches, signal installations, and other equipment, with apparatus that has proved successful elsewhere in the operation of privately owned railroads. Thence they receive the incentive to institute innovations in order to keep up with the progress in technology and in methods of business management that is taking place all around them.

  It is a matter of common knowledge that national and municipal enterprises have, on the whole, failed, that they are expensive and inefficient, and that they have to be subsidized out of tax funds just to maintain themselves in operation. Of course, where a public enterprise occupies a monopolistic position—as is, for instance, generally the case with municipal transportation facilities and electric light and power plants—the bad consequences of inefficiency need not always express themselves in visible financial failure. Under certain circumstances it may be possible to conceal it by making use of the opportunity open to the monopolist of raising the price of his products and services high enough to render these enterprises, in spite of their uneconomic management, still profitable. The lower productivity of the socialist method of production merely manifests itself differently here and is not so easily recognized as otherwise; essentially, however, the case remains the same.

  But none of these experiments in the socialist management of enterprises can afford us any basis for judging what it would mean if the socialist ideal of the communal ownership of all means of production were to be realized. In the socialist society of the future, which will leave no room whatsoever for the free activity of private enterprises operating side by side with those owned and controlled by the state, the central planning board will lack entirely the gauge provided for the whole economy by the market and market prices. In the market, where all goods and services come to be traded, exchange ratios, expressed in money prices, may be determined for everything bought and sold. In a social order based on private property, it thus becomes possible to resort to monetary calculation in checking on the results of all economic activities. The social productivity of every economic transaction may be tested by the methods of bookkeeping and cost accounting. It yet remains to be shown that public enterprises are unable to make use of cost accounting in the same way as private enterprises do. Nevertheless, monetary calculation does give even governmental and communal enterprises some basis for judging the success or failure of their management. In a completely socialist economic system, this would be quite impossible, for in the absence of private ownership of the means of production, there could be no exchange of capital goods in the market and consequently neither money prices nor monetary calculation. The general management of a purely socialist society will therefore have no means of reducing to a common denominator the costs of production of all the heterogeneous commodities that it plans to produce.

  Nor can this be achieved by setting expenditures in kind against savings in kind. One cannot calculate if it is not possible to reduce to a common medium of expression hours of labor of various grades, iron, coal, building materials of every kind, machines, and all the other things needed in the operation and management of different enterprises. Calculation is possible only when one is able to reduce to monetary terms all the goods under consideration. Of course, monetary calculation has its imperfections and deficiencies, but we have nothing better to put in its place. It suffices for the practical purposes of life as long as the monetary system is sound. If we were to renounce monetary calculation, every economic computation would become absolutely impossible.

  This is the decisive objection that economics raises against the possibility of a socialist society. It must forgo the intellectual division of labor that consists in the cooperation of all entrepreneurs, landowners, and workers as producers and consumers in the formation of market prices. But without it, rationality, i.e., the possibility of economic calculation, is unthinkable.

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  7: Session III Reading 1: The Other Problems with Socialism

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: CHAPTER 7: The Distribution of Income

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  CHAPTER 7

  The Distribution of Income

  1

  The Nature of Distribution Under Liberalism and Socialism

  On logical grounds, treatment of the problem of income should properly come at the end of any investigation into the life of the socialist community. Production must take place before distribution is possible, therefore, logically, the former should be discussed before the latter. But the problem of distribution is so prominent a feature of Socialism as to suggest the earliest possible discussion of the question. For fundamentally, Socialism is nothing but a theory of “just” distribution; the socialist movement is nothing but an attempt to achieve this ideal. All socialist schemes start from the problem of distribution and all come back to it. For Socialism the problem of distribution is the economic problem.

  The problem of distribution is moreover peculiar to socialism. It arises only in a socialist economy. It is true, we are in the habit of speaking of distribution in an economic society based on private property, and economic theory deals with the problem of income and the determination of the prices of the factors of production under the heading “Distribution.” This terminology is traditional, and it is so firmly established that the substitution of another would be unthinkable. Nevertheless, it is misleading and does not indicate the nature of the theory which it is meant to describe. Under Capitalism incomes emerge as a result of market transactions which are indissolubly linked up with production. We do not first produce things and afterwards distribute them. When products are supplied for use and consumption, incomes for the greater part have already been determined, since they arise during the process of production and are indeed derived from it. Workers, landowners, and capitalists and a large number of the entrepreneurs contributing to production have already received their share before the product is ready for consumption. The prices which are obtained for the final product on the market decide only the income which a section of entrepreneurs obtain from the process of production. (The influence which these prices have on the income of other classes has already been exerted via the anticipations of the entrepreneurs.) As thus in the capitalistic order of society the aggregation of individual incomes to form a total social income is only a theoretical conception, the concept of distribution is only figurative. The reason that this expression has been adopted, instead of the simple and more suitable term formation of income, is that the founders of scientific economics, the Physiocrats and the English classical school, only gradually learned to free themselves from the etatistic outlook of mercantilism. Although precisely this analysis of income formation as a result of market transactions was their principal achievement, they adopted the practice—fortunately without any harm to the content of their teachings—of grouping the chapters dealing with the different kinds of income under the heading “distribution.”42

  Only in the socialist community is there any distribution of consumable goods in the true sense of the word. If in considering capitalistic society we use the term distribution in any but a purely figurative sense then an analogy is being made between the determination of income in a socialist and in a capitalist community. The conception of any actual process of distribution of income must be kept out of any investigation of the mechanism of capitalist society.

  2

  The Social Dividend

  According to the fundamental idea of Socialism only goods which are ripe for consumption are eligible for distribution. Goods of a higher order remain the property of the community for purposes of further production; they must not be distributed. Goods of the first order, on the contrary, are without exception destined to be distributed: they constitute indeed the net social dividend. Since in considering the socialist society we cannot quite get rid of ideas which are only appropriate to the capitalist order, it is usual to say that the society will retain a part of the consumers’ goods for public consumption. We are really thinking of that part of consumption which in the capitalistic society is usually called public expenditure. Where the principle of private property is rigidly applied this public expenditure consists exclusively of the cost of maintaining the apparatus which assures the undisturbed course of things. The only task of the strictly Liberal state is to secure life and property against attacks both from external and internal foes. It is a producer of security, or, as Lassalle mockingly termed it, a night watchman’s state. In a socialist community there will be the corresponding task of securing the socialist order and the peaceful course of socialistic production. Whether the apparatus of coercion and violence which serves this purpose will still be known as the state or be called by some other name, and whether it will be legally given a separate status among the other functions incumbent upon the socialist community, is a matter of complete indifference to us. We have only to make it clear that all expenditure devoted to this end will appear in the socialist community as general costs of production. So far as they involve the use of labour for the purposes of distributing the social dividend, they must be reckoned in such a way that the workers employed get their share.

  But public expenditure includes other outlays. Most states and municipalities provide their citizens with certain utilities in kind, sometimes gratuitously, sometimes at a charge which covers only a part of the expense. As a rule this happens in the case of single services which are yielded by durable commodities. Thus parks, art galleries, public libraries, places of worship, are made available for those who wish to use them. Similarly, roads and streets are accessible to everyone. Moreover, direct distribution of consumption goods takes place, as for example, when medicine and diet are given to the sick and educational apparatus to pupils; personal service is also supplied when medical treatment is given. All this is not Socialism, it is not production on the basis of common ownership of the means of production. Distribution, indeed, occurs here, but what is distributed is first collected by taxation from the citizens. Only so far as this distribution deals with products of state or municipal production can it be described as a piece of Socialism within the framework of an otherwise liberal order of society. We need not stop to inquire how far this branch of state and municipal activity is due to views which have been influenced by the socialist critics of capitalist society and how far it is due to the special nature of certain particularly durable consumption goods which yield almost unlimited service. For us it is only important that in the case of this public expenditure, even in an otherwise capitalistic society, a distribution in the actual sense of the word takes place.

  Moreover, the socialist community will not make a physical distribution of all consumers’ goods. It is not likely to present a copy of every new book to every citizen, but rather to place the books in public reading rooms for the general use. It will do the same with its schools and teaching, its public gardens, playgrounds and assembly halls. The expenditure which all these arrangements necessitate is not deducted from the social dividend; on the contrary, it is a part of the social dividend.

  This part of the social dividend exhibits this one peculiarity, that without prejudice to the principles which determine the distribution of consumable consumers’ goods and part of durable goods, special principles of distribution can be applied to it corresponding to the special nature of the services involved. The way in which art collections and scientific publications are made available for general use is quite independent of the rules which are otherwise applied to the distribution of goods of the first order.

  3

  The Principles of Distribution

  The socialist community is characterized by the fact that in it there is no connection between production and distribution. The magnitude of the share which is assigned for the use of each citizen is quite independent of the value of the service he renders. It would be fundamentally impossible to base distribution on the imputation of value because it is an essential feature of socialistic methods of production that the shares of the different factors of production in the result cannot be ascertained; and any arithmetical test of the relations between effort and result is impossible.

  It would therefore not be possible to base even a part of distribution on an economic calculation of the contribution of the different factors, e.g. by first granting the worker the full product of his labour which under the capitalist system he would receive in the form of wages, and then applying a special form of distribution in the case of the shares which are attributed to the material factors of production and to the work of the entrepreneur. On the whole socialists lack any clear conception of this fact. But a faint suspicion of them pervades the Marxian doctrine that under Socialism the categories wages, profit, and rent would be unthinkable.

  There are four different principles upon which socialistic distribution can conceivably be based: equal distribution per head, distribution according to service rendered to the community, distribution according to needs, and distribution according to merit. These principles can be combined in different ways.

  The principle of equal distribution derives from the old doctrine of natural law of the equality of all human beings. Rigidly applied it would prove absurd. It would permit no distinction between adults and children, between the sick and the healthy, between the industrious and the lazy, or between good and bad. It could be applied only in combination with the other three principles of distribution. It would at least be necessary to take into account the principle of distribution according to needs, so that shares might be graded according to age, sex, health and special occupational needs; it would be necessary to take into account the principle of distribution according to services rendered, so that distinction could be made between industrious and less industrious, and between good and bad workers; and finally, some account would have to be taken of merit, so as to make reward or punishment effective. But even if the principle of equal distribution is modified in these ways the difficulties of socialistic distribution are not removed. In fact, these difficulties cannot be overcome at all.

  We have already shown the difficulties raised by applying the principle of distribution according to value of services rendered. In the capitalist system the economic subject receives an income corresponding to the value of his contribution to the general process of production. Services are rewarded according to their value. It is precisely this arrangement which Socialism wishes to change and to replace by one under which the shares attributed to the material factors of production and to the entrepreneur would be so distributed that no property owner and no entrepreneur would have a standing fundamentally different from that of the rest of the community. But this involves a complete divorce of distribution from economic imputation of value. It has nothing to do with the value of the individual’s service to the community. It could be brought into external relation with the service rendered only if the service of the individual were made the basis of distribution according to some external criteria. The most obvious criterion appears to be the number of hours worked. But the significance to the social dividend of any service rendered is not to be measured by the length of working time. For, in the first place, the value of the service differs according to its use in the economic scheme. The results will differ according to whether the service is used in the right place, that is to say, where it is most urgently required, or in the wrong place. In the socialist organization, however, the worker cannot be made ultimately responsible for this, but only those who assign him the work. Secondly, the value of the service varies according to the quality of the work and according to the particular capability of the worker; it varies according to his strength and his zeal. It is not difficult to find ethical reasons for equal payments to workers of unequal capabilities. Talent and genius are the gifts of God, and the individual is not responsible for them, as is often said. But this does not solve the problem whether it is expedient or practicable to pay all hours of labour the same price.

  The third principle of distribution is according to needs. The formula of each according to his needs is an old slogan of the unsophisticated communist. It is occasionally backed up by referring to the fact that the Early Christians shared all goods in common.43 Others again regard it as practicable because it is supposed to form the basis of distribution within the family. No doubt it could be made universal if the disposition of the mother, who hungers gladly rather than that her children should go without, could be made universal. The advocates of the principle of distribution according to needs overlook this. They overlook much more besides. They overlook the fact that so long as any kind of economic effort is necessary only a part of our needs can be satisfied, and a part must remain unsatisfied. The principle of “to each according to his needs” remains meaningless so long as it is not defined to what extent each individual is allowed to satisfy his needs. The formula is illusory since everyone has to forgo the complete satisfaction of all his needs.44 It could indeed be applied within narrow limits. The sick and suffering can be assigned special medicine, care, and attendance, better attention and special treatment for their special needs, without making this consideration for exceptional cases the general rule.

  Similarly it is quite impossible to make the merit of the individual the general principle of distribution. Who is to decide on merits? Those in power have often had very strange views on the merits or demerits of their contemporaries. And the voice of the people is not the voice of God. Who would the people choose today as the best of their contemporaries? It is not unlikely that the choice would fall on a film star, or perhaps on a prize-fighter. Today the English people would probably be inclined to call Shakespeare the greatest Englishman. Would his contemporaries have done so? And how would they esteem a second Shakespeare if he were among them today? Moreover, why should those be penalized in whose lap Nature has not placed the great gifts of talent and genius? Distribution according to the merits of the individual would open the door wide to mere caprice and leave the individual defenseless before the oppression of the majority. Conditions would be created which would make life unbearable.

  As far as the economics of the problem are concerned it is a matter of indifference which principle or which combination of different people is made a basis for distribution. Whatever principle is adopted the fact remains that each individual will receive an allocation from the community. The citizen will receive a bundle of claims which can be exchanged within a certain time for a definite amount of different goods. In this way he will procure his daily meals, fixed shelter, occasional pleasures, and from time to time new clothing. Whether the satisfaction of needs which he obtains in this way is great or small will depend upon the productivity of the efforts of the community.

  4

  The Process of Distribution

  It is not necessary that each individual should himself consume the whole share allotted to him. He can let some go to waste, give some away, or, as far as the commodity permits, put some aside for later consumption. Some, however, he can exchange. The beer drinker will readily forgo his share of non-alcoholic drink to obtain more beer. The abstainer will be prepared to forgo his claim to spirits if he can acquire other commodities instead. The aesthete will surrender a visit to the cinema for the sake of more opportunities to hear good music; the lowbrow will willingly exchange tickets to art galleries for more congenial pleasures. Everyone will be ready to exchange, but the exchange will be confined to consumers’ goods. Producers’ goods will be res extra commercium (things beyond commerce).

  Such exchange need not be confined to direct barter: it can also take place indirectly within certain narrow limits. The same reasons which have led to indirect exchange in other types of society will make it advantageous to those exchanging in the socialistic community. It follows that even here there will be opportunity for the use of a general medium of exchange—money.

  The role of money in the socialist economy will be fundamentally the same as in a free economic system—that of a general facilitator of exchange. But the significance of this role will be quite different. In a society based on the collective ownership of the means of production, the significance of the role of money will be incomparably narrower than in a society based on private property in the means of production. For in the socialist commonwealth, exchange itself has a much narrower significance, since it is confined to consumers’ goods only. There cannot be money prices of producers’ goods since these do not enter into exchange. The accounting function which money exercises in production in a free economic order will no longer exist in a socialist community. Money calculations of value will be impossible.

  Nevertheless the central administration of production and distribution cannot leave out of consideration the exchange relations which arise in this sort of traffic. Clearly it would have to take them into account if it desired to make different commodities mutually substitutable when assessing the distribution of the social dividend.

  Thus if in the process of exchange the relation of one cigar to five cigarettes was established, the administration could not arbitrarily lay it down that one cigar equalled three cigarettes, so that it might be able on this basis to give one individual only cigars and another only cigarettes. If the tobacco allowance has not been equally distributed, partly in cigars and partly in cigarettes, that is to say, if some—either according to their wishes or by order of the government—received only cigars and others only cigarettes, the exchange relations already established could not be ignored. Otherwise all those who received cigarettes would be unfairly treated, compared with those receiving cigars, since the person who had received a cigar could exchange it for five cigarettes whilst he had obtained it as the equivalent of three cigarettes.

  Alterations of exchange relationships in this traffic among the citizens would consequently compel the administration to make corresponding changes in the substitution ratios of the various commodities. Every such change will indicate that the relations between the various needs of the citizens and their satisfaction had altered, that people now wanted some commodities more than before, others less. The economic administration would presumably endeavor to adjust production to this change. It would endeavour to produce more of the more desired commodity and less of the less desired. But one thing, however, it would not be able to do: it would not be able to permit the individual citizens to redeem their tobacco tickets arbitrarily in cigars or cigarettes. If individuals were allowed free choice of cigars or cigarettes they might demand more cigars or more cigarettes than had been produced, or, on the other hand, cigars or cigarettes might be left on hand at the distributing centers because no one demanded them.

  The labour theory of value appears to offer a simple solution of this problem. For an hour of labour a citizen receives a token which entitles him to the product of one hour of labour, with a deduction to defray the general obligation of the community, e.g. support of the disabled, expenditure on cultural purposes. Allowing for this deduction to cover the expenditure borne by the community as a whole, every worker who has worked one hour will have the right to obtain products on which one hour of labour has been expended. Any one who is ready to pay by giving to the community his own working time corresponding to the working time used to produce them can draw from the supply centers consumers’ goods and services and apply them to his own use.

  But such a principle of distribution would not work, since labour is not uniform or homogeneous. There are qualitative differences between the different forms of labour which, taken in conjunction with variations in the supply and demand of the resulting products, lead to different values. Ceteris paribus the supply of pictures cannot be increased without the quality of the work suffering. The worker who has supplied an hour of simple labour cannot be granted the right to consume the product of an hour of work of a higher quality: and it would be impossible in a socialist community to establish any connection between the importance of work done for the community and the share in the yield of communal production given for the work. Payment for work would be quite arbitrary. For the methods of calculating value used in a free economic society based on private ownership of the means of production would be inaccessible to it since, as we have seen, such imputation is impossible in a socialistic society. Economic facts would clearly limit the power of society to reward the labourer arbitrarily; in the long run the wage total can in no circumstances exceed the income of society. Within this limit, however, the community is free to act. It can decide to pay all work equally, regardless of quality; it can just as easily make a distinction between the various hours of work, according to the quality of the work rendered. But in both cases it must reserve the right to decide the particular distribution of the products.

  Even if we abstract from differences in the quality of labour and its product and accept the possibility of determining how much labour inheres in any product, the community would never allow the individual who had rendered an hour of labour to consume the product of an hour’s labour. For all economic goods entail material costs apart from labour. A product for which more raw material is required must not be made equivalent to a product requiring less raw material.

  5

  The Costs of Distribution

  Socialistic criticism of the capitalist system devotes much space to complaints about the high costs of what can be called the apparatus of distribution. They include under this the cost of all national and political institutions, including expenditure on military purposes and war. They also include the expense to society arising from free competition. All the expenditure on advertisement and the activities of persons involved in the competitive struggle such as agents, commercial travellers, etc., and the costs entailed by the efforts of firms to remain independent instead of amalgamating into larger units or joining cartels which make possible specialization and thereby the cheapening of production, are debited to the distributive process of the capitalist system. The socialistic society will, so the critics think, save enormously by putting an end to this waste.

  The expectation that the socialist community will save that outlay which can properly be termed state expenditure is derived from the doctrine, peculiar to many anarchists and to Marxian socialists, that state compulsion would be superfluous in a society not based on private property in the means of production. They argue that in the socialist community “obedience to the simple fundamental rules governing any form of social life will very soon become of necessity a habit,” but this is backed up by a hint that “evasion of regulation and control enforced by the whole people will undoubtedly be enormously difficult,” and will incur “swift and severe punishment,” since “the armed workers” would not be “sentimental intellectuals” nor “let themselves be mocked.”45 All this is merely playing with words. Control, Arms, Punishment, are not these “a special repressive authority,” and thus according to Engels’ own words a “State”?46 Whether the compulsion is exercised by armed workers—who cannot work while they bear arms—or by the workers’ sons clad in police uniforms, will make no difference to the costs which the compulsion entails.

  But the State is a coercive apparatus not only to its own inhabitants: it applies coercion externally. Only a state comprising the whole universe would need to exert no external coercion and then only because in that event there would be no foreign land, no foreigners and no foreign states. Liberalism, with its fundamental antagonism to warfare, wants to give the whole world some state form of organization. If this can be achieved it is inconceivable without a coercive apparatus. If all the armies of the individual states were abolished we could not dispense with a world apparatus of coercion, a world police to ensure world peace. Whether Socialism unites all states into a single one or whether it leaves them independent of each other, in any case it too will not be able to do without a coercive apparatus.

  The socialist apparatus of coercion too will entail some expense. Whether this will be greater or less than the expense of the state apparatus of the capitalist society naturally we cannot say. We merely need to see that the social dividend will be reduced by the amount involved.

  As for the wastes of distribution under Capitalism, little need be said. Since in capitalist society there is no distribution in the real sense of the word there are no costs of distribution. Trading expenses and similar costs cannot be called distribution costs, not only because they are not the costs of a distribution, which is a special process in itself, but also because the effects of the services devoted to these purposes extend far beyond the mere distribution of goods. Competition is not confined to distribution: that is only a part of its service. It serves equally the process of production, indeed it is essential for any organization of production which is to ensure high productivity. It is not enough therefore to compare these costs with the costs incurred by the apparatus of distribution and management in a socialist community. If socialist methods of production reduce productivity—and we shall speak of this later—it matters little that it saves the work of commercial travellers, brokers and advertisers.

  [42. ]Cannan, A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848, 3rd ed. (London, 1917), pp. 183 ff. Also p. 294 of Socialism.

  [43. ]Acts of the Apostles, II. 45.

  [44. ]See Pecqueur’s criticism of this formula of distribution in Théorie nouvelle d’Économie sociale et politique (Paris, 1842), pp. 613 ff. Pecqueur shows himself superior to Marx, who unhesitatingly indulges in the illusion that “In a higher stage of the communist society ... the narrow bourgeois legal horizon could be completely surpassed and society could write on its banners: From each according to his abilities, to each according to his needs!” Marx, Zur Kritik des sozialdemokratischen Parteiprogramms von Gotha, p. 17.

  [45. ]Lenin, Staat und Revolution, p. 96. Publisher’s Note: pp. 305-306 in the English edition.

  [46. ]Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft, p. 302. Publisher’s Note: p. 389 in the English edition.

• Back to Top

  8: Session III Reading 2: The Other Problems with Socialism

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: CHAPTER 9: The Position of the Individual Under Socialism

  Accessed from oll.libertyfund.org/title/1060/103881 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  CHAPTER 9

  The Position of the Individual Under Socialism

  1

  Selection of Personnel and Choice of Occupation

  The Socialist Community is a great authoritarian association in which orders are issued and obeyed. This is what is implied by the words “planned economy” and the “abolition of the anarchy of production.” The inner structure of a socialist community is best understood if we compare it with the inner structure of an army. Many socialists indeed prefer to speak of the “army of labour.” As in an army, so under Socialism, everything depends on the orders of the supreme authority. Everyone has a place to which he is appointed. Everyone has to remain in his place until he is moved to another. It follows that men become pawns of official action. They rise only when they are promoted. They sink only when they are degraded. It would be waste of time to describe such conditions. They are the common knowledge of every citizen of a bureaucratic state.

  It is obvious that, in a state of this sort, all appointments should be based upon personal capacity. Each position should be held by the individual best fitted to hold it—always provided that he is not required for more important work elsewhere. Such is the fundamental principle of all systematically ordered authoritarian organizations—of the Chinese Mandarinate equally with modern bureaucracies.

  In giving effect to this principle the first problem that arises is the appointment of the supreme authority. There are two ways to the solution of this problem, the oligarchical-monarchical and the democratic, but there can be only one solution—the charismatic solution. The supreme rulers (or ruler) are chosen in virtue of the grace with which they are endowed by divine dispensation. They have superhuman powers and capacities lifting them above the other mortals. To resist them is not only to resist the powers that be; it is to defy the commandments of the Deity. Such is the basis of theocracies—of clerical aristocracies of realms of “the Lord’s anointed.” But it is equally the basis of the Bolshevist dictatorship in Russia. Summoned by history to the performance of their sublime task, the Bolsheviks pose as the representatives of humanity, as the tools of necessity, as the consummators of the great scheme of things. Resistance to them is the greatest of all crimes. But against their adversaries they may resort to any expedients. It is the old aristocratic-theocratic idea in a new form.

  Democracy is the other method of solving the problem. Democracy places everything in the hands of the majority. At its head is a ruler, or rulers, chosen by a majority decision. But the basis of this is as charismatic as any other. Only in this case grace is regarded as being granted in equal proportions to all and sundry. Everyone is endowed with it. The voice of the people is the voice of God. This is to be seen especially clearly in Tommaso Campanella’s City of the Sun. The Regent chosen by the national assembly is also priest and his name is “Hoh,” that means “metaphysics.”74 In authoritarian ideology, democracy is valued not for its social functions, but only as a means for the ascertainment of the absolute.75

  According to charismatic theory, in appointing officials the supreme authority transmits to them the grace it possesses itself. An official appointment raises ordinary mortals above the level of the masses. They count for more than others. When on duty their status is especially enhanced. No doubt of their capacity, or of their fitness for office, is permissible. Office makes the man.

  Apart from their polemical value, all these theories are purely formal. They do not tell us anything about how such appointments actually work. They are indifferent to origins. They do not inquire whether the dynasties and the aristocracies concerned attained to power by the chance of war. They give no idea of the mechanism of the party system which brings the leaders of a democracy to the helm. They tell nothing of the actual machinery for selecting officials.

  But since only an omniscient ruler could do without them, special arrangements for the appointment of the officials must be made. Since the supreme authority cannot do everything, appointment to lesser positions at least must be left to subordinate authorities. To prevent this power from degenerating into mere license, it must be hedged about by regulations. In this way selection comes to be based not on genuine capacity but on compliance with certain forms, the passing of certain examinations, attendance at certain schools, having spent a certain number of years in a subordinate position, and so on. Of the shortcomings of such methods there can be only one opinion. The successful conduct of business demands qualities quite other than those necessary for passing examinations—even if the examinations deal with subjects bearing on the work of the position in question. A man who has spent a certain time in a subordinate capacity is far from being, for that reason, fitted for a higher post. It is not true that one learns to command by first learning to obey. Age is no substitute for personal capacity. In short, the system is deficient. Its only justification is that nothing better is known to put in its place.

  Attempts have recently been made to invoke the aid of experimental psychology and physiology, and many promise therefrom results of the highest importance to Socialism. There can be no doubt that under Socialism, something corresponding to medical examination for military service would have to be employed on a larger scale and with more refined methods. Those who feigned bodily deformities to escape difficult and uncongenial work would have to be examined, as would those who attempted work for which they were not properly developed. But the warmest advocates of such methods could scarcely pretend that they could do more than impose a very loose curb upon the grossest abuses of officialdom. For all those kinds of work demanding something more than mere muscular strength and a good development of particular senses they are not applicable at all.

  2

  Art and Literature, Science and Journalism

  Socialist society is a society of officials. The way of living prevailing in it, and the mode of thinking of its members, are determined by this fact. People who are always expecting promotion, people who had always a “chief” on whom they depend, people who, because they receive a fixed salary, never understand the connection between production and their own consumption—the last ten years has witnessed the rise of this type everywhere in Europe. It is in Germany, however, where it is especially at home. The whole psychology of our time derives from it.

  Socialism knows no freedom of choice in occupation. Everyone has to do what he is told to do and to go where he is sent. Anything else is unthinkable. We shall discuss later and in another connection how this will affect the productivity of labour. Here we have to discuss the position of art and science, literature and the press under such conditions.

  Under Bolshevism in Russia and Hungary, the artists, scientists and writers, who were recognized as such by the selectors appointed for this purpose, were exempted from the general obligation to work and given a definite salary. All such as were not recognized remained subject to the general obligation to work and received no support for other activity. The press was nationalized.

  This is the simplest solution of the problem, and one which harmonizes completely with the general structure of socialist society. Officialdom is extended to the sphere of the spirit. Those who do not please the holders of power are not allowed to paint or to sculpt or to conduct an orchestra. Their works are not printed or performed. And if the decision does not depend directly upon the free judgment of the economic administration but is referred to the advice of an expert council the case is not materially altered. On the contrary, expert councils, which are inevitably composed of the old and the established, must be admitted to be even less competent than laymen to assist the rise of young talent with different views and perhaps greater mastery than their own. Even if the choice were referred to the whole nation the rise of independent spirits setting themselves against traditional technique and accepted opinions would not be facilitated. Such methods can only foster a race of epigones.

  In Cabet’s Icaria, only such books which please the republic are to be printed (les ouvrages préférés [the preferred or favored works]). Writings of pre-socialistic times are to be examined by the Republic. Those which are partially useful are to be revised. Those which are regarded as dangerous or useless are to be burnt. The objection, that this would be to do what Omar did by burning the Alexandrian Library, Cabet held to be quite untenable. For, said he, “nous faisons en faveur de l’humanité ce que ces oppresseurs faisaient contre elle. Nous avons fait du feu pour brûler les méchants livres, tandis que des brigands ou des fanatiques allumaient les bûchers pour brûler d’innocents hérétiques.” (“We do on behalf of society what oppressors do against it. We make fires to burn the evil books, while the brigands or fanatics light fires to burn innocent heretics at the stake.”)76 From a point of view such as this, solution of the problem of toleration is impossible. Mere opportunists excepted, everyone is convinced of the rightness of his opinions. But, if such a conviction by itself were a justification for intolerance, then everyone would have a right to coerce and persecute everyone else of another way of thinking.77 In these circumstances, the demand for toleration can only be a prerogative of the weak. With power comes the exercise of intolerance. In such a case there must always be war and enmity between men. Peaceful co-operation is out of the question. It is because it desires peace that Liberalism demands toleration for all opinions.

  Under Capitalism the artist and the scientist have many alternatives open to them. If they are rich they can follow their own inclinations. They can seek out rich patrons. They can work as public officials. They can attempt to live on the sale of their creative work. Each of these alternatives has its dangers, in particular the two latter. It may well be that he who gives new values to mankind, or who is capable of so giving, suffers want and poverty. But there is no way to prevent this effectively. The creative spirit innovates necessarily. It must press forward. It must destroy the old and set the new in its place. It could not conceivably be relieved of this burden. If it were it would cease to be a pioneer. Progress cannot be organized.78 It is not difficult to ensure that the genius who has completed his work shall be crowned with laurel; that his mortal remains shall be laid in a grave of honour and monuments erected to his memory. But it is impossible to smooth the way that he must tread if he is to fulfil his destiny. Society can do nothing to aid progress. If it does not load the individual with quite unbreakable chains, if it does not surround the prison in which it encloses him with quite unsurmountable walls, it has done all that can be expected of it. Genius will soon find a way to win its own freedom.

  The nationalization of intellectual life, which must be attempted under Socialism, must make all intellectual progress impossible. It is possible to deceive oneself about this because, in Russia, new kinds of art have become the fashion. But the authors of these innovations were already working, when the Soviet came into power. They sided with it because, not having been recognized hitherto, they entertained hopes of recognition from the new regime. The great question, however, is whether later innovators will be able to oust them from the position they have now gained.

  In Bebel’s Utopia only physical labour is recognized by society. Art and science are relegated to leisure hours. In this way, thinks Bebel, the society of the future “will possess scientists and artists of all kinds in countless numbers.” These, according to their several inclinations, will pursue their studies and their arts in their spare time.79 Thus Bebel allows himself to be swayed by the manual labourer’s philistine resentment against all those who are not hewers of wood and drawers of water. All mental work he regards as mere dilettantism, as can be seen from the fact that he groups it with “social intercourse.”80 But nevertheless we must inquire whether under these conditions the mind would be able to create that freedom without which it cannot exist.

  Obviously all artistic and scientific work which demands time, travel, technical education and great material expenditure, would be quite out of the question. But we will assume that it is possible to devote oneself to writing or to music, after the day’s work is done. We will assume further that such activities will not be hindered by malicious intervention on the part of the economic administration—by transferring unpopular authors to remote localities, for instance—so that with the aid perhaps of devoted friends, an author or a composer is able to save enough to pay the fee demanded by the state printing works for the publication of a small edition. In this way he may even succeed in bringing out a little independent periodical—perhaps even in procuring a theatrical production.81 But all this would have to overcome the overwhelming competition of the officially supported arts, and the economic administration could at any time suppress it. For we must not forget that as one could not ascertain the cost of printing, the economic administration would be free to decide the business conditions under which publication could take place. No censor, no emperor, no pope, has ever possessed the power to suppress intellectual freedom which would be possessed by a socialist community.

  3

  Personal Liberty

  It is customary to describe the position of the individual under Socialism by saying that he would be unfree, that the socialist community would be a “prison state.” This expression contains a judgment of value which, as such, lies outside the sphere of scientific thought. Science cannot decide whether freedom is a good or an evil or a mere matter of indifference. It can only inquire wherein freedom consists and where freedom resides.

  Freedom is a sociological concept. It is meaningless to apply it to conditions outside society: as can be well seen from the confusions prevailing everywhere in the celebrated free-will controversy. The life of man depends upon natural conditions that he has no power to alter. He lives and dies under these conditions and, because they are not subject to his will, he must subordinate himself to them. Everything he does is subject to them. If he throws a stone it follows a course conditioned by nature. If he eats and drinks the processes within his body are similarly determined. We attempt to exhibit this dependence of the process of events upon definite and permanent functional relationship, by the idea of the conformity of all natural occurrences to unerring and unchangeable laws. These laws dominate man’s life; he is completely circumscribed by them. His will and his actions are only conceivable as taking place within their limits. Against nature and within nature there is no freedom.

  Social life, too, is a part of nature and, within it, unalterable laws of nature hold their sway. Action, and the results of action, are conditioned by these laws. If, with the origin of action in will, and its working out in societies, we associate an idea of freedom, this is not because we conceive that such action takes place independently of natural laws: the meaning of this concept of freedom is quite different.

  It is not here a question of the problem of internal freedom. It is the problem of external freedom with which we are concerned. The former is a problem of the origin of willing, the latter of the working out of action. Every man is dependent upon the attitude of his fellow men. He is affected by their actions in a multitude of ways. If he has to suffer them to treat him as if he had no will of his own, if he cannot prevent them from riding roughshod over his wishes, he must feel a one-sided dependence upon them and will say that he is unfree. If he is weaker, he must accommodate himself to coercion by them.

  Under the social relations that arise from co-operation in common work this one-sided dependence becomes reciprocal. In so far as each individual acts as a member of society he is obliged to adapt himself to the will of his fellows. In this way no one depends more upon others than others depend upon him. This is what we understand by external freedom. It is a disposition of individuals within the framework of social necessity involving, on the one side, limitation of the freedom of the individual in relation to others, and, on the other, limitation of the freedom of others in relation to him.

  An example should make this clear. Under Capitalism the employer appears to have great power over the employee. Whether he engages a man, how he employs him, what wages he gives him, whether he dismisses him—all depend upon his decision. But this freedom on his part and the corresponding unfreedom of the other are only apparent. The conduct of the employer to the employee is part of a social process. If he does not deal with the employee in a manner appropriate to the social valuation of the employee’s service, then there arise consequences which he himself has to bear. He can, indeed, deal badly with the employee, but he himself must pay the costs of his arbitrary behaviour. To this extent therefore the employee is dependent upon him. But this dependence is not greater than the dependence of each one of us upon our neighbour. For even in a state where the laws are enforced everybody of course who is willing to bear the consequences of his action, is free to break our windows or do us bodily harm.

  Strictly speaking, of course, on this view there can be no social action which is entirely arbitrary. Even the oriental despot, who to all appearances is free to do what he likes with the life of the enemy he captures, must consider the results of his action. But there are differences of degree in the way in which the costs of arbitrary action are related to the satisfactions arising therefrom. No laws can afford us protection against the assaults of men whose enmity is such that they are willing to bear all the consequences of their action. But if the laws are sufficiently severe to ensure that, as a general rule, our peace is not disturbed, then we feel ourselves independent of the evil intentions of our fellows, at any rate to a certain extent. The historical relaxation of the penal laws is to be attributed, not to an amelioration of morals, or to decadence on the part of legislators, but simply to the fact that so far as men have learnt to check resentment by considering the consequences of action it has been possible to abate the severity of punishments without weakening their deterrent power. To-day the menace of a short term of imprisonment is more effective protection against crimes against the person than the gallows were at one time.

  There is no place for the arbitrary, where exact money reckoning enables us completely to calculate action. If we allow ourselves to be carried away by the current laments over the stony-heartedness of an age which reckons everything in terms of shillings and pence, we overlook that it is precisely this linking up of action with considerations of money profit which is society’s most effective means of limiting arbitrary action. It is precisely arrangements of this kind which make the consumer, on the one hand, the employer, the capitalist, the landowner and the worker on the other—in short, all concerned in producing for demands other than their own—dependent upon social cooperation. Only complete failure to understand this reciprocity of relationship can lead anyone to ask whether the debtor is dependent on the creditor, or the creditor on the debtor. In fact, each is dependent on the other, and the relationship between buyer and seller, employer and employee, is of the same nature. It is customary to complain that, nowadays, personal considerations are banished from business life and that money. rules everything. But what really is here complained of is simply that, in that department of activity which we call purely economic, whims and favours are banished and only those considerations are valid which social co-operation demands.

  This, then, is freedom in the external life of man—that he is independent of the arbitrary power of his fellows. Such freedom is no natural right. It did not exist under primitive conditions. It arose in the process of social development and its final completion is the work of mature Capitalism. The man of pre-capitalistic days was subject to a “gracious lord” whose favour he had to acquire. Capitalism recognizes no such relation. It no longer divides society into despotic rulers and rightless serfs. All relations are material and impersonal, calculable and capable of substitution. With capitalistic money calculations freedom descends from the sphere of dreams to reality.

  When men have gained freedom in purely economic relationships they begin to desire it elsewhere. Hand in hand with the development of Capitalism, therefore, go attempts to expel from the State all arbitrariness and all personal dependence. To obtain legal recognition of the subjective rights of citizens, to limit the arbitrary action of officials to the narrowest possible field—this is the aim and object of the liberal movement. It demands not grace but rights. And it recognizes from the outset that there is no other way of realizing this demand than by the most rigid suppressing of the powers of the State over the individual. Freedom, in its view, is freedom from the State.

  For the State—the coercive apparatus worked by the persons forming the government—is scathless to freedom only when its actions have to conform to certain clear, unequivocal, universal norms, or when they obey the principles governing all work for profit. The former is the case when it functions judicially; for the judge is bound by laws allowing small play for personal opinion. The latter is the case when under Capitalism the State functions as an entrepreneur working under the same conditions and subject to the same principles as other entrepreneurs working for a profit. What it does beyond this can neither be determined by law or in any other way limited sufficiently to guard against arbitrary action. The individual then has no defence against the decision of officials. He cannot calculate what consequences his actions will have because he cannot tell how they will be regarded by those on whom he depends. This is the negation of freedom.

  It is customary to regard the problem of external freedom as a problem of the greater or less dependence of the individual upon society.82 But political freedom is not the whole of freedom. In order that a man may be free it is not sufficient that he may do anything unharmful to others without hindrance from the government or from the repressive power of custom. He must also be in the position to act without fearing unforeseen social consequences. Only Capitalism guarantees this freedom by explicitly referring all reciprocal relations to the cold impersonal principle of exchange du ut des (I give as you give, or colloquially, give and take).

  Socialists usually attempt to refute the argument for freedom by contending that under Capitalism only the possessor is free. The proletarian is unfree because he must work for his livelihood. It is impossible to imagine a cruder conception of freedom. That man must work, because his desire to consume is greater than that of the beasts of the field, is part of the nature of things. That the possessor is able to live without conforming to this rule is a gain derived from the existence of society which injures no one—not even the possessionless. And the possessionless themselves benefit from the existence of society, in that co-operation makes labour more productive. Socialism could only lessen the dependence of the individual upon natural conditions by increasing this productivity. If it cannot do that, if on the contrary it diminishes productivity, then it will diminish freedom.

  [74. ]Georg Adler, Geschichte des Sozialismus und Kommunismus (Leipzig, 1899), pp. 185 ff.

  [75. ]On the social-dynamic functions of democracy see p. 60 of Socialism.

  [76. ]Cabet, Voyage en Icarie (Paris, 1848), p. 127.

  [77. ]Luther urged the Princes of his party not to tolerate the monastic system and the Mass. According to him it would be irrelevant to answer that, as the Emperor Charles was convinced that the Papist doctrine was true, he would act justly, from his point of view, in destroying the Lutheran teachings as heresy. For we know “that he is not certain of this, nor can he be certain, because we know that he errs and fights against the Gospels. For it is not our duty to believe that he is certain, because he goes without God’s Word and we go with God’s Word; rather it is his duty to recognize God’s Word and to advance it, like us, with all his power.” Dr. Martin Luther’s Briefe, Sendschreiben und Bedenken, ed. de Wette, Part IV (Berlin, 1827), pp. 93 ff.; Paulus, Protestantismus und Toleranz im 16. Jahrhundert (Freiburg, 1911), p. 23.

  [78. ]“It is misleading to say: Progress should be organized. What is really productive cannot be put into forms made in advance; it flourishes only in unrestricted freedom. The followers may then organize themselves, which is also called ’forming a school’.” Spranger, Begabung und Studium (Leipzig, 1917), p. 8. See also Mill, On Liberty, 3rd ed. (London, 1864), pp. 114 ff.

  [79. ]Bebel, Die Frau und der Sozialismus, p. 284. Publisher’s Note: p. 395 in the English edition. See Index to Works Cited for complete citation.

  [80. ]How Bebel pictured to himself life in a socialist community is shown by the following: “Here she (Woman) is active under the same conditions as the man. At one moment a practical worker in some industry she is in the next hour educator, teacher, nurse; in the third part of the day she exercises some art or cultivates a science; and in the fourth part she fulfils some administrative function. She enjoys studies, pleasures and amusement with her like or with men, just as she wishes and as the opportunity offers. In love choice she is free and unfettered like the man. She woos or lets herself be wooed, etc.” (Bebel, op. cit., p. 342). Publisher’s Note: pp. 466-467 in English edition.

  [81. ]This corresponds to Bellamy’s ideas. (Ein Rückblick, translated by Hoops in Meyers Volksbücher, pp. 230 ff.) Publisher’s Note: In English, Looking Backward: If Socialism Comes, 2000-1887 (Boston, 1889); chapter 15; and (W. Foulsham, London), pp. 92-99.

  [82. ]Similarly formulated by J. S. Mill, On Liberty, p. 7.

• Back to Top

  9: Session III Reading 3: The Other Problems with Socialism

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: CHAPTER 32: Capitalist Ethics

  Accessed from oll.libertyfund.org/title/1060/104121 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

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  CHAPTER 32

  Capitalist Ethics

  1

  Capitalist Ethics and the Impracticability of Socialism

  In the expositions of Ethical Socialism one constantly finds the assertion that it presupposes the moral purification of men. As long as we do not succeed in elevating the masses morally we shall be unable to transfer the socialist order of society from the sphere of ideas to that of reality. The difficulties in the way of Socialism lie exclusively, or predominantly, in men’s moral shortcomings. Some writers doubt whether this obstacle will ever be overcome; others are content to say that the world will not be able to achieve Socialism for the present or in the immediate future.

  We have been able to show why the socialist economy is impracticable: not because men are morally too base, but because the problems that a socialist order would have to solve present insuperable intellectual difficulties. The impracticability of Socialism is the result of intellectual, not moral, incapacity. Socialism could not achieve its end, because a socialist economy could not calculate value. Even angels, if they were endowed only with human reason, could not form a socialistic community.

  If a socialist community were capable of economic calculation, it could be set up without any change in men’s moral character. In a socialist society different ethical standards would prevail from those of a society based on private ownership in the means of production. The temporary sacrifices demanded of the individual by society would be different. Yet it would be no more difficult to enforce the code of socialist morals than it is to enforce the code of capitalist morals, if there were any possibility of making objective computations within the socialist society. If a socialist society could ascertain separately the product of the labour of each single member of the society, his share in the social product could be calculated and his reward fixed proportionately to his productive contribution. Under such circumstances the socialist order would have no cause to fear that a comrade would fail to work with the maximum of energy for lack of any incentive to sweeten the toil of labour. Only because this condition is lacking, Socialism will have to construct for its Utopia a type of human being totally different from the race which now walks the earth, one to whom labour is not toil and pain, but joy and pleasure. Because such a calculus is out of the question, the Utopian socialist is obliged to make demands on men which are diametrically opposed to nature. This inadequacy of the human type which would cause the breakdown of Socialism, may appear to be of a moral order; on closer examination it turns out to be a question of intellect.

  2

  The Alleged Defects of Capitalist Ethics

  To act reasonably means to sacrifice the less important to the more important. We make temporary sacrifices when we give up small things to obtain bigger things, as when we cease to indulge in alcohol to avoid its physiological after-effects. Men submit to the effort of labour in order that they may not starve.

  Moral behaviour is the name we give to the temporary sacrifices made in the interests of social co-operation, which is the chief means by which human wants and human life generally may be supplied. All ethics are social ethics. (If it be claimed that rational behaviour, directed solely towards one’s own good, should be called ethical too, and that we had to deal with individual ethics and with duties to oneself, we could not dispute it; indeed this mode of expression emphasizes perhaps better than ours, that in the last analysis the hygiene of the individual and social ethics are based on the same reasoning.) To behave morally, means to sacrifice the less important to the more important by making social co-operation possible.

  The fundamental defect of most of the anti-utilitarian systems of ethics lies in the misconstruction of the meaning of the temporary sacrifices which duty demands. They do not see the purpose of sacrifice and foregoing of pleasure, and they construct the absurd hypothesis that sacrifice and renunciation are morally valuable in themselves. They elevate unselfishness and self-sacrifice and the love of compassion, which lead to them, to absolute moral values. The pain that at first accompanies the sacrifice is defined as moral because it is painful—which is very near asserting that all action painful to the performer is moral.

  From the discovery of this confusion we can see why various sentiments and actions which are socially neutral or even harmful come to be called moral. Of course, even reasoning of this sort cannot avoid returning furtively to utilitarian ideas. If we are unwilling to praise the compassion of a doctor who hesitates to undertake a life-saving operation on the ground that he thereby saves the patient pain, and distinguish, therefore, between true and false compassion, we re-introduce the teleological consideration of purpose which we tried to avoid. If we praise unselfish action, then human welfare, as a purpose, cannot be excluded. There thus arises a negative utilitarianism: we are to regard as moral that which benefits, not the person acting, but others. An ethical ideal has been set up which cannot be fitted into the world we live in. Therefore, having condemned the society built up on “self-interest” the moralist proceeds to construct a society in which human beings are to be what his ideal requires. He begins by misunderstanding the world and laws; he then wishes to construct a world corresponding to his false theories, and he calls this the setting up of a moral ideal.

  Man is not evil merely because he wants to enjoy pleasure and avoid pain—in other words, to live. Renunciation, abnegation, and self-sacrifice are not good in themselves. To condemn the ethics demanded by social life under Capitalism and to set up in their place standards for moral behaviour which—it is thought—might be adopted under Socialism is a purely arbitrary procedure.

  PART V

  DESTRUCTIONISM

• Back to Top

  10: Session III Reading 4: The Other Problems with Socialism

  Friedrich August von Hayek, “The Use of Knowledge in Society,” American Economic Review, XXXV, No. 4; September, 1945, pp. 519–30.

  Accessed from oll.libertyfund.org/title/92 on 2008-08-21

  This essay is published with permission of the copyright holders the American Economic Review.

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  F. A. Hayek, “The Use of Knowledge in Society” American Economic Review, XXXV, No. 4; September, 1945, pp. 519–30.

  I

  What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.

  This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given.

  The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

  This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics. Though the problem with which I want primarily to deal in this paper is the problem of a rational economic organization, I shall in its course be led again and again to point to its close connections with certain methodological questions. Many of the points I wish to make are indeed conclusions toward which diverse paths of reasoning have unexpectedly converged. But, as I now see these problems, this is no accident. It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.

  II

  In ordinary language we describe by the word “planning” the complex of interrelated decisions about the allocation of our available resources. All economic activity is in this sense planning; and in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner. The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process, and the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy—or of designing an efficient economic system.

  The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about “economic planning” centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly.

  Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge. And this, in turn, depends on whether we are more likely to succeed in putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to fit their plans with those of others.

  III

  It will at once be evident that on this point the position will be different with respect to different kinds of knowledge; and the answer to our question will therefore largely turn on the relative importance of the different kinds of knowledge; those more likely to be at the disposal of particular individuals and those which we should with greater confidence expect to find in the possession of an authority made up of suitably chosen experts. If it is today so widely assumed that the latter will be in a better position, this is because one kind of knowledge, namely, scientific knowledge, occupies now so prominent a place in public imagination that we tend to forget that it is not the only kind that is relevant. It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the difficulty to the problem of selecting the experts. What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem.

  Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

  It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries. This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production. Even economists who regard themselves as definitely immune to the crude materialist fallacies of the past constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned—apparently because in their scheme of things all such knowledge is supposed to be “given.” The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer.

  IV

  If it is fashionable today to minimize the importance of the knowledge of the particular circumstances of time and place, this is closely connected with the smaller importance which is now attached to change as such. Indeed, there are few points on which the assumptions made (usually only implicitly) by the “planners” differ from those of their opponents as much as with regard to the significance and frequency of changes which will make substantial alterations of production plans necessary. Of course, if detailed economic plans could be laid down for fairly long periods in advance and then closely adhered to, so that no further economic decisions of importance would be required, the task of drawing up a comprehensive plan governing all economic activity would be much less formidable.

  It is, perhaps, worth stressing that economic problems arise always and only in consequence of change. So long as things continue as before, or at least as they were expected to, there arise no new problems requiring a decision, no need to form a new plan. The belief that changes, or at least day-to-day adjustments, have become less important in modern times implies the contention that economic problems also have become less important. This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge.

  Is it true that, with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as when a new factory is to be erected or a new process to be introduced? Is it true that, once a plant has been built, the rest is all more or less mechanical, determined by the character of the plant, and leaving little to be changed in adapting to the ever-changing circumstances of the moment?

  The fairly widespread belief in the affirmative is not, as far as I can ascertain, borne out by the practical experience of the businessman. In a competitive industry at any rate—and such an industry alone can serve as a test—the task of keeping cost from rising requires constant struggle, absorbing a great part of the energy of the manager. How easy it is for an inefficient manager to dissipate the differentials on which profitability rests, and that it is possible, with the same technical facilities, to produce with a great variety of costs, are among the commonplaces of business experience which do not seem to be equally familiar in the study of the economist. The very strength of the desire, constantly voiced by producers and engineers, to be allowed to proceed untrammeled by considerations of money costs, is eloquent testimony to the extent to which these factors enter into their daily work.

  One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians occasionally seem to be inclined to do—by the “law of large numbers” or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs; tiles for its roof, stationery for its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market.

  This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”

  V

  If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. But the “man on the spot” cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.

  How much knowledge does he need to do so successfully? Which of the events which happen beyond the horizon of his immediate knowledge are of relevance to his immediate decision, and how much of them need he know?

  There is hardly anything that happens anywhere in the world that might not have an effect on the decision he ought to make. But he need not know of these events as such, nor of all their effects. It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to obtain. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses. It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment.

  It is in this connection that what I have called the “economic calculus” proper helps us, at least by analogy, to see how this problem can be solved, and in fact is being solved, by the price system. Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not—every time some small adjustment in the allocation of resources had to be made—go explicitly through all the relations between ends and means which might possibly be affected. It is indeed the great contribution of the pure logic of choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of equivalence (or “values,” or “marginal rates of substitution"), i.e., by attaching to each kind of scarce resource a numerical index which cannot be derived from any property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure. In any small change he will have to consider only these quantitative indices (or “values") in which all the relevant information is concentrated; and, by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle ab initio or without needing at any stage to survey it at once in all its ramifications.

  Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coördinate the separate actions of different people in the same way as subjective values help the individual to coördinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

  VI

  We must look at the price system as such a mechanism for communicating information if we want to understand its real function—a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.

  Of course, these adjustments are probably never “perfect” in the sense in which the economist conceives of them in his equilibrium analysis. But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency. The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction. This is enough of a marvel even if, in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same constant or “normal” level.

  I have deliberately used the word “marvel” to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. But those who clamor for “conscious direction”—and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously—should remember this: The problem is precisely how to extend the span of out utilization of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.

  The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and with most of our cultural inheritance, and constitutes really the central theoretical problem of all social science. As Alfred Whitehead has said in another connection, “It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them.” This is of profound significance in the social field. We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.

  The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a division of labor but also a coördinated utilization of resources based on an equally divided knowledge has become possible. The people who like to deride any suggestion that this may be so usually distort the argument by insinuating that it asserts that by some miracle just that sort of system has spontaneously grown up which is best suited to modern civilization. It is the other way round: man has been able to develop that division of labor on which our civilization is based because he happened to stumble upon a method which made it possible. Had he not done so, he might still have developed some other, altogether different, type of civilization, something like the “state” of the termite ants, or some other altogether unimaginable type. All that we can say is that nobody has yet succeeded in designing an alternative system in which certain features of the existing one can be preserved which are dear even to those who most violently assail it—such as particularly the extent to which the individual can choose his pursuits and consequently freely use his own knowledge and skill.

  VII

  It is in many ways fortunate that the dispute about the indispensability of the price system for any rational calculation in a complex society is now no longer conducted entirely between camps holding different political views. The thesis that without the price system we could not preserve a society based on such extensive division of labor as ours was greeted with a howl of derision when it was first advanced by von Mises twenty-five years ago. Today the difficulties which some still find in accepting it are no longer mainly political, and this makes for an atmosphere much more conducive to reasonable discussion. When we find Leon Trotsky arguing that “economic accounting is unthinkable without market relations”; when Professor Oscar Lange promises Professor von Mises a statue in the marble halls of the future Central Planning Board; and when Professor Abba P. Lerner rediscovers Adam Smith and emphasizes that the essential utility of the price system consists in inducing the individual, while seeking his own interest, to do what is in the general interest, the differences can indeed no longer be ascribed to political prejudice. The remaining dissent seems clearly to be due to purely intellectual, and more particularly methodological, differences.

  A recent statement by Professor Joseph Schumpeter in his Capitalism, Socialism, and Democracy provides a clear illustration of one of the methodological differences which I have in mind. Its author is pre-eminent among those economists who approach economic phenomena in the light of a certain branch of positivism. To him these phenomena accordingly appear as objectively given quantities of commodities impinging directly upon each other, almost, it would seem, without any intervention of human minds. Only against this background can I account for the following (to me startling) pronouncement. Professor Schumpeter argues that the possibility of a rational calculation in the absence of markets for the factors of production follows for the theorist “from the elementary proposition that consumers in evaluating (‘demanding’) consumers' goods ipso facto also evaluate the means of production which enter into the production of these goods.”1

  Taken literally, this statement is simply untrue. The consumers do nothing of the kind. What Professor Schumpeter's "ipso facto" presumably means is that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers' goods. But this, too, is not correct. Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind. It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers' goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it. The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.

  The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.

  That an economist of Professor Schumpeter's standing should thus have fallen into a trap which the ambiguity of the term “datum” sets to the unwary can hardly be explained as a simple error. It suggests rather that there is something fundamentally wrong with an approach which habitually disregards an essential part of the phenomena with which we have to deal: the unavoidable imperfection of man's knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired. Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people's knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain. I am far from denying that in our system equilibrium analysis has a useful function to perform. But when it comes to the point where it misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is high time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem.

  Notes

  [1.]J. Schumpeter, Capitalism, Socialism, and Democracy (New York; Harper, 1942), p. 175. Professor Schumpeter is, I believe, also the original author of the myth that Pareto and Barone have “solved” the problem of socialist calculation. What they, and many others, did was merely to state the conditions which a rational allocation of resources would have to satisfy and to point out that these were essentially the same as the conditions of equilibrium of a competitive market. This is something altogether different from knowing how the allocation of resources satisfying these conditions can be found in practice. Pareto himself (from whom Barone has taken practically everything he has to say), far from claiming to have solved the practical problem, in fact explicitly denies that it can be solved without the help of the market. See his Manuel d'économie pure (2d ed., 1927), pp. 233–34. The relevant passage is quoted in an English translation at the beginning of my article on “Socialist Calculation: The Competitive ‘Solution,’ ” in Economica, New Series, Vol. VIII, No. 26 (May, 1940), p. 125.

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  11: Session IV Reading 1: Interventionism and the Knowledge Problem

  Please read Sections 1 and 2 of the Epilogue.

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: EPILOGUE

  Accessed from oll.libertyfund.org/title/1060/104171 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  EPILOGUE

  (Originally published in 1947 as Planned Chaos by the Foundation for Economic Education, Inc.)

  Introductory Remarks

  The characteristic mark of this age of dictators, wars and revolutions is its anti-capitalistic bias. Most governments and political parties are eager to restrict the sphere of private initiative and free enterprise. It is an almost unchallenged dogma that capitalism is done for and that the coming of all-round regimentation of economic activities is both inescapable and highly desirable.

  None the less capitalism is still very vigorous in the Western Hemisphere. Capitalist production has made very remarkable progress even in these last years. Methods of production were greatly improved. Consumers have been supplied with better and cheaper goods and with many new articles unheard of a short time ago. Many countries have expanded the size and improved the quality of their manufacturing. In spite of the anti-capitalistic policies of all governments and of almost all political parties, the capitalist mode of production is in many countries still fulfilling its social function in supplying the consumers with more, better and cheaper goods.

  It is certainly not a merit of governments, politicians and labour union officers that the standard of living is improving in the countries committed to the principle of private ownership of the means of production. Not offices and bureaucrats, but big business deserves credit for the fact that most of the families in the United States own a motor car and a radio set. The increase in per capita consumption in America as compared with conditions a quarter of a century ago is not an achievement of laws and executive orders. It is an accomplishment of business men who enlarged the size of their factories or built new ones.

  One must stress this point because our contemporaries are inclined to ignore it. Entangled in the superstitions of statism and government omnipotence, they are exclusively preoccupied with governmental measures. They expect everything from authoritarian action and very little from the initiative of enterprising citizens. Yet, the only means to increase well-being is to increase the quantity of products. This is what business aims at.

  It is grotesque that there is much more talk about the achievements of the Tennessee Valley Authority than about all the unprecedented and unparalleled achievements of American privately operated processing industries. However, it was only the latter which enabled the United Nations to win the war and today enables the United States to come to the aid of the Marshall Plan countries.

  The dogma that the State or the Government is the embodiment of all that is good and beneficial and that the individuals are wretched underlings, exclusively intent upon inflicting harm upon one another and badly in need of a guardian, is almost unchallenged. It is taboo to question it in the slightest way. He who proclaims the godliness of the State and the infallibility of its priests, the bureaucrats, is considered as an impartial student of the social sciences. All those raising objections are branded as biased and narrow-minded. The supporters of the new religion of statolatry are no less fanatical and intolerant than were the Mohammedan conquerors of Africa and Spain.

  History will call our age the age of the dictators and tyrants. We have witnessed in the last years the fall of two of these inflated supermen. But the spirit which raised these knaves to autocratic power survives. It permeates textbooks and periodicals, it speaks through the mouths of teachers and politicians, it manifests itself in party programmes and in plays and novels. As long as this spirit prevails there cannot be any hope of durable peace, of democracy, of the preservation of freedom or of a steady improvement in the nation’s economic well-being.

  1

  The Failure of Interventionism

  Nothing is more unpopular today than the free market economy, i.e., capitalism. Everything that is considered unsatisfactory in present-day conditions is charged to capitalism. The atheists make capitalism responsible for the survival of Christianity. But the papal encyclicals blame capitalism for the spread of irreligion and the sins of our contemporaries, and the Protestant churches and sects are no less vigorous in their indictment of capitalist greed. Friends of peace consider our wars as an offshoot of capitalist imperialism. But the adamant nationalist warmongers of Germany and Italy indicted capitalism for its “bourgeois” pacifism, contrary to human nature and to the inescapable laws of history. Sermonizers accuse capitalism of disrupting the family and fostering licentiousness. But the “progressives” blame capitalism for the preservation of allegedly outdated rules of sexual restraint. Almost all men agree that poverty is an outcome of capitalism. On the other hand many deplore the fact that capitalism, in catering lavishly to the wishes of people intent upon getting more amenities and a better living, promotes a crass materialism. These contradictory accusations of capitalism cancel one another. But the fact remains that there are few people left who would not condemn capitalism altogether.

  Although capitalism is the economic system of modern Western civilization, the policies of all Western nations are guided by utterly anti-capitalistic ideas. The aim of these interventionist policies is not to preserve capitalism, but to substitute a mixed economy for it. It is assumed that this mixed economy is neither capitalism nor socialism. It is described as a third system, as far from capitalism as it is from socialism. It is alleged that it stands midway between socialism and capitalism, retaining the advantages of both and avoiding the disadvantages inherent in each.

  More than half a century ago the outstanding man in the British socialist movement, Sidney Webb, declared that the socialist philosophy is “but the conscious and explicit assertion of principles of social organization which have been already in great part unconsciously adopted.” And he added that the economic history of the nineteenth century was “an almost continuous record of the progress of socialism.”52 A few years later an eminent British statesman, Sir William Harcourt, stated: “We are all socialists now.”53 When in 1913 an American, Elmer Roberts, published a book on the economic policies of the Imperial Government of Germany as conducted since the end of the 1870s, he called them “monarchical socialism.”54

  However, it was not correct simply to identify interventionism and socialism. There are many supporters of interventionism who consider it the most appropriate method of realizing—step by step—full socialism. But there are also many interventionists who are not outright socialists; they aim at the establishment of the mixed economy as a permanent system of economic management. They endeavour to restrain, to regulate and to “improve” capitalism by government interference with business and by labour unionism.

  In order to comprehend the working of interventionism and of the mixed economy it is necessary to clarify two points:

  First: If within a society based on private ownership of the means of production some of these means are owned and operated by the government or by municipalities, this still does not make for a mixed system which would combine socialism and private ownership. As long as only certain individual enterprises are publicly controlled, the characteristics of the market economy determining economic activity remain essentially unimpaired. The publicly owned enterprises, too, as buyers of raw materials, semi-finished goods and labour, and as sellers of goods and services, must fit into the mechanism of the market economy. They are subject to the law of the market; they have to strive after profits or, at least, to avoid losses. When it is attempted to mitigate or to eliminate this dependence by covering the losses of such enterprises with subsidies out of public funds, the only result is a shifting of this dependence somewhere else. This is because the means for the subsidies have to be raised somewhere. They may be raised by collecting taxes. But the burden of such taxes has its effects on the public, not on the government collecting the tax. It is the market, and not the revenue department, which decides upon whom the burden of the tax falls and how it affects production and consumption. The market and its inescapable law are supreme.

  Second: There are two different patterns for the realization of socialism. The one pattern—we may call it the Marxian or Russian pattern—is purely bureaucratic. All economic enterprises are departments of the government just as the administration of the army and the navy or the postal system. Every single plant, shop or farm, stands in the same relation to the superior central organization as does a post office to the office of the Postmaster-General. The whole nation forms one single labour army with compulsory service; the commander of this army is the chief of state.

  The second pattern—we may call it the German or Zwangswirtschaft system55 —differs from the first one in that it, seemingly and nominally, maintains private ownership of the means of production, entrepreneurship, and market exchange. So-called entrepreneurs do the buying and selling, pay the workers, contract debts and pay interest and amortization. But they are no longer entrepreneurs. In Nazi Germany they were called shop managers or Betriebsführer. The government tells these seeming entrepreneurs what and how to produce, at what prices and from whom to buy, at what prices and to whom to sell. The government decrees at what wages labourers should work, and to whom and under what terms the capitalists should entrust their funds. Market exchange is but a sham. As all prices, wages and interest rates are fixed by the authority, they are prices, wages and interest rates in appearance only; in fact they are merely quantitative terms in the authoritarian orders determining each citizen’s income, consumption and standard of living. The authority, not the consumers, directs production. The central board of production management is supreme; all citizens are nothing else but civil servants. This is socialism with the outward appearance of capitalism. Some labels of the capitalistic market economy are retained, but they signify here something entirely different from what they mean in the market economy.

  It is necessary to point out this fact to prevent a confusion of socialism and interventionism. The system of the hampered market economy, or interventionism, differs from socialism by the very fact that it is still market economy. The authority seeks to influence the market by the intervention of its coercive power, but it does not want to eliminate the market altogether. It desires that production and consumption should develop along lines different from those prescribed by the unhindered market, and it wants to achieve its aim by injecting into the working of the market orders, commands and prohibitions for whose enforcement the police power and its apparatus of coercion and compulsion stand ready. But these are isolated interventions; their authors assert that they do not plan to combine these measures into a completely integrated system which regulates all prices, wages and interest rates, and which thus places full control of production and consumption in the hands of the authorities.

  However, all the methods of interventionism are doomed to failure. This means: the interventionist measures must needs result in conditions which from the point of view of their own advocates are more unsatisfactory than the previous state of affairs they were designed to alter. These policies are therefore contrary to purpose.

  Minimum wage rates, whether enforced by government decree or by labour union pressure and compulsion, are useless if they fix wage rates at the market level. But if they try to raise wage rates above the level which the unhampered labour market would have determined, they result in permanent unemployment of a great part of the potential labour force.

  Government spending cannot create additional jobs. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from the commercial banks, it means credit expansion and inflation. If in the course of such an inflation the rise in commodity prices exceeds the rise in nominal wage rates, unemployment will drop. But what makes unemployment shrink is precisely the fact that real wage rates are falling.

  The inherent tendency of capitalist evolution is to raise real wage rates steadily. This is the effect of the progressive accumulation of capital by means of which technological methods of production are improved. There is no means by which the height of wage rates can be raised for all those eager to earn wages other than through the increase of the per capita quota of capital invested. Whenever the accumulation of additional capital stops, the tendency towards a further increase in real wage rates comes to a standstill. If capital consumption is substituted for an increase in capital available, real wage rates must drop temporarily until the checks on a further increase in capital are removed. Government measures which retard capital accumulation or lead to capital consumption—such as confiscatory taxation—are therefore detrimental to the vital interests of the workers.

  Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.

  It can hardly be asserted that the economic history of the last decades has run counter to the pessimistic predictions of the economists. Our age has to face great economic troubles. But this is not a crisis of capitalism. It is the crisis of interventionism, of policies designed to improve capitalism and to substitute a better system for it.

  No economist ever dared to assert that interventionism could result in anything else than in disaster and chaos. The advocates of interventionism--foremost among them the Prussian Historical School and the American Institutionalists—were not economists. On the contrary. In order to promote their plans they flatly denied that there is any such thing as economic law. In their opinion governments are free to achieve all they aim at without being restrained by an inexorable regularity in the sequence of economicphenomena Like the German socialist Ferdinand Lassalle, they maintain that the State is God.

  The interventionists do not approach the study of economic matters with scientific disinterestedness. Most of them are driven by an envious resentment against those whose incomes are larger than their own. This bias makes it impossible for them to see things as they really are. For them the main thing is not to improve the conditions of the masses, but to harm the entrepreneurs and capitalists even if this policy victimizes the immense majority of the people.

  In the eyes of the interventionists the mere existence of profits is objectionable. They speak of profit without dealing with its corollary, loss. They do not comprehend that profit and loss are the instruments by means of which the consumers keep a tight rein on all entrepreneurial activities. It is profit and loss that make the consumers supreme in the direction of business. It is absurd to contrast production for profit and production for use. On the unhampered market a man can earn profits only by supplying the consumers in the best and cheapest way with the goods they want to use. Profit and loss withdraw the material factors of production from the hands of the inefficient and place them in the hands of the more efficient. It is their social function to make a man the more influential in the conduct of business the better he succeeds in producing commodities for which people scramble. The consumers suffer when the laws of the country prevent the most efficient entrepreneurs from expanding the sphere of their activities. What made some enterprises develop into “big business” was precisely their success in filling best the demand of the masses.

  Anti-capitalistic policies sabotage the operation of the capitalist system of the market economy. The failure of interventionism does not demonstrate the necessity of adopting socialism. It merely exposes the futility of interventionism. All those evils which the self-styled “progressives” interpret as evidence of the failure of capitalism are the outcome of their allegedly beneficial interference with the market. Only the ignorant, wrongly identifying interventionism and capitalism, believe that the remedy for these evils is socialism.

  2

  The Dictatorial, Anti-Democratic and Socialist Character of Interventionism

  Many advocates of interventionism are bewildered when one tells them that in recommending interventionism they themselves are fostering anti-democratic and dictatorial tendencies and the establishment of totalitarian socialism. They protest that they are sincere believers and opposed to tyranny and socialism. What they aim at is only the improvement of the conditions of the poor. They say that they are driven by considerations of social justice, and favour a fairer distribution of income precisely because they are intent upon preserving capitalism and its political corollary or superstructure, viz., democratic government.

  What these people fail to realize is that the various measures they suggest are not capable of bringing about the beneficial results aimed at. On the contrary they produce a state of affairs which from the point of view of their advocates is worse than the previous state which they were designed to alter. If the government, faced with this failure of its first intervention, is not prepared to undo its interference with the market and to return to a free economy, it must add to its first measure more and more regulations and restrictions. Proceeding step by step on this way it finally reaches a point in which all economic freedom of individuals has disappeared. Then socialism of the German pattern, the Zwangswirtschaft of the Nazis, emerges.

  We have already mentioned the case of minimum wage rates. Let us illustrate the matter further by an analysis of a typical case of price control.

  If the government wants to make it possible for poor parents to give more milk to their children, it must buy milk at the market price and sell it to those poor people with a loss at a cheaper rate; the loss may be covered from the means collected by taxation. But if the government simply fixes the price of milk at a lower rate than the market, the results obtained will be contrary to the aims of the government. The marginal producers will, in order to avoid losses, go out of the business of producing and selling milk. There will be less milk available for the consumers, not more. This outcome is contrary to the government’s intentions. The government interfered because it considered milk as a vital necessity. It did not want to restrict its supply.

  Now the government has to face the alternative: either to refrain from any endeavours to control prices, or to add to its first measure a second one, i.e., to fix the prices of the factors of production necessary for the production of milk. Then the same story repeats itself on a remoter plane: the government has again to fix the prices of the factors of production necessary for the production of those factors of production which are needed for the production of milk. Thus the government has to go further and further, fixing the prices of all the factors of production—both human (labour) and material—and forcing every entrepreneur and every worker to continue work at these prices and wages. No branch of production can be omitted from this all-round fixing of prices and wages and this general order to continue production. If some branches of production were left free, the result would be a shifting of capital and labour to them and a corresponding fall of the supply of the goods whose prices the government had fixed. However, it is precisely these goods which the government considers as especially important for the satisfaction of the needs of the masses.

  But when this state of all-round control of business is achieved, the market economy has been replaced by a system of planned economy, by socialism. Of course, this is not the socialism of immediate state management of every plant by the government as in Russia, but the socialism of the German or Nazi pattern.

  Many people were fascinated by the alleged success of German price control. They said: You have only to be as brutal and ruthless as the Nazis and you will succeed in controlling prices. What these people, eager to fight Nazism by adopting its methods, did not see was that the Nazis did not enforce price control within a market society, but they established a full socialist system, a totalitarian commonwealth.

  Price control is contrary to purpose if it is limited to some commodities only. It cannot work satisfactorily within a market economy. If the government does not draw from this failure the conclusion that it must abandon all attempts to control prices, it must go further and further until it substitutes socialist all-round planning for the market economy.

  Production can either be directed by the prices fixed on the market by the buying and by the abstention from buying on the part of the public. Or it can be directed by the government’s central board of production management. There is no third solution available. There is no third social system feasible which would be neither market economy nor socialism. Government control of only a part of prices must result in a state of affairs which—without any exception—everybody considers as absurd and contrary to purpose. Its inevitable result is chaos and social unrest.

  It is this that the economists have in mind in referring to economic law and asserting that interventionism is contrary to economic law.

  In the market economy the consumers are supreme. Their buying and their abstention from buying ultimately determine what the entrepreneurs produce and in what quantity and quality. It determines directly the prices of the consumers’ goods and indirectly the prices of all producers’ goods, viz., labour and material factors of production. It determines the emergence of profits and losses and the formation of the rate of interest. It determines every individual’s income. The focal point of the market economy is the market, i.e., the process of the formation of commodity prices, wage rates and interest rates and their derivatives, profits and losses. It makes all men in their capacity as producers responsible to the consumers. This dependence is direct with entrepreneurs, capitalists, farmers and professional men, and indirect with people working for salaries and wages. The market adjusts the efforts of all those engaged in supplying the needs of the consumers to the wishes of those for whom they produce, the consumers. It subjects production to consumption.

  The market is a democracy in which every penny gives a right to vote. It is true that the various individuals have not the same power to vote. The richer man casts more ballots than the poorer fellow. But to be rich and to earn a higher income is, in the market economy, already the outcome of a previous election. The only means to acquire wealth and to preserve it, in a market economy not adulterated by government-made privileges and restrictions, is to serve the consumers in the best and cheapest way. Capitalists and landowners who fail in this regard suffer losses. If they do not change their procedure, they lose their wealth and become poor. It is consumers who make poor people rich and rich people poor. It is the consumers who fix the wages of a movie star and an opera singer at a higher level than those of a welder or an accountant.

  Every individual is free to disagree with the outcome of an election campaign or of the market process. But in a democracy he has no other means to alter things than persuasion. If a man were to say: “I do not like the mayor elected by majority vote; therefore I ask the government to replace him by the man I prefer,” one would hardly call him a democrat. But if the same claims are raised with regard to the market, most people are too dull to discover the dictatorial aspirations involved.

  The consumers have made their choices and determined the income of the shoe manufacturer, the movie star and the welder. Who is Professor X to arrogate to himself the privilege of overthrowing their decision? If he were not a potential dictator, he would not ask the government to interfere. He would try to persuade his fellow-citizens to increase their demand for the products of the welders and to reduce their demand for shoes and pictures.

  The consumers are not prepared to pay for cotton prices which would render the marginal farms, i.e., those producing under the least favourable conditions, profitable. This is very unfortunate indeed for the farmers concerned; they must discontinue growing cotton and try to integrate themselves in another way into the whole of production.

  But what shall we think of the statesman who interferes by compulsion in order to raise the price of cotton above the level it would reach on the free market? What the interventionist aims at is the substitution of police pressure for the choice of the consumers. All this talk: the state should do this or that, ultimately means: the police should force consumers to behave otherwise than they would behave spontaneously. In such proposals as: let us raise farm prices, let us raise wage rates, let us lower profits, let us curtail the salaries of executives, the us ultimately refers to the police. Yet the authors of these projects protest that they are planning for freedom and industrial democracy.

  In most non-socialist countries the labour unions are granted special rights. They are permitted to prevent non-members from working. They are allowed to call a strike and, when on strike, are virtually free to employ violence against all those who are prepared to continue working, viz., the strike-breakers. This system assigns an unlimited privilege to those engaged in vital branches of industry. Those workers whose strike cuts off the supply of water, light, food and other necessities are in a position to obtain all they want at the expense of the rest of the population. It is true that in the United States their unions have up to now exercised some moderation in taking advantage of this opportunity. Other American unions and many European unions have been less cautious. They are intent upon enforcing wage increases without bothering about the disaster inevitably resulting.

  The interventionists are not shrewd enough to realize that labour union pressure and compulsion are absolutely incompatible with any system of social organization. The union problem has no reference whatsoever to the right of citizens to associate with one another in assemblies and associations; no democratic country denies its citizens this right. Neither does anybody dispute a man’s right to stop work and to go on strike. The only question is whether or not the unions should be granted the privilege of resorting with impunity to violence. This privilege is no less incompatible with socialism than with capitalism. No social co-operation under the division of labour is possible when some people or unions of people are granted the r ight to prevent by violence and the threat of violence other people from working. When enforced by violence, a strike in vital branches of production or a general strike are tantamount to a revolutionary destruction of society.

  A government abdicates if it tolerates any non-governmental agency’s use of violence. If the government forsakes its monopoly of coercion and compulsion, anarchic conditions result. If it were true that a democratic system of government is unfit to protect unconditionally every individual’s right to work in defiance of the orders of a union, democracy would be doomed. Then dictatorship would be the only means to preserve the division of labour and to avoid anarchy. What generated dictatorship in Russia and Germany was precisely the fact that the mentality of these nations made suppression of union violence unfeasible under democratic conditions. The dictators abolished strikes and thus broke the spine of labour unionism. There is no question of strikes in the Soviet empire.

  It is illusory to believe that arbitration of labour disputes could bring the unions into the framework of the market economy and make their functioning compatible with the preservation of domestic peace. Judicial settlement of controversies is feasible if there is a set of rules available, according to which individual cases can be judged. But if such a code is valid and its provisions are applied to the determination of the height of wage rates, it is no longer the market which fixes them, but the code and those who legislate with regard to it. Then the government is supreme and no longer the consumers buying and selling on the market. If no such code exists, a standard according to which a controversy between employers and employees could be decided is lacking. It is vain to speak of “fair” wages in the absence of such a code. The notion of fairness is nonsensical if not related to an established standard. In practice, if the employers do not yield to the threats of the unions, arbitration is tantamount to the determination of wage rates by the government-appointed arbitrator. Peremptory authoritarian decision is substituted for the market price. The issue is always the same: the government or the market. There is no third solution.

  Metaphors are often very useful in elucidating complicated problems and in making them comprehensible to less intelligent minds. But they become misleading and result in nonsense if people forget that every comparison is imperfect. It is silly to take metaphorical idioms literally and to deduce from their interpretation features of the object one wished to make more easily understandable by their use. There is no harm in the economists’ description of the operation of the market as automatic and in their custom of speaking of the anonymous forces operating on the market. They could not anticipate that anybody would be so stupid as to take these metaphors literally.

  No “automatic” and “anonymous” forces actuate the “mechanism” of the market. The only factors directing the market and determining prices are purposive acts of men. There is no automatism; there are men consciously aiming at ends chosen and deliberately resorting to definite means for the attainment of these ends. There are no mysterious mechanical forces; there is only the will of every individual to satisfy his demand for various goods. There is no anonymity; there are you and I and Bill and Joe and all the rest. And each of us is engaged both in production and consumption. Each contributes his share to the determination of prices.

  The dilemma is not between automatic forces and planned action. It is between the democratic process of the market, in which every individual has his share, and the exclusive rule of a dictatorial body. Whatever people do in the market economy, is the execution of their own plans. In this sense every human action means planning. What those calling themselves planners advocate is not the substitution of planned action for letting things go. It is the substitution of the planner’s own plan for the plans of his fellow-men. The planner is a potential dictator who wants to deprive all other people of the power to plan and act according to their own plans. He aims at one thing only: the exclusive absolute pre-eminence of his own plan.

  It is no less erroneous to declare that a government that is not socialistic has no plan. Whatever a government does is the execution of a plan, i.e., of a design. One may disagree with such a plan. But one must not say that it is not a plan at all. Professor Wesley C. Mitchell maintained that the British liberal government “planned to have no plan.”56 However, the British government in the liberal age certainly had a definite plan. Its plan was private ownership of the means of production, free initiative and market economy. Great Britain was very prosperous indeed under this plan which according to Professor Mitchell is “no plan.”

  The planners pretend that their plans are scientific and that there cannot be disagreement with regard to them among well-intentioned and decent people. However, there is no such thing as a scientific ought. Science is competent to establish what is. It can never dictate what ought to be and what ends people should aim at. It is a fact that men disagree in their value judgments. It is insolent to arrogate to oneself the right to overrule the plans of other people and to force them to submit to the plan of the planner. Whose plan should be executed? The plan of the CIO or those of any other group? The plan of Trotsky or that of Stalin? The plan of Hitler or that of Strasser?

  When people were committed to the idea that in the field of religion only one plan must be adopted, bloody wars resulted. With the acknowledgment of the principle of religious freedom these wars ceased. The market economy safeguards peaceful economic co-operation because it does not use force upon the economic plans of the citizens. If one master plan is to be substituted for the plans of each citizen, endless fighting must emerge. Those who disagree with the dictator’s plan have no other means to carry on than to defeat the despot by force of arms.

  It is an illusion to believe that a system of planned socialism could be operated according to democratic methods of government. Democracy is inextricably linked with capitalism. It cannot exist where there is planning. Let us refer to the words of the most eminent of the contemporary advocates of socialism. Professor Harold Laski declared that the attainment of power by the British Labour Party in the normal parliamentary fashion must result in a radical transformation of parliamentary government. A socialist administration needs “guarantees” that its work of transformation would not be “disrupted” by repeal in event of its defeat at the polls. Therefore the suspension of the Constitution is “inevitable.”57 How pleased would Charles I and George III have been if they had known the books of Professor Laski!

  Sidney and Beatrice Webb (Lord and Lady Passfield) tell us that “in any corporate action a loyal unity of thought is so important that, if anything is to be achieved, public discussion must be suspended between the promulgation of the decision and the accomplishment of the task.” Whilst “the work is in progress” any expression of doubt, or even of fear that the plan will not be successful, is “an act of disloyalty, or even of treachery.”58 Now as the process of production never ceases and some work is always in progress and there is always something to be achieved, it follows that a socialist government must never concede any freedom of speech and the press. “A loyal unity of thought,” what a high-sounding circumlocution for the ideals of Philip II and the Inquisition! In this regard another eminent admirer of the Soviets, Mr. T. G. Crowther, speaks without any reserve. He plainly declares that inquisition is “beneficial to science when it protects a rising class,”59 i.e., when Mr. Crowther’s friends resort to it. Hundreds of similar dicta could be quoted.

  In the Victorian age, when John Stuart Mill wrote his essay On Liberty, such views as those held by Professor Laski, Mr. and Mrs. Webb and Mr. Crowther were called reactionary. Today they are called “progressive” and “liberal.” On the other hand people who oppose the suspension of parliamentary government and of the freedom of speech and the press and the establishment of inquisition are scorned as “reactionaries,” as “economic royalists” and as “Fascists.”

  Those interventionists who consider interventionism as a method of bringing about full socialism step by step are at least consistent. If the measures adopted fail to achieve the beneficial results expected and end in disaster, they ask for more and more government interference until the government has taken over the direction of all economic activities. But those interventionists who look at interventionism as a means of improving capitalism and thereby preserving it are utterly confused.

  In the eyes of these people all the undesired and undesirable effects of government interference with business are caused by capitalism. The very fact that a governmental measure has brought about a state of affairs which they dislike is for them a justification of further measures. They fail, for instance, to realize that the role monopolistic schemes play in our time is the effect of government interference such as tariffs and patents. They advocate government action for the prevention of monopoly. One could hardly imagine a more unrealistic idea. For the governments whom they ask to fight monopoly are the same governments who are devoted to the principle of monopoly. Thus, the American New Deal Government embarked upon a thorough-going monopolistic organization of every branch of American business, by the NRA, and aimed at organizing American farming as a vast monopolistic scheme, restricting farm output for the sake of substituting monopoly prices for the lower market prices. It was a party to various international commodity control agreements the undisguised aim of which was to establish international monopolies of various commodities. The same is true of all other governments. The Union of Soviet Socialist Republics was also a party to some of these intergovernmental monopolistic conventions.60 Its repugnance for collaboration with the capitalistic countries was not so great as to cause it to miss any opportunity for fostering monopoly.

  The programme of this self-contradictory interventionism is dictatorship, supposedly to make people free. But the liberty its supporters advocate is liberty to do the “right” things, i.e., the things they themselves want to be done. They are not only ignorant of the economic problem involved. They lack the faculty of logical thinking.

  The most absurd justification of interventionism is provided by those who look upon the conflict between capitalism and socialism as if it were a contest over the distribution of income. Why should not the propertied classes be more compliant? Why should they not accord to the poor workers a part of their ample revenues? Why should they oppose the government’s design to raise the share of the underprivileged by decreeing minimum wage rates and maximum prices and by cutting profits and interest rates down to a “fairer” level? Pliability in such matters, they say, would take the wind from the sails of the radical revolutionaries and preserve capitalism. The worst enemies of capitalism, they say, are those intransigent doctrinaires whose excessive advocacy of economic freedom, of laisser-faire and Manchesterism renders vain all attempts to come to a compromise with the claims of labour. These adamant reactionaries are alone responsible for the bitterness of contemporary party strife and the implacable hatred it generates. What is needed is the substitution of a constructive programme for the purely negative attitude of the economic royalists. And, of course, “constructive” is in the eyes of these people only interventionism.

  However, this mode of reasoning is entirely vicious. It takes for granted that the various measures of government interference with business will attain those beneficial results which their advocates expect from them. It blithely disregards all that economics says about their futility in attaining the ends sought, and their unavoidable and undesirable consequences. The question is not whether minimum wage rates are fair or unfair, but whether or not they bring about unemployment of a part of those eager to work. By calling these measures just, the interventionist does not refute the objections raised against their expediency by the economists. He merely displays ignorance of the question at issue.

  The conflict between capitalism and socialism is not a contest between two groups of claimants concerning the size of the portions to be allotted to each of them out of a definite supply of goods. It is a dispute concerning what system of social organization best serves human welfare. Those fighting socialism do not reject socialism because they envy the workers the benefits they (the workers) could allegedly derive from the socialist mode of production. They fight socialism precisely because they are convinced that it would harm the masses in reducing them to the status of poor serfs entirely at the mercy of irresponsible dictators.

  In this conflict of opinions everybody must make up his mind and take a definite stand. Everybody must side either with the advocates of economic freedom or with those of totalitarian socialism. One cannot evade this dilemma by adopting an allegedly middle-of-the-road position, namely interventionism. For interventionism is neither a middle way nor a compromise between capitalism and socialism. It is a third system. It is a system the absurdity and futility of which is agreed upon not only by all economists but even by the Marxians.

  There is no such thing as an “excessive” advocacy of economic freedom. On the one hand, production can be directed by the efforts of each individual to adjust his conduct so as to fill the most urgent wants of the consumers in the most appropriate way. This is the market economy. On the other hand, production can be directed by authoritarian decree. If these decrees concern only some isolated items of the economic structure, they fail to attain the ends sought, and their own advocates do not like their outcome. If they come up to all-round regimentation, they mean totalitarian socialism.

  Men must choose between the market economy and socialism. The state can preserve the market economy in protecting life, health and private property against violent or fraudulent aggression; or it can itself control the conduct of all production activities. Some agency must determine what should be produced. If it is not the consumers by means of demand and supply on the market, it must be the government by compulsion.

  3

  Socialism and Communism

  In the terminology of Marx and Engels the words communism and socialism are synonymous. They are alternately applied without any distinction between them. The same was true for the practice of all Marxian groups and sects until 1917. The political parties of Marxism which considered the Communist Manifesto as the unalterable gospel of their doctrine called themselves socialist parties. The most influential and most numerous of these parties, the German party, adopted the name Social Democratic Party. In Italy, in France and in all other countries in which Marxian parties already played a role in political life before 1917, the term socialist likewise superseded the term communist. No Marxian ever ventured, before 1917, to distinguish between communism and socialism.

  In 1875, in his Criticism of the Gotha Programme of the German Social Democratic Party, Marx distinguished between a lower (earlier) and a higher (later) phase of the future communist society. But he did not reserve the name of communism to the higher phase, and did not call the lower phase socialism as differentiated from communism.

  One of the fundamental dogmas of Marx is that socialism is bound to come “with the inexorability of a law of nature.” Capitalist production begets its own negation and establishes the socialist system of public ownership of the means of production. This process “executes itself through the operation of the inherent laws of capitalist production.”61 It is independent of the wills of people.62 It is impossible for men to accelerate it, to delay it or to hinder it. For “no social system ever disappears before all the productive forces are developed for the development of which it is broad enough, and new higher methods of production never appear before the material conditions of their existence have been hatched out in the womb of previous society.”63

  This doctrine is, of course, irreconcilable with Marx’s own political activities and with the teachings he advanced for the justification of these activities. Marx tried to organize a political party which by means of revolution and civil war should accomplish the transition from capitalism to socialism. The characteristic feature of their parties was, in the eyes of Marx and all Marxian doctrinaires, that they were revolutionary parties invariably committed to the idea of violent action. Their aim was to rise in rebellion, to establish the dictatorship of the proletarians and to exterminate mercilessly all bourgeois. The deeds of the Paris Communards in 1871 were considered as the perfect model of such a civil war. The Paris revolt, of course, had lamentably failed. But later uprisings were expected to succeed.64

  However, the tactics applied by the Marxian parties in various European countries were irreconcilably opposed to each of these two contradictory varieties of the teachings of Karl Marx. They did not place confidence in the inevitability of the coming of socialism. Neither did they trust in the success of a revolutionary upheaval. They adopted the methods of parliamentary action. They solicited votes in election campaigns and sent their delegates into the parliaments. They “degenerated” into democratic parties. In the parliaments they behaved like other parties of the opposition. In some countries they entered into temporary alliances with other parties, and occasionally socialist members sat in the cabinets. Later, after the end of the first World War, the socialist parties became paramount in many parliaments. In some countries they ruled exclusively, in others in close co-operation with “bourgeois” parties.

  It is true that these domesticated socialists before 1917 never abandoned lip service to the rigid principles of orthodox Marxism. They repeated again and again that the coming of socialism is unavoidable. They emphasized the inherent revolutionary character of their parties. Nothing could arouse their anger more than when somebody dared to dispute their adamant revolutionary spirit. However, in fact they were parliamentary parties like all other parties.

  From a correct Marxian point of view, as expressed in the later writings of Marx and Engels (but not yet in the Communist Manifesto), all measures designed to restrain, to regulate and to improve capitalism were simply “petty-bourgeois” nonsense stemming from an ignorance of the immanent laws of capitalist evolution. True socialists should not place any obstacles in the way of capitalist evolution. For only the full maturity of capitalism could bring about socialism. It is not only vain, but harmful to the interests of the proletarians to resort to such measures. Even labour-unionism is not an adequate means for the improvement of the conditions of the workers.65 Marx did not believe that interventionism could benefit the masses. He violently rejected the idea that such measures as minimum wage rates, price ceilings, restriction of interest rates, social security and so on are preliminary steps in bringing about socialism. He aimed at the radical abolition of the wages system which can be accomplished only by communism in its higher phase. He would have sarcastically ridiculed the idea of abolishing the “commodity character” of labour within the frame of a capitalist society by the enactment of a law.

  But the socialist parties as they operated in the European countries were virtually no less committed to interventionism than the Sozialpolitik of the Kaiser’s Germany and the American New Deal. It was against this policy that George Sorel and Syndicalism directed their attacks. Sorel, a timid intellectual of a bourgeois background, deprecated the “degeneration” of the socialist parties for which he blamed their penetration by bourgeois intellectuals. He wanted to see the spirit of ruthless aggressiveness, inherent in the masses, revived and freed from the guardianship of intellectual cowards. For Sorel nothing counted but riots. He advocated action directe, i.e., sabotage and the general strike, as initiatory steps towards the final great revolution.

  Sorel had success mostly among snobbish and idle intellectuals and no less snobbish and idle heirs of wealthy entrepreneurs. He did not perceptibly move the masses. For the Marxian parties in Western and Central Europe his passionate criticism was hardly more than a nuisance. His historical importance consisted mainly in the role his ideas played in the evolution of Russian Bolshevism and Italian Fascism.

  In order to understand the mentality of the Bolshevists we must again refer to the dogmas of Karl Marx. Marx was fully convinced that capitalism is a stage of economic history which is not limited to a few advanced countries only. Capitalism has the tendency to convert all parts of the world into capitalist countries. The bourgeoisie forces all nations to become capitalist nations. When the final hour of capitalism sounds, the whole world will be uniformly in the stage of mature capitalism, ripe for the transition to socialism. Socialism will emerge at the same time in all parts of the world.

  Marx erred on this point no less than in all his other statements. Today even the Marxians cannot and do not deny that there still prevail enormous differences in the development of capitalism in various countries. They realize that there are many countries which, from the point of view of the Marxian interpretation of history, must be described as precapitalistic. In these countries the bourgeoisie has not yet attained a ruling position and has not yet set the historical stage of capitalism which is the necessary prerequisite of the appearance of socialism. These countries therefore must first accomplish their “bourgeois revolution” and must go through all phases of capitalism before there can be any question of transforming them into socialist countries. The only policy which Marxians could adopt in such countries would be to support the bourgeois unconditionally, first in their endeavours to seize power and then in their capitalistic ventures. A Marxian party could for a very long time have no other task than to be subservient to bourgeois liberalism. This alone is the mission which historical materialism, if consistently applied, could assign to Russian Marxians. They would be forced to wait quietly until capitalism should have made their nation ripe for socialism.

  But the Russian Marxians did not want to wait. They resorted to a new modification of Marxism according to which it was possible for a nation to skip one of the stages of historical evolution. They shut their eyes to the fact that this new doctrine was not a modification of Marxism, but rather the denial of the last remnant which was left of it. It was an undisguised return to the pre-Marxian and anti-Marxian socialist teachings according to which men are free to adopt socialism at any time if they consider it as a system more beneficial to the commonweal than capitalism. It utterly exploded all the mysticism inwrought into dialectical materialism and in the alleged Marxian discovery of the inexorable laws of mankind’s economic evolution.

  Having emancipated themselves from Marxian determinism, the Russian Marxians were free to discuss the most appropriate tactics for the realization of socialism in their country. They were no longer bothered with economic problems. They had no longer to investigate whether or not the time had come. They had only one task to accomplish, the seizure of the reins of government.

  One group maintained that lasting success could be expected only if the support of a sufficient number of the people, though not necessarily of the majority, could be won. Another group did not favour such a time-consuming procedure. They suggested a bold stroke. A small group of fanatics should be organized as the vanguard of the revolution. Strict discipline and unconditional obedience to the chief should make these professional revolutionists fit for a sudden attack. They should supplant the Czarist government and then rule the country according to the traditional methods of the Czar’s police.

  The terms used to signify these two groups—Bolshevists (majority) for the latter and Mensheviks (minority) for the former—refer to a vote taken in 1903 at a meeting held for the discussion of these tactical issues. The only difference dividing the two groups from one another was this matter of tactical methods. They both agreed with regard to the ultimate end: socialism.

  Both sects tried to justify their respective points of view by quoting passages from Marx’s and Engels’s writings. This is, of course, the Marxian custom. And each sect was in a position to discover in these sacred books dicta confirming its own stand.

  Lenin, the Bolshevist chief, knew his countrymen much better than his adversaries and their leader, Plekhanov, did. He did not, like Plekhanov, make the mistake of applying to Russians the standards of the Western nations. He remembered how foreign women had twice simply usurped supreme power and quietly ruled for a life-time. He was aware of the fact that the terrorist methods of the Czar’s secret police were successful and he was confident that he could considerably improve on these methods. He was a ruthless dictator and he knew that the Russians lacked the courage to resist oppression. Like Cromwell, Robespierre and Napoleon, he was an ambitious usurper and fully trusted the absence of revolutionary spirit in the immense majority. The autocracy of the Romanovs was doomed because the unfortunate Nicholas II was a weakling. The socialist lawyer Kerensky failed because he was committed to the principle of parliamentary government. Lenin succeeded because he never aimed at anything else than his own dictatorship. And the Russians yearned for a dictator, for a successor of the Terrible Ivan.

  The rule of Nicholas II was not ended by a real revolutionary upheaval. It collapsed on the battlefields. Anarchy resulted which Kerensky could not master. A skirmish in the streets of Saint Petersburg removed Kerensky. A short time later Lenin had his eighteenth Brumaire. In spite of all the terror practised by the Bolshevists the Constituent Assembly, elected by universal franchise for men and women, had only about twenty per cent Bolshevist members. Lenin dispelled by force of arms the Constituent Assembly. The short-lived “liberal” interlude was liquidated. Russia passed from the hands of the inept Romanovs into those of a real autocrat.

  Lenin did not content himself with the conquest of Russia. He was fully convinced that he was destined to bring the bliss of socialism to all nations, not only to Russia. The official name which he chose for his government—Union of the Soviet Socialist Republics—does not contain any reference to Russia. It was designed as the nucleus of a world government. It was implied that all foreign comrades by rights owed allegiance to this government and that all foreign bourgeois who dared to resist were guilty of high treason and deserved capital punishment. Lenin did not doubt in the least that all Western countries were on the eve of the great final revolution. He daily expected its outbreak.

  There was in the opinion of Lenin only one group in Europe that might—although without any prospect of success—try to prevent the revolutionary upheaval: the depraved members of the intelligentsia who had usurped the leadership of the socialist parties. Lenin had long hated these men for their addiction to parliamentary procedure and their reluctance to endorse his dictatorial aspirations. He raged against them because he held them responsible for the fact that the socialist parties had supported the war effort of their countries. Already in his Swiss exile, which ended in 1917, Lenin began to split the European socialist parties. Now he set up a new, a Third International which he controlled in the same dictatorial manner in which he directed the Russian Bolshevists. For this new party Lenin chose the name Communist Party. The communists were to fight unto death the various European socialist parties, these “social traitors,” and they were to arrange the immediate liquidation of the bourgeoisie and seizure of power by the armed workers. Lenin did not differentiate between socialism and communism as social systems. The goal which he aimed at was not called communism as opposed to socialism. The official name of the Soviet government is Union of the Socialist (not of the Communist) Soviet Republics. In this regard he did not want to alter the traditional terminology which considered the terms as synonymous. He merely called his partisans, the only sincere and consistent supporters of the revolutionary principles of orthodox Marxism, communists and their tactical methods communism because he wanted to distinguish them from the “treacherous hirelings of the capitalist exploiters,” the wicked Social Democratic leaders like Kautsky and Albert Thomas. These traitors, he emphasized, were anxious to preserve capitalism. They were not true socialists. The only genuine Marxians were those who rejected the name of socialists, irremediably fallen into disrepute.

  Thus the distinction between communists and socialists came into being. Those Marxians who did not surrender to the dictator in Moscow called themselves social democrats or, in short, socialists. What characterized them was the belief that the most appropriate method for the realization of their plans to establish socialism, the final goal common to them as well as to the communists, was to win the support of the majority of their fellow-citizens. They abandoned the revolutionary slogans and tried to adopt democratic methods for the seizure of power. They did not bother about the problem whether or not a socialist regime is compatible with democracy. But for the attainment of socialism they were resolved to apply democratic procedures.

  The communists, on the other hand, were in the early years of the Third International firmly committed to the principle of revolution and civil war. They were loyal only to their Russian chief. They expelled from their ranks everybody who was suspected of feeling himself bound by any of his country’s laws. They plotted unceasingly and squandered blood in unsuccessful riots.

  Lenin could not understand why the communists failed everywhere outside Russia. He did not expect much from the American workers. In the United States, the communists agreed, the workers lacked the revolutionary spirit because they were spoiled by well-being and steeped in the vice of money-making. But Lenin did not doubt that the European masses were class-conscious and therefore fully committed to revolutionary ideas. The only reason why the revolution had not been realized was in his opinion the inadequacy and cowardice of the communist officials. Again and again he deposed his vicars and appointed new men. But he did not succeed any better.

  In the Anglo-Saxon and in the Latin-American countries the socialist voters place confidence in democratic methods. Here the number of people who seriously aim at a communist revolution is very small. Most of those who publicly proclaim their adherence to the principles of communism would feel extremely unhappy if the revolution were to arise and expose their lives and their property to danger. If the Russian armies were to march into their countries or if domestic communists were to seize power without engaging them in the fight, they would probably rejoice in the hope of being rewarded for their Marxian orthodoxy. But they themselves do not long for revolutionary laurels.

  It is a fact that in all these thirty years of passionate pro-Soviet agitation not a single country outside Russia went communist of its citizens’ own accord. Eastern Europe turned to communism only when the diplomatic arrangements of international power politics had converted it into a sphere of exclusive Russian influence and hegemony. It is unlikely that Western Germany, France, Italy and Spain will espouse communism if the United States and Great Britain do not adopt a policy of absolute diplomatic “désintéressement.” What gives strength to the communist movement in these and in some other countries is the belief that Russia is driven by an unflinching “dynamism” while the Anglo-Saxon powers are indifferent and not very much interested in their fate.

  Marx and the Marxians erred lamentably when they assumed that the masses long for a revolutionary overthrow of the “bourgeois” order of society. The militant communists are to be found only in the ranks of those who make a living from their communism or expect that a revolution would further their personal ambitions. The subversive activities of these professional plotters are dangerous precisely on account of the naivety of those who are merely flirting with the revolutionary idea. Those confused and misguided sympathizers who call themselves “liberals” and whom the communists call “useful innocents,” the fellow-travellers and even the majority of the officially registered party members, would be terribly frightened if they were to discover one day that their chiefs mean business when preaching sedition. But then it may be too late to avert disaster.

  For the time being, the ominous peril of the communist parties in the West lies in their stand on foreign affairs. The distinctive mark of all present-day communist parties is their devotion to the aggressive foreign policy of the Soviets. Whenever they must choose between Russia and their own country, they do not hesitate to prefer Russia. Their principle is: Right or wrong, my Russia. They strictly obey all orders issued from Moscow. When Russia was an ally of Hitler, the French communists sabotaged their own country’s war effort and the American communists passionately opposed President Roosevelt’s plans to aid England and France in their struggle against the Nazis. The communists all over the world branded all those who defended themselves against the German invaders as “imperialist warmongers.” But as soon as Hitler attacked Russia, the imperialist war of the capitalists changed over-night into a just war of defence. Whenever Stalin conquers one more country, the communists justify this aggression as an act of self-defence against “Fascists.”

  In their blind worship of everything that is Russian, the communists of Western Europe and the United States by far surpass the worst excesses ever committed by chauvinists. They wax rapturous about Russian movies, Rus sian music and the alleged discoveries of Russian science. They speak in ecstatic words about the economic achievements of the Soviets. They ascribe the victory of the United Nations to the deeds of the Russian armed forces. Russia, they contend, has saved the world from the Fascist menace. Russia is the only free country while all other nations are subject to the dictatorship of the capitalists. The Russians alone are happy and enjoy the bliss of living a full life; in the capitalist countries the immense majority are suffering from frustration and unfulfilled desires. Just as the pious Muslim yearns for a pilgrimage to the Prophet’s tomb at Mecca, so the communist intellectual deems a pilgrimage to the holy shrines of Moscow as the event of his life.

  However, the distinction in the use of the terms communists and socialists did not affect the meaning of the terms communism and socialism as applied to the final goal of the policies common to them both. It was only in 1928 that the programme of the Communist International, adopted by the sixth congress in Moscow,66 began to differentiate between communism and socialism (and not merely between communists and socialists).

  According to this new doctrine there is, in the economic evolution of mankind, between the historical stage of capitalism and that of communism, a third stage, namely that of socialism. Socialism is a social system based on public control of the means of production and full management of all processes of production and distribution by a planning central authority. In this regard it is equal to communism. But it differs from communism in so far as there is no equality of the portions allotted to each individual for his own consumption. There are still wages paid to the comrades and these wage rates are graduated according to economic expediency as far as the central authority deems it necessary for securing the greatest possible output of products. What Stalin calls socialism corresponds by and large to Marx’s concept of the “early phase” of communism. Stalin reserves the term communism exclusively for what Marx called the “higher phase” of communism. Socialism, in the sense in which Stalin has lately used the term, is moving towards communism, but is in itself not yet communism. Socialism will turn into communism as soon as the increase in wealth to be expected from the operation of the socialist methods of production has raised the lower standard of living of the Russian masses to the higher standard which the distinguished holders of important offices enjoy in present-day Russia.67

  The apologetical character of this new terminological practice is obvious. Stalin finds it necessary to explain to the vast majority of his subjects why their standard of living is extremely low, much lower than that of the masses in the capitalist countries and even lower than that of the Russian proletarians in the days of Czarist rule. He wants to justify the fact that salaries and wages are unequal, that a small group of Soviet officials enjoys all the luxuries modern technique can provide, that a second group, more numerous than the first one, but less numerous than the middle class in imperial Russia, lives in “bourgeois” style, while the masses, ragged and barefooted, subsist in congested slums and are poorly fed. He can no longer blame capitalism for this state of affairs. Thus he was compelled to resort to a new ideological makeshift.

  Stalin’s problem was the more burning as the Russian communists in the early days of their rule had passionately proclaimed income equality as a principle to be enforced from the first instant of the proletarians’ seizure of power. Moreover, in the capitalist countries the most powerful demagogic trick applied by the Russia-sponsored communist parties is to excite the envy of those with lower incomes against all those with higher incomes. The main argument advanced by the communists for the support of their thesis that Hitler’s National Socialism was not genuine socialism, but, on the contrary, the worst variety of capitalism, was that there was in Nazi Germany inequality in the standard of living.

  Stalin’s new distinction between socialism and communism is in open contradiction to the policy of Lenin, and no less to the tenets of the propaganda of the communist parties outside the Russian frontiers. But such contradictions do not matter in the realm of the Soviets. The word of the dictator is the ultimate decision, and nobody is so foolhardy as to venture opposition.

  It is important to realize that Stalin’s semantical innovation affects merely the terms communism and socialism. He did not alter the meaning of the terms socialist and communist. The Bolshevist party is just as before called communist. The Russophile parties beyond the borders of the Soviet Union call themselves communist parties and are violently fighting the socialist parties which, in their eyes, are simply social traitors. But the official name of the Union of Soviet Socialist Republics remains unchanged.

  4

  Russia’s Aggressiveness

  The German, Italian and Japanese nationalists justified their aggressive policies by their lack of Lebensraum. Their countries are comparatively over populated. They are poorly endowed by nature and depend on the import of foodstuffs and raw materials from abroad. They must export manufactures to pay for these badly needed imports. But the protectionist policies espoused by the countries producing a surplus of foodstuffs and raw materials close their frontiers to import of manufactures. The world is manifestly tending towards a state of full economic autarky of each nation. In such a world, what fate is in store for those nations who can neither feed nor clothe their citizens out of domestic resources?

  The Lebensraum doctrine of the self-styled “have-not” peoples emphasizes that there are in America and in Australia millions of acres of unused land much more fertile than the barren soil which the farmers of the have-not nations are tilling. Natural conditions for mining and manufacturing are likewise much more propitious than in the countries of the have-nots. But the German, Italian and Japanese peasants and workers are barred from access to these areas favoured by nature. The immigration laws of the comparatively underpopulated countries prevent their migration. These laws raise the marginal productivity of labour and thereby wage rates in the underpopulated countries and lower them in the overpopulated countries. The high standard of living in the United States and the British Dominions is paid for by a lowering of the standard of living in the congested countries of Europe and Asia.

  The true aggressors, say these German, Italian and Japanese nationalists, are those nations who by means of trade and migration barriers have arrogated to themselves the lion’s share of the natural riches of the earth. Has not the Pope68 himself declared that the root causes of the World Wars are “that cold and calculating egoism which tends to hoard the economic resources and materials destined for the use of all to such an extent that the nations less favoured by nature are not permitted access to them”?69 The war that Hitler, Mussolini and Hirohito kindled was from this point of view a just war, for its only aim was to give to the have-nots what, by virtue of natural and divine right, belongs to them.

  The Russians cannot venture to justify their aggressive policy by such arguments. Russia is a comparatively underpopulated country. Its soil is much better endowed by nature than that of any other nation. It offers the most advantageous conditions for the growing of all kinds of cereals, fruits, seeds and plants. Russia owns immense pastures and almost inexhaustible forests. It has the richest resources for the production of gold, silver, platinum, iron, copper, nickel, manganese and all other metals, and of oil. But for the despotism of the Czars and the lamentable inadequacy of the communist system, its population could long since have enjoyed the highest standard of living. It is certainly not lack of natural resources that pushes Russia towards conquest.

  Lenin’s aggressiveness was an outgrowth of his conviction that he was the leader of the final world revolution. He considered himself as the legitimate successor of the First International, destined to accomplish the task in which Marx and Engels had failed. The knell of capitalism had sounded, and no capitalist machinations could delay the expropriation of the expropriators any longer. What was needed was only the dictator of the new social order. Lenin was ready to take the burden upon his shoulders.

  Since the days of the Mongol invasions mankind has not had to face such an unflinching and thorough-going aspiration for unlimited world supremacy.In every country the Russian emissaries and the communist fifth columns were fanatically working for the “Anschluss” to Russia. But Lenin lacked the first four columns. Russia’s military forces were at that time contemptible. When they crossed the Russian borders, they were stopped by the Poles. They could not march further West. The great campaign for world conquest petered out.

  It was just idle talk to discuss the problems whether communism in one country only is possible or desirable. The communists had failed utterly outside the Russian frontiers. They were forced to stay at home.

  Stalin devoted all his energy to the organization of a standing army of a size the world had never seen before. But he was not more successful than Lenin and Trotsky had been. The Nazis easily defeated this army and occupied the most important part of Russia’s territory. Russia was saved by the British and, above all, by the American forces. American Lend-Lease enabled the Russians to follow on the heels of the Germans when the scarcity of equipment and the threatening American invasion forced them to withdraw from Russia. They could even occasionally defeat the rearguards of the retreating Nazis. They could conquer Berlin and Vienna when the American airplanes had smashed the German defences. When the Americans had crushed the Japanese, the Russians could quietly stab them in the back.

  Of course, the communists inside and outside of Russia and the fellow-travellers passionately contend that it was Russia that defeated the Nazis and liberated Europe. They pass over in silence the fact that the only reason why the Nazis could not capture Moscow, Leningrad and Stalingrad was their lack of munitions, airplanes and gasoline. It was the blockade that made it impossible for the Nazis to provide their armies with the equipment needed, and to construct in the occupied Russian territory a transport system that could ship this equipment to the far distant front line. The decisive battle of the war was the battle of the Atlantic. The great strategical events in the war against Germany were the conquest of Africa and Sicily and the victory in Normandy. Stalingrad was, when measured by the gigantic standards of this war, hardly more than a tactical success. In the struggle against the Italians and the Japanese, Russia’s share was nil.

  But the spoils of the victory go to Russia alone. While the other United Nations do not seek for territorial aggrandizement, the Russians are in full swing. They have annexed the three Baltic Republics, Bessarabia, Czechoslovakia’s province of Carpatho-Russia,70 a part of Finland, a great part of Poland and huge territories in the Far East. They claim the rest of Poland, Rumania, Hungary, Yugoslavia, Bulgaria, Korea and China as their exclusive sphere of influence. They are anxious to establish in these countries “friendly” governments, i.e. puppet governments. But for the opposition raised by the United States and Great Britain they would rule today in the whole of continental Europe, continental Asia and Northern Africa. Only the American and British garrisons in Germany bar the Russians’ way to the shores of the Atlantic.

  Today, no less than after the first World War, the real menace for the West does not lie in the military power of Russia. Great Britain could easily repel a Russian attack and it would be sheer lunacy for the Russians to undertake a war against the United States. Not the Russian armies, but the communist ideologies threaten the West. The Russians know it very well and place confidence not in their own army, but in their foreign partisans. They want to overthrow the democracies from within, not from without. Their main weapon is the pro-Russian machinations of their Fifth Columns. These are the crack divisions of Bolshevism.

  The communist writers and politicians inside and outside of Russia explain Russia’s aggressive policies as mere self-defence. It is, they say, not Russia that plans aggression but, on the contrary, the decaying capitalist democracies. Russia wants merely to defend its own independence. This is an old and well-tried method of justifying aggression. Louis XIV and Napoleon I, Wilhelm II and Hitler were the most peace-loving of all men. When they invaded foreign countries, they did so only in just self-defence. Russia was as much menaced by Esthonia or Latvia as Germany was by Luxemburg or Denmark.

  An outgrowth of this fable of self-defence is the legend of the cordon sanitaire. The political independence of the small neighbour countries of Russia, it is maintained, is merely a capitalist makeshift designed to prevent the European democracies from being infected with the germ of communism. Hence, it is concluded, these small nations have forfeited their right to independence. For Russia has the inalienable right to claim that its neighbours—and likewise its neighbours’ neighbours—should only be ruled by “friendly,” i.e., strictly communist, governments. What would happen to the world if all great powers were to make the same pretension?

  The truth is that it is not the governments of the democratic nations that aim at overthrowing the present Russian system. They do not foster pro-democratic fifth columns in Russia and they do not incite the Russian masses against their rulers. But the Russians are busy day and night fomenting unrest in every country.

  The very lame and hesitant intervention of the Allied Nations in the Russian Civil War was not a pro-capitalist and anti-communist venture. For the Allied Nations, involved in their struggle for life and death with the Germans, Lenin was at that time merely a tool of their deadly foes. Ludendorff had dispatched Lenin to Russia in order to overthrow the Kerensky regime and to bring about the defection of Russia. The Bolshevists fought by force of arms all those Russians who wanted to continue the alliance with France, Great Britain and the United States. From a military point of view it was impossible for the Western nations to stay neutral while their Russian allies were desperately defending themselves against the Bolshevists. For the Allied Nations the Eastern Front was at stake. The cause of the “White” generals was their own cause.

  As soon as the war against Germany came to an end in 1918, the Allies lost interest in Russian affairs. There was no longer any need for an Eastern Front. They did not care a whit about the internal problems of Russia. They longed for peace and were anxious to withdraw from the fighting. They were, of course, embarrassed because they did not know how to liquidate their venture with propriety. Their generals were ashamed of abandoning companions in arms who had fought to the best of their abilities in a common cause. To leave these men in the lurch was in their opinion nothing short of cowardice and desertion. Such considerations of military honour delayed for some time the withdrawal of the inconspicuous Allied detachments and the termination of deliveries to the Whites. When this was finally accomplished, the Allied statesmen felt relief. From then on they adopted a policy of strict neutrality with regard to Russian affairs.

  It was very unfortunate indeed that the Allied Nations had been willynilly entangled in the Russian Civil War. It would have been better if the military situation of 1917 and 1918 had not compelled them to interfere. But one must not overlook the fact that the abandonment of intervention in Russia was tantamount to the final failure of President Wilson’s policy. The United States had entered the war in order to make “the world safe for democracy.” The victory had crushed the Kaiser and substituted in Germany a republican government for the comparatively mild and limited imperial autocracy. On the other hand, it had resulted in Russia in establishing a dictatorship compared with which the despotism of the Czars could be called liberal. But the Allies were not eager to make Russia safe for democracy as they had tried to do with Germany. After all, the Kaiser’s Germany had parliaments, ministers responsible to the parliaments, trial by jury, freedom of thought, of religion and of the press not much more limited than in the West, and many other democratic institutions. But Soviet Russia was an unlimited despotism.

  The Americans, the French and the British failed to see things from this angle. But the anti-democratic forces in Germany, Italy, Poland, Hungary and the Balkans thought differently. As the nationalists of these countries interpreted it, the neutrality of the Allied Powers with regard to Russia was evidence of the fact that their concern for democracy had been a mere blind. The Allies, they argued, had fought Germany because they envied Germany’s economic prosperity and they spared the new Russian autocracy because they were not afraid of Russian economic power. Democracy, these nationalists concluded, was nothing else than a convenient catchword to delude gullible people. And they became frightened that the emotional appeal of this slogan would one day be used as a disguise for insidious assaults against their own independence.

  Since the abandonment of the intervention Russia had certainly no longer any reason to fear the great Western powers. Neither were the Soviets afraid of a Nazi aggression. The assertions to the contrary, very popular in Western Europe and in America, resulted from complete ignorance of German affairs. But the Russians knew Germany and the Nazis. They had read Mein Kampf. They learned from this book not only that Hitler coveted the Ukraine, but also that Hitler’s fundamental strategical idea was to embark upon the conquest of Russia only after having definitely and forever annihilated France. The Russians were fully convinced that Hitler’s expectation, as expressed in Mein Kampf, that Great Britain and the United States would keep out of this war and would quietly let France be destroyed, was vain. They were certain that such a new world war, in which they themselves planned to stay neutral, would result in a new German defeat. And this defeat, they argued, would make Germany—if not the whole of Europe— safe for Bolshevism. Guided by this opinion, Stalin already in the time of the Weimar Republic aided the then secret German rearmament. The German communists helped the Nazis as much as they could in their endeavours to undermine the Weimar regime. Finally Stalin entered in August 1939 into an open alliance with Hitler, in order to give him a free hand against the West.

  What Stalin—like all other people—did not anticipate was the overwhelming success of the German armies in 1940. Hitler attacked Russia in 1941 because he was fully convinced that not only France but also Great Britain was done for, and that the United States, menaced in the rear by Japan, would not be strong enough to interfere successfully with European affairs.

  The disintegration of the Hapsburg Empire in 1918 and the Nazi defeat in 1945 have opened the gates of Europe to Russia. Russia is today the only military power on the European continent. But why are the Russians so intent upon conquering and annexing? They certainly do not need the resources of these countries. Neither is Stalin driven by the idea that such conquests could increase his popularity with the Russian masses. His subjects are indifferent to military glory.

  It is not the masses whom Stalin wants to placate by his aggressive policy, but the intellectuals. For their Marxian orthodoxy is at stake, the very foundation of the Soviet might.

  These Russian intellectuals were narrow-minded enough to absorb modifications of the Marxian creed which were in fact an abandonment of the essential teachings of dialectical materialism, provided that these modifications flattered their Russian chauvinism. They swallowed the doctrine that their holy Russia could skip one of the inextricable stages of economic evolution as described by Marx. They prided themselves on being the vanguard of the proletariat and the world revolution who, by realizing socialism first in one country only, set up a glorious example for all other nations. But it is impossible to explain to them why the other nations do not finally catch up with Russia. In the writings of Marx and Engels, which one cannot keep out of their hands, they discover that the fathers of Marxism considered Great Britain and France and even Germany as the countries most advanced in civilization and in the evolution of capitalism. These students of the Marxian universities may be too dull to comprehend the philosophical and economic doctrines of the Marxian gospel. But they are not too dull to see that Marx considered those Western countries as much more advanced than Russia.

  Then some of these students of economic policies and statistics begin to suspect that the standard of living of the masses is much higher in the capitalist countries than in their own country. How can this be? Why are conditions much more propitious in the United States which—although foremost in capitalist production—is most backward in awakening class-consciousness in the proletarians?

  The inference from these facts seems inescapable. If the most advanced countries do not adopt communism and fare rather well under capitalism, if communism is limited to a country which Marx considered as backward and does not bring about riches for all, is not perhaps the correct interpretation that communism is a feature of backward countries and results in general poverty? Must not a Russian patriot be ashamed of the fact that his country is committed to this system?

  Such thoughts are very dangerous in a despotic country. Whoever dared to express them would be mercilessly liquidated by the G.P.U. But, even unspoken, they are on the tip of every intelligent man’s tongue. They trouble the sleep of the supreme officials and perhaps even that of the great dictator. He certainly has the power to crush every opponent. But considerations of expediency make it inadvisable to eradicate all somewhat judicious people and to run the country only with stupid blockheads.

  This is the real crisis of Russian Marxism. Every day that passes without bringing the world revolution aggravates it. The Soviets must conquer the world or else they are menaced in their own country by a defection of the intelligentsia. It is concern about the ideological state of Russia’s shrewdest minds that pushes Stalin’s Russia towards unflinching aggression.

  5

  Trotsky’s Heresy

  The dictatorial doctrine as taught by the Russian Bolshevists, the Italian Fascists and the German Nazis tacitly implies that there cannot arise any disagreement with regard to the question who shall be the dictator. The mystical forces directing the course of historical events designate the providential leader. All righteous people are bound to submit to the unfathomable decrees of history and to bend their knees before the throne of the man of destiny. Those who decline to do so are heretics, abject scoundrels who must be “liquidated.”

  In reality the dictatorial power is seized by that candidate who succeeds in exterminating in time all his rivals and their helpers. The dictator paves his way to supreme power by slaughtering all his competitors. He preserves his eminent position by butchering all those who could possibly dispute it. The history of all oriental despotisms bears witness to this, as well as the experience of contemporary dictatorship.

  When Lenin died in 1924, Stalin supplanted his most dangerous rival, Trotsky. Trotsky escaped, spent years abroad in various countries of Europe, Asia and America and was finally assassinated in Mexico City. Stalin remained the absolute ruler of Russia.

  Trotsky was an intellectual of the orthodox Marxian type. As such he tried to represent his personal feud with Stalin as a conflict of principles. He tried to construct a Trotsky doctrine as distinguished from the Stalin doctrine. He branded Stalin’s policies as an apostasy from the sacred legacy of Marx and Lenin. Stalin retorted in the same way. In fact, however, the conflict was a rivalry of two men, not a conflict of antagonistic ideas and principles. There was some minor dissent with regard to tactical methods. But in all essential matters Stalin and Trotsky were in agreement.

  Trotsky had lived, before 1917, many years in foreign countries and was to some degree familiar with the main languages of the Western peoples. He posed as an expert in international affairs. Actually he did not know anything about Western civilization, political ideas and economic conditions. As a wandering exile he had moved almost exclusively in the circles of his fellow-exiles. The only foreigners whom he had met occasionally in coffee-houses and club-rooms of Western and Central Europe were radical doctrinaires, by their Marxian prepossessions precluded from reality. His main reading was Marxian books and periodicals. He scorned all other writings as “bourgeois” literature. He was absolutely unfitted to see events from any other angle than that of Marxism. Like Marx he was ready to interpret every great strike and every small riot as the sign of the outbreak of the final great revolution.

  Stalin is a poorly educated Georgian. He has not the slightest knowledge of any Western language. He does not know Europe or America. Even his achievements as a Marxian author are questionable. But it was precisely the fact that, although an adamant supporter of communism, he was not indoctrinated with Marxian dogmas that made him superior to Trotsky. Stalin was not deluded by the spurious tenets of dialectical materialism. When faced with a problem, he did not search for an interpretation in the writings of Marx and Engels. He trusted his common sense. He was judicious enough to discern the fact that the policy of world revolution as inaugurated by Lenin and Trotsky in 1917 had failed completely outside the borders of Russia.

  In Germany the communists, led by Karl Liebknecht and Rosa Luxemburg, were crushed by detachments of the regular army and by nationalist volunteers in a bloody battle fought in January 1919 in the streets of Berlin. The communist seizure of power in Munich in spring 1919 and the Hölz riot71 in March 1921 ended likewise in disaster. In Hungary, in 1919, the communists were defeated by Horthy and Gömbös and the Rumanian army. In Austria various communist plots failed in 1918 and 1919; a violent upheaval in July 1927 was easily quelled by the Vienna police. In Italy, in 1920, the occupation of the factories was a complete miscarriage. In France and in Switzerland the communist propaganda seemed to be very powerful in the first years following the Armistice of 1918; but it evaporated very soon. In Great Britain, in 1926, the general strike called by the labour unions resulted in lamentable failure.

  Trotsky was so blinded by his orthodoxy that he refused to admit that the Bolshevist methods had failed. But Stalin realized it very well. He did not abandon the idea of instigating revolutionary outbreaks in all foreign countries and of conquering the whole world for the Soviets. But he was fully aware of the fact that it was necessary to postpone the aggression for a few years and to resort to new methods for its execution. Trotsky was wrong in accusing Stalin of strangling the communist movement outside of Russia. What Stalin really did was to apply other means for the attainment of ends which are common to him and all other Marxians.

  As an exegetic of Marxian dogmas Stalin was certainly inferior to Trotsky. But he surpassed his rival by far as a politician. Bolshevism owes its successes in world policies to Stalin, not to Trotsky.

  In the field of domestic policies, Trotsky resorted to the well-tried traditional tricks which Marxians had always applied in criticizing socialist measures adopted by other parties. Whatever Stalin did was not true socialism and communism, but, on the contrary, the very opposite of it, a monstrous perversion of the lofty principles of Marx and Lenin. All the disastrous features of public control of production and distribution as they appeared in Russia were, in Trotsky’s interpretation, brought about by Stalin’s policies. They were not unavoidable consequences of communist methods. They were attendant phenomena of Stalinism, not of communism. It was exclusively Stalin’s fault that an absolutist irresponsible bureaucracy was supreme, that a class of privileged oligarchs enjoyed luxuries while the masses lived on the verge of starvation, that a terrorist regime executed the old guard of revolutionaries and condemned millions to slave labour in concentration camps, that the secret police was omnipotent, that the labour unions were powerless, that the masses were deprived of all rights and liberties. Stalin was not a champion of the egalitarian classless society. He was the pioneer of a return to the worst methods of class rule and exploitation. A new ruling class of about 10 per cent of the population ruthlessly oppressed and exploited the immense majority of toiling proletarians.

  Trotsky was at a loss to explain how all this could be achieved by only one man and his few sycophants. Where were the “material productive forces,” much talked about in Marxian historical materialism, which—“independent of the wills of individuals”—determine the course of human events “with the inexorability of a law of nature”? How could it happen that one man was in a position to alter the “juridical and political superstructure” which is uniquely and inalterably fixed by the economic structure of society? Even Trotsky agreed that there was no longer any private ownership of the means of production in Russia. In Stalin’s empire, production and distribution are entirely controlled by “society.” It is a fundamental dogma of Marxism that the superstructure of such a system must necessarily be the bliss of the earthly paradise. There is in Marxian doctrines no room for an interpretation blaming individuals for a degenerative process which could convert the blessing of public control of business into evil. A consistent Marxian—if consistency were compatible with Marxism—would have to admit that Stalin’s political system was the necessary superstructure of communism.

  All essential items in Trotsky’s programme were in perfect agreement with the policies of Stalin. Trotsky advocated the industrialization of Russia. It was this that Stalin’s Five-Year Plans aimed at. Trotsky advocated the collectivization of agriculture. Stalin established the Kolkhoz and liquidated the Kulaks. Trotsky favoured the organization of a big army. Stalin organized such an army. Neither was Trotsky when still in power a friend of democracy. He was, on the contrary, a fanatical supporter of dictatorial oppression of all “saboteurs.” It is true, he did not anticipate that the dictator could consider him, Trotsky, author of Marxian tracts and veteran of the glorious extermination of the Romanovs, as the most wicked saboteur. Like all other advocates of dictatorship, he assumed that he himself or one of his intimate friends would be the dictator.

  Trotsky was a critic of bureaucratism. But he did not suggest any other method for the conduct of affairs in a socialist system. There is no other alternative to profit-seeking private business than bureaucratic management.72

  The truth is that Trotsky found only one fault with Stalin: that he, Stalin, was the dictator and not himself, Trotsky. In their feud they both were right. Stalin was right in maintaining that his regime was the embodiment of socialist principles. Trotsky was right in asserting that Stalin’s regime had made Russia a hell.

  Trotskyism did not entirely disappear with Trotsky’s death. Boulangerism in France, too, survived for some time the end of General Boulanger. There are still Carlists left in Spain although the line of Don Carlos died out. Such posthumous movements are, of course, doomed.

  But in all countries there are people who, although themselves fanatically committed to the idea of all-round planning, i.e. public ownership of the means of production, become frightened when they are confronted with the real face of communism. These people are disappointed. They dream of a Garden of Eden. For them communism, or socialism, means an easy life in riches and the full enjoyment of all liberties and pleasures. They fail to realize the contradictions inherent in their image of the communist society. They have uncritically swallowed all the lunatic fantasies of Charles Fourier and all the absurdities of Veblen. They firmly believe in Engels’s assertion that socialism will be a realm of unlimited freedom. They indict capitalism for everything they dislike, and are fully convinced that socialism will deliver them from all evil. They ascribe their own failures and frustrations to the unfairness of this “mad” competitive system and expect that socialism will assign them that eminent position and high income which by right are due to them. They are Cinderellas yearning for the prince-saviour who will recognize their merits and virtues. The loathing of capitalism and the worship of communism are consolations for them. They help them to disguise to themselves their own inferiority, and to blame the “system” for their own shortcomings.

  In advocating dictatorship such people always advocate the dictatorship of their own clique. In asking for planning, what they have in mind is always their own plan, not that of others. They will never admit that a socialist or communist regime is true and genuine socialism or communism, if it does not assign to themselves the most eminent position and the highest income. For them the essential feature of true and genuine communism is that all affairs are precisely conducted according to their own will, and that all those who disagree are beaten into submission.

  It is a fact that the majority of our contemporaries are imbued with socialist and communist ideas. However, this does not mean that they are unanimous in their proposals for socialization of the means of production and public control of production and distribution. On the contrary. Each socialist coterie is fanatically opposed to the plans of all other socialist groups. The various socialist sects fight one another most bitterly.

  If the case of Trotsky and the analogous case of Gregor Strasser in Nazi Germany were isolated cases, there would be no need to deal with them. But they are not casual incidents. They are typical. Study of them reveals the psychological causes both of the popularity of socialism and of its unfeasibility.

  6

  The Liberation of the Demons

  The history of mankind is the history of ideas. For it is ideas, theories and doctrines that guide human action, determine the ultimate ends men aim at, and the choice of the means employed for the attainment of these ends. The sensational events which stir the emotions and catch the interest of superficial observers are merely the consummation of ideological changes. There are no such things as abrupt sweeping transformations of human affairs. What is called, in rather misleading terms, a “turning point in history” is the coming on the scene of forces which were already for a long time at work behind the scene. New ideologies, which had already long since superseded the old ones, throw off their last veil and even the dullest people become aware of the changes which they did not notice before.

  In this sense Lenin’s seizure of power in October 1917 was certainly a turning point. But its meaning was very different from that which the communists attribute to it.

  The Soviet victory played only a minor role in the evolution towards socialism. The pro-socialist policies of the industrial countries of Central and Western Europe were of much greater consequence in this regard. Bismarck’s social security scheme was a more momentous pioneering on the way towards socialism than was the expropriation of the backward Russian manufactures. The Prussian National Railways had provided the only instance of a government-operated business which, for some time at least, had avoided manifest financial failure. The British had already before 1914 adopted essential parts of the German social security system. In all industrial countries, the governments were committed to interventionist policies which were bound to result ultimately in socialism. During the war most of them embarked upon what was called war socialism. The German Hindenburg Programme which, of course, could not be executed completely on account of Germany’s defeat, was no less radical but much better designed than the much talked-about Russian Five-Year Plans.

  For the socialists in the predominantly industrial countries of the West, the Russian methods could not be of any use. For these countries, production of manufactures for export was indispensable. They could not adopt the Russian system of economic autarky. Russia had never exported manufactures in quantities worth mentioning. Under the Soviet system it withdrew almost entirely from the world market of cereals and raw materials. Even fanatical socialists could not help admitting that the West could not learn anything from Russia. It is obvious that the technological achievements in which the Bolshevist gloried were merely clumsy imitations of things accomplished in the West. Lenin defined communism as: “the Soviet power plus electrification.” Now, electrification was certainly not of Russian origin, and the Western nations surpass Russia in the field of electrification no less than in every other branch of industry.

  The real significance of the Lenin revolution is to be seen in the fact that it was the bursting forth of the principle of unrestricted violence and oppression. It was the negation of all the political ideals that had for three thousand years guided the evolution of Western civilization.

  State and government are the social apparatus of violent coercion and repression. Such an apparatus, the police power, is indispensable in order to prevent anti-social individuals and bands from destroying social co-operation. Violent prevention and suppression of anti-social activities benefit the whole of society and each of its members. But violence and oppression are none the less evils and corrupt those in charge of their application. It is necessary to restrict the power of those in office lest they become absolute despots. Society cannot exist without an apparatus of violent coercion. But neither can it exist if the office holders are irresponsible tyrants free to inflict harm upon those they dislike.

  It is the social function of the laws to curb the arbitrariness of the police. The rule of law restricts the arbitrariness of the Officers as much as possible. It strictly limits their discretion, and thus assigns to the citizens a sphere in which they are free to act without being frustrated by government interference.

  Freedom and liberty always mean freedom from police interference. In nature there are no such things as liberty and freedom. There is only the adamant rigidity of the laws of nature to which man must unconditionally submit if he wants to attain any ends at all. Neither was there liberty in the imaginary paradisaical conditions which, according to the fantastic prattle of many writers, preceded the establishment of societal bonds. Where there is no government, everybody is at the mercy of his stronger neighbour. Liberty can be realized only within an established state ready to prevent a gangster from killing and robbing his weaker fellows. But it is the rule of law alone which hinders the rulers from turning themselves into the worst gangsters.

  The laws establish norms of legitimate action. They fix the procedures required for the repeal or alteration of existing laws and for the enactment of new laws. They likewise fix the procedures required for the application of the laws in definite cases, the due process of law. They establish courts and tribunals. Thus they are intent upon avoiding a situation in which the individuals are at the mercy of the rulers.

  Mortal men are liable to error, and legislators and judges are mortal men. It may happen again and again that the valid laws or their interpretation by the courts prevent the executive organs from resorting to some measures which could be beneficial. No great harm, however, can result. If the legislators recognize the deficiency of the valid laws, they can alter them. It is certainly a bad thing that a criminal may sometimes evade punishment because there is a loophole left in the law, or because the prosecutor has neglected some formalities. But it is the minor evil when compared with the consequences of unlimited discretionary power on the part of the “benevolent” despot.

  It is precisely this point which anti-social individuals fail to see. Such people condemn the formalism of the due process of law. Why should the laws hinder the government from resorting to beneficial measures? Is it not fetishism to make supreme the laws, and not expediency? They advocate the substitution of the welfare state (Wohlfahrtsstaat) for the state governed by the rule of law (Rechtsstaat). In this welfare state, paternal government should be free to accomplish all things it considers beneficial to the commonweal. No “scraps of paper” should restrain an enlightened ruler in his endeavours to promote the general welfare. All opponents must be crushed mercilessly lest they frustrate the beneficial action of the government. No empty formalities must protect them any longer against their well-deserved punishment.

  It is customary to call the point of view of the advocates of the welfare state the “social” point of view as distinguished from the “individualistic” and “selfish” point of view of the champions of the rule of law. In fact, however, the supporters of the welfare state are utterly anti-social and intolerant zealots. For their ideology tacitly implies that the government will exactly execute what they themselves deem right and beneficial. They entirely disregard the possibility that there could arise disagreement with regard to the question of what is right and expedient and what is not. They advocate enlightened despotism, but they are convinced that the enlightened despot will in every detail comply with their own opinion concerning the measures to be adopted. They favour planning, but what they have in mind is exclusively their own plan, not those of other people. They want to exterminate all opponents, that is, all those who disagree with them. They are utterly intolerant and are not prepared to allow any discussion. Every advocate of the welfare state and of planning is a potential dictator. What he plans is to deprive all other men of all their rights, and to establish his own and his friends’ unrestricted omnipotence. He refuses to convince is fellow-citizens. He prefers to “liquidate” them. He scorns the “bourgeois” society that worships law and legal procedure. He himself worships violence and bloodshed.

  The irreconcilable conflict of these two doctrines, rule of law versus welfare state, was at issue in all the struggles which men fought for liberty. It was a long and hard evolution. Again and again the champions of absolutism triumphed. But finally the rule of law predominated in the realm of Western civilization. The rule of law, or limited government, as safeguarded by constitutions and bills of rights, is the characteristic mark of this civilization. It was the rule of law that brought about the marvelous achievements of modern capitalism and of its—as consistent Marxians should say—“superstructure,” democracy. It secured for a steadily increasing population unprecedented well-being. The masses in the capitalist countries enjoy today a standard of living far above that of the well-to-do of earlier ages.

  All these accomplishments have not restrained the advocates of despotism and planning. However, it would have been preposterous for the champions of totalitarianism to disclose the inextricable dictatorial consequences of their endeavours openly. In the nineteenth century the ideas of liberty and the rule of law had won such a prestige that it seemed crazy to attack them frankly. Public opinion was firmly convinced that despotism was done for and could never be restored. Was not even the Czar of barbarian Russia forced to abolish serfdom, to establish trial by jury, to grant a limited freedom to the press and to respect the laws?

  Thus the socialists resorted to a trick. They continued to discuss the coming dictatorship of the proletariat, i.e., the dictatorship of each socialist author’s own ideas, in their esoteric circles. But to the broad public they spoke in a different way. Socialism, they asserted, will bring true and full liberty and democracy. It will remove all kinds of compulsion and coercion. The state will “wither away.” In the socialist commonwealth of the future there will be neither judges and policemen nor prisons and gallows.

  But the Bolshevists took off the mask. They were fully convinced that the day of their final and unshakable victory had dawned. Further dissimulation was neither possible nor required. The gospel of bloodshed could be preached openly. It found an enthusiastic response among all the degenerate literati and parlour intellectuals who for many years already had raved about the writings of Sorel and Nietzsche. The fruits of the “treason of the intellectuals”73 mellowed to maturity. The youths who had been fed on the ideas of Carlyle and Ruskin were ready to seize the reins.

  Lenin was not the first usurper. Many tyrants had preceded him. But his predecessors were in conflict with the ideas held by their most eminent contemporaries. They were opposed by public opinion because their principles of government were at variance with the accepted principles of right and legality. They were scorned and detested as usurpers. But Lenin’s usurpation was seen in a different light. He was the brutal superman for whose coming the pseudo-philosophers had yearned. He was the counterfeit saviour whom history had elected to bring salvation through bloodshed. Was he not the most orthodox adept of Marxian “scientific” socialism? Was he not the man destined to realize the socialist plans for whose execution the weak statesmen of the decaying democracies were too timid? All well-intentioned people asked for socialism; science, through the mouths of the infallible professors, recommended it; the churches preached Christian socialism; the workers longed for the abolition of the wage system. Here was the man to fulfil all these wishes. He was judicious enough to know that you cannot make an omelet without breaking eggs.

  Half a century ago all civilized people had censured Bismarck when he declared that history’s great problems must be solved by blood and iron. Now the majority of quasi-civilized men bowed to the dictator who was prepared to shed much more blood than Bismarck ever did.

  This was the true meaning of the Lenin revolution. All the traditional ideas of right and legality were overthrown. The rule of unrestrained violence and usurpation was substituted for the rule of law. The “narrow horizon of bourgeois legality,” as Marx had dubbed it, was abandoned. Henceforth no laws could any longer limit the power of the elect. They were free to kill ad libitum. Man’s innate impulses towards violent extermination of all whom he dislikes, repressed by a long and wearisome evolution, burst forth. The demons were unfettered. A new age, the age of the usurpers, dawned. The gangsters were called to action, and they listened to the Voice.

  Of course, Lenin did not mean this. He did not want to concede to other people the prerogatives which he claimed for himself. He did not want to assign to other men the privilege of liquidating their adversaries. Him alone had history elected and entrusted with the dictatorial power. He was the only “legitimate” dictator because—an inner voice had told him so. Lenin was not bright enough to anticipate that other people, imbued with other creeds, could be bold enough to pretend that they also were called by an inner voice. Yet, within a few years too such men, Mussolini and Hitler, became quite conspicuous.

  It is important to realize that Fascism and Nazism were socialist dictatorships. The communists, both the registered members of the communist parties and the fellow-travellers, stigmatize Fascism and Nazism as the highest and last and most depraved stage of capitalism. This is in perfect agreement with their habit of calling every party which does not unconditionally surrender to the dictates of Moscow—even the German Social Democrats, the classical party of Marxism—hirelings of capitalism.

  It is of much greater consequence that the communists have succeeded in changing the semantic connotation of the term Fascism. Fascism, as will be shown later, was a variety of Italian socialism. It was adjusted to the particular conditions of the masses in overpopulated Italy. It was not a product of Mussolini’s mind and will survive the fall of Mussolini. The foreign policies of Fascism and Nazism, from their early beginnings, were rather opposed to one another. The fact that the Nazis and the Fascists closely co-operated after the Ethiopian war, and were allies in the second World War, did not eradicate the differences between these two tenets any more than did the alliance between Russia and the United States eradicate the differences between Sovietism and the American economic system. Fascism and Nazism were both committed to the Soviet principle of dictatorship and violent oppression of dissenters. If one wants to assign Fascism and Nazism to the same class of political systems, one must call this class dictatorial regime and one must not neglect to assign the Soviets to the same class.

  In recent years the communists’ semantic innovations have gone even further. They call everybody whom they dislike, every advocate of the free enterprise system, a Fascist. Bolshevism, they say, is the only really democratic system. All non-communist countries and parties are essentially undemocratic and Fascist.

  It is true that sometimes also non-socialists—the last vestiges of the old aristocracy—toyed with the idea of an aristocratic revolution modelled according to the pattern of Soviet dictatorship. Lenin had opened their eyes. What dupes, they moaned, have we been! We have let ourselves be deluded by the spurious catchwords of the liberal bourgeoisie. We believed that it was not permissible to deviate from the rule of law and to crush mercilessly those challenging our rights. How silly were these Romanovs in granting to their deadly foes the benefits of a fair legal trial! If somebody arouses the suspicion of Lenin, he is done for. Lenin does not hesitate to exterminate, without any trial, not only every suspect, but all his kin and friends too. But the Czars were superstitiously afraid of infringing the rules established by those scraps of paper called laws. When Alexander Ulyanov conspired against the Czar’s life, he alone was executed; his brother Vladimir was spared. Thus Alexander III himself preserved the life of Ulyanov-Lenin, the man who ruthlessly exterminated his son, his daughter-in-law and their children and with them all the other members of the family he could catch. Was this not the most stupid and suicidal policy?

  However, no action could result from the day dreams of these old Tories. They were a small group of powerless grumblers. They were not backed by any ideological forces and they had no followers.

  The idea of such an aristocratic revolution motivated the German Stahlhelm and the French Cagoulards.74 The Stahlhelm was simply dispelled by order of Hitler. The French Government could easily imprison the Cagoulards before they had any opportunity to do harm.

  The nearest approach to an aristocratic dictatorship is Franco’s regime. But Franco was merely a puppet of Mussolini and Hitler, who wanted to secure Spanish aid for the impending war against France or at least Spanish “friendly” neutrality. With his protectors gone, he will either have to adopt Western methods of government or face removal.

  Dictatorship and violent oppression of all dissenters are today exclusively socialist institutions. This becomes clear as we take a closer look at Fascism and Nazism.

  7

  Fascism

  When the war broke out in 1914, the Italian socialist party was divided as to the policy to be adopted.

  One group clung to the rigid principles of Marxism. This war, they maintained, is a war of the capitalists. It is not seemly for the proletarians to side with any of the belligerent parties. The proletarians must wait for the great revolution, the civil war of the united socialists against the united exploiters. They must stand for Italian neutrality.

  The second group was deeply affected by the traditional hatred of Austria. In their opinion the first task of the Italians was to free their unredeemed brethren. Only then would the day of the socialist revolution appear.

  In this conflict Benito Mussolini, the outstanding man in Italian socialism, chose at first the orthodox Marxian position. Nobody could surpass Mussolini in Marxian zeal. He was the intransigent champion of the pure creed, the unyielding defender of the rights of the exploited proletarians, the eloquent prophet of the socialist bliss to come. He was an adamant adversary of patriotism, nationalism, imperialism, monarchical rule and all religious creeds. When Italy in 1911 opened the great series of wars by an insidious assault upon Turkey, Mussolini organized violent demonstrations against the departure of troops for Libya. Now, in 1914, he branded the war against Germany and Austria as an imperialist war. He was then still under the dominating influence of Angelica Balabanoff, the daughter of a wealthy Russian landowner. Miss Balabanoff had initiated him into the subtleties of Marxism. In her eyes the defeat of the Romanovs counted more than the defeat of the Habsburgs. She had no sympathy for the ideals of the Risorgimento.

  But the Italian intellectuals were first of all nationalists. As in all other European countries, most of the Marxians longed for war and conquest. Mussolini was not prepared to lose his popularity. The thing he hated most was not to be on the side of the victorious faction. He changed his mind and became the most fanatical advocate of Italy’s attack on Austria. With French financial aid he founded a newspaper to fight for the cause of the war.

  The anti-Fascists blame Mussolini for this defection from the teachings of rigid Marxism. He was bribed, they say, by the French. Now, even these people should know that the publication of a newspaper requires funds. They themselves do not speak of bribery if a wealthy American provides a man with the money needed for the publication of a fellow-traveller newspaper, or if funds mysteriously flow into the communist publishing firms. It is a fact that Mussolini entered the scene of world politics as an ally of the democracies, while Lenin entered it as a virtual ally of imperial Germany.

  More than anybody else Mussolini was instrumental in achieving Italy’s entry into the first World War. His journalistic propaganda made it possible for the government to declare war on Austria. Only those few people have a right to find fault with his attitude in the years 1914 to 1918 who realize that the disintegration of the Austro-Hungarian Empire spelled the doom of Europe. Only those Italians are free to blame Mussolini who begin to understand that the only means of protecting the Italian-speaking minorities in the littoral districts of Austria against the threatening annihilation by the Slavonic majorities was to preserve the integrity of the Austrian state, whose constitution guaranteed equal rights to all linguistic groups. Mussolini was one of the most wretched figures of history. But the fact remains that his first great political deed still meets with the approval of all his countrymen and of the immense majority of his foreign detractors.

  When the war came to an end, Mussolini’s popularity dwindled. The communists, swept into popularity by events in Russia, carried on. But the great communist venture, the occupation of the factories in 1920, ended in complete failure, and the disappointed masses remembered the former leader of the socialist party. They flocked to Mussolini’s new party, the Fascists. The youth greeted with turbulent enthusiasm the self-styled successor of the Caesars. Mussolini boasted in later years that he had saved Italy from the danger of communism. His foes passionately dispute his claims. Communism, they say, was no longer a real factor in Italy when Mussolini seized power. The truth is that the frustration of communism swelled the ranks of the Fascists and made it possible for them to destroy all other parties. The overwhelming victory of the Fascists was not the cause, but the consequence, of the communist fiasco.

  The programme of the Fascists, as drafted in 1919, was vehemently anti-capitalistic.75 The most radical New Dealers and even communists could agree with it. When the Fascists came to power, they had forgotten those points of their programme which referred to the liberty of thought and the press and the right of assembly. In this respect they were conscientious disciples of Bukharin and Lenin. Moreover they did not suppress, as they had promised, the industrial and financial corporations. Italy badly needed foreign credits for the development of its industries. The main problem for Fascism, in the first years of its rule, was to win the confidence of the foreign bankers. It would have been suicidal to destroy the Italian corporations.

  Fascist economic policy did not—at the beginning—essentially differ from those of all other Western nations. It was a policy of interventionism. As the years went on, it more and more approached the Nazi pattern of socialism. When Italy, after the defeat of France, entered the second World War, its economy was by and large already shaped according to the Nazi pattern. The main difference was that the Fascists were less efficient and even more corrupt than the Nazis.

  But Mussolini could not long remain without an economic philosophy of his own invention. Fascism posed as a new philosophy, unheard of before and unknown to all other nations. It claimed to be the gospel which the resurrected spirit of ancient Rome brought to the decaying democratic peoples whose barbarian ancestors had once destroyed the Roman empire. It was the consummation both of the Rinascimento and the Risorgimento in every respect, the final liberation of the Latin genius from the yoke of foreign ideologies. Its shining leader, the peerless Duce, was called to find the ultimate solution for the burning problems of society’s economic organization and of social justice.

  From the dust-heap of discarded socialist utopias, the Fascist scholars salvaged the scheme of guild socialism. Guild socialism was very popular with British socialists in the last years of the first World War and in the first years following the Armistice. It was so impracticable that it disappeared very soon from socialist literature. No serious statesman ever paid any attention to contradictory and confused plans of guild socialism. It was almost forgotten when the Fascists attached it to a new label, and flamboyantly proclaimed corporativism as the new social panacea. The public inside and outside of Italy was captivated. Innumerable books, pamphlets and articles were written in praise of the stato corporativo. The governments of Austria and Portugal very soon declared that they were committed to the noble principles of corporativism. The papal encyclical Quadragesimo Anno (1931) contained some paragraphs which could be interpreted—but need not be—as an approval of corporativism. In France its ideas found many eloquent supporters.

  It was mere idle talk. Never did the Fascists make any attempt to realize the corporativist programme, industrial self-government. They changed the name of the chambers of commerce into corporative councils. They called corporazione the compulsory organizations of the various branches of industry which were the administrative units for the execution of the German pattern of socialism they had adopted. But there was no question of the corporazione’s self-government. The Fascist cabinet did not tolerate anybody’s interference with its absolute authoritarian control of production. All the plans for the establishment of the corporative system remained a dead letter.

  Italy’s main problem is its comparative overpopulation. In this age of barriers to trade and migration, the Italians are condemned to subsist permanently on a lower standard of living than that of the inhabitants of the countries more favoured by nature. The Fascists saw only one means to remedy this unfortunate situation: conquest. They were too narrow-minded to comprehend that the redress they recommended was spurious and worse than the evil. They were moreover so entirely blinded by self-conceit and vain-glory that they failed to realize that their provocative speeches were simply ridiculous. The foreigners whom they insolently challenged knew very well how negligible Italy’s military forces were.

  Fascism was not, as its advocates boasted, an original product of the Italian mind. It began with a split in the ranks of Marxian socialism, which certainly was an imported doctrine. Its economic programme was borrowed from German non-Marxian socialism and its aggressiveness was likewise copied from Germans, the All-deutsche or Pan-German forerunners of the Nazis. Its conduct of government affairs was a replica of Lenin’s dictatorship. Corporativism, its much advertised ideological adornment, was of British origin. The only home-grown ingredient of Fascism was the theatrical style of its processions, shows and festivals.

  The shortlived Fascist episode ended in blood, misery and ignominy. But the forces which generated Fascism are not dead. Fanatical nationalism is a feature common to all present-day Italians. The communists are certainly not prepared to renounce their principle of dictatorial oppression of all dissenters. Neither do the Catholic parties advocate freedom of thought, of the press or of religion. There are in Italy only very few people indeed who comprehend that the indispensable prerequisite of democracy and the rights of men is economic freedom.

  It may happen that Fascism will be resurrected under a new label and with new slogans and symbols. But if this happens, the consequences will be detrimental. For Fascism is not as the Fascists trumpeted a “new way to life,”76 it is a rather old way towards destruction and death.

  8

  Nazism

  The philosophy of the Nazis, the German National Socialist Labour Party, is the purest and most consistent manifestation of the anticapitalistic and socialistic spirit of our age. Its essential ideas are not German or “Aryan” in origin, nor are they peculiar to the present day Germans. In the genealogical tree of the Nazi doctrine such Latins as Sismondi and Georges Sorel, and such Anglo-Saxons as Carlyle, Ruskin and Houston Stewart Chamberlain, were more conspicuous than any German. Even the best known ideological attire of Nazism, the fable of the superiority of the Aryan master race, was not of German provenance; its author was a Frenchman, Gobineau. Germans of Jewish descent, like Lassalle, Lasson, Stahl and Walter Rathenau, contributed more to the essential tenets of Nazism than such men as Sombart, Spann and Ferdinand Fried. The slogan into which the Nazis condensed their economic philosophy, viz., Gemeinnutz geht vor Eigennutz (i.e., the commonweal ranks above private profit), is likewise the idea underlying the American New Deal and the Soviet management of economic affairs. It implies that profit-seeking business harms the vital interests of the immense majority, and that it is the sacred duty of popular government to prevent the emergence of profits by public control of production and distribution.

  The only specifically German ingredient in Nazism was its striving after the conquest of Lebensraum. And this, too, was an outcome of their agreement with the ideas guiding the policies of the most influential political parties of all other countries. These parties proclaim income equality as the main thing. The Nazis do the same. What characterizes the Nazis is the fact that they are not prepared to acquiesce in a state of affairs in which the Germans are doomed forever to be “imprisoned,” as they say, in a comparatively small and overpopulated area in which the productivity of labour must be smaller than in the comparatively underpopulated countries, which are better endowed with natural resources and capital goods. They aim at a fairer distribution of earth’s natural resources. As a “have-not” nation they look at the wealth of the richer nations with the same feelings with which many people in the Western countries look at the higher incomes of some of their countrymen. The “progressives” in the Anglo-Saxon countries assert that “liberty is not worth having” for those who are wronged by the comparative smallness of their incomes. The Nazis say the same with regard to international relations. In their opinion the only freedom that matters is Nahrungsfreiheit (viz., freedom from importing food). They aim at the acquisition of a territory so large and rich in natural resources that they could live in economic self-sufficiency at a standard not lower than that of any other nation. They consider themselves as revolutionaries fighting for their inalienable natural rights against the vested interests of a host of reactionary nations.

  It is easy for economists to explode the fallacies involved in the Nazi doctrines. But those who disparage economics as “orthodox and reactionary,” and fantically support the spurious creeds of socialism and economic nationalism, were at a loss to refute them. For Nazism was nothing but the logical application of their own tenets to the particular conditions of comparatively overpopulated Germany.

  For more than seventy years the German professors of political science, history, law, geography and philosophy eagerly imbued their disciples with a hysterical hatred of capitalism, and preached the war of “liberation” against the capitalistic West. The German “socialists of the chair,” much admired in all foreign countries, were the pacemakers of the two World Wars. At the turn of the century the immense majority of the Germans were already radical supporters of socialism and aggressive nationalism. They were then already firmly committed to the principles of Nazism. What was lacking and was added later was only a new term to signify their doctrine.

  When the Soviet policies of mass extermination of all dissenters and of ruthless violence removed the inhibitions against wholesale murder, which still troubled some of the Germans, nothing could any longer stop the advance of Nazism. The Nazis were quick to adopt the Soviet methods. They imported from Russia: the one-party system and the pre-eminence of this party in political life; the paramount position assigned to the secret police; the concentration camps; the administrative execution or imprisonment of all opponents; the extermination of the families of suspects and of exiles; the methods of propaganda; the organization of affiliated parties abroad and their employment for fighting their domestic governments and espionage and sabotage; the use of the diplomatic and consular service for fomenting revolution; and many other things besides. There were nowhere more docile disciples of Lenin, Trotsky and Stalin than the Nazis were.

  Hitler was not the founder of Nazism; he was its product. He was, like most of his collaborators, a sadistic gangster. He was uneducated and ignorant; he had failed even in the lower grades of high school. He never had any honest job. It is a fable that he had ever been a paperhanger. His military career in the first World War was rather mediocre. The First Class Iron Cross was given to him after the end of the war as a reward for his activities as a political agent. He was a maniac obsessed by megalomania. But learned professors nourished his self-conceit. Werner Sombart, who once had boasted that his life was devoted to the task of fighting for the ideas of Marx,77 Sombart, whom the American Economic Association had elected to Honorary membership and many non-German universities to honorary degrees, candidly declared that Führertum means a permanent revelation and that the Führer received his orders directly from God, the supreme Führer of the Universe.78

  The Nazi plan was more comprehensive and therefore more pernicious than that of the Marxians. It aimed at abolishing laisser-faire not only in the production of material goods, but no less in the production of men. The Führer was not only the general manager of all industries; he was also the general manager of the breeding-farm intent upon rearing superior men and eliminating inferior stock. A grandiose scheme of eugenics was to be put into effect according to “scientific” principles.

  It is vain for the champions of eugenics to protest that they did not mean what the Nazis executed. Eugenics aims at placing some men, backed by the police power, in complete control of human reproduction. It suggests that the methods applied to domestic animals be applied to men. This is precisely what the Nazis tried to do, The only objection which a consistent eugenist can raise is that his own plan differs from that of the Nazi scholars and that he wants to rear another type of men than the Nazis. As every supporter of economic planning aims at the execution of his own plan only, so every advocate of eugenic planning aims at the execution of his own plan and wants himself to act as the breeder of human stock.

  The eugenists pretend that they want to eliminate criminal individuals. But the qualification of a man as a criminal depends upon the prevailing laws of the country and varies with the change in social and political ideologies. John Huss, Giordano Bruno and Galileo Galilei were criminals from the point of view of the laws which their judges applied. When Stalin robbed the Russian State Bank of several million rubles, he committed a crime. Today it is an offence in Russia to disagree with Stalin. In Nazi Germany sexual intercourse between “Aryans” and the members of an “inferior” race was a crime. Whom do the eugenists want to eliminate, Brutus or Caesar? Both violated the laws of their country. If eighteenth-century eugenists had prevented alcohol addicts from generating children, their planning would have eliminated Beethoven.

  It must be emphasized again: there is no such thing as a scientific ought. Which men are superior and which are inferior can only be decided by personal value judgments not liable to Verification or falsification. The eugenists delude themselves in assuming that they themselves will be called to decide what qualities are to be conserved in the human stock. They are too dull to take into account the possibility that other people might make the choice according to their own value judgments.79 In the eyes of the Nazis the brutal killer, the “fair-haired beast,” is the most perfect specimen of mankind.

  The mass slaughters perpetrated in the Nazi horror camps are too horrible to be adequately described by words. But they were the logical and consistent application of doctrines and policies parading as applied science and proved by some men who in a sector of the natural sciences have displayed acumen and technical skill in laboratory research.

  9

  The Teachings of Soviet Experience

  Many people all over the world assert that the Soviet “experiment” has supplied conclusive evidence in favour of socialism and disproved all, or at least most, of the objections raised against it. The facts, they say, speak for themselves. It is no longer permissible to pay any attention to the spurious aprioristic reasoning of armchair economists criticizing the socialist plans. A crucial experiment has exploded their fallacies.

  It is, first of all, necessary to comprehend that in the field of purposive human action and social relations no experiments can be made and no experiments have ever been made. The experimental method to which the natural sciences owe all their achievements is inapplicable in the social sciences. The natural sciences are in a position to observe in the laboratory experiment the consequences of the isolated change in one element only, while other elements remain unchanged. Their experimental observation refers ultimately to certain isolable elements in sense experience. What the natural sciences call facts are the causal relations shown in such experiments. Their theories and hypotheses must be in agreement with these facts.

  But the experience with which the sciences of human action have to deal is essentially different. It is historical experience. It is an experience of complex phenomena, of the joint effects brought about by the co-operation of a multiplicity of elements. The social sciences are never in a position to control the conditions of change and to isolate them from one another in the way in which the experimenter proceeds in arranging his experiments. They never enjoy the advantage of observing the consequences of a change in one element only, other conditions being equal. They are never faced with facts in the sense in which the natural sciences employ this term. Every fact and every experience with which the social sciences have to deal is open to various interpretations. Historical facts and historical experience can never prove or disprove a statement in the way in which an experiment proves or disproves.

  Historical experience never comments upon itself. It needs to be interpreted from the point of view of theories constructed without the aid of experimental observations. There is no need to enter into an epistemological analysis of the logical and philosophical problems involved. It is enough to refer to the fact that nobody—whether scientist or layman--ever proceeds otherwise when dealing with historical experience. Every discussion of the relevance and meaning of historical facts falls back very soon on a discussion of abstract general principles, logically antecedent to the facts to be elucidated and interpreted. Reference to historical experience can never solve any problem or answer any question. The same historical events and the same statistical figures are claimed as confirmations of contradictory theories.

  If history could prove and teach us anything, it would be that private ownership of the means of production is a necessary requisite of civilization and material well-being. All civilizations have up to now been based on private property. Only nations committed to the principle of private property have risen above penury and produced science, art and literature. There is no experience to show that any other social system could provide mankind with any of the achievements of civilization. Nevertheless, only few people consider this as a sufficient and incontestable refutation of the socialist programme.

  On the contrary, there are even people who argue the other way round. It is frequently asserted that the system of private property is done for precisely because it was the system that men applied in the past. However beneficial a social system may have been in the past, they say, it cannot be so in the future too; a new age requires a new mode of social organization. Mankind has reached maturity; it would be pernicious for it to cling to the principles to which it resorted in the earlier stages of its evolution. This is certainly the most radical abandonment of experimentalism. The experimental method may assert: because a produced in the past the result b, it will produce it in the future also. It must never assert: because a produced in the past the result b, it is proved that it cannot produce it any longer.

  In spite of the fact that mankind has had no experience with the socialist mode of production, the socialist writers have constructed various schemes of socialist systems based on aprioristic reasoning. But as soon as anybody dares to analyse these projects and to scrutinize them with regard to their feasibility and their ability to further human welfare, the socialists vehemently object. These analyses, they say, are merely idle aprioristic speculations. They cannot disprove the correctness of our statements and the expediency of our plans. They are not experimental. One must try socialism and then the results will speak for themselves.

  What these socialists ask for is absurd. Carried to its ultimate logical consequences, their idea implies that men are not free to refute by reasoning any scheme, however nonsensical, self-contradictory and impracticable, that any reformer is pleased to suggest. According to their view, the only method permissible for the refutation of such a—necessarily abstract and aprioristic—plan is to test it by reorganizing the whole of society according to its designs. As soon as a man sketches the plan for a better social order, all nations are bound to try it and to see what will happen.

  Even the most stubborn socialists cannot fail to admit that there are various plans for the construction of the future utopia, incompatible with one another. There is the Soviet pattern of all-round socialization of all enterprises and their outright bureaucratic management; there is the German pattern of Zwangswirtschaft, towards the complete adoption of which the Anglo-Saxon countries are manifestly tending; there is guild socialism, under the name of corporativism still very popular in some Catholic countries. There are many other varieties. The supporters of most of these competing schemes assert that the beneficial results to be expected from their own scheme will appear only when all nations will have adopted it; they deny that socialism in one country only can already bring the blessings they ascribe to socialism. The Marxians declare that the bliss of socialism will emerge only in its “higher phase” which, as they hint, will appear only after the working class will have passed “through long struggles, through a whole series of historical processes, wholly transforming both circumstances and men.”80 The inference from all this is that one must realize socialism and quietly wait for a very long time until its promised benefits come. No unpleasant experiences in the period of transition, no matter how long this period may be, can disprove the assertion that socialism is the best of all conceivable modes of social organization. He that believeth shall be saved.

  But which of the many socialist plans, contradicting one another, should be adopted? Every socialist sect passionately proclaims that its own brand is alone genuine socialism and that all other sects advocate counterfeit, entirely pernicious measures. In fighting one another, the various socialist factions resort to the same methods of abstract reasoning which they stigmatize as vain apriorism whenever they are applied against the correctness of their own statements and the expediency and practicability of their own schemes. There is, of course, no other method available. The fallacies implied in a system of abstract reasoning—such as socialism is—cannot be smashed otherwise than by abstract reasoning.

  The fundamental objection advanced against the practicability of socialism refers to the impossibility of economic calculation. It has been demonstrated in an irrefutable way that a socialist commonwealth would not be in a position to apply economic calculation. Where there are no market prices for the factors of production because they are neither bought nor sold, it is impossible to resort to calculation in planning future action and in determining the result of past action. A socialist management of production would simply not know whether or not what it plans and executes is the most appropriate means to attain the ends sought. It will operate in the dark, as it were. It will squander the scarce factors of production both material and human (labour). Chaos and poverty for all will unavoidably result.

  All earlier socialists were too narrow-minded to see this essential point. Neither did the earlier economists conceive its full importance. When the present writer in 1920 showed the impossibility of economic calculation under socialism, the apologists of socialism embarked upon the search for a method of calculation applicable to a socialist system. They utterly failed in these endeavours. The futility of the schemes they produced could easily be shown. Those communists who were not entirely intimidated by the fear of the Soviet executioners, for instance Trotsky, freely admitted that economic accounting is unthinkable without market relations.81 The intellectual bankruptcy of the socialist doctrine can no longer be disguised. In spite of its unprecedented popularity, socialism is done for. No economist can any longer question its impracticability. The avowal of socialist ideas is today the proof of a complete ignorance of the basic problems of economics. The socialist’s claims are as vain as those of the astrologers and the magicians.

  With regard to this essential problem of socialism, viz., economic calculation, the Russian “experiment” is of no avail. The Soviets are operating within a world the greater part of which still clings to a market economy. They base the calculations on which they make their decisions on the prices established abroad. Without the help of these prices their actions would be aimless and planless. Only as far as they refer to this foreign price system are they able to calculate, keep books and prepare their plans. In this respect one may agree with the statement of various socialist and communist authors that socialism in one or a few countries only is not yet true socialism. Of course, these authors attach a quite different meaning to their assertion. They want to say that the full blessings of socialism can be reaped only in a world-embracing socialist community. Those familiar with the teachings of economics must, on the contrary, recognize that socialism will result in full chaos precisely if it is applied in the greater part of the world.

  The second main objection raised against socialism is that it is a less efficient mode of production than is capitalism and that it will impair the productivity of labour. Consequently, in a socialist commonwealth the standard of living of the masses will be low when compared with conditions prevailing under capitalism. There is no doubt that this objection has not been disproved by the Soviet experience. The only certain fact about Russian affairs under the Soviet regime with regard to which all people agree is: that the standard of living of the Russian masses is much lower than that of the masses in the country which is universally considered as the paragon of capitalism, the United States of America. If we were to regard the Soviet regime as an experiment, we would have to say that the experiment has clearly demonstrated the superiority of capitalism and the inferiority of socialism.

  It is true that the advocates of socialism are intent upon interpreting the lowness of the Russian standard of living in a different way. As they see things, it was not caused by socialism, but was—in spite of socialism—brought about by other agencies. They refer to various factors, e.g., the poverty of Russia under the Czars, the disastrous effects of the wars, the alleged hostility of the capitalist democratic nations, the alleged sabotage of the remnants of the Russian aristocracy and bourgeoisie and of the Kulaks. There is no need to enter into an examination of these matters. For we do not contend that any historical experience could prove or disprove a theoretical statement in the way in which a crucial experiment can verify or falsify a statement concerning natural events. It is not the critics of socialism, but its fanatical advocates, who maintain that the Soviet “experiment” proves something with regard to the effects of socialism. However, what they are really doing in dealing with the manifest and undisputed facts of Russian experience is to push them aside by impermissible tricks and fallacious syllogisms. They disavow the obvious facts by commenting upon them in such a way as to deny their bearing and their significance upon the question to be answered.

  Let us, for the sake of argument, assume that their interpretation is correct. But then it would still be absurd to assert that the Soviet experiment has evidenced the superiority of socialism. All that could be said is: the fact that the masses’ standard of living is low in Russia does not provide conclusive evidence that socialism is inferior to capitalism.

  A comparison with experimentation in the field of the natural sciences may clarify the issue. A biologist wants to test a new patent food. He feeds it to a number of guinea pigs. They all lose weight and finally die. The experimenter believes that their decline and death were not caused by the patent food, but by merely accidental affliction with pneumonia. It would nevertheless be absurd for him to proclaim that his experiment had evidenced the nutritive value of the compound because the unfavourable result is to be ascribed to accidental occurrences, not causally linked with the experimental arrangement. The best he could contend is that the outcome of the experiment was not conclusive, that it does not prove anything against the nutritive value of the food tested. Things are, he could assert, as if no experiment had been tried at all.

  Even if the Russian masses’ standard of living were much higher than that of the capitalist countries, this still would not be conclusive proof of the superiority of socialism. It may be admitted that the undisputed fact that the standard of living in Russia is lower than that in the capitalist West does not conclusively prove the inferiority of socialism. But it is nothing short of idiocy to announce that the experience of Russia has demonstrated the superiority of public control of production.

  Neither does the fact that the Russian armies, after having suffered many defeats, finally—with armament manufactured by American big business and donated to them by the American taxpayers—could aid the Americans in the conquest of Germany prove the pre-eminence of communism. When the British forces had to sustain a temporary reverse in North Africa, Professor Harold Laski, that most radical advocate of socialism, was quick to announce the final failure of capitalism. He was not consistent enough to interpret the German conquest of the Ukraine as the final failure of Russian communism. Neither did he retract his condemnation of the British system when his country emerged victorious from the war. If the military events are to be considered as the proof of any social system’s excellence, it is rather the American than the Russian system for which they bear witness.

  Nothing that has happened in Russia since 1917 contradicts any of the statements of the critics of socialism and communism. Even if one bases one’s judgment exclusively on the writings of communists and fellow-trav ellers, one cannot discover any feature in Russian conditions that tells in favour of the Soviet’s social and political system. All the technological improvements of the last decades originated in the capitalistic countries. It is true that the Russians have tried to copy some of these innovations. But so did all backward oriental peoples too.

  Some communists are eager to have us believe that the ruthless oppression of dissenters and the radical abolition of the freedom of thought, speech and the press are not inherent marks of the public control of business. They are, they argue, only accidental phenomena of communism, its signature in a country which—as was the case with Russia—never enjoyed freedom of thought and conscience. However, these apologists for totalitarian despotism are at a loss to explain how the rights of man could be safeguarded under government omnipotence.

  Freedom of thought and conscience is a sham in a country in which the authorities are free to exile everybody whom they dislike into the Arctic or the desert, and to assign him hard labour for life. The autocrat may always try to justify such arbitrary acts by pretending that they are motivated exclusively by considerations of public welfare and economic expediency. He alone is the supreme arbiter to decide all matters referring to the execution of the plan. Freedom of the press is illusory when the government owns and operates all paper mills, printing offices and publishing houses, and ultimately decides what is to be printed and what not. The right of assembly is vain if the government owns all assembly halls and determines for what purposes they shall be used. And so it is with all other liberties too. In one of his lucid intervals Trotsky—of course Trotsky the hunted exile, not the ruthless commander of the Red army—saw things realistically and declared: “In a country where the sole employer is the State, opposition means death by slow starvation. The old principle: who does not work shall not eat, has been replaced by a new one: who does not obey shall not eat.”82 This confession settles the issue.

  What the Russian experience shows is a very low level of the standard of living of the masses and unlimited dictatorial despotism. The apologists of communism are intent upon explaining these uncontested facts as accidental only; they are, they say, not the fruit of communism, but occurred in spite of communism. But even if one were to accept these excuses for the sake of argument, it would be nonsensical to maintain that the Soviet “experiment” has demonstrated anything in favour of communism and socialism.

  10

  The Alleged Invitability of Socialism

  Many people believe that the coming of totalitarianism is inevitable. The “wave of the future,” they say, “carries mankind inexorably towards a system under which all human affairs are managed by omnipotent dictators. It is useless to fight against the unfathomable decrees of history.”

  The truth is that most people lack the intellectual ability and courage to resist a popular movement, however pernicious and ill-considered. Bismarck once deplored the lack of what he called civilian courage, i.e., bravery in dealing with civic affairs, on the part of his countrymen. But neither did the citizens of other nations display more courage and judiciousness when faced with the menace of communist dictatorship. They either yielded silently, or timidly raised some trifling objections.

  One does not fight socialism by criticizing only some accidental features of its schemes. In attacking many socialists’ stand on divorce and birth control, or their ideas about art and literature, one does not refute socialism. It is not enough to disapprove of the Marxian assertions that the theory of relativity or the philosophy of Bergson or psycho-analysis is “bourgeois” moonshine. Those who find fault with Bolshevism and Nazism only for their anti-Christian leanings implicitly endorse all the rest of these bloody schemes.

  On the other hand, it is sheer stupidity to praise the totalitarian regimes for alleged achievements which have no reference whatever to their political and economic principles. It is questionable whether the observations that in Fascist Italy the railway trains ran on schedule and the bug population of second-rate hotel beds was decreasing, were correct or not; but it is in any case of no importance for the problem of Fascism. The fellow-travellers are enraptured by Russian films, Russian music and Russian caviar. But there lived greater musicians in other countries and under other social systems; good pictures were produced in other countries too; and it is certainly not a merit of Generalissimo Stalin that the taste of caviar is delicious. Neither does the prettiness of Russian ballet dancers or the construction of a great power station on the Dnieper expiate for the mass slaughter of the Kulaks.

  The readers of picture magazines and the movie-fans long for the picturesque. The operatic pageants of the Fascists and the Nazis and the parading of the girl-battalions of the Red army are after their heart. It is more fun to listen to the radio speeches of a dictator than to study economic treatises. The entrepreneurs and technologists who pave the way for economic improvement work in seclusion; their work is not suitable to be visualized on the screen. But the dictators, intent upon spreading death and destruction, are spectacularly in sight of the public. Dressed in military garb they eclipse in the eyes of the movie-goers the colourless bourgeois in plain clothes.

  The problems of society’s economic organization are not suitable for light talk at fashionable cocktail parties. Neither can they be dealt with adequately by demagogues haranguing mass assemblies. They are serious things. They require painstaking study. They must not be taken lightly.

  The socialist propaganda never encountered any decided opposition. The devastating critique by which the economists exploded the futility and impracticability of the socialist schemes and doctrines did not reach the moulders of public opinion. The universities were mostly dominated by socialist or interventionist pedants not only in continental Europe, where they were owned and operated by the governments, but even in the Anglo-Saxon countries. The politicians and the statesmen, anxious not to lose popularity, were lukewarm in their defence of freedom. The policy of appeasement, so much criticized when applied in the case of the Nazis and the Fascists, was practised universally for many decades with regard to all other brands of socialism. It was this defeatism that made the rising generation believe that the victory of socialism is inevitable.

  It is not true that the masses are vehemently asking for socialism and that there is no means to resist them. The masses favour socialism because they trust the socialist propaganda of the intellectuals. The intellectuals, not the populace, are moulding public opinion. It is a lame excuse of the intellectuals that they must yield to the masses. They themselves have generated the socialist ideas and indoctrinated the masses with them. No proletarian or son of a proletarian has contributed to the elaboration of the interventionist and socialist programmes. Their authors were all of bourgeois background. The esoteric writings of dialectical materialism, of Hegel, the father both of Marxism and of German aggressive nationalism, the books of Georges Sorel, of Gentile and of Spengler were not read by the average man; they did not move the masses directly. It was the intellectuals who popularized them.

  The intellectual leaders of the peoples have produced and propagated the fallacies which are on the point of destroying liberty and Western civilization. The intellectuals alone are responsible for the mass slaughters which are the characteristic mark of our century. They alone can reverse the trend and pave the way for a resurrection of freedom.

  Not mythical “material productive forces,” but reason and ideas determine the course of human affairs. What is needed to stop the trend towards socialism and despotism is common sense and moral courage.

  [52. ]Sidney Webb in Fabian Essays in Socialism, first published in 1889 (American edition, New York, 1891, p. 4).

  [53. ]Cf. G. M. Trevelyan, A Shortened History of England (London, 1942), p. 510.

  [54. ]Elmer Roberts, Monarchical Socialism in Germany (New York, 1913).

  [55. ]Zwang means compulsion, Wirtschaft means economy. The English language equivalent for Zwangswirtschaft is something like compulsory economy.

  [56. ]Wesley C. Mitchell, “The Social Sciences and National Planning” in Planned Society, ed. Findlay Mackenzie (New York, 1937), p. 112

  [57. ]Laski, Democracy in Crisis (Chapel Hill, 1933), pp. 87-8.

  [58. ]Sidney and Beatrice Webb, Soviet Communism: A New Civilization? (New York, 1936), Vol. II, pp. 1038-39.

  [59. ]T. G. Crowther, Social Relations of Science (London, 1941), p. 333.

  [60. ]The collection of these conventions, published by The International Labour Office under the title Intergovernmental Commodity Control Agreements (Montreal, 1943).

  [61. ]Marx, Das Kapital, 7th ed. (Hamburg, 1914), Vol. I, p. 728. Publisher’s Note: In English edition, p. 836.

  [62. ]Marx, Zur Kritik der politischen Ökonomie, ed. Kautsky (Stuttgart, 1897), p. xi. Publisher’s Note: In English edition by Kerr, pp. 11-12; by Eastman, p. 10.

  [63. ]Ibid., p. xii. Publisher’s Note: In English edition by Kerr, p. 12; by Eastman, p. 11.

  [64. ]Marx, Der Bürgerkrieg in Frankreich, ed. Pfemfert (Berlin, 1919), passim. Publisher’s Note: In English, “The Civil War in France.” Reprinted in Eastman anthology, pp. 367-429.

  [65. ]Marx, Value, Price and Profit, ed. Eleanor Marx Aveling (New York, 1901), pp. 72-74.

  [66. ]Blueprint for World Conquest as Outlined by the Communist International, Human Events (Washington and Chicago, 1946), pp. 181-82.

  [67. ]David J. Dallin, The Real Soviet Russia (Yale University Press, 1944), pp. 88-95.

  [68. ]Pius XII (pope, 1939-1958) (Pub.).

  [69. ]Christmas Eve broadcast, New York Times, December 25, 1941.

  [70. ]The annexation of Carpatho-Russia utterly explodes their hypocritical indignation about the Munich agreements of 1938.

  [71. ]The Hölz riot was a communist uprising in Germany (March 1921 in Mansfeldischen), led by World War I veteran Max Hölz (1889-1933). Hölz was sentenced to life imprisonment as a result, granted amnesty in 1928, and then left Germany for the Soviet Union (Pub.)

  [72. ]Mises, Bureaucracy (Yale University Press, 1944).

  [73. ]Benda, La trahison des clercs (Paris, x927). Publisher’s Note: In English, The Treason of the Intellectuals (New York: William Morrow, 1928) and The Betrayal of the Intellectuals (Boston: Beacon Press, 1955)

  [74. ]Stahlhelm was an association of German World War veterans, established 1918. Cagoulards were members of a secret French extreme rightist, terrorist organization, the Cagoule. It was responsible for several assassinations of socialists and Italian anti-fascists and it collaborated with the Nazis and the French Vichy government during WWII (Pub.).

  [75. ]This programme is reprinted in English in Count Carlo Sforza’s book, Contemporary Italy, translated by Drake and Denise de Kay (New York, 1944), pp. 295-6.

  [76. ]For instance Mario Palmieri, The Philosophy of Fascism (Chicago, 1936), p. 248.

  [77. ]Sombart, Das Lebenswerk yon Karl Marx (Jena, 1909), p. 3.

  [78. ]Sombart, A New Social Philosophy, trans. and ed. K. F. Geiser (Princeton University Press, 1937), p. 194.

  [79. ]The devastating critique of eugenics by H. S. Jennings, The Biological Basis of Human Nature (New York, 1930), pp. 223-52.

  [80. ]Marx, Der Bürgerkrieg in Frankreich, ed. Pfemfert (Berlin, 1919), p. 54. Publisher’s Note: In English, “The Civil War in France,” p. 408.

  [81. ]Hayek, Individualism and the Economic Order (Chicago University Press, 1948), pp. 89-91.

  [82. ]Quoted by Hayek, The Road to Serfdom (1944), Chapter IX, p. 119.

• Back to Top

  12: Session IV Reading 2: Interventionism and the Knowledge Problem

  Please read Sections 1-3 of this Chapter.

  The 3rd reading for this session “Interventionism” (Sections 1 and 2) from Mises, A Critique of Interventionsm (1929) is not available online at this time.

  Ludwig von Mises, Human Action: A Treatise on Economics, in 4 vols., ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007). Vol. 3. Chapter: CHAPTER 27: The Government and the Market

  Accessed from oll.libertyfund.org/title/1895/110642 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  CHAPTER 27

  The Government and the Market

  1

  The Idea of a Third System

  Private ownership of the means of production (market economy or capitalism) and public ownership of the means of production (socialism or communism or “planning”) can be neatly distinguished. Each of these two systems of society’s economic organization is open to a precise and unambiguous description and definition. They can never be confounded with one another; they cannot be mixed or combined; no gradual transition leads from one of them to the other; they are mutually incompatible. With regard to the same factors of production there can only exist private control or public control. If in the frame of a system of social cooperation only some means of production are subject to public ownership while the rest are controlled by private individuals, this does not make for a mixed system combining socialism and private ownership. The system remains a market society, provided the socialized sector does not become entirely separated from the non-socialized sector and lead a strictly autarkic existence. (In this latter case there are two systems independently coexisting side by side—a capitalist and a socialist.) Publicly owned enterprises operating within a system in which there are privately owned enterprises and a market, and socialized countries, exchanging goods and services with nonsocialist countries, are integrated into a system of market economy. They are subject to the law of the market and have the opportunity of resorting to economic calculation.1

  If one considers the idea of placing by the side of these two systems or between them a third system of human cooperation under the division of labor, one can always start only from the notion of the market economy, never from that of socialism. The notion of socialism with its rigid monism and centralism that vests the powers to choose and to act in one will exclusively does not allow of any compromise or concession; this construction is not amenable to any adjustment or alteration. But it is different with the scheme of the market economy. Here the dualism of the market and the government’s power of coercion and compulsion suggests various ideas. Is it really peremptory or expedient, people ask, that the government keep itself out of the market? Should it not be a task of government to interfere and to correct the operation of the market? Is it necessary to put up with the alternative of capitalism or socialism? Are there not perhaps still other realizable systems of social organization which are neither communism nor pure and unhampered market economy?

  Thus people have contrived a variety of third solutions, of systems which, it is claimed, are as far from socialism as they are from capitalism. Their authors allege that these systems are nonsocialist because they aim to preserve private ownership of the means of production and that they are not capitalistic because they eliminate the “deficiencies” of the market economy. For a scientific treatment of the problems involved which by necessity is neutral with regard to all value judgments and therefore does not condemn any features of capitalism as faulty, detrimental, or unjust, this emotional recommendation of interventionism is of no avail. The task of economics is to analyze and to search for truth. It is not called upon to praise or to disapprove from any standard of preconceived postulates and prejudices. With regard to interventionism it has only one question to ask and to answer: How does it work?

  2

  The Intervention

  There are two patterns for the realization of socialism.

  The first pattern (we may call it the Lenin or the Russian pattern) is purely bureaucratic. All plants, shops, and farms are formally nationalized (verstaatlicht); they are departments of the government operated by civil servants. Every unit of the apparatus of production stands in the same relation to the superior central organization as does a local post office to the office of the postmaster general.

  The second pattern (we may call it the Hindenburg or German pattern) nominally and seemingly preserves private ownership of the means of production and keeps the appearance of ordinary markets, prices, wages, and interest rates. There are, however, no longer entrepreneurs, but only shop managers (Betriebsführer in the terminology of the Nazi legislation). These shop managers are seemingly instrumental in the conduct of the enterprises entrusted to them; they buy and sell, hire and discharge workers and remunerate their services, contract debts and pay interest and amortization. But in all their activities they are bound to obey unconditionally the orders issued by the government’s supreme office of production management. This office (the Reichswirtschaftsministerium in Nazi Germany) tells the shop managers what and how to produce, at what prices and from whom to buy, at what prices and to whom to sell. It assigns every worker to his job and fixes his wages. It decrees to whom and on what terms the capitalists must entrust their funds. Market exchange is merely a sham. All the wages, prices, and interest rates are fixed by the government; they are wages, prices, and interest rates in appearance only; in fact they are merely quantitative terms in the government’s orders determining each citizen’s job, income, consumption, and standard of living. The government directs all production activities. The shop managers are subject to the government, not to the consumers’ demand and the market’s price structure. This is socialism under the outward guise of the terminology of capitalism. Some labels of the capitalistic market economy are retained, but they signify something entirely different from what they mean in the market economy.

  It is necessary to point out this fact in order to prevent a confusion of socialism and interventionism. The system of interventionism or of the hampered market economy differs from the German pattern of socialism by the very fact that it is still a market economy. The authority interferes with the operation of the market economy, but does not want to eliminate the market altogether. It wants production and consumption to develop along lines different from those prescribed by an unhampered market, and it wants to achieve its aim by injecting into the working of the market orders, commands, and prohibitions for whose enforcement the police power and its apparatus of violent compulsion and coercion stand ready. But these are isolated acts of intervention. It is not the aim of the government to combine them into an integrated system which determines all prices, wages and interest rates and thus places full control of production and consumption into the hands of the authorities.

  The system of the hampered market economy or interventionism aims at preserving the dualism of the distinct spheres of government activities on the one hand and economic freedom under the market system on the other hand. What characterizes it as such is the fact that the government does not limit its activities to the preservation of private ownership of the means of production and its protection against violent or fraudulent encroachments. The government interferes with the operation of business by means of orders and prohibitions.

  The intervention is a decree issued directly or indirectly, by the authority in charge of society’s administrative apparatus of coercion and compulsion which forces the entrepreneurs and capitalists to employ some of the factors of production in a way different from what they would have resorted to if they were only obeying the dictates of the market. Such a decree can be either an order to do something or an order not to do something. It is not required that the decree be issued directly by the established and generally recognized authority itself. It may happen that some other agencies arrogate to themselves the power to issue such orders or prohibitions and to enforce them by an apparatus of violent coercion and oppression of their own. If the recognized government tolerates such procedures or even supports them by the employment of its governmental police apparatus, matters stand as if the government itself had acted. If the government is opposed to other agencies’ violent action, but does not succeed in suppressing it by means of its own armed forces, although it would like to suppress it, anarchy results.

  It is important to remember that government interference always means either violent action or the threat of such action. The funds that a government spends for whatever purposes are levied by taxation. And taxes are paid because the taxpayers are afraid of offering resistance to the tax gatherers. They know that any disobedience or resistance is hopeless. As long as this is the state of affairs, the government is able to collect the money that it wants to spend. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.

  To draw attention to this fact does not imply any reflection upon government activities. In stark reality, peaceful social cooperation is impossible if no provision is made for violent prevention and suppression of antisocial action on the part of refractory individuals and groups of individuals. One must take exception to the often-repeated phrase that government is an evil, although a necessary and indispensable evil. What is required for the attainment of an end is a means, the cost to be expended for its successful realization. It is an arbitrary value judgment to describe it as an evil in the moral connotation of the term. However, in face of the modern tendencies toward a deification of government and state, it is good to remind ourselves that the old Romans were more realistic in symbolizing the state by a bundle of rods with an ax in the middle than are our contemporaries in ascribing to the state all the attributes of God.

  3

  The Delimitation of Governmental Functions

  Various schools of thought parading under the pompous names of philosophy of law and political science indulge in futile and empty brooding over the delimitation of the functions of government. Starting from purely arbitrary assumptions concerning allegedly eternal and absolute values and perennial justice, they arrogate to themselves the office of the supreme judge of earthly affairs. They misconstrue their own arbitrary value judgments derived from intuition as the voice of the Almighty or of the nature of things.

  There is, however, no such thing as a perennial standard of what is just and what is unjust. Nature is alien to the idea of right and wrong. “Thou shalt not kill” is certainly not part of natural law. The characteristic feature of natural conditions is that one animal is intent upon killing other animals and that many species cannot preserve their own life except by killing others. The notion of right and wrong is a human device, a utilitarian precept designed to make social cooperation under the division of labor possible. All moral rules and human laws are means for the realization of definite ends. There is no method available for the appreciation of their goodness or badness other than to scrutinize their usefulness for the attainment of the ends chosen and aimed at.

  From the notion of natural law some people deduce the justice of the institution of private property in the means of production. Other people resort to natural law for the justification of the abolition of private property in the means of production. As the idea of natural law is quite arbitrary, such discussions are not open to settlement.

  State and government are not ends, but means. Inflicting evil upon other people is a source of direct pleasure only to sadists. Established authorities resort to coercion and compulsion in order to safeguard the smooth operation of a definite system of social organization. The sphere in which coercion and compulsion is applied and the content of the laws which are to be enforced by the police apparatus are conditioned by the social order adopted. As state and government are designed to make this social system operate safely, the delimitation of governmental functions must be adjusted to its requirements. The only standard for the appreciation of the laws and the methods for their enforcement is whether or not they are efficient in safeguarding the social order which it is desired to preserve.

  The notion of justice makes sense only when referring to a definite system of norms which in itself is assumed to be uncontested and safe against any criticism. Many peoples have clung to the doctrine that what is right and what is wrong is established from the dawn of the remotest ages and for eternity. The task of legislators and courts was not to make laws, but to find out what is right by virtue of the unchanging idea of justice. This doctrine, which resulted in an adamant conservatism and a petrification of old customs and institutions, was challenged by the doctrine of natural right. To the positive laws of the country the notion of a “higher” law, the law of nature, was opposed. From the arbitrary standard of natural law the valid statutes and institutions were called just or unjust. To the good legislator was assigned the task of making the positive laws agree with the natural law.

  The fundamental errors involved in these two doctrines have long since been unmasked. For those not deluded by them it is obvious that the appeal to justice in a debate concerning the drafting of new laws is an instance of circular reasoning. Delege ferenda there is no such a thing as justice. The notion of justice can logically only be resorted to de lege lata. It makes sense only when approving or disapproving concrete conduct from the point of view of the valid laws of the country. In considering changes in the nation’s legal system, in rewriting or repealing existing laws and writing new laws, the issue is not justice, but social expediency and social welfare. There is no such thing as an absolute notion of justice not referring to a definite system of social organization. It is not justice that determines the decision in favor of a definite social system. It is, on the contrary, the social system which determines what should be deemed right and what wrong. There is neither right nor wrong outside the social nexus. For the hypothetical isolated and self-sufficient individual the notions of just and unjust are empty. Such an individual can merely distinguish between what is more expedient and what is less expedient for himself. The idea of justice refers always to social cooperation.

  It is nonsensical to justify or to reject interventionism from the point of view of a fictitious and arbitrary idea of absolute justice. It is vain to ponder over the just delimitation of the tasks of government from any preconceived standard of perennial values. It is no less impermissible to deduce the proper tasks of government from the very notions of government, state, law and justice. It was precisely this that was absurd in the speculations of medieval scholasticism, of Fichte, Schelling, and Hegel, and the German Begriffsjurisprudenz. Concepts are tools of reasoning. They must never be considered as regulative principles dictating modes of conduct.

  It is a display of supererogatory mental gymnastics to emphasize that the notions of state and sovereignty logically imply absolute supremacy and thus preclude the idea of any limitations on the state’s activities. Nobody questions the fact that a state has the power to establish totalitarianism within the territory in which it is sovereign. The problem is whether or not such a mode of government is expedient from the point of view of the preservation and functioning of social cooperation. With regard to this problem no sophisticated exegesis of concepts and notions can be of any use. It must be decided by praxeology, not by a spurious metaphysics of state and right.

  The philosophy of law and political science are at a loss to discover any reason why government should not control prices and not punish those defying the price ceilings decreed, in the same way as it punishes murderers and thieves. As they see it, the institution of private property is merely a revocable favor graciously granted by the almighty sovereign to the wretched individuals. There cannot be any wrong in repealing totally or partially the laws that granted this favor; no reasonable objection can be raised against expropriation and confiscation. The legislator is free to substitute any social system for that of the private ownership of the means of production, just as he is free to substitute another national anthem for that adopted in the past. The formula car tel est notre bon plaisir [for such is our good pleasure] is the only maxim of the sovereign lawgiver’s conduct.

  As against all this formalism and legal dogmatism, there is need to emphasize again that the only purpose of the laws and the social apparatus of coercion and compulsion is to safeguard the smooth functioning of social cooperation. It is obvious that the government has the power to decree maximum prices and to imprison or to execute those selling or buying at a higher price. But the question is whether such a policy can or cannot attain the ends which the government wants to attain by resorting to it. This is a purely praxeological and economic problem. Neither the philosophy of law nor political science can contribute anything to its solution.

  The problem of interventionism is not a problem of the correct delimitation of the “natural,” “just,” and “proper” tasks of state and government. The issue is: How does a system of interventionism work? Can it realize those ends which people, in resorting to it, want to attain?

  The confusion and lack of judgment displayed in dealing with the problems of interventionism are amazing indeed. There are, for instance, people who argue thus: It is obvious that traffic regulations on the public roads are necessary. Nobody objects to the government’s interference with the car driver’s conduct. The advocates of laissez faire contradict themselves in fighting government interference with market prices and yet not advocating the abolition of government traffic regulation.

  The fallacy of this argument is manifest. The regulation of traffic on a road is one of the tasks incumbent upon the agency that operates the road. If this agency is the government or the municipality, it is bound to attend to this task. It is the task of a railroad’s management to fix the timetable of the trains and it is the task of a hotel’s management to decide whether or not there should be music in the dining room. If the government operates a railroad or a hotel, it is the government’s task to regulate these things. With a state opera the government decides which operas should be produced and which should not; it would be a non sequitur, however, to deduce from this fact that it is also a task of the government to decide these things for a nongovernmental opera.

  The interventionist doctrinaires repeat again and again that they do not plan the abolition of private ownership of the means of production, of entrepreneurial activities, and of market exchange. Also the supporters of the most recent variety of interventionism, the German soziale Marktwirtschaft, stress that they consider the market economy to be the best possible and most desirable system of society’s economic organization, and that they are opposed to the government omnipotence of socialism. But, of course, all these advocates of a middle-of-the-road policy emphasize with the same vigor that they reject Manchesterism and laissez-faire liberalism. It is necessary, they say, that the state interfere with the market phenomena whenever and wherever the “free play of the economic forces” results in conditions that appear as “socially” undesirable. In making this assertion they take it for granted that it is the government that is called upon to determine in every single case whether or not a definite economic fact is to be considered as reprehensible from the “social” point of view and, consequently whether or not the state of the market requires a special act of government interference.

  All these champions of interventionism fail to realize that their program thus implies the establishment of full government supremacy in all economic matters and ultimately brings about a state of affairs that does not differ from what is called the German or the Hindenburg pattern of socialism. If it is in the jurisdiction of the government to decide whether or not definite conditions of the economy justify its intervention, no sphere of operation is left to the market. Then it is no longer the consumers who ultimately determine what should be produced, in what quantity, of what quality, by whom, where, and how—but it is the government. For as soon as the outcome brought about by the operation of the unhampered market differs from what the authorities consider “socially” desirable, the government interferes. That means the market is free as long as it does precisely what the government wants it to do. It is “free” to do what the authorities consider to be the “right” things, but not to do what they consider the “wrong” things; the decision concerning what is right and what is wrong rests with the government. Thus the doctrine and the practice of interventionism ultimately tend to abandon what originally distinguished them from outright socialism and to adopt entirely the principles of totalitarian all-around planning.

  4

  Righteousness as the Ultimate Standard of the Individual’s Actions

  According to a widespread opinion it is possible, even in the absence of government interference with business, to divert the operation of the market economy from those lines along which it would develop if left to exclusive control by the profit motive. Advocates of a social reform to be accomplished by compliance with the principles of Christianity or with the demands of “true” morality maintain that conscience should also guide well-intentioned people in their dealings on the market. If all people were prepared not only to concern themselves about profit, but no less about their religious and moral obligations, no government compulsion and coercion would be required in order to put things right. What is needed is not a reform of government and the laws of the country, but the moral purification of man, a return to the Lord’s commandments and to the precepts of the moral code, a turning away from the vices of greed and selfishness. Then it will be easy to reconcile private ownership of the means of production with justice, righteousness, and fairness. The disastrous effects of capitalism will be eliminated without prejudice to the individual’s freedom and initiative. People will dethrone the Moloch capitalism without enthroning the Moloch state.

  The arbitrary value judgments which are at the bottom of these opinions need not concern us here. What these critics blame capitalism for is irrelevant; their errors and fallacies are beside the point. What does matter is the idea of erecting a social system on the twofold basis of private property and of moral principles restricting the utilization of private property. The system recommended, say its advocates, will be neither socialism nor capitalism nor interventionism. Not socialism, because it will preserve private ownership of the means of production; not capitalism, because conscience will be supreme and not the urge for profit; not interventionism, because there will be no need for government interference with the market.

  In the market economy the individual is free to act within the orbit of private property and the market. His choices are final. For his fellow men his actions are data which they must take into account in their own acting. The coordination of the autonomous actions of all individuals is accomplished by the operation of the market. Society does not tell a man what to do and what not to do. There is no need to enforce cooperation by special orders or prohibitions. Noncooperation penalizes itself. Adjustment to the requirements of society’s productive effort and the pursuit of the individual’s own concerns are not in conflict. Consequently no agency is required to settle such conflicts. The system can work and accomplish its tasks without the interference of an authority issuing special orders and prohibitions and punishing those who do not comply.

  Beyond the sphere of private property and the market lies the sphere of compulsion and coercion; here are the dams which organized society has built for the protection of private property and the market against violence, malice, and fraud. This is the realm of constraint as distinguished from the realm of freedom. Here are rules discriminating between what is legal and what is illegal, what is permitted and what is prohibited. And here is a grim machine of arms, prisons, and gallows and the men operating it, ready to crush those who dare to disobey.

  Now, the reformers with whose plans we are concerned suggest that along with the norms designed for the protection and preservation of private property further ethical rules should be ordained. They want to realize in production and consumption things other than those realized under the social order in which the individuals are not checked by any obligation other than that of not infringing upon the persons of their fellow men and upon the right of private property. They want to ban those motives that direct the individual’s action in the market economy (they call them selfishness, acquisitiveness, profit-seeking) and to replace them with other impulses (they call them conscientiousness, righteousness, altruism, fear of God, charity). They are convinced that such a moral reform would in itself be sufficient to safeguard a mode of operation of the economic system, more satisfactory from their point of view than that of unhampered capitalism, without any of those special governmental measures which interventionism and socialism require.

  The supporters of these doctrines fail to recognize the role which those springs of action they condemn as vicious play in the operation of the market economy. The only reason why the market economy can operate without government orders telling everybody precisely what he should do and how he should do it is that it does not ask anybody to deviate from those lines of conduct which best serve his own interests. What integrates the individual’s actions into the whole of the social system of production is the pursuit of his own purposes. In indulging in his “acquisitiveness” each actor contributes his share to the best possible arrangement of production activities. Thus, within the sphere of private property and the laws protecting it against encroachments on the part of violent or fraudulent action, there is no antagonism between the interests of the individual and those of society.

  The market economy becomes a chaotic muddle if this predominance of private property which the reformers disparage as selfishness is eliminated. In urging people to listen to the voice of their conscience and to substitute considerations of public welfare for those of private profit, one does not create a working and satisfactory social order. It is not enough to tell a man not to buy on the cheapest market and not to sell on the dearest market. It is not enough to tell him not to strive after profit and not to avoid losses. One must establish unambiguous rules for the guidance of conduct in each concrete situation.

  Says the reformer: The entrepreneur is rugged and selfish when, taking advantage of his own superiority, he underbids the prices asked by a less efficient competitor and thus forces the man to go out of business. But how should the “altruistic” entrepreneur proceed? Should he under no circumstances sell at a price lower than any competitor? Or are there certain conditions which justify underbidding the competitor’s prices?

  Says the reformer on the other hand: The entrepreneur is rugged and selfish when, taking advantage of the state of the market, he asks a price so high that poor people are excluded from purchasing the merchandise. But what should the “good” entrepreneur do? Should he give away the merchandise free of charge? If he charges any price, however low, there will always be people who cannot buy at all or not so much as they would buy if the price were still lower. What group of those eager to buy is the entrepreneur free to exclude from getting the merchandise?

  There is no need to deal at this point of our investigation with the consequences resulting from any deviation from the height of prices as determined on an unhampered market. If the seller avoids underbidding his less efficient competitor, a part at least of his supply remains unsold. If the seller offers the merchandise at a price lower than that determined on an unhampered market, the supply available is insufficient to enable all those ready to expend this lower price to get what they are asking for. We will analyze later these as well as other consequences of any deviation from the market prices.2 What we must recognize even at this point is that one cannot content oneself simply by telling the entrepreneur that he should not let himself be guided by the state of the market. It is imperative to tell him how far he must go in asking and paying prices. If it is no longer profit-seeking that directs the entrepreneurs’ actions and determines what they produce and in what quantities, if the entrepreneurs are no longer bound by the instrumentality of the profit motive to serve the consumers to the best of their abilities, it is necessary to give them definite instructions. One cannot avoid guiding their conduct by specified orders and prohibitions, precisely such decrees as are the mark of government interference with business. Any attempt to render such interference superfluous by attributing primacy to the voice of conscience, to charity and brotherly love, is vain.

  The advocates of a Christian social reform pretend that their ideal of greed and profit-seeking tamed and restrained by conscientiousness and compliance with the moral law worked rather well in the past. All the evils of our day are caused by defection from the precepts of the church. If people had not defied the commandments and had not coveted unjust profit, mankind would still enjoy the bliss experienced in the Middle Ages when at least the elite lived up to the principles of the Gospels. What is needed is to bring back those good old days and then to see that no new apostasy deprives men of their beneficent effects.

  There is no need to enter into an analysis of the social and economic conditions of the thirteenth century which these reformers praise as the greatest of all periods of history. We are concerned merely with the notion of just prices and wage rates which was essential in the social teachings of the doctors of the church and which the reformers want to raise to the position of the ultimate standard of economic conduct.

  It is obvious that with theorists this notion of just prices and wage rates always refers and always referred to a definite social order which they considered the best possible order. They recommend the adoption of their ideal scheme and its preservation forever. No further changes are to be tolerated. Any alteration of the best possible state of social affairs can only mean deterioration. The world view of these philosophers does not take into account man’s ceaseless striving for improvement of the material conditions of wellbeing. Historical change and a rise in the general standard of living are notions foreign to them. They call “just” that mode of conduct that is compatible with the undisturbed preservation of their utopia, and everything else unjust.

  However, the notion of just prices and wage rates as present to the mind of people other than philosophers is very different. When the non-philosopher calls a price just, what he means is that the preservation of this price improves or at least does not impair his own revenues and station in society. He calls unjust any price that jeopardizes his own wealth and station. It is “just” that the prices of those goods and services which he sells rise more and more and that the prices of those goods and services he buys drop more and more. To the farmer no price of wheat, however high, appears unjust. To the wage earner no wage rates, however high, appear unfair. But the farmer is quick to denounce every drop in the price of wheat as a violation of divine and human laws, and the wage earners rise in rebellion when their wages drop. Yet the market society has no means of adjusting production to changing conditions other than the operation of the market. By means of price changes it forces people to restrict the production of articles less urgently asked for and to expand the production of those articles for which consumers’ demand is more urgent. The absurdity of all endeavors to stabilize prices consists precisely in the fact that stabilization would prevent any further improvement and result in rigidity and stagnation. The flexibility of commodity prices and wage rates is the vehicle of adjustment, improvement, and progress. Those who condemn changes in prices and wage rates as unjust, and who ask for the preservation of what they call just, are in fact combating endeavors to make economic conditions more satisfactory.

  It is not unjust that there has long prevailed a tendency toward such a determination of the prices of agricultural products that the greater part of the population abandoned farming and moved toward the processing industries. But for this tendency, 90 per cent or more of the population would still be occupied in agriculture and the processing industries would have been stunted in their growth. All strata of the population, including the farmers, would be worse off. If the scholastic doctrine of the just price had been put into practice, the thirteenth century’s economic conditions would still prevail. Population figures would be much smaller than they are today and the standard of living much lower.

  Both varieties of the just price doctrine, the philosophical and the popular, agree in their condemnation of the prices and wage rates as determined on the unhampered market. But this negativism does not in itself provide any answer to the question of what height the just prices and wage rates should attain. If righteousness is to be elevated to the position of the ultimate standard of economic action, one must unambiguously tell every actor what he should do, what prices he should ask, and what prices he should pay in each concrete case, and one must force—by recourse to an apparatus of violent compulsion and coercion—all those venturing disobedience to comply with these orders. One must establish a supreme authority issuing norms and regulating conduct in every respect, altering these norms if need be, interpreting them authentically, and enforcing them. Thus the substitution of social justice and righteousness for selfish profit-seeking requires for its realization precisely those policies of government interference with business which the advocates of the moral purification of mankind want to make superfluous. No deviation from the unhampered market economy is thinkable without authoritarian regimentation. Whether the authority in which these powers are vested is called lay government or theocratical priesthood makes no difference.

  The reformers, in exhorting people to turn away from selfishness, address themselves to capitalists and entrepreneurs, and sometimes, although only timidly, to wage earners as well. However, the market economy is a system of consumers’ supremacy. The sermonizers should appeal to consumers, not to producers. They should persuade the consumers to renounce preferring better and cheaper merchandise to poorer and dearer merchandise lest they hurt the less efficient producer. They should persuade them to restrict their own purchases in order to provide poorer people with the opportunity to buy more. If one wants the consumers to act in this way, one must tell them plainly what to buy, in what quantity, from whom, and at what prices; and one must provide for enforcing such orders by coercion and compulsion. But then one has adopted exactly that system of authoritarian control which moral reform wants to make unnecessary.

  Whatever freedom individuals can enjoy within the framework of social cooperation is conditional upon the concord of private gain and public weal. Within the orbit in which the individual, in pursuing his own wellbeing, advances also—or at least does not impair—the well-being of his fellow men, people going their own ways jeopardize neither the preservation of society nor the concerns of other people. A realm of freedom and individual initiative emerges, a realm in which man is allowed to choose and to act of his own accord. This sphere of freedom, by the socialists and interventionists contemptuously dubbed “economic freedom,” is alone what makes any of those conditions possible that are commonly called freedoms within a system of social cooperation under the division of labor. It is the market economy or capitalism with its political corollary (the Marxians would have to say: with its “superstructure”), representative government.

  Those who contend that there is a conflict between the acquisitiveness of various individuals or between the acquisitiveness of individuals on the one hand and the commonweal on the other, cannot avoid advocating the suppression of the individuals’ right to choose and to act. They must substitute the supremacy of a central board of production management for the discretion of the citizens. In their scheme of the good society there is no room left for private initiative. The authority issues orders and everybody is forced to obey.

  5

  The Meaning of Laissez Faire

  In eighteenth-century France the saying laissez faire, laissez passer was the formula into which some of the champions of the cause of liberty compressed their program. Their aim was the establishment of the unhampered market society. In order to attain this end they advocated the abolition of all laws preventing more industrious and more efficient people from outdoing less industrious and less efficient competitors and restricting the mobility of commodities and of men. It was this that the famous maxim was designed to express.

  In our age of passionate longing for government omnipotence the formula laissez faire is in disrepute. Public opinion now considers it a manifestation both of moral depravity and of the utmost ignorance.

  As the interventionist sees things, the alternative is “automatic forces” or “conscious planning.”3 It is obvious, he implies, that to rely upon automatic processes is sheer stupidity. No reasonable man can seriously recommend doing nothing and letting things go as they do without interference on the part of purposive action. A plan, by the very fact that it is a display of conscious action, is incomparably superior to the absence of any planning. Laissez faire is said to mean: Let the evils last, do not try to improve the lot of mankind by reasonable action.

  This is utterly fallacious talk. The argument advanced for planning is entirely derived from an impermissible interpretation of a metaphor. It has no foundation other than the connotations implied in the term “automatic” which it is customary to apply in a metaphorical sense for the description of the market process.4 Automatic, says the Concise Oxford Dictionary,5 means “unconscious, unintelligent, merely mechanical.” Automatic, says Webster’s Collegiate Dictionary,6 means “not subject to the control of the will, . . . performed without active thought and without conscious intention or direction.” What a triumph for the champion of planning to play this trump card!

  The truth is that the alternative is not between a dead mechanism or a rigid automatism on one hand and conscious planning on the other hand. The alternative is not plan or no plan. The question is whose planning? Should each member of society plan for himself, or should a benevolent government alone plan for them all? The issue is not automatism versus conscious action; it is autonomous action of each individual versus the exclusive action of the government. It is freedom versus government omnipotence.

  Laissez faire does not mean: Let soulless mechanical forces operate. It means: Let each individual choose how he wants to cooperate in the social division of labor; let the consumers determine what the entrepreneurs should produce. Planning means: Let the government alone choose and enforce its rulings by the apparatus of coercion and compulsion.

  Under laissez faire, says the planner, it is not those goods which people “really” need that are produced, but those goods from the sale of which the highest returns are expected. It is the objective of planning to direct production toward the satisfaction of the “true” needs. But who is to decide what the “true” needs are?

  Thus, for instance, Professor Harold Laski, the former chairman of the British Labor Party, would determine as the objective of the planned direction of investment “that the use of the investor’s savings will be in housing rather than in cinemas.”7 It is beside the point whether or not one agrees with the professor’s view that better houses are more important than moving pictures. It is a fact that the consumers, in spending part of their money for admission to the movies, have made another choice. If the masses of Great Britain, the same people whose votes swept the Labor Party into power, were to stop patronizing the moving pictures and to spend more for comfortable homes and apartments, profit-seeking business would be forced to invest more in building homes and apartment houses and less in the production of expensive pictures. It was Mr. Laski’s desire to defy the wishes of the consumers and to substitute his own will for that of the consumers. He wanted to do away with the democracy of the market and to establish the absolute rule of the production tsar. Perhaps he believed that he was right from a higher point of view, and that as a superman he was called upon to impose his own valuations on the masses of inferior men. But then he ought to have been frank enough to say so plainly.

  All this passionate praise of the supereminence of government action is but a poor disguise for the individual interventionist’s self-deification. The great god State is a great god only because it is expected to do exclusively what the individual advocate of interventionism wants to see achieved. Only that plan is genuine which the individual planner fully approves. All other plans are simply counterfeit. In saying “plan” what the author of a book on the benefits of planning has in mind is, of course, his own plan alone. He does not take into account the possibility that the plan which the government puts into practice may differ from his own plan. The various planners agree only with regard to their rejection of laissez faire, i.e., the individuals’ discretion to choose and to act. They entirely disagree with regard to the choice of the unique plan to be adopted. To every exposure of the manifest and incontestable defects of interventionist policies the champions of interventionism react in the same way. These faults, they say, were the results of spurious interventionism; what we are advocating is good interventionism, not bad interventionism. And, of course, good interventionism is the professor’s own brand.

  Laissez faire means: Let the common man choose and act; do not force him to yield to a dictator.

  6

  Direct Government Interference with Consumption

  In investigating the economic problems of interventionism we do not have to deal with those actions of the government whose aim it is to influence immediately the consumer’s choice of consumers’ goods. Every act of government interference with business must indirectly affect consumption. As the government’s interference alters the market data, it must also alter the valuations and the conduct of the consumers. But if the aim of the government is merely to force the consumers directly to consume goods other than what they would have consumed in the absence of the government’s decree, no special problems emerge to be scrutinized by economics. It is beyond doubt that a strong and ruthless police apparatus has the power to enforce such decrees.

  In dealing with the choices of the consumers we do not ask what motives induced a man to buy a and not to buy b. We merely investigate what effects on the determination of market prices and thereby on production were brought about by the concrete conduct of the consumers. These effects do not depend on the considerations which led individuals to buy a and not to buy b; they depend only on the real acts of buying and abstention from buying. It is immaterial for the determination of the prices of gas masks whether people buy them of their own accord or because the government forces everybody to have a gas mask. What alone counts is the size of the demand.

  Governments which are eager to keep up the outward appearance of freedom even when curtailing freedom disguise their direct interference with consumption under the cloak of interference with business. The aim of American prohibition was to prevent the individual residents of the country from drinking alcoholic beverages. But the law hypocritically did not make drinking as such illegal and did not penalize it. It merely prohibited the manufacture, the sale and the transportation of intoxicating liquors, the business transactions which precede the act of drinking. The idea was that people indulge in the vice of drinking only because unscrupulous businessmen prevail upon them. It was, however, manifest that the objective of prohibition was to encroach upon the individuals’ freedom to spend their dollars and to enjoy their lives according to their own fashion. The restrictions imposed upon business were only subservient to this ultimate end.

  The problems involved in direct government interference with consumption are not catallactic problems. They go far beyond the scope of catallactics and concern the fundamental issues of human life and social organization. If it is true that government derives its authority from God and is entrusted by Providence to act as the guardian of the ignorant and stupid populace, then it is certainly its task to regiment every aspect of the subject’s conduct. The Godsent ruler knows better what is good for his wards than they do themselves. It is his duty to guard them against the harm they would inflict upon themselves if left alone.

  Self-styled “realistic” people fail to recognize the immense importance of the principles implied. They contend that they do not want to deal with the matter from what, they say, is a philosophic and academic point of view. Their approach is, they argue, exclusively guided by practical considerations. It is a fact, they say, that some people harm themselves and their innocent families by consuming narcotic drugs. Only doctrinaires could be so dogmatic as to object to the government’s regulation of the drug traffic. Its beneficent effects cannot be contested.

  However, the case is not so simple as that. Opium and morphine are certainly dangerous, habit-forming drugs. But once the principle is admitted that it is the duty of government to protect the individual against his own foolishness, no serious objections can be advanced against further encroachments. A good case could be made out in favor of the prohibition of alcohol and nicotine. And why limit the government’s benevolent providence to the protection of the individual’s body only? Is not the harm a man can inflict on his mind and soul even more disastrous than any bodily evils? Why not prevent him from reading bad books and seeing bad plays, from looking at bad paintings and statues and from hearing bad music? The mischief done by bad ideologies, surely, is much more pernicious, both for the individual and for the whole society, than that done by narcotic drugs.

  These fears are not merely imaginary specters terrifying secluded doctrinaires. It is a fact that no paternal government, whether ancient or modern, ever shrank from regimenting its subjects’ minds, beliefs, and opinions. If one abolishes man’s freedom to determine his own consumption, one takes all freedoms away. The naïve advocates of government interference with consumption delude themselves when they neglect what they disdainfully call the philosophical aspect of the problem. They unwittingly support the case of censorship, inquisition, religious intolerance, and the persecution of dissenters.

  In dealing with the catallactics of interventionism we do not discuss these political consequences of direct government interference with the citizens’ consumption. We are exclusively concerned with those acts of interference which aim at forcing the entrepreneurs and capitalists to employ the factors of production in a way different from what they would have done if they merely obeyed the dictates of the market. In doing this, we do not raise the question of whether such interference is good or bad from any preconceived point of view. We merely ask whether or not it can attain those ends which those advocating and resorting to it are trying to attain.

  Corruption

  An analysis of interventionism would be incomplete if it were not to refer to the phenomenon of corruption.

  There are hardly any acts of government interference with the market process that, seen from the point of view of the citizens concerned, would not have to be qualified either as confiscations or as gifts. As a rule, one individual or a group of individuals is enriched at the expense of other individuals or groups of individuals. But in many cases, the harm done to some people does not correspond to any advantage for other people.

  There is no such thing as a just and fair method of exercising the tremendous power that interventionism puts into the hands of the legislature and the executive. The advocates of interventionism pretend to substitute for the—as they assert, “socially” detrimental—effects of private property and vested interests the unlimited discretion of the perfectly wise and disinterested legislator and his conscientious and indefatigable servants, the bureaucrats. In their eyes the common man is a helpless infant, badly in need of a paternal guardian to protect him against the sly tricks of a band of rogues. They reject all traditional notions of law and legality in the name of a “higher and nobler” idea of justice. Whatever they themselves do is always right because it hurts those who selfishly want to retain for themselves what, from the point of view of this higher concept of justice, ought to belong to others.

  The notions of selfishness and unselfishness as employed in such reasoning are self-contradictory and vain. As has been pointed out, every action aims at the attainment of a state of affairs that suits the actor better than the state that would prevail in the absence of this action. In this sense every action is to be qualified as selfish. The man who gives alms to hungry children does it, either because he values his own satisfaction expected from this gift higher than any other satisfaction he could buy by spending this amount of money, or because he hopes to be rewarded in the beyond. The politician is, in this sense, always selfish no matter whether he supports a popular program in order to get an office or whether he firmly clings to his own—unpopular—convictions and thus deprives himself of the benefits he could reap by betraying them.

  In the terminology of anticapitalism the words selfish and unselfish are used to classify people from the point of view of a doctrine that considers equality of wealth and income as the only natural and fair state of social conditions, that brands those who own or earn more than the average as exploiters, and that condemns entrepreneurial activities as detrimental to the commonweal. To be in business, to depend directly on the approval or disapproval of one’s actions by the consumers, to woo the patronage of the buyers, and to earn profit if one succeeds in satisfying them better than one’s competitors do is, from the point of view of officialdom’s ideology, selfish and shameful. Only those on the government’s payroll are rated as unselfish and noble.

  Unfortunately the officeholders and their staffs are not angelic. They learn very soon that their decisions mean for the businessmen either considerable losses or—sometimes—considerable gains. Certainly there are also bureaucrats who do not take bribes; but there are others who are anxious to take advantage of any “safe” opportunity of “sharing” with those whom their decisions favor.

  In many fields of the administration of interventionist measures, favoritism simply cannot be avoided. Take, for example, the case of export or import licenses. Such a license has for the licensee a definite cash value. To whom ought the government grant a license and to whom should it be denied? There is no neutral or objective yardstick available to make the decision free from bias and favoritism. Whether or not money changes hands in the affair does not matter. The scandal is the same when the license is given to people who have rendered or are expected to render other kinds of valuable services (e.g., in casting their votes) to the people upon whom the decision depends.

  Corruption is a regular effect of interventionism. It may be left to the historians and to the lawyers to deal with the problems involved.8

  [1. ]See above, pp. 258–59.

  [2. ]See below, pp. 758–67.

  [3. ]Cf. A. H. Hansen, “Social Planning for Tomorrow,” in The United States after the War (Cornell University Lectures, Ithaca, 1945), pp. 32–33.

  [4. ]See above, pp. 315–16.

  [5. ](3d ed. Oxford, 1934), p. 74.

  [6. ](5th ed. Springfield, 1946), p. 73.

  [7. ]Cf. Laski’s broadcast, “Revolution by Consent,” reprinted in Talks, X, no. 10 (October, 1945), 7.

  [8. ]It is usual today to plead the cause of communist revolutions by denouncing the attacked noncommunist government as corrupt. Thus one tried to justify the support that a part of the American press and some of the representatives of the American Administration gave first to the Chinese communists and then to those of Cuba by calling the regime of Chiang Kai-shek and later that of Batista corrupt. But from this point of view, every communist revolution against a government that is not fully committed to laissez faire appears as justified.

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  13: Session V Reading 1: The Slippery Slope of Interventionism

  Ludwig von Mises, Human Action: A Treatise on Economics, in 4 vols., ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007). Vol. 3. Chapter: CHAPTER 36: The Crisis of Interventionism

  Accessed from oll.libertyfund.org/title/1895/110743 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  CHAPTER 36

  The Crisis of Interventionism

  1

  The Harvest of Interventionism

  The interventionist policies as practiced for many decades by all governments of the capitalistic West have brought about all those effects which the economists predicted. There are wars and civil wars, ruthless oppression of the masses by clusters of self-appointed dictators, economic depressions, mass unemployment, capital consumption, famines.

  However, it is not these catastrophic events which have led to the crisis of interventionism. The interventionist doctrinaires and their followers explain all these undesired consequences as the unavoidable features of capitalism. As they see it, it is precisely these disasters that clearly demonstrate the necessity of intensifying interventionism. The failures of the interventionist policies do not in the least impair the popularity of the implied doctrine. They are so interpreted as to strengthen, not to lessen, the prestige of these teachings. As a vicious economic theory cannot be simply refuted by historical experience, the interventionist propagandists have been able to go on in spite of all the havoc they have spread.

  Yet the age of interventionism is reaching its end. Interventionism has exhausted all its potentialities and must disappear.

  2

  The Exhaustion of the Reserve Fund

  The idea underlying all interventionist policies is that the higher income and wealth of the more affluent part of the population is a fund which can be freely used for the improvement of the conditions of the less prosperous. The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution. Every measure is ultimately justified by declaring that it is fair to curb the rich for the benefit of the poor.

  In the field of public finance progressive taxation of incomes and estates is the most characteristic manifestation of this doctrine. Tax the rich and spend the revenue for the improvement of the condition of the poor, is the principle of contemporary budgets. In the field of industrial relations shortening the hours of work, raising wages, and a thousand other measures are recommended under the assumption that they favor the employee and burden the employer. Every issue of government and community affairs is dealt with exclusively from the point of view of this principle.

  An illustrative example is provided by the methods applied in the operation of nationalized and municipalized enterprises. These enterprises very often result in financial failure; their accounts regularly show losses burdening the state or the city treasury. It is of no use to investigate whether the deficits are due to the notorious inefficiency of the public conduct of business enterprises or, at least partly, to the inadequacy of the prices at which the commodities or services are sold to the customers. What matters is the fact that the taxpayers must cover these deficits. The interventionists fully approve of this arrangement. They passionately reject the two other possible solutions: selling the enterprises to private entrepreneurs or raising the prices charged to the customers to such a height that no further deficit remains. The first of these proposals is in their eyes manifestly reactionary because they believe that the inevitable trend of history is toward more and more socialization. The second is deemed “antisocial” because it places a heavier load upon the consuming masses. It is fairer to make the taxpayers, i.e., the wealthy citizens, bear the burden. Their ability to pay is greater than that of the average people riding the nationalized railroads and the municipalized subways, trolleys, and buses. To ask that such public utilities should be self-supporting, is, say the interventionists, a relic of the old-fashioned ideas of orthodox finance. One might as well aim at making the roads and the public schools self-supporting.

  It is not necessary to argue with the advocates of this deficit policy. It is obvious that recourse to this ability-to-pay principle depends on the existence of such incomes and fortunes as can still be taxed away. It can no longer be resorted to once these extra funds have been exhausted by taxes and other interventionist measures.

  This is precisely the present state of affairs in most of the European countries. The United States has not yet gone so far; but if the actual trend of its economic policies is not radically altered very soon, it will be in the same condition in a few years.

  For the sake of argument we may disregard all the other consequences which the full triumph of the ability-to-pay principle must bring about and concentrate upon its financial aspects.

  The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. He does not realize that increasing expenditure in one department enjoins restricting it in other departments. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped. In recommending a greater allowance for the schools he simply stresses the point that it would be a good thing to spend more for education. He does not venture to prove that to raise the budgetary allowance for schools is more expedient than to raise that of another department, e.g., that of health. It never occurs to him that grave arguments could be advanced in favor of restricting public spending and lowering the burden of taxation. The champions of cuts in the budget are in his eyes merely the defenders of the manifestly unfair class interests of the rich.

  With the present height of income and inheritance tax rates, this reserve fund out of which the interventionists seek to cover all public expenditure is rapidly shrinking. It has practically disappeared altogether in most European countries. In the United States the recent advances in tax rates produced only negligible revenue results beyond what would be produced by a progression which stopped at much lower rates. High surtax rates for the rich are very popular with interventionist dilettantes and demagogues, but they secure only modest additions to the revenue.1 From day to day it becomes more obvious that large-scale additions to the amount of public expenditure cannot be financed by “soaking the rich,” but that the burden must be carried by the masses. The traditional tax policy of the age of interventionism, its glorified devices of progressive taxation and lavish spending have been carried to a point at which their absurdity can no longer be concealed. The notorious principle that, whereas private expenditures depend on the size of income available, public revenues must be regulated according to expenditures, refutes itself. Henceforth, governments will have to realize that one dollar cannot be spent twice, and that the various items of government expenditure are in conflict with one another. Every penny of additional government spending will have to be collected from precisely those people who hitherto have been intent upon shifting the main burden to other groups. Those anxious to get subsidies will themselves have to foot the bill. The deficits of publicly owned and operated enterprises will be charged to the bulk of the population.

  The situation in the employer-employee nexus will be analogous. The popular doctrine contends that wage earners are reaping “social gains” at the expense of the unearned income of the exploiting classes. The strikers, it is said, do not strike against the consumers but against “management.” There is no reason to raise the prices of products when labor costs are increased; the difference must be borne by employers. But when more and more of the share of the entrepreneurs and capitalists is absorbed by taxes, higher wage rates, and other “social gains” of employees, and by price ceilings, nothing remains for such a buffer function. Then it becomes evident that every wage raise, with its whole momentum, must affect the prices of the products and that the social gains of each group fully correspond to the social losses of the other groups. Every strike becomes, even in the short run and not only in the long run, a strike against the rest of the people.

  An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

  3

  The End of Interventionism

  The interventionist interlude must come to an end because interventionism cannot lead to a permanent system of social organization. The reasons are threefold.

  First: Restrictive measures always restrict output and the amount of goods available for consumption. Whatever arguments may be advanced in favor of definite restrictions and prohibitions, such measures in themselves can never constitute a system of social production.

  Second: All varieties of interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which—from the point of view of their authors’ and advocates’ valuations—is less desirable than the previous state of affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go farther and farther until the market economy has been entirely destroyed and socialism has been substituted for it.

  Third: Interventionism aims at confiscating the “surplus” of one part of the population and at giving it to the other part. Once this surplus is exhausted by total confiscation, a further continuation of this policy is impossible.

  Marching ever further along the path of interventionism, all those countries that have not adopted full socialism of the Russian pattern are more and more approaching what is called a planned economy, i.e., socialism of the German or Hindenburg pattern. In regard to economic policies, there is nowadays little difference among the various nations and, within each nation, among the various political parties and pressure groups. The historical party names have lost their significance. There are, as far as economic policy is concerned, practically only two factions left: the advocates of the Lenin method of all-around nationalization and the interventionists. The advocates of the free market economy have little influence upon the course of events. What economic freedom still exists is the out-come of the failure of the measures resorted to by the governments, rather than of an intentional policy.

  It is difficult to find out how many of the supporters of interventionism are conscious of the fact that the policies they recommend directly lead toward socialism, and how many hold fast to the illusion that what they are aiming at is a middle-of-the-road system that can last as a permanent system—a “third solution” of the problem of society’s economic organization. At any rate, it is certain that all interventionists believe that the government, and the government alone, is called upon to decide in every single case whether one has to let things go as the market determines them or whether an act of intervention is needed. This means that they are prepared to tolerate the supremacy of the consumers only as far as it brings about a result of which they themselves approve. As soon as something happens in the economy that any of the various bureaucratic institutions does not like or that arouses the anger of a pressure group, people clamor for new interventions, controls, and restrictions. But for the inefficiency of the law-givers and the laxity, carelessness, and corruption of many of the functionaries, the last vestiges of the market economy would have long since disappeared.

  The unsurpassed efficiency of capitalism never before manifested itself in a more beneficial way than in this age of heinous anticapitalism. While governments, political parties, and labor unions are sabotaging all business operations, the spirit of enterprise still succeeds in increasing the quantity and improving the quality of products and in rendering them more easily accessible to the consumers. In the countries that have not yet entirely abandoned the capitalistic system the common man enjoys today a standard of living for which the princes and nabobs of ages gone by would have envied him. A short time ago the demagogues blamed capitalism for the poverty of the masses. Today they rather blame capitalism for the “affluence” that it bestows upon the common man.

  It has been shown that the managerial system, i.e., the assignment of ancillary tasks in the conduct of business to responsible helpers to whom a certain amount of discretion can be granted, is possible only within the frame of the profit system.2 What characterizes the manager as such and imparts to him a condition different from that of the mere technician is that, within the sphere of his assignment, he himself determines the methods by which his actions should conform to the profit principle. In a socialist system in which there is neither economic calculation nor capital accounting nor profit computation, there is no room left for managerial activities either. But as long as a socialist commonwealth is still in a position to calculate on the ground of prices determined on foreign markets, it can also utilize a quasi-managerial hierarchy to some extent.

  It is a poor makeshift to call any age an age of transition. In the living world there is always change. Every age is an age of transition. We may distinguish between social systems that can last and such as are inevitably transitory because they are self-destructive. It has already been pointed out in what sense interventionism liquidates itself and must lead to socialism of the German pattern. Some European countries have already reached this phase, and nobody knows whether or not the United States will follow suit. But as long as the United States clings to the market economy and does not adopt the system of full government control of business, the socialist economies of Western Europe will still be in a position to calculate. Their conduct of business still lacks the most characteristic feature of socialist conduct; it is still based on economic calculation. It is therefore in every respect very different from what it would become if all the world were to turn toward socialism.

  It is often said that one half of the world cannot remain committed to the market economy when the other half is socialist, and vice versa. However, there is no reason to assume that such a partition of the earth and the coexistence of the two systems is impossible. If this is really the case, then the present economic system of the countries that have discarded capitalism may go on for an indefinite period of time. Its operation may result in social disintegration, chaos, and misery for the peoples. But neither a low standard of living nor progressive impoverishment automatically liquidates an economic system. It gives way to a more efficient system only if people themselves are intelligent enough to comprehend the advantages such a change might bring them. Or it may be destroyed by foreign invaders provided with better military equipment by the greater efficiency of their own economic system.

  Optimists hope that at least those nations which have in the past developed the capitalist market economy and its civilization will cling to this system in the future too. There are certainly as many signs to confirm as to disprove such an expectation. It is vain to speculate about the outcome of the great ideological conflict between the principles of private ownership and public ownership, of individualism and totalitarianism, of freedom and authoritarian regimentation. All that we can know beforehand about the result of this struggle can be condensed in the following three statements:

  • 1. We have no knowledge whatever about the existence and operation of agencies which would bestow final victory in this clash on those ideologies whose application will secure the preservation and further intensification of societal bonds and the improvement of mankind’s material well-being. Nothing suggests the belief that progress toward more satisfactory conditions is inevitable or a relapse into very unsatisfactory conditions impossible.
  • 2. Men must choose between the market economy and socialism. They cannot evade deciding between these alternatives by adopting a “middle-of-the-road” position, whatever name they may give to it.
  • 3. In abolishing economic calculation the general adoption of socialism would result in complete chaos and the disintegration of social cooperation under the division of labor.

  PART 7

  The Place of Economics in Society

  [1. ]In the United States the surtax rate under the 1942 Act was 52 per cent on the taxable income bracket $22,000–26,000. If the surtax had stopped at this level, the loss of revenue on 1942 income would have been about $249 million or 2.8 per cent of the total individual income tax for that year. In the same year the total net incomes in the income classes of $10,000 and above was $8,912 million. Complete confiscation of these incomes would not have produced as much revenue as was obtained in this year from all taxable incomes, namely, $9,046 million. Cf. A Tax Program for a Solvent America, Committee on Postwar Tax Policy (New York, 1945), pp. 116–17, 120.

  [2. ]Cf. above, pp. 305–8.

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  14: Session V Reading 3: The Slippery Slope of Interventionism

  The 2nd reading for this session is not availble online at this time. Please read “Theory of Price Controls” in Mises, A Critique of Interventionsm (1929).

  Please read Chapters 10-13 of Part II In Interventionism from the links below.

  Ludwig von Mises, Economic Freedom and Interventionism: An Anthology of Articles and Essays, selected and edited by Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007). Chapter: PART II: Interventionism

  Accessed from oll.libertyfund.org/title/1887/109577 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  PART II

  Interventionism

  It is self-evident that human beings are not omniscient; they cannot know everything. And they are not omnicompetent; they make mistakes. However, Mises was convinced that they would have more knowledge and would make fewer mistakes if they were free and if their voluntary actions were not hampered. Mises’s understanding of economic theory convinced him that men who are free to seek their respective goals by peaceful means, to compete, cooperate, bargain, and exchange with one another, to adjust and adapt to changing conditions, will learn by reason and experience. They will often be able to correct their mistakes, misjudgments, and miscalculations before the effects become serious. Everyone concerned will benefit as a result.

  Realizing the advantages of peaceful social cooperation, Mises was led to advocate the protection of free markets and private property. The role of government was to act as “night watchman.” It should not otherwise interfere with the peaceful and voluntary actions of individuals. It should not try to be both God and Santa Claus. Government should use its power, as Mises says, “only to protect decent law-abiding people against violent or fraudulent attacks.”

  The articles in this section point out the unfortunate consequences when government goes beyond this limited role. Some of the articles in this section date from the period of the post–World War II “Cold War” against communism and the Korean War (1950–53). The effects of inflation (monetary expansion) were then in the news and price controls were imposed temporarily. Among the issues discussed here are government spending, special privileges, artificially maintained wage rates, credit expansion, and inflation, all of which persist to this day.

  The people, Mises said, must come to understand the consequences of these programs. It is “diabolic,” Mises writes in one article, “to egg various pressure groups on to ask for more and more government spending to be financed by credit expansion. The bill for such government extravagance is always footed by the most industrious and provident people,” to the disadvantage of all the people.

  10

  The Why of Human Action*

  There are no ivory towers to house economists. Whether he likes it or not, the economist is always dragged into the turmoil of the arena in which nations, parties, and pressure groups are battling. Nothing absorbs the minds of our contemporaries more intensely than the pros and cons of economic doctrines. Economic issues engross the attention of modern writers and artists more than any other problem. Philosophers and theologians today deal more often with economic themes than with those topics which were once considered as the proper field of philosophical and theological studies. What divides mankind into two hostile camps, whose violent clash may destroy civilization, is antagonistic ideas with regard to the economic interpretation of human life and action.

  Politicians proclaim their utter contempt for what they label as “mere theory.” They pretend that their own approach to economic problems is purely practical and free from any dogmatic prepossessions. They fail to realize that their policies are determined by definite assumptions about causal relations, i.e., that they are based on definite theories. Acting man, in choosing certain means for the attainment of ends aimed at, is necessarily always guided by “mere theory”; there is no practice without an underlying doctrine. In denying this truth, the politician tries in vain to withdraw the faulty, self-contradictory, and a hundred-times refuted misapprehensions directing his conduct of affairs from the criticism of the economists.

  The social function of economic science consists precisely in developing sound economic theories and in exploding the fallacies of vicious reasoning. In the pursuit of this task the economist incurs the deadly enmity of all mountebanks and charlatans whose shortcuts to an earthly paradise he debunks. The less these quacks are able to advance plausible objections to an economist’s argument, the more furiously do they insult them.

  Sound Money versus Inflationism and Expansionism

  At the beginning of our century the governments of the civilized nations were committed either to the so-called classical gold standard or to the gold exchange standard. Their conduct of monetary and credit policies was, to be sure, not free from mistakes, and they indulged in a certain amount of credit expansion. But when compared with conditions after 1914, they were moderate in their expansionist ventures and spurned the fantastic projects of the so-called “monetary cranks” who advocated boundless inflation and credit expansion as the patent medicine for all economic ills.

  Yet this rejection of the plans which aimed at making people prosperous through increasing the quantity of money and fiduciary media was not founded upon a satisfactory cognition of the inevitable and undesired consequences of such a policy. The governments were disinclined to deviate from traditional standards of monetary management because the troubles engendered by earlier inflations had not yet been obliterated from the memory of the older statesmen and some vestiges of the prestige of the classical economists still prevailed. Professors and bankers loathed the writings of Ernest Solvay (1838–1922), Silvio Gesell (1862–1930), and a host of other expansionists. But hardly anybody knew why these authors were wrong or how to refute them. In fact the doctrines generally accepted by the treasuries, the central banks, the financial press, and the universities did not differ essentially from the ideas advanced by the “monetary cranks.” These champions of a sweeping social reform to be accomplished by monetary measures only carried the official doctrine to its ultimate logical consequences. It was to be expected that in a coming emergency, such as a great war or revolution, those in office would turn away from their cautious reserve and that orgies of inflation and credit expansion would be rife.

  Such was the state of monetary and credit theory when my Theory of Money and Credit was published.1 I tried to construct a theory based entirely upon the modern subjectivist methods of dealing with economic issues, the marginal utility concept. What was called “inflation” at that time and is passionately praised today under the labels of deficit spending and pump-priming can never make a nation more prosperous. It may bring about a shift of income and wealth from some groups of the population to other groups, but it invariably tends to impair the prosperity of the whole nation. In my book, I pointed out that the phenomenon of interest, i.e., the higher valuation of present goods as against future goods, is an ineluctable category of human conduct which does not depend on the particular structure of society’s economic organization; it cannot be abolished by any statutes or reforms. Endeavors to keep the rate of interest below the height it would attain on a market not sabotaged by credit expansion are doomed to failure in the long run. In the short run they result in an artificial boom which inevitably ends in a crash and slump. The recurrence of periods of economic depression is not a phenomenon inherent in the very course of affairs under laissez-faire capitalism. It is, on the contrary, the outcome of the reiterated attempts to “improve” the operation of capitalism by “cheap money” and credit expansion. If one wants to avert depressions, one must abstain from any tampering with the rate of interest. Thus was elaborated the theory which supporters and critics of my ideas very soon began to call the “Austrian theory of the trade cycle.”

  As expected, my theses were furiously vilified by the apologists of the official doctrine. Especially abusive was the response on the part of the German professors, the self-styled “intellectual bodyguard of the House of Hohenzollern.” In exemplifying one point, a hypothetical assumption was made that the purchasing power of the German mark might drop to one-millionth of its previous equivalent. “What a muddle-headed man who dares to introduce—if only hypothetically—such a fantastic assumption!” shouted one of the reviewers. But a few years later the purchasing power of the mark was down not to one-millionth, but to one-billionth of its prewar amount!

  It is a sad fact that people are reluctant to learn from either theory or experience. Neither the disasters manifestly brought about by deficit spending and low interest-rate policies, nor the confirmation of the theories in my Theory of Money and Credit by such eminent thinkers as Friedrich von Hayek, Henry Hazlitt, and the late Benjamin M. Anderson have up to now been able to put an end to the popularity of the fiat money frenzy.* The monetary and credit policies of all nations are headed for a new catastrophe, probably more disastrous than any of the older slumps.

  The Economic Theory of Socialism

  Sixty years ago Sidney Webb boasted that the economic history of the century is an almost continuous record of the progress of socialism. A few years later an eminent British statesman, Sir William Harcourt, asserted: “We are all Socialists now.” There cannot be any doubt that all nations were pursuing policies which were bound to result finally in the establishment of all-round planning exclusively by the government, i.e., socialism or communism.

  Yet nobody ventured to analyze the economic problems of a socialist system. Karl Marx had outlawed such studies as merely “utopian” and “unscientific.” As he saw it, the mythical productive forces which inevitably determine the course of history and direct the conduct of men “independently of their wills” would in due time arrange everything in the best possible way; it would be a vain presumption of mortal men to arrogate to themselves a judgment in these matters. This Marxian taboo was strictly observed. Hosts of pseudo-economists and pseudo-experts dealt with alleged shortcomings of capitalism and praised the blessings of government control of all human activities; but hardly anybody had the intellectual honesty to investigate the economic problems of socialism.

  To put an end to this intolerable state of affairs I wrote several essays and finally a book on socialism.2 The main result of my studies was to prove that a socialist commonwealth would not be in a position to apply economic calculation. When socialism is limited to one or to a few countries only, the socialists can still resort to economic calculation on the basis of prices determined on the markets of nonsocialist countries. But once all countries adopted socialism, there would no longer be any market for the factors of production, the factors of production would no longer be sold and bought, and no prices would be determined for them.

  This means that it would become impossible for a socialist management to reduce the various factors of production to a common denominator and thereby resort to calculation in planning future action and in appraising the result of past action. Such a socialist management would simply not know whether what it planned and executed was the most appropriate procedure to attain the ends sought. It would operate in the dark. It would squander scarce factors of production, both material and human (labor). The paradox of planning is precisely that it abolishes the conditions required for rational action based on weighing cost (input) and result (output). What is advocated as conscious planning is in fact the elimination of conscious purposive action.

  The socialist and communist authors could not help admitting that my demonstration was irrefutable. To save face they radically reversed their argument. Until 1920, the year in which my thesis on economic calculation was first published, all socialists had declared that the essence of socialism was the elimination of the market and market prices. All the blessings which they expected from the realization of socialism were described as the result of this abolition of the price system. But now they are anxious to show that markets and market prices can be preserved even under socialism. They are drafting spurious and self-contradictory schemes for a socialism in which people “play” market in the way children play war or railroad. They do not comprehend in what respect such childish play differs from the real thing it tries to imitate.

  The Middle Way

  Many politicians and authors believe that they could avoid the necessity of choosing between capitalism (laissez faire) and socialism (communism, planning). They recommend a third solution which—as they say—is as far from capitalism as it is from socialism. In imperial Germany this third system was called Sozialpolitik; in the United States it is known as the New Deal. Economists prefer the term used by the French, interventionism. The idea is that private ownership of the means of production should not be entirely abolished; but the government should “improve” and correct the operation of the market by interfering with the operations of the capitalists and entrepreneurs—by means of orders and prohibitions, taxes, and subsidies.

  But interventionism cannot work as a permanent system of society’s economic organization. The various measures recommended must necessarily bring about results which—from the point of view of their own advocates and the governments resorting to them—are more unsatisfactory than the previous state of affairs which they were designed to alter. If the government neither acquiesces in this outcome nor derives from it the conclusion that it is advisable to abstain from all such measures, it is forced to supplement its first steps by more and more interference until it has abolished private control of the means of production entirely and thus established socialism. The conduct of economic affairs, i.e., the determination of the purposes for which the factors of production should be employed, can ultimately be directed either by buying and abstention from buying on the part of consumers, or by government decrees. There is no middle way. Control is indivisible.

  It is interventionism that produces all those evils for which a misguided public opinion indicts laissez-faire capitalism. As has been pointed out above, the endeavors to lower the rate of interest by means of credit expansion generate the recurrence of depression. Attempts to raise wage rates above the height they would attain in an unhampered market result in prolonged mass unemployment. “Soak-the-rich” taxation results in capital consumption. The joint outcome of all interventionist measures is general impoverishment. It is a misnomer to call the interventionist state the welfare state. What it ultimately achieves is not improving but lowering the common man’s welfare, his standard of living. The unprecedented economic development of the United States and the high standard of living of its population were achievements of the free enterprise system.

  The Interconnectedness of All Economic Phenomena

  Economics does not allow any breaking up into special branches. It invariably deals with the interconnectedness of all phenomena of acting and economizing. All economic facts mutually condition one another. Each of the various economic problems must be dealt with in the frame of a comprehensive system assigning its due place and weight to every aspect of human wants and desires. All monographs remain fragmentary if not integrated into a systematic treatment of the whole body of social and economic relations.

  To provide such a comprehensive analysis is the task of my book Human Action, a Treatise on Economics (New Haven: Yale University Press, 1949). It is the consummation of lifelong studies and investigations, the precipitate of half a century of experience. I saw the forces operating which could not but annihilate the high civilization and prosperity of Europe. In writing my book, I was hoping to contribute to the endeavors of our most eminent contemporaries to prevent this country from following the path which leads to the abyss.

  11

  Deception of Government Intervention*

  The intellectual and moral faculties of man can thrive only where people associate with one another peacefully. Peace is the origin of all human things, not—as the ancient Greek philosopher Heraclitus said—war. But as human nature is, peace can be established and preserved only by a power fit and ready to crush all peacebreakers.

  Government or state is the social apparatus of coercion and compulsion. Its purpose is to make the world safe for peaceful human cooperation by protecting society against attacks on the part of foreign aggressors or domestic gangsters. The characteristic mark of a government is that it has, within a definite part of the earth’s surface, the exclusive power and right to resort to violence.

  Within the orbit of Western civilization the power and the functions of government are limited. Many hundreds, even thousands of years of bitter conflicts resulted in a state of affairs that granted to the individual citizens effective rights and freedom, not mere freedoms. In the market economy the individuals are free from government intervention as long as they do not offend against the duly promulgated laws of the land. The government interferes only to protect decent law-abiding people against violent or fraudulent attacks.

  There are people who call government an evil, although a necessary evil. However, what is needed in order to attain a definite end must not be called an evil in the moral connotation of the term. It is a means, but not an evil. Government may even be called the most beneficial of all earthly institutions as without it no peaceful human cooperation, no civilization, and no moral life would be possible. In this sense the apostle declared that “the powers that be are ordained of God.”

  But the very existence of a government apparatus of coercion and compulsion makes a new problem arise. The men handling this apparatus yield too easily to the temptation of misusing their power. They turn their weapons against those whom they were expected to serve and to protect. The main political problem of all ages was and is: how to prevent the rulers from turning into despots and making the state totalitarian. Defense of the individual’s liberty against the encroachments of tyrannical governments, against the dangers of a totalitarian regime, was and is the essential issue of the history of Western civilization.

  Now in our age the cause of totalitarianism has won new vigor through the adoption of a ruse. The radical suppression of every individual’s freedom to choose his own way for the benefit of the supreme political authority is praised, under the labels of socialism, communism, or planning, as the attainment of true liberty. Those aiming at a state of affairs in which every individual will be reduced to the status of a mere cog in the plans of the “social engineers” are parading as the successors of the great champions of freedom. The subjugation of a free nation by the forces of the most tyrannical regime history has ever known is called “liberation.”

  Middle-of-the-Road Policy

  Faced with the tremendous challenge of totalitarianism, the ruling parties of the West do not venture to preserve the system of free enterprise that gave to their nations the highest standard of living ever attained in history. They ignore the fact that conditions for all citizens of the United States and those other countries which have not put too many obstacles in the way of free enterprise are much more favorable than conditions for the inhabitants of the totalitarian countries. They think that it is necessary to abandon the market economy and to adopt a middle-of-the-road policy that is supposed to avoid the alleged deficiencies of the capitalistic economy. They aim at a system which, as they see it, is as far from socialism as it is from capitalism and which is better than either of those two. By direct intervention of the government, they want to remove what they consider unsatisfactory in the market economy.

  Such a policy of government interference with the market phenomena was already recommended by Marx and Engels in the Communist Manifesto. But the authors of the Communist Manifesto considered the ten groups of interventionist measures they suggested as measures to bring about step-by-step full socialism. However, in our time the government spokesmen and the politicians of the left recommend the same measures as a method, even as the only method, to salvage capitalism.

  The advocates of interventionism or government interference with the market protest that they do not want socialism, but rather to retain private ownership of the material factors of production, free enterprise, and market exchange. But they assert that these institutions of the market economy could be easily misused, and are often misused, by the propertied classes for an unfair exploitation of the poorer strata of the population. To prevent such an outcome they want to restrain the discretion of the individuals by governmental orders and prohibitions. The government should interfere with all those actions of the businessmen which it considers as detrimental to the public interest; in other respects, however, it should leave the market alone.

  According to this interventionist doctrine the government alone is called upon to decide in every single case whether or not the “public interest” requires government intervention. The real meaning of the interventionist principle, therefore, amounts to the declaration: Business is free to act as long as what it does complies exactly with the plans and intentions of the government. Thus nothing is left to the market other than the right to execute meekly what the government wants it to do. Nothing remains of the market economy but some labels, although their meaning is radically altered.

  The interventionist doctrine fails to comprehend that the two systems—the market economy of consumers’ supremacy and the government directed economy—cannot be combined into a practicable composite. In the market economy the entrepreneurs are unconditionally subject to the supremacy of the consumers. They are forced to proceed in such a way that their operations are approved by the purchases of the consumers and thus become profitable. If they fail in these endeavors, they suffer losses and must, if they do not succeed in amending their methods, go out of business.

  However, even if the government prevents the entrepreneurs from choosing those projects that the consumers wish them to execute, it does not attain the ends it wanted to attain by its order or prohibition. Both producers and consumers are forced to adjust their behavior to the new state of affairs brought about by the government’s intervention. But it may happen that the way in which they, the producers and consumers, react appears as still less desirable, in the eyes of the government and the advocates of its interference, than the previous state of the unhampered market that the government wanted to alter. Then if the government does not want to abstain from any intervention and to repeal its first measure, it is forced to add to its first intervention a new one. The same story then repeats itself at another level. Again the outcome of the government’s intervention appears to the government as even more unsatisfactory than the preceding state that it was designed to remedy.

  In this way, the government is forced to add to its first intervention more and more decrees of interference until it has actually eliminated any influence of the market factors—entrepreneurs, capitalists, and employees as well as consumers—upon the determination of the ways of production and consumption.

  12

  The Agony of the Welfare State*

  For about a hundred years the Communists and interventionists of all shades have been indefatigable in predicting the impending final collapse of capitalism. While their prophecies have not come true, the world today has to face the agony of the much glorified policies of the Welfare State.

  The Welfare State

  The guiding principles of the Welfare State were best laid down by Ferdinand Lassalle (1825–64), both the friend and rival of Marx. Lassalle ridiculed the liberal doctrines. They assigned to the state, he remarked sneeringly, only the functions of a night watchman. In his eyes the state (with a capital S) was God and Santa Claus at the same time. The state had inexhaustible funds at its disposal, which could freely be used to make all citizens prosperous and happy. The state should nationalize big business, underwrite projects for the realization of which private capital was not available, redistribute national income, and provide for everyone security from the cradle to the grave.

  For Bismarck and his professorial henchmen, deadly foes of “Anglo-Saxon” freedom as they were, this welfare state program was the consummation of the historical mission of Germany’s ruling Hohenzollern dynasty as well as of the social gospel of a new Christianity. This Sozialpolitik provided a common ground for the cooperation of churchmen and atheists, of royalists and republicans, of nationalists and internationalists. Capitalism had multiplied population figures and raised the average standard of living to an unprecedented height. Yet all these groups were united in the fight against capitalism’s alleged inhumanities.

  The new German policy was soon enthusiastically praised by British Fabianism, and later adopted by all European nations and by the United States.

  The Welfare State school communicated to mankind the tidings that the philosophers’ stone had finally been found. Self-styled “new economics” dismissed as palpable nonsense what “orthodox” economics had said about the alleged nature-given limitation of useful goods and resources and the consequent necessity of saving and progressive capital accumulation. There is, they shouted, abundance; poverty is merely the outcome of bad policies favoring the selfish interests of the few at the expense of the many.

  Let the Rich Pay

  If the interventionist says the state should do this or that (and pay for it) he is fully aware of the fact that the state does not own any funds but those which it collects as taxes from citizens. His idea is to let the government tax away the greater part of the income and capital of the wealthy citizens and spend this revenue for the benefit of the majority of the people. The riches of the nabobs are considered inexhaustible, and so, consequently, are the funds of the government. There is no need to be stingy in matters of public expenditure. What may appear as waste in the affairs of individual citizens, when we consider the nation’s budget, is a means of creating jobs and promoting welfare.

  Under the impact of such doctrines the system of progressive tax rates was carried to extremes. But then finally the myth of the inexhaustibleness of the wealth of the rich had to evaporate. The politicians were perplexed when they discovered that they had reached the limit. Several years ago, Mr. Hugh Gaitskell [1906–63], head of the British Treasury in the socialist cabinet of Mr. Clement Attlee [1883–1967], had to admit “that there is not enough money to take away from England’s rich to raise the standard of living any further.” The same is true for all other nations. In this country even if all taxable income of those earning more than $25,000 were confiscated, the additional income to the government would amount to much less than $1,000,000,000, a trifle when compared with a [1953] budget of roughly $78,000,000,000 and a threatened deficit of $10,000,000,000. The house of cards built by the “new economics” is crashing.

  Politics seemed to be a very simple thing in these last decades. The main task of a politician was to induce the government to spend more and more. Subsidies, public works, new offices with hosts of employees, and many other costly things secured popularity and votes. Let “them,” that is, the rich, pay. But now their funds are spent. Henceforth the funds of the beneficiaries themselves will have to be tapped if more handouts are to be made to them.

  The statist philosophy considers the entrepreneur a useless idler who skims the cream from industry without performing any corresponding economic service. The nationalization of business it is said merely abolishes the unjustified privileges of parasitic drones. A salaried public servant does the jobs previously assigned to the businessman much more efficiently and much more cheaply. The expropriation of private ownership is especially urgent in the field of public utilities.

  Guided by these principles, the governments of the various European countries long ago nationalized the railroads, the telephone and the telegraph, and many other branches of business. The result was catastrophic: scandalously poor service, high rates, yearly increasing deficits that have to be covered out of budgetary allowances.

  Derailment of State Railroads

  The financial embarrassment of the main European countries is predominantly caused by the bankruptcy of the nationalized public utilities. The deficit of these enterprises is incurable. A further rise in their rates would bring about a drop in total net proceeds. The traffic could not bear it. Daily experience proves clearly to everybody but the most bigoted fanatics of socialism that governmental management is inefficient and wasteful. But it is impossible to sell these enterprises back to private capital because the threat of a new expropriation by a later government would deter potential buyers.

  In a capitalist country the railroads and the telegraph and telephone companies pay considerable taxes. In the countries of the mixed economy, the yearly losses of these public enterprises are a heavy drain upon the nation’s purse. They are not taxpayers, but tax-eaters.

  Under the conditions of today, the nationalized public utilities of Europe are not merely feasting on taxes paid by the citizens of their own country; they are also living at the expense of the American taxpayer. A considerable part of the foreign-aid billions is swallowed by the deficits of Europe’s nationalization experiments. If the United States had nationalized the American railroads, and had not only to forgo the taxes that the companies pay, but, in addition, to cover every year a deficit of several billions, it would not have been in a position to indemnify the European countries for the foolishness of their own socialization policies. So what is postponing the obvious collapse of the Welfare State in Europe is merely the fact that the United States has been slow and “backward” in adopting the principles of the Welfare State’s “new economics”: it has not nationalized railroads, telephone, and telegraph.

  Yet Americans who want to study the effects of public ownership of transit systems are not forced to visit Europe. Some of the nation’s largest cities—among them Detroit, Baltimore, Boston, San Francisco—provide them with ample material. The most instructive case, however, is that of the New York City subways.

  New York City subways are only a local transit system. In many technological and financial respects, however, they surpass by far the national railroad systems of many countries. As everybody knows, their operation results every year in a tremendous deficit. The financial management accumulates operating deficits, planning to fund them by the issuance of serial bonds. Only a municipality of the bigness, wealth, and prestige of New York could venture on such a policy. With a private corporation financial analysts would apply a rather ugly word to its procedures: bankruptcy. No sane investor would buy bonds of a private corporation run on such a basis.

  Incorrigible socialists are, of course, not at all alarmed. “Why should a subway pay?” they are asking. “The schools, the hospitals, the police do not pay; there is no reason why it should be different with a transit system.” This “why” is really remarkable. As if the problem were to find an answer to a why, and not to a wherefrom.

  There is always this socialist prepossession with the idea that the “rich” can be endlessly soaked. The sad fact, however, is that there is not enough left to fill the bottomless barrels of the public treasury. Precisely because the schools, the hospitals, and the police are very expensive, the city cannot bear the subway deficit. If it wants to levy a special tax to subsidize the subway, it will have to tax the same people who are supposed to profit from the preservation of the low fare.

  The other alternative is to raise the fare from the present [1953] level of ten cents to fifteen cents.* It will certainly be done. And it will certainly prove insufficient. After a while a rise to twenty cents will follow—with the same unfavorable result. There is no remedy for the inefficiency of public management. Moreover there is a limit to the height at which raised rates will increase revenue. Beyond this point further rises are self-defeating. This is the dilemma facing every public enterprise.

  Subways at a Dead End

  How little the management of the New York City subways is touched by the spirit of business was proved a short time ago when it triumphantly announced economies made by cutting down services. While all private enterprises in the country compete with one another in improving and expanding services, the municipality of New York is proud of cutting them down!

  When economists clearly demonstrated the reasons why socialism cannot work, the statists and interventionists arrogantly proclaimed their contempt for mere theory. “Let the facts speak for themselves; not economics books, only experience counts.” Now the facts have spoken.

  It is just a historical accident that transportation systems were nationalized while bakeries and automobile factories remained in the hands of private capital. If it had been the other way round, the socialists would perorate: “It is obvious that bakeries and automobile plants cannot pay like railroads. They are public utilities supplying the masses with vital necessities. They must show deficits, and the taxes paid by the extremely profitable railroads must provide the government with the funds required for making good these deficits.”

  It is paradoxical indeed that Washington is eager to spend the taxpayers’ money for the benefit of European deficit railroads and does not bother about the transit deficits of large American cities. Marshall Plan aid* seems to differ from charity, at least in this respect—it does not begin at home.

  History has been rather kind to the American voter. It has provided him with object lessons in socialism. If he looks behind the Iron Curtain, he can learn useful things about the one-party system of the classless and profitless “people’s democracies.” If he studies European budgets, he will be informed about the “blessings” of nationalization. Even if he stays at home, he can extend his views by carefully reading what the newspapers report about the financial breakdown of New York City, the world’s largest and richest urban agglomeration, the intellectual capital of Western civilization, the home of the United Nations. There is plenty of experience that can induce a man to analyze scrupulously what the progressive propaganda has taught him, and to think twice before again casting his vote for the apostles of socialization and advocates of public spending.

  13

  Wage Interference by Government*

  When in the nineteenth century the question was asked: What can be done in order to raise wage rates and thereby to improve the average standard of living of the most numerous class of the population, the economists answered: One has to accelerate the increase of capital as compared with population. This answer infuriated the reformers and socialists. Historian Thomas Carlyle called economics the dismal science, and Karl Marx smeared the economists as bourgeois idiots and sycophants of the exploiters. But such abusive language cannot change the facts. Today the statesmen of all underdeveloped countries realize very well that what is needed to improve the lot of the masses of their peoples is investment of additional capital. In spending dozens of billions of dollars for foreign aid the American Government implicitly admits the correctness of this thesis. And even the most fanatical foes of capitalism no longer venture to deny that the comparatively high standard of living of the manual workers in this country and in some parts of Europe is due to the increase in the amount of capital invested per head of the employees.

  Thus at least in dealing with the economic problems of underdeveloped nations the President, Congress, and public opinion virtually acknowledge the doctrine of the much abused classical economists. But in dealing with domestic problems they are guided by very different ideas. They proceed as if the height of wage rates could be fixed ad libitum [at will] by government decree or by labor union pressure and compulsion. Our tax system—especially the way in which personal incomes, corporations, and estates and inheritances are taxed—not only reduces considerably the amount of savings, but in many regards directly results in capital decumulation. But the authorities and their advisers are not concerned about these effects. They are intent upon raising wage rates either through decreeing minimum wage rates or through pro-union policies.

  Labor Union Privileges

  The laws have in the last decades granted to the unions many privileges. But these legal privileges also would not have given to unions and to the methods of collective bargaining the tremendous power that they enjoy today in this country and in almost all other noncommunist countries. What makes the unions formidable is the fact that the authorities—the federal government as well as the state and municipal governments—have designedly and wittingly abandoned for the benefit of the unions the essential power of political sovereignty, viz., the exclusive right to suppress disobedience by recourse to violent action. When striking workers resort to acts of violence against strikebreakers or against the persons or the property of those who employ strikebreakers, the authorities preserve a lofty neutrality. The police do not protect those attacked; the district attorneys do not prosecute the assailants and consequently no opportunity is given to the penal courts to try to punish them.

  What is today euphemistically called the right to strike is in fact the right of striking workers, by recourse to violence, to prevent people who want to work from working. This means that the authorities have surrendered to the unions an essential attribute of their governmental functions. In matters of wage determination the voice of the unions has the power that in other matters the Constitution and the laws assign exclusively to orders of the authorities issued in conformity with the laws. You must obey such orders and prohibitions or else your obedience will be obtained by beating you into submission.

  The statesmen and politicians who step-by-step—not only in this country but also in all other countries of Western industrialism—granted this quite exceptional, tremendous privilege to the unions were guided by the belief that raising wage rates above the height the unhampered market would have fixed them is beneficial to all those who want to make a living by earning wages. As they saw it, a rise in wage rates will reduce profits and interest rates and thus improve the lot of those toiling in factories and offices at the sole expense of a socially quite useless “leisure class.”

  These self-styled friends of the common man failed to see the fact that capitalism is essentially mass production for supplying the masses. In the precapitalistic ages the processing industries, the artisans organized in guilds and crafts, produced only for the wants of small groups of well-to-do. Under capitalism, however, the masses of the working people are the main consumers of the products. Big business always serves the many; the shops serving the fancies of the rich never attain bigness. If we refer to the consumers, we refer, by and large, to the same people we are talking about in referring to the wage earners.

  Above-Market Wage Rates

  The labor market fixes wage rates at the height at which all those intent upon hiring workers can hire as many as they want and all those anxious to find a job can find one. If wage rates, either by government decree or by union pressure and compulsion, are raised above this height, there are two alternatives. Either prices are raised concomitantly, so both demand and sales drop, production must be curtailed, and a part of the previously employed workers must be discharged. Or prices remain unchanged, although the cost of production is increased, so that firms that are producing under the least favorable conditions and, therefore, with the highest costs will suffer losses and be forced to go out of business or at least to restrict the quantity of their production. Again workers will have to be discharged. Thus, whatever is done to impose wage rates higher than those the free unhampered market would have determined results in unemployment of a part of the potential labor force.

  If a union succeeds in forcing the employers to pay higher wage rates than those they were prepared to pay under the prevailing state of market conditions, this is not a victory for “labor,” i.e., for all those who are anxious to earn wages. It is a boon only for those workers who will be employed at the new rates. It is a calamity for all those whom it condemns to lasting unemployment.

  The effect of raising wage rates above the potential market rates, i.e., unemployment for some, is not denied by any economist. Even Lord Keynes did not question it. He realized very well that there is no other means to fight unemployment than to adjust wage rates to the height consonant with the state of the unhampered market. The characteristic mark of the Keynesian approach to the problem of unemployment is that, for practical and tactical reasons, he suggested bringing about this adjustment by inflation and its inevitable consequence, a rise in commodity prices. He thought that “a movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices.”* As everybody knows today it is impossible to delude the unions and their members in this way. People are nowadays index conscious.

  The outstanding fact is that it is impossible to raise wage rates by coercive measures, be it a direct government minimum wage decree, or labor union violence or threat of such violence, without bringing about lasting unemployment of a part of those looking for jobs. The exceptional powers the governments granted to the unions do not benefit all those anxious to earn wages, but only a part of them. The others are victimized. Experience with labor union policies and governmental minimum wage rates has confirmed what economic theory teaches: There is no other method of improving the well-being of the whole class of wage earners than by accelerating saving and the accumulation of new capital.

  14

  Unemployment and the Height of Wage Rates*

  Public opinion, misguided by the fanatical propaganda on the part of the deadly foes of freedom and prosperity, looks upon the disputes concerning the height of wage rates as if they were only conflicts between wage earners and employers. It ascribes to the employers the power to determine wage rates ad libitum. It fails to realize the fact that the entrepreneur is not sovereign in the conduct of his enterprise but entirely subject to the most rigid orders given by his customers, the public. It does not depend on the businessman’s arbitrariness to determine what he produces and how. He is, by the instrumentality of the profit and loss system, forced to supply the buying public in the best possible and cheapest way with those commodities and services which they are asking for most urgently. All his measures are directed toward meeting the wishes of the public. The consumers are sovereign and the businessmen are their servants.

  Consumer Sovereignty

  It is the consumers that ultimately determine the prices of the products and thereby indirectly the prices their purveyors are able to pay for the material means of production and for the labor required for turning out the products. It is the consumers that determine that a movie star should get a much higher pay than a welder, a charwoman much less than a boxing champion.

  Economics describes this state of affairs in formulating its marginal utility doctrine. It points out that the price paid for every factor of production, whether material or human, depends on the value that the consumers ascribe to its contribution to the turning out of the product. If the businessman spends more for the purchase of a factor than the consumers are prepared to refund to him in buying the product, he suffers losses and, if he does not change his practice in time, he is forced to go out of business. In this way the market, i.e., all of the people, determine the prices of the material factors of production and the height of salaries and wage rates paid to all people working in the offices, shops, and farms.

  This is what is meant by those who call the market economy a democracy in which every penny gives a right to vote. The whole of the nation is, as it were, a tribunal that assigns to everybody the prices which he can reap in selling his products or his labor. Everybody participates in this process in a double capacity. On the one hand he is, as a buyer and a consumer, a member of the tribunal that assigns to everybody his income and on the other hand he is, as a breadwinner, one of those to whom an income is assigned. In buying admission to a show, the man who makes a hundred dollars a week in his job in a factory assigns a salary of $10,000 a week to an actor. It is the same man’s valuation that assigns a much lower pay to the work of a bus driver or a housepainter.

  What Makes Wages Rise

  In their capacity as earners of wages and salaries the immense majority of the nation are vitally interested in the establishment of conditions that cause wages and salaries to rise. There is but one way to attain this end, viz., to raise the marginal productivity of the individual job holder’s contribution by increasing the amount of capital invested per capita. The height of wages depends on the height of the per head quota of capital invested. When the accumulation of capital outruns the increase in population, the marginal utility of the worker’s contribution rises and makes wages go up concomitantly. Saving and capital accumulation are the very implements of improving the material conditions of the wage earners.

  Wages and salaries are in present-day America much higher than they were in the past because the quantity of capital invested increased more rapidly than the number of people anxious to get jobs. The plight of the underdeveloped nations is due to their shortage of capital. It is not denied by anybody that what these countries need in order to improve the standard of living of their masses is more capital. A man working in India with the primitive tools that in the capitalistic countries have been discarded long since produces much less per unit of time than the American or British worker. Consequently the compensation he receives is much lower.

  It is the most stupid of all communist lies that the considerable capital investments America and Western Europe made in Latin America, Asia, and Africa mean “exploitation” of the natives for the benefit of the foreign capitalists. What was wrong with these economically backward countries was that they did not develop spontaneously those legal and institutional conditions that make saving and capital accumulation safe against the arbitrariness and the greed of those in political office. Where the laws do not sufficiently protect private ownership of the means of production, there cannot be any indigenous development of modern industrial plants. Nature has endowed much better with natural resources most of those countries that are today looked upon as backward than it has the soil of the countries occupied by the capitalistic nations. The poverty of these underdeveloped nations is not due to natural conditions. It is a result of their bad policies. If the foreign capitalists had not provided them with capital, most of them would still even have to do without railroads and hydroelectric power plants. Every investment that foreigners made in their lands was immediately followed by an upward movement of wages, not only in the plants erected by the foreigners themselves, but also in other fields of business.

  What Generates Unemployment

  Public opinion believes that the improvement in the conditions of the wage earners is an achievement of the unions and of various legislative measures. Public opinion gives to unionism and to legislation credit for the rise in wage rates, the shortening of hours of work, the disappearance of child labor, and many other changes. The prevalence of this belief made unionism popular and is responsible for the trend in labor legislation of the last decades. As people think that they owe their high standard of living to unionism, they condone violence, coercion, and intimidation on the part of unionized labor and are indifferent to the curtailment of personal freedom inherent in the union-shop and closed-shop clauses.

  But this popular doctrine misconstrues every aspect of economic reality. As has been pointed out, the height of wage rates at which all those eager to get jobs can be and are employed depends on the marginal productivity of their performance. If the employers are prevented, either by union pressure and compulsion or by government decree, from hiring help at this market rate, and are forced to pay more, the costs incurred by the employment of workers in the production of a number of articles rise above the prices the consumers are prepared to expend for the value added to the product by these workingmen’s efforts. In order to avoid losses and bankruptcy, the businessmen are under the necessity to restrict their production activities and therefore to reduce the number of men employed.

  At the wage rates established in a free labor market, i.e., in a market not manipulated—we may better say not sabotaged—by labor union or government compulsion, all those who are anxious to get jobs can find employment. But if wage rates are fixed above the potential market rates, unemployment of a part of the potential labor force develops. Mass unemployment becomes a lasting phenomenon.

  It is not the operation of the market economy that generates unemployment with all its moral and material evils, but precisely the ill-contrived, although well-intentioned, actions of unions and governments. There is no other means to do away with unemployment than to abstain from any government and union meddling with the height of wage rates.

  Inflation Not Fit to Fight Unemployment

  The self-styled American “liberals” propose to do away with unemployment by inflation. They suggest an increase in the quantity of money in circulation through credit expansion.

  Lord Keynes did not invent, but merely popularized this makeshift. He was well aware of the fact that inflation inevitably results in a rise in all commodity prices or, what is merely another way of describing the same effect, in a drop in the monetary unit’s, the dollar’s, purchasing power. But he argued that the wage earners will acquiesce in “a gradual and automatic lowering of real wages as a result of rising prices.”* It is obvious that Keynes thus fully admitted that nothing but a lowering of real wage rates can do away with unemployment. The inflation which he recommended was designed as a clever trick to cheat the workers. He expected that they would not be shrewd enough to realize that real wages had dropped and that, therefore, they would not ask for higher pay to compensate for the reduction in the monetary unit’s purchasing power.

  Keynes failed entirely to see that the decades of reckless inflation have made everybody—the newspapers, the average man, the housewives, and the workers and union leaders—index conscious. His assumption underrates in an almost unbelievable way the intellectual powers of the masses. One cannot avoid the nefarious implications of the spurious union doctrine by deceiving the public. Moreover it must be remembered that inflation is not a policy that can last. If inflation and credit expansion are not stopped in time, they result in a more and more accelerated drop in the monetary unit’s purchasing power, and in skyrocketing commodity prices until the inflated money becomes entirely worthless and the whole government-manipulated currency system collapses. In our age, this has happened to the monetary regime of various countries.

  How Honest Workers Plan to Do Away with Unemployment

  An analysis of the Keynesian prescription for doing away with unemployment clearly shows that Lord Keynes also never doubted that what causes unemployment is a policy that fixes wage rates above the level at which the free market would have fixed them. What he suggested to attain full employment was a peculiar, and as he believed, very cunning, method to reduce real wage rates. In fact all people who gave serious thought to the matter agree in pointing out that at the wage rates determined on the unhampered labor market all those eager to find jobs are getting them. (Incidentally it may be mentioned also that Karl Marx and the doctrines of the Marxian parties admitted that unions as well as governments cannot, without creating unemployment, raise wage rates above the rates corresponding to the conditions of the market.)

  The terrorism of the union bosses and the political parties fed by ample union subsidies have for many years succeeded in popularizing the myth that expects a betterment of the wage earners’ material conditions, not from an increase in the per head quota of capital invested and the resulting technological advancement, but from government action and from union violence. But fortunately it is impossible for lies to remain unchallenged forever. There are signs that the truth about industrial relations is beginning to spread in spite of all endeavors of the union bosses to conceal it.

  While the Administration and Congress are embarrassed by the rising tide of unemployment and do not consider any other method to reduce it than by resorting to inflation, better schemes are recommended from the midst of the unemployed. In Wheeling, West Virginia, a community on the Ohio River, an unemployed steelworker named Thomas E. Elliott, who has worked only a month and a half in the past four years, advances an anti-unemployment plan that does not require any aid from Washington. His plan, as outlined in U.S. News and World Report,* is to offer to prospective employers better and cheaper labor. He and 1,400 other unemployed will promise any company coming in that they will do an honest day’s work at a fair wage, but if the plant makes a profit they will expect to get additional pay. “Steel wages are too high today,” Mr. Elliott said. “Some men who have been getting $3 an hour in the steel mills will have to be satisfied with $1.85 or $2 an hour.” Better to have a job at lower wages, he decided, than to remain unemployed while asking for $3 an hour.

  If this plan materializes, a plain citizen will have contributed to the welfare of the nation and its manual workers more than all the learned advisers of the Administration and all the members of the innumerable government agencies. Good luck to you, Mr. Elliott!

  15

  Wage Earners and Employers*

  To answer that question we must first look at a little history. In the pre-capitalistic ages a nation’s social order and economic system were based upon the military superiority of an elite. The victorious conqueror appropriated to himself all the country’s utilizable land, retained a part for himself, and distributed the rest among his retinue. Some got more, others less, and the great majority nothing. In the England of the early Plantagenets [the line of British kings, descended from French Normans, who reigned from 1154 to 1399], a Saxon was right when he thought: “I am poor because there are Normans to whom more was given than is needed for the support of their families.” In those days the affluence of the rich was the cause of the poverty of the poor.

  Conditions in the capitalist society are different. In the market economy the only way left to the more gifted individuals to take advantage of their superior abilities is to serve the masses of their fellowmen. Profits go to those who succeed in filling the most urgent of the not-yet-satisfied wants of the consumers in the best possible and cheapest way. The profits saved, accumulated, and plowed back into the plant benefit the common man twice. First, in his capacity as a wage earner, by raising the marginal productivity of labor and thereby real wage rates for all those eager to find jobs. Then later again, in his capacity as a consumer when the products manufactured with the aid of the additional capital flow into the market and become available at the lowest possible prices.

  The characteristic principle of capitalism is that it is mass production to supply the masses. Big business serves the many. Those outfits that are producing for the special tastes of the rich never outgrow medium or even small size. Under such conditions those anxious to get jobs and to earn wages and salaries have a vital interest in the prosperity of the business enterprises. For only the prosperous firm or corporation has the opportunity to invest, that is, to expand and to improve its activities by the employment of ever better and more efficient tools and machines.

  The better equipped the plant is the more can the individual worker produce within a unit of time, the higher is what the economists call the marginal productivity of his labor and, thereby, the real wages he gets. The fundamental difference between the conditions of an economically underdeveloped country like India and those of the United States is that in India the per head quota of capital invested and thereby the marginal productivity of labor and consequently wage rates are much lower than in this country. The capital of the capitalists benefits not only those who own it but also those who work in the plants and those who buy and consume the goods produced.

  And then there is one very important fact to keep in mind. When one distinguishes, as we did in the preceding observations, between the concerns of the capitalists and those of the people employed in the plants owned by the capitalists, one must not forget that this is a simplification that does not correctly describe the real state of present-day American affairs. For the typical American wage earner is not penniless. He is a saver and investor. He owns savings accounts, United States Savings Bonds and other bonds, and first of all insurance policies. But he is also a stockholder. At the end of the last year [1961] the accumulated personal savings reached $338 billion. A considerable part of this sum is lent to business by the banks, savings banks, and insurance companies. Thus the average American household owns well over $6,000 that are invested in American business.

  The typical family’s stake in the flourishing of the nation’s business enterprises consists not only in the fact that these firms and corporations are employing the head of the family. There is a second fact that counts for them, to wit that the principal and interest of their savings are safe only as far as the American free enterprise is in good shape and prospering. It is a myth that there prevails a conflict between the interests of the corporations and firms and those of the people employed by them. In fact, good profits and high real wages go hand in hand.

  16

  Full Employment and Monetary Policy*

  At the price determined in an unhampered market all those who consider it satisfactory can sell and all those who are prepared to pay it can buy. If commodities remain unsold, this is not due to their “unsalability” but to speculation on the part of their owners; they hold out because they expect that they will be able to sell later at a higher price.

  It is different when the authorities try to influence the market by compulsion. If the government decrees and enforces minimum prices higher than the potential market prices, a part of the supply offered for sale at the official minimum price remains unsold. This fact is well known. Therefore, if a government wants to push the price of a commodity above the potential market price, it does not simply resort to the fixing of minimum prices. Rather it tries to reduce the quantity offered for sale on the market, for instance by purchasing and withholding a part of the supply available.

  All this applies also to labor. At the wage rates determined in the labor market everybody who looks for a job can get it and everybody who wants to employ workers can hire them. In the unhampered labor market, wage rates always tend toward full employment.

  Market wage rates rise when the marginal productivity of labor outruns the marginal productivity of capital goods; or, more simply, when the per-head quota of capital invested increases. This is effected either by accumulation of new capital or by a drop in the number of workers. An increase in the amount of capital is the result of saving and consequent investment. A reduction in the supply of labor on the market can be brought about by restricting immigration. In the age of liberalism, in the traditional classical meaning of the term, there were practically no migration barriers. In this age of welfarism and unionism, well-nigh all governments have either completely prohibited immigration or, as for instance the United States and other American republics, stipulated definite quotas. Beyond that, some American unions have tried to reduce still more the number of jobseekers in their segments of the labor market by excluding racial minorities from some kinds of employment and by rendering entrance into certain branches extremely difficult.

  There is need to emphasize that only such “artificial” or “institutional” reduction of the labor supply makes it possible for the unions to raise their members’ wage rates. Their success in raising the wages of their members is won at the expense of those whom they have excluded. These outsiders are forced to look for jobs in industries in which remuneration is lower than what they would have earned in the field that is closed to them.

  Effects of Labor Unions

  Labor unionism as we know it today is the outcome of a long evolution. In the beginning only a few branches were organized, mostly those with the best-paid skilled workers. At that time, those who could not find a job in a unionized industry because wages had been pushed above the potential market height and thereby the demand for labor had been reduced, were forced to go into the nonunionized branches of business. Their influx into these branches increased in them the number of jobseekers and thus tended to depress there the height of wage rates. Thus, the higher wages of unionized workers brought about pressures on the jobs and wages of nonunionized workers. The more unionization spread, the more difficult it became for those who had lost their jobs on account of union policy to find other jobs; they remained unemployed. Wherever and whenever the unions succeeded in raising wage rates above the potential market rate, i.e., above the amount the workers would have earned without union interference, “institutional” unemployment developed as a lasting phenomenon.

  As the union leaders see it, the determination of wage rates is the outcome of a struggle for power between the employers and the employees. Their interpretation does not acknowledge that wages depend on the state of the market and that the workers who receive the wages form the immense majority of the consumers out of whose pockets the wages are ultimately paid. The average wage earner considers it unfair that the movie star and the boxing champion are paid a hundred times more than the welder and the charwoman. He fails to see that his own behavior, his own purchases on the market, and those of other wage earners like him contribute to this result. An entrepreneur cannot pay more to a worker than he expects to collect from the customers for this man’s performance. Even the most infatuated supporters of the exploitation doctrine are finally forced to admit that, at a certain height of wage rates, lasting unemployment of a considerable part of the potential labor force becomes unavoidable.

  The market economy is ultimately controlled by the conduct of the consumers, that is by the conduct of all the people. In buying or in desisting from buying, the consumers determine what ought to be produced, of what quality and in what quantity. They determine who should make profits and who should suffer losses. They make rich men poor and poor men rich. The consumers are continuously shifting control of the material factors of production into the hands of those entrepreneurs, capitalists, and landowners who are most successful in supplying them, the consumers, in the cheapest and best possible way. Thus, in the capitalistic economy control of the factors of production is, as it were, a revocable mandate granted by the public. The operation of the market, in a daily repeated plebiscite, assigns to everybody the place in which he is to contribute to the united effort of all. This daily plebiscite determines the height of everybody’s income.

  The Alternative—Socialism

  The individual resents the fact that he is forced to adjust himself to the conditions of the market and must forgo many of his own wishes and inclinations. However, it is obvious that the immeasurable benefits that cooperation under the system of the social division of labor affords to everybody must be paid for by some sacrifices. Whatever society’s economic organization may be, it must always prevent man from behaving without due concern for the existence of others. The alternative to the hegemony of the market under capitalism is not absolute freedom, but the unconditional surrender of all to the supremacy of the socialist planning authority.

  Society cannot do without an institution that channels the available workers into those branches in which they are most urgently needed and withdraws them from those in which there is less need for them. The labor market serves this purpose by raising wage rates in expanding industries and reducing them in shrinking industries. The alternative is to assign to each man a job by government order.

  The tyranny of the labor market is milder than that of socialist regimentation. It grants to the individual a margin within which he is free to ignore the market’s directives. If he is prepared to put up with a lower income, he can choose vocations in which he can either dedicate himself to his ideals or indulge his inclination for laziness. But the command of the socialist dictator does not brook contradiction.

  There is only one method to abolish lasting mass unemployment, the return to the freedom of the labor market. Lasting mass unemployment is always institutional. It is the inevitable effect of the enforcement of wage rates that are higher than the potential market rates at which all jobseekers could find employment. It does not matter whether these minimum wage rates were decreed directly by the government or induced indirectly by the fact that the government is not willing to protect the enterprises and the strikebreakers against the violence of the unions.

  The political power of the unions has succeeded in suppressing the dispassionate discussion of these problems. But it could not prevent the undesirable consequences of the unions’ policies from wreaking havoc. In the twenties, in many European countries mass unemployment became the main political embarrassment. It was clear that these conditions could not continue indefinitely. Something had to be done. Smart politicians thought that they had found a solution. As it was deemed impermissible to antagonize the unions, and to tamper with the money wage rates dictated by them, they resorted to currency devaluation, reducing purchasing power and, thus, real wage rates. England took the lead in 1931. Very soon other countries followed.

  For a while the nostrum worked. Some time passed before the unions began to pay full attention to the drop in the monetary unit’s purchasing power. But when the index of the cost of living became the main issue in wage negotiations, the monetary method of eliminating mass unemployment had exhausted its serviceableness.

  A New Messiah

  It was precisely at this juncture that Lord Keynes entered the scene with his good tidings, the allegedly new economic doctrine designed to supersede all previous economic teachings, including those of the earlier writings of Keynes himself. Following in the wake of the politicians who in 1931 had demolished the British gold standard, and of their imitators, he pointed out that “a gradual and automatic lowering of real wages,” that results from a lowering of the monetary unit’s purchasing power, will be less strongly resisted than attempts to revise money wages downward. But in 1936, when Keynes’s book was published, this no longer agreed with the facts.

  Keynes’s General Theory of 1936 and his later writings are hardly different from the bulk of inflationist literature which for more than a century has flooded the world. Like the authors of all these pamphlets, Keynes tries to dispose of all those who do not share his opinions by calling them “orthodox.” He never tries to disprove their teachings rationally. He enriched the prosaic language of diplomatic correspondence by terms borrowed from the messianic jargon of the “monetary cranks.” For instance, in the British document that inaugurated the events which finally led to the establishment of the International Monetary Fund, he declared that credit expansion performs the “miracle . . . of turning a stone into bread.” But he did not add any new idea to the old, long since entirely refuted and discredited arguments of the inflationists. All Keynes accomplished was to coin a new slogan—“full employment”—which became the motto of present-day policies of inflation and credit expansion.

  The full-employment doctrine underlying these inflation and credit expansion policies, in complete accord with the teachings of the Communist Manifesto, declares that the very operation of the capitalistic mode of production inevitably generates the emergence of mass unemployment. Unlike the creed of the more consistent Marxians it does not, however, contend that the return of periods of economic depression and large-scale unemployment is absolutely inevitable in the market economy. It attributes to the State (with a capital S) the power to create jobs for everybody. All that the State has to do is to put more money into the hands of the people and thereby to increase demand. It is wrong, this official full-employment doctrine goes on to assert, to call an increase in the quantity of money created for this purpose, inflation. It is just “full-employment” policy. Those “reactionaries” who ramble on about monetary stability and the return to gold are depicted as the worst enemies of civilization, public welfare, and the common man.

  The climate of opinion of the United States is fully dominated by these ideas. The unions are in a position to succeed in what are euphemistically called wage negotiations because the laws are loaded in favor of the unions and because the Government is always prepared to use its power to their advantage. (In this regard it does not make much difference whether the Administration is Republican or Democratic.) From time to time the unions ask for raises; the employers are forced to yield; as soon as business begins to slacken and workers are discharged, public opinion vehemently asks for more “easy money.” After a short period of hesitation the Administration gives in and puts pressure upon the Federal Reserve Board to reduce interest rates, so as to increase the quantity of money and make it “easier.”

  A Few Dissenters

  Fortunately the inflationary policy is still seriously resisted by a group of critics who are not numerous but who are conspicuous by their competence and familiarity with the problems involved. Among these dissenters are several eminent writers, a few influential businessmen, and, what is worthy of notice, also some members of the Federal Reserve Board. This handful of men do not have the power to put an end to this nefarious monetary and credit policy. Yet their weighty reasoning has in the last years, especially under President Eisenhower’s regime, succeeded in keeping the inflationary ventures within narrow limits. It is the merit of their warning voices that the world’s richest country has up to now not embarked upon the pernicious policy of runaway inflation.

  The full significance of this success can only be appreciated if one takes into account the vehemence of the pro-inflationist propaganda of university teachers and of “progressive” politicians and journalists. Some of the utterances of these people are really amazing. Thus several years ago the then chairman of the Federal Reserve Bank of New York declared: “Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.” The lecture that contained this statement had the characteristic title: “Taxes For Revenue Are Obsolete.”* In the same vein, a professor of economics† pointed out, in a voluminous work, that the government “can raise all the money it needs by printing it”; the purpose of taxation is “never to raise money” but “to leave less in the hands of the taxpayer.”

  The weakness of the small group advocating sound monetary policy and fighting all inflationary measures is their disinclination to attack the “full employment” doctrine openly and directly. It is practically impossible to bring this issue up before the public. Certainly there are men with the courage to risk their careers or even their personal safety by criticizing the “full employment” doctrine. But there are neither newspapers nor publishers who would dare to spread doctrines that criticize and reject the institution of unionism in principle. Even those writers who occasionally expose blackmail and embezzlement on the part of individual union officers emphasize again and again that they consider the institution of unionism as such, and the policies of the unions, as beneficial to the welfare of the wage earners and the whole nation; they merely intend to free the unions from dishonest leaders. As long as such ideas about the effects of unionism prevail, even modest attempts at repealing the privileges granted to the unions by the New Deal are doomed to fail, and there cannot be any question of protecting enterprises and those willing to work against violence on the part of the unions.

  At the most recent meeting of the International Monetary Fund there was much talk about the danger of inflation. In order to fight this danger, it is no longer enough to work for a better understanding of monetary problems. It is no less important to enlighten public opinion about the absurdity of the “full-employment” doctrine that guides the conduct of all governments and all political parties today.

  17

  Gold versus Paper*

  Most people take it for granted that the world will never return to the gold standard. The gold standard, they say, is as obsolete as the horse and buggy. The system of government-issued fiat money provides the treasury with the funds required for an open-handed spending policy that benefits everybody; it forces prices and wages up and the rate of interest down and thereby creates prosperity. It is a system that is here to stay.

  Now whatever virtues one may ascribe—undeservedly—to the modern variety of the greenback standard, there is one thing that it certainly cannot achieve. It can never become a permanent, lasting system of monetary management. It can work only as long as people are not aware of the fact that the government plans to keep it.

  The Alleged Blessings of Inflation

  The alleged advantages that the champions of fiat money expect from the operation of the system they advocate are temporary only. An injection of a definite quantity of new money into the nation’s economy starts a boom as it enhances prices. But once this new money has exhausted all its price-raising potentialities and all prices and wages are adjusted to the increased quantity of money in circulation, the stimulation it provided to business ceases. Thus even if we neglect dealing with the undesired and undesirable consequences and social costs of such inflationary measures and, for the sake of argument, even if we accept all that the harbingers of “expansionism” advance in favor of inflation, we must realize that the alleged blessings of these policies are short-lived. If one wants to perpetuate them, it is necessary to go on and on increasing the quantity of money in circulation and expanding credit at an ever-accelerated pace. But even then the ideal of the expansionists and inflationists, viz., an everlasting boom not upset by any reverse, could not materialize.

  A fiat-money inflation can be carried on only as long as the masses do not become aware of the fact that the government is committed to such a policy. Once the common man finds out that the quantity of circulating money will be increased more and more, and that consequently its purchasing power will continually drop and prices will rise to ever higher peaks, he begins to realize that the money in his pocket is melting away. Then he adopts the conduct previously practiced only by those smeared as profiteers; he “flees into real values.” He buys commodities, not for the sake of enjoying them, but in order to avoid the losses involved in holding cash. The knell of the inflated monetary system sounds. We have only to recall the many historical precedents beginning with the Continental Currency of the War of Independence.

  Why Perpetual Inflation Is Impossible

  The fiat-money system, as it operates today in this country and in some others, could avoid disaster only because a keen critique on the part of a few economists alerted public opinion and forced upon the government cautious restraint in their inflationary ventures. If it had not been for the opposition of these authors, usually labeled orthodox and reactionary, the dollar would long since have gone the way of the German mark of 1923. The catastrophe of the Reich’s currency was brought about precisely because no such opposition was vocal in Weimar Germany.

  Champions of the continuation of the easy money scheme are mistaken when they think that the policies they advocate could prevent altogether the adversities they complain about. It is certainly possible to go on for a while in the expansionist routine of deficit spending by borrowing from the commercial banks and supporting the government bond market. But after some time it will be imperative to stop. Otherwise the public will become alarmed about the future of the dollar’s purchasing power and a panic will follow. As soon as one stops, however, all the unwelcome consequences of the aftermath of inflation will be experienced. The longer the preceding period of expansion has lasted, the more unpleasant those consequences will be.

  The attitude of a great many people with regard to inflation is ambivalent. They are aware, on the one hand, of the dangers inherent in a continuation of the policy of pumping more and more money into the economic system. But as soon as anything substantial is done to stop increasing the amount of money, they begin to cry out about high interest rates and bearish conditions on the stock and commodity exchanges. They are loath to relinquish the cherished illusion which ascribes to government and central banks the magic power to make people happy by endless spending and inflation.

  Full Employment and the Gold Standard

  The main argument advanced today against the return to the gold standard is crystallized in the slogan “full-employment policy.” It is said that the gold standard paralyzes efforts to make unemployment disappear.

  On a free labor market the tendency prevails to fix wage rates for every kind of work at such a height that all employers ready to pay these wages find all the employees they want to hire, and all job-seekers ready to work for these wages find employment. But if compulsion or coercion on the part of the government or the labor unions is used to keep wage rates above the height of these market rates, unemployment of a part of the potential labor force inevitably results.

  Neither governments nor labor unions have the power to raise wage rates for all those eager to find jobs. All they can achieve is to raise wage rates for the workers employed, while an increasing number of people who would like to work cannot get employment. A rise in the market wage rate—i.e., the rate at which all job-seekers finally find employment—can be brought about only by raising the marginal productivity of labor. Practically, this means by raising the per-capita quota of capital invested. Wage rates and standards of living are much higher today than they were in the past because under capitalism the increase in capital invested by far exceeds the increase in population. Wage rates in the United States are many times higher than in India because the American per-capita quota of capital invested is many times higher than the Indian per-capita quota of capital invested.

  There is only one method for a successful “full-employment policy”—let the market determine the height of wage rates. The method that Lord Keynes has baptized “full-employment policy” also aimed at reestablishment of the rate which the free labor market tends to fix. The peculiarity of Keynes’s proposal consisted in the fact that it proposed to eradicate the discrepancy between the decreed and enforced official wage rate and the potential rate of the free labor market by lowering the purchasing power of the monetary unit. It aimed at holding nominal wage rates, i.e., wage rates expressed in terms of the national fiat money, at the height fixed by the government’s decree or by labor union pressure. But as the quantity of money in circulation was increased and consequently a trend toward a drop in the monetary unit’s purchasing power developed, real wage rates, i.e., wage rates expressed in terms of commodities, would fall. Full employment would be reached when the difference between the official rate and the market rate of real wages disappeared.

  There is no need to examine anew the question whether the Keynesian scheme could really work. Even if, for the sake of argument, we were to admit this, there would be no reason to adopt it. Its final effect upon the conditions of the labor market would not differ from that achieved by the operation of the market factors when left alone. But it attains this end only at the cost of a very serious disturbance in the whole price structure and thereby the entire economic system. The Keynesians refuse to call “inflation” any increase in the quantity of money in circulation that is designed to fight unemployment. But this is merely playing with words. For they themselves emphasize that the success of their plan depends on the emergence of a general rise in commodity prices.

  It is, therefore, a fable that the Keynesian full-employment recipe could achieve anything for the benefit of the wage earners that could not be achieved under the gold standard. The full-employment argument is as illusory as all the other arguments advanced in favor of increasing the quantity of money in circulation.

  The Specter of an Unfavorable International Balance

  A popular doctrine maintains that the gold standard cannot be preserved by a country with what is called an “unfavorable balance of payments.” It is obvious that this argument is of no use to the American opponents of the gold standard. The United States [1953] has a very considerable surplus of exports over imports. This is neither an act of God nor an effect of wicked isolationism. It is the consequence of the fact that this country, under various titles and pretexts, gives financial aid to many foreign nations. These grants alone enable the foreign recipients to buy more in this country than they are selling in its markets. In the absence of such subsidies it would be impossible for any country to buy anything abroad that it could not pay for, either by exporting commodities or by rendering some other service such as carrying foreign goods in its ships or entertaining foreign tourists. No artifices of monetary policy, however sophisticated and however ruthlessly enforced by the police, can in any way alter this fact.

  It is not true that the so-called have-not countries have derived any advantage from their abandonment of the gold standard. The virtual repudiation of their foreign debts, and the virtual expropriation of foreign investments that it involved, brought them no more than a momentary respite. The main and lasting effect of abandoning the gold standard, the disintegration of the international capital market, hit these debtor countries much harder than it hit the creditor countries. The falling off of foreign investments is one of the main causes of the calamities they are suffering today.

  The gold standard did not collapse. Governments, anxious to spend, even if this meant spending their countries into bankruptcy, intentionally aimed at destroying it. They are committed to an antigold policy, but they have lamentably failed in their endeavors to discredit gold. Although officially banned, gold in the eyes of the people is still money, even the only genuine money. The more prestige the legal-tender notes produced by the various government printing offices enjoy, the more stable their exchange ratio is against gold. But people do not hoard paper; they hoard gold. The citizens of this country, of course, are not free to hold, to buy, or to sell gold.* If they were allowed to do so, they certainly would.

  No international agreements, no diplomats, and no supernational bureaucracies are needed in order to restore sound monetary conditions. If a country adopts a noninflationary policy and clings to it, then the condition required for the return to gold is already present. The return to gold does not depend on the fulfillment of some material condition. It is an ideological problem. It presupposes only one thing: the abandonment of the illusion that increasing the quantity of money creates prosperity.

  The excellence of the gold standard is to be seen in the fact that it makes the monetary unit’s purchasing power independent of the arbitrary and vacillating policies of governments, political parties, and pressure groups. Historical experience, especially in the last decades, has clearly shown the evils inherent in a national currency system that lacks this independence.

  18

  Inflation and You*

  There has been so much learned talk about the threats and dire consequences of inflation that plain folks begin to be suspicious. Did not the economists of the 1920s, except for a few outsiders whom the others scorned as orthodox doctrinarians, forecast everlasting prosperity? What if their present fears are no better founded than their optimism fifteen years ago? The layman, therefore, has the right to ask the specialist to explain the matter and to do so in simple terms. We economists should not be exempt indefinitely from the obligation, which is accepted by doctors, engineers, and other scientists, of making ourselves understood by the layman. The obligation is clear-cut in the matter of inflation, an economic problem which is as close to every American as his own skin.

  Everybody knows that inflation consists of a large increase in the available quantity of money and money substitutes such as bank credits. In a country like the United States, which transacts so much of its business by checks and through bank credits, the main vehicle of inflation is not so much the printing of additional paper money as the increase of deposit currency. Everybody also knows that a general rise of prices and wages is the unavoidable and inescapable result of inflation. And finally, most people realize that when inflation is going on price control is a quite ineffective method of controlling prices and wages; at best, it is a temporary expedient to break or postpone the force of inflationary effects.

  There is widespread ignorance, however, concerning the social implications of inflation. How will it affect you personally, if you are a professional man, a worker, a farmer? What will it do to your possessions, your debts, your insurance policies?

  Social and Economic Effects of Inflation

  The first fact that needs to be noted in answering such questions is that inflation is detrimental to all creditors. The higher prices rise, the lower will fall the purchasing power of the principal and interest payments due. The dollar which was loaned out had a higher purchasing ability, could provide more goods, than the dollar which is paid back.

  And who is a creditor? Does inflation touch only businessmen and financiers? Nothing of the sort. You who read these lines are certainly a creditor. Every person who has a legal claim to deferred payments of any kind is a creditor. If you have a savings account with a bank, if you own bonds, if you are entitled to a pension, if you have paid for an insurance policy, you are a creditor, and are, hence, directly hit by inflation.

  Professional men, civil servants, commissioned officers of the armed forces, teachers, most white-collar workers, salaried employees, skilled specialists, mechanics, and engineers normally provide for their own old age and for their dependents in ways that make them creditors, that is through savings, insurance, pensions, and annuities. Moreover, Social Security has brought the great masses of ordinary workers into the ranks of creditors. For all these millions of people, every further step toward inflation means a further decline in the real value of the claims or credits they have saved up by years of toil and sacrifice. They will collect the number of dollars to which they are entitled—but each of those dollars will be thinner than it used to be, capable of providing less food, clothing, and shelter.

  The loss of the creditor, of course, is the profit of the debtor. The man who borrowed a thousand or a million full-sized dollars repays his lender with a thousand or a million depreciated dollars. The mortgages on farms and on real estate, the debts owed by industrial enterprises, all shrink as inflation proceeds. Thus, a comparatively small group of debtors is favored at the expense of the teeming groups of creditors.

  The most fateful results of inflation derive from the fact that the rise of prices and wages which it causes occurs at different times and in a different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and rise higher than others. Not merely inflation itself, but its unevenness, works havoc.

  While inflation is under way, some people enjoy the benefit of higher prices for the goods or services they sell, while the prices for goods and services they buy have not yet risen or have not risen to the same extent. These people profit from their fortunate position. Inflation seems to them “good business,” a “boom.” But their gains are always derived from the losses of other sections of the population. The losers are those in the unhappy situation of selling services or commodities whose prices have not yet risen to the same degree as have prices of the things they buy for daily consumption.

  These victims, by and large, are the same kind of people—roughly, the middle classes—who are injured as creditors through the depreciation of their bank savings, insurance policies, pensions, etc. The salaries of teachers and ministers, the fees of doctors, go up only slowly as compared to the tempo with which prices of food, rent, clothing, and so on, go up. There is always a considerable time lag between the increase in the money income of the white-collar workers and professional people and the increase in costs of food, clothing, and other necessities.

  Hedging Against Inflation

  Has the average man any means of evading the detrimental effects of inflation?

  Those insured, or entitled to pensions or social security benefits, cannot avoid being victimized. And the picture is not much brighter for other groups of creditors. Of course, the bondholder may sell his bonds and the bank depositor may withdraw his balance. But if they keep the money, they are no less subject to the harmful effects of the fall in the money’s purchasing power. In other words, the dollar continues to evaporate whether it is resting in a bank, a bond, or a strongbox at home.

  For the Europeans, struck by the great inflations of World War I and its aftermath, there was a simple means of escape. They needed only to change their local currencies for the money of a country with a sound currency. They bought dollars or they bought gold. It might have been illegal, but it worked. For Americans, no such remedy is available. If the dollar goes bad, no foreign currency can conceivably prove better. At the same time, the U.S. government has closed the avenue of escape by forbidding its citizens to own gold coins or ingots.*

  You may buy a farm. But that is a remedy only if you become a farmer and till the soil with your own hands. Otherwise, it is a remedy not for yourself but for the tenant who works the farm. It may reasonably be expected that, in the course of inflation, new laws will safeguard tenants—whether on farms or in residences—against rises in rent.* In European inflations, rents were always restricted by legislation.

  You may buy a home for yourself and your family. But in a period of inflation, economic conditions change swiftly and in unexpected ways. You cannot foresee whether it will be necessary suddenly to change your place of residence and employment. Then you will have to sell the house—renting it is almost useless—and experience proves that such forced sales rarely bring the amounts laid out for acquiring the property.

  You may buy common stock. But the experts are convinced that taxation will confiscate not only the profits but a good deal of the capital invested, too. While the prices of all commodities are rising, stock market quotations may still cling more or less to preinflation levels. This means that in owning common stock you are not much better protected than in owning bonds.

  You may buy jewelry and other valuables. But you cannot always expect to sell these at a later date for what you paid for them. Nobody knows in advance how the market conditions for any given valuable will develop. Diamonds and rubies, for instance, may hold much of their value. But what if the owners of the largest hoards of precious stones should unload them because of changing political or social conditions?

  Neither is it possible to escape the detrimental effects of the time lag between the rise of different prices and wages. Trade union policies are futile in this connection. As long as the war (World War II) is going on, labor may succeed in obtaining, at least for some groups, wages which correspond to the rise of commodity prices. But sooner or later if industry does not keep pace, they will face the choice between a sharp decline in wages and the maintenance of high wage levels with long-lasting unemployment for millions. In the long run, inflation hurts the interests of all groups of labor, as well as those of the middle classes.

  There is only one class which, as a whole, derives profit from inflation: the indebted farmers. Their mortgages are wiped out and the products of their own toil bring higher returns corresponding to the higher prices they must pay for things they purchase.

  The owners of really large fortunes, too, may succeed in preserving a greater or smaller portion of their wealth, but inflation results in the consumption of a good deal of a nation’s capital stock.

  Even if some special groups profit, the whole country is poorer.

  Moral and Political Effects of Inflation

  Worse than the immediate economic consequences of inflation are its attendant moral and political dangers.

  It has been asserted that Nazism is the fruit of the vast German inflation of 1923. That is not quite correct. It would be more correct to say that the great inflation and the Nazi scourge both derived from the mentalities and the doctrines that long dominated German public opinion. The State, which the German socialist Ferdinand Lassalle had already proclaimed as god, was supposed to be able to achieve anything. The omnipotent State was credited with the magic power of unlimited spending without any burden on the citizenry. Money, said the German “monetary cranks,” is a creature of the State; there is no harm in issuing infinite quantities of paper currency.

  Fortunately, such superstitions are strange to the healthy common sense of America. Inflation, therefore, will never go as far in this country as it did in Germany. Even a much more moderate inflation, however, shakes the foundations of a country’s social structure. The millions who see themselves deprived of security and well-being become desperate. The realization that they have lost all or most all of what they had set aside for a rainy day radicalizes their entire outlook. They tend to fall easy prey to adventurers aiming at dictatorship, and to charlatans offering patent-medicine solutions. The sight of some people profiteering while the rest suffer infuriates them. The effect of such an experience is especially strong among the youth. They learn to live in the present and scorn those who try to teach them “old-fashioned” morality and thrift.

  Inflation and Government Borrowing

  The writer, having witnessed the course of inflations in one European nation after another, believes that it is not too late to stop further inflation in the United States by bold and painful measures. Inflation is not an act of God. It is a result of the methods used to provide a part of the means for the conduct of the war. One set of methods can still be replaced by another, less harmful set. It is still possible to keep down the amount of money and money substitutes by financing the total amount necessary through taxation and loans.

  People sometimes call inflation a special way of “taxing” a country’s citizens. This is a dangerous opinion. And it is wholly untrue. Inflation is not a method of taxation, but an alternative for taxation. When a government imposes taxes, it has full control. It can tax and distribute the burden any way it considers fair and desirable, allotting a larger share of the tax burden to those who are better able to carry it, reducing the burden on the less fortunate. But in the case of inflation, it sets in motion a mechanism that is beyond its control. It is not the government, but the operation of the price system, that decides how much this or that group will suffer.

  And there is another important difference. All taxes collected flow into the vaults of the public treasury. But with inflation, the public treasury’s gain is less than what it costs the individual citizen, since a considerable part of that cost is drained off by the profiteers, the minority that benefits from the inflation.

  It is no less fallacious to consider inflation as a method of raising loans for public use. Technically, inflation does increase the total of the government’s indebtedness to the banks. But the banks’ intervention is only instrumental. If the government borrows from the banks, the banks do not grant loans out of their own funds, or out of money deposited with them by the public; the banks are not real lenders; they grant the loans out of their “excess reserves.” They merely expand credit for the benefit of the government. In other words, they increase the quantity of money substitutes.

  When you as an individual buy a government bond, you make a loan to the government; you put part of your cash holdings into the hands of the treasury. There is then no increase in the total quantity of currency or credits available and hence no inflation.

  However, it is different when government borrows from the banks’ “excess reserves.” Their so-called “excess reserves” are not a tangible thing. The term is merely a phrase indicating the limits within which the law is prepared to tolerate credit expansion, that is to say further inflation. The effects of loans from available “excess reserves” are just as inflationary as the effects of issuing more paper money. It is a mistake, therefore, to confuse this government “borrowing” from the “excess reserves” of the banks with genuine loans.

  Popular education is absolutely essential. It is clear that the efforts of the U.S. government to collect the means necessary for the conduct of the war by taxation and by sale of government bonds represent sound measures for heading off inflation. Everybody should be made to understand that the burden of high taxes and of making personal loans to the government are minor evils compared to the disastrous and inexorable consequences of inflation. Not only for the sake of the national welfare, but for the sake of your own interests—whether you are rich or poor, employer or wage earner—you should do your best to arrest the further progress of inflation.

  19

  Inflation*

  The government provides a part of the funds required for rearmament by inflation, that is, by increasing the quantity of money in circulation and the amount of bank balances subject to check.

  The unavoidable consequence of inflation is the emergence of a general tendency of all prices to rise. If the government had procured all the money it needed for rearmament by taxing the citizens, the increased demand on its part would have been counteracted by a drop in the purchases of the taxpayers. The expanded military consumption would have been neutralized on the market by a restriction in civilian consumption. But with inflation the additional demand of the armed forces comes on top of the nondecreased demand of the public and makes prices soar.

  What the bureaucrats have in mind when talking about “fighting” inflation is not avoiding inflation, but suppressing its inevitable consequences by price control. This is a hopeless venture. The attempt to fix prices at a lower rate than that which the unhampered market would determine renders unremunerative the business of some producers, that is, those operating at the highest costs. This forces them to discontinue production.

  Wartime Experience

  Inflation, in conjunction with price control, brings about scarcity. Housewives remember very well what happened in World War II with meat, butter, eggs, and many other articles under the regime of the Office of Price Administration. Yet price control has been reestablished.* If Congress does not let the present price control law expire on June 30, as scheduled, the country will very soon experience anew not only all the hardships of inflation, but also all the evils created by the vain attempts to conceal these hardships by price control.

  Economists know very well that there is only one means available to prevent a further rise in all commodity prices, namely, to end inflation entirely. If the government obtains all its funds from the public and stops increasing the quantity of money in circulation and borrowing from the commercial banks, prices will remain unchanged, by and large, and there will not be any need for the activities of a price dictator.

  But the administration does not want to stop inflation. It does not want to endanger its popularity with the voters by collecting, through taxation, all it wants to spend. It prefers to mislead the people by resorting to the seemingly nononerous method of increasing the supply of money and credit. Yet, whatever system of financing may be adopted, whether taxation, borrowing, or inflation, the full incidence of the government’s expenditures must fall upon the public.

  With inflation as well as with taxation, it is the citizens who must foot the total bill. The distinguishing mark of inflation, when considered as a method of filling the vaults of the Treasury, is that it distributes the burden in a most unfair way, overcharging those who are least able to bear it.

  A Semantic Trick

  To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call “inflation” the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase.

  They put the responsibility for the rising cost of living on business. This is a classical case of the thief crying “catch the thief.” The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices. While the Office of Stabilization and Price Control is busy annoying sellers as well as consumers by a flood of decrees and regulations, the only effect of which is scarcity, the Treasury goes on with inflation.

  20

  Inflation: An Unworkable Fiscal Policy*

  In dealing with problems concerned with the economics of mobilization, it is first of all necessary to realize that fiscal policies have reached a turning point.

  In recent decades all nations have looked upon the income and the wealth of the more prosperous citizens as an inexhaustible reserve which could be freely tapped. Whenever there was need for additional funds, one tried to collect them by raising the taxes to be paid by the upper-income brackets. There seemed to be enough money for any suggested expenditure because there seemed to be no harm in “soaking the rich” a bit more. As the votes of these rich do not count much in elections, the members of the legislative bodies were always ready to increase public spending at their expense. There is a French dictum: Les affaires, c’est l’argent des autres. “Business is other people’s money.” In these last sixty years political and fiscal affairs were virtually “other people’s money.” Let the rich pay, was the slogan.

  End of an Era

  Now this period of fiscal history has come to an end. With the exception of the United States and some of the British Dominions, what has been called the ability-to-pay of the wealthy citizens has been completely absorbed by taxes. No further funds of any significance can be collected from them. Henceforth all government spending will have to be financed by taxing the masses.

  The European nations concerned are not yet fully aware of this fact because they have found a substitute. They are getting Marshall Plan aid; the U.S. taxpayer fills the gap.

  In this country things have not yet gone as far as they have in other countries. It is still possible to raise an additional $2 or $3 billion, or perhaps even $4 billion, by increasing corporation taxes, and “excess profits” taxes, and by rendering the personal income tax more progressive. But under present conditions, even $4 billion would be only a fraction of what the Treasury needs. Thus, in this country we are also at the end of a period of fiscal policies. The whole philosophy of public finance must undergo a revision. In considering the pros and cons of a suggested expenditure the members of Congress will no longer be able to think: The rich have enough; let them pay. In the future, the voters on whose ballots the Congressmen depend will have to pay.

  Inflation, an increase in money and credit, is certainly not a means to avoid or to postpone for more than a short time the need to resort to taxes levied on people other than those belonging to the rich minority. If, for the sake of argument, we leave aside all the objections which may be raised against any inflationary policy, we must take into account the fact that inflation can never be more than a temporary makeshift. Inflation cannot be continued over a long period of time without defeating its fiscal purpose and ending in a complete debacle as was the case in this country with the Continental currency, in France with the mandats territoriaux, and in Germany with the mark in 1923.

  What makes it possible for a government to increase its funds by inflation is the ignorance of the public. The people must ignore the fact that the government has chosen inflation as a fiscal system and plans to go on with inflation endlessly. It must ascribe the general rise in prices to other causes than to the policy of the government and must assume that prices will drop again in a not-too-distant future. If this opinion fades away, inflation comes to a catastrophic breakdown.

  The Housewife’s Behavior

  If the housewife who needs a new frying pan reasons: “Now prices are too high; I will postpone the purchase until they drop again,” inflation can still fulfill its fiscal purpose. As long as people share this view, they increase their cash holdings and bank balances, and a part of the newly created money is absorbed by these additional cash holdings and bank balances; prices on the market do not rise in proportion to the inflation.

  But then—sooner or later—comes a turning point. The housewife discovers that the government expects to go on inflating and that consequently prices will continue to rise more and more. Then she reasons: “I do not need a new frying pan today; I shall only need one next year. But I had better buy it now because next year the price will be much higher.” If this insight spreads, inflation is done for. Then all people rush to buy. Everybody is anxious to reduce his holding of cash because he does not want to be hurt by the drop in the monetary unit’s purchasing power. The phenomenon then appears which in Europe was called the “flight into real values.” People rush to exchange their depreciating paper money for something tangible, something real. The knell sounds of the currency system involved.

  In this country we have not yet reached this second and final stage of every protracted inflation. But if the authorities do not very soon abandon any further attempt to increase the amount of money in circulation and to expand credit, we shall one day come to the same unpleasant result.

  It is not a matter of choosing between financing the increased government expenditure by collecting taxes and borrowing from the public on the one hand and financing it by inflation on the other hand. Inflation can never be an instrument of fiscal policy over a long period of time. Continued inflation inevitably leads to catastrophe.

  Therefore, we should not waste our time in discussing methods of price control. Price control cannot prevent the rise in prices if inflation is going on. Even capital punishment could not make price control work in the days of Emperor Diocletian or during the French Revolution. Let us concentrate our efforts on the problem of how to avoid inflation, not upon useless schemes of how to conceal its inexorable consequences.

  Taxation the Key

  What is needed in wartime is to divert production and consumption from peacetime channels toward military goals. In order to achieve this, it is necessary for the government to tax the citizens, to take away from them the money which they would otherwise spend for things they must no longer buy and consume so the government can spend it for the conduct of the war.

  At the breakfast table of every citizen in wartime sits an invisible guest, as it were, a GI who shares his meal. Parked in the citizen’s garage is not only the family car, but also—invisibly—a tank or a plane. The important fact is that a GI needs more in food, clothing, and other things than he used to consume as a civilian. And military equipment wears out much more quickly than civilian equipment. The costs of a modern war are enormous.

  The adequate method of providing the funds the government needs for war is, of course, taxation. Part of the funds may also be provided by borrowing from the public, the citizens. But if the Treasury increases the amount of money in circulation or borrows from the commercial banks, it inflates. Inflation can do the job for a limited time. But it is the most expensive method of financing a war; it is socially disruptive and should be avoided.

  Inflation: A Convenient Makeshift

  There is no need to dwell upon the disastrous consequences of inflation. All people agree in this regard. But inflation is a very convenient makeshift for those in power. It is a handy means to divert the resentment of the people from the government. In the eyes of the masses, big business, the “profiteers,” the merchants—not the Administration—appear responsible for the rise in prices and the ensuing need to restrict consumption.

  Perhaps somebody will consider what I am saying here as antidemocratic, reactionary, and economic royalism. But the truth is that inflation is a typically antidemocratic measure. It is a policy of governments that do not have the courage to tell the people honestly what the real costs of their conduct of affairs are.

  A truly democratic government would have to tell the voters openly that they must pay higher taxes because expenses have risen considerably. But it is much more agreeable for a government to present only a part of the bill to the people and to resort to inflation for the rest of its expenditures. What a triumph if they can say: Everybody’s income is rising, everybody has now more money in his pocket, business is booming.

  Deficit spending is not a new invention. During the greater part of the nineteenth century it was the preferred fiscal method of precisely those governments that were not then considered democratic and progressive—Austria, Italy, and Russia. Austria’s budget showed a deficit yearly from 1781 on, until the late ’80s of the nineteenth century, when an orthodox professor of economics, Dunajewski, as minister of finance, restored the budgetary equilibrium. There is no reason to be proud of deficit spending, nor to call it progress.

  Going After Lower Brackets

  If one wants to collect more taxes, it will be necessary to lay a burden greater than hitherto on the lower income brackets, the strata of society whose members consume the much greater part of the total amount consumed in this country. Up to now it has been customary to tax predominantly corporations and individuals with higher incomes. But even the outright confiscation of these revenues would only cover a fraction of the additional funds the country needs today.

  Some experts have declared that it is necessary to tax the people until it hurts. I disagree with these sadists. The purpose of taxation is not to hurt, but to raise the money the country needs to rearm and to fight in Korea. It is a sad fact that world affairs now make it necessary for the government to force people who used to buy nylon stockings and shirts to shift to other du Pont products, namely munitions.

  In his book Eternal Peace, the German philosopher Immanuel Kant (1724–1804) suggested that government should be forbidden to finance wars by borrowing. He expected that the warlike spirit would dwindle if all countries had to pay cash for their wars. However, no serious objection can be raised against borrowing from the public, from people who have saved and are prepared to invest in government bonds. But borrowing from the commercial banks is tantamount to printing additional bank notes and expanding the amount of deposits subject to check. That is inflation.

  Semantic Confusion

  There is nowadays a very reprehensible, even dangerous, semantic confusion that makes it extremely difficult for the nonexpert to grasp the true state of affairs. Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term “inflation” to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. It follows that nobody cares about inflation in the traditional sense of the term. As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.

  Look at the silly term, “inflationary pressures.” There is no such thing as an “inflationary pressure.” There is inflation or there is the absence of inflation. If there is no increase in the quantity of money and if there is no credit expansion, the average height of prices and wages will by and large remain unchanged. But if the quantity of money and credit is increased, prices and wages must rise, whatever the government may decree. If there is no inflation, price control is superfluous. If there is inflation, price control is a sham, a hopeless venture.

  It is the government that makes our inflation. The policy of the Treasury, and nothing else.

  We have been told a lot about the need for, and the virtues of, direct controls.

  We have learned that they preserve the individual’s liberty to choose the grocer he prefers. I do not want to examine what value may be attached to direct controls from a metaphysical point of view. I only want to stress one fact: As a means for preventing and fighting inflation or its consequences, direct controls are absolutely useless.

  21

  Socialism, Inflation, and the Thrifty Householder*

  The most serious dangers for American freedom and the American way of life do not come from without. They are not of a military character. Neither will socialism conquer this country—and, for that matter, the civilized nations of Western Europe—in the shape of an open surrender to the program of the Communist International. Whatever chances socialism may have in the United States are due to the economic policies of our own political parties that gradually undermine the economic and social foundations of American freedom and prosperity.

  Both traditional parties, the Republicans as well as the Democrats, are sincere in protesting their abhorrence of totalitarianism. The voters in casting their ballots for either of these parties are fully convinced that they are voting for officeholders who are firmly committed to the preservation intact of the Constitution and all the freedoms it grants to the individual citizens. These politicians and their supporters would be seriously alarmed if they realized that they are virtually paving the way for a system that does not differ essentially from the totalitarian system they decidedly reject.

  Socialism and Planning Not Different from Communism

  The fundamental fallacy that leads contemporary political thinking astray is to be seen in the fictitious distinction between communism on the one side and socialism and planning on the other side.

  The two terms socialism and communism are synonyms. Communism is a very old term, while the term socialism was first coined in France at the end of the 1830s. Up to the year 1917 both were used indiscriminately. Thus Marx and Engels called the program they published in 1848 the Communist Manifesto, while the parties they organized for the realization of this program called themselves socialist parties.

  Before 1917 no distinction was made between the two words. When Lenin called his party “communist,” he meant that it was a party sincerely aiming at the realization of socialism as distinct from the parties that, according to Lenin, merely called themselves socialist parties while in fact they were “social traitors” and “servants” of the bourgeoisie. Lenin never pretended that his Communist party had any other goal than the realization of socialism. The official name he gave to his government was—and is—the Union of the Soviet Socialist Republics. If somebody says he is opposed to communism, but cherishes socialism, he is no more consistent or logical than a man who declares that he is opposed to murder but cherishes assassination.

  The essential feature of the socialist, or communist conduct of affairs is the substitution of the government’s unique plan for the plans of individual citizens. “Planning” is therefore nothing but one term more to signify what the terms socialism and communism are designed to signify.

  Yet many leaders of our political parties are deluded by the idea that socialism and planning are something different from communism and that in fostering these schemes they are opposing communism, while in fact they are fully adopting the Communist program. Of course, these confused politicians pretend that what they are aiming at is a socialist system that preserves democracy and representative government. They say they want to abolish “only” economic freedom and to retain political freedom. They are at a loss to realize that economic control is not merely control of one sector of human life which can be separated from other sectors. If the government controls all material factors of production, it controls all aspects of the individuals’ activities. If it controls all publishing facilities, all printing presses, radio, television, and all assembly halls, every political activity depends on the discretion of the authorities. If everybody is bound to work according to the orders of the government, only those whom the rulers trust are free to devote their time and their efforts to public affairs. It is not an accident that representative government and civil liberties developed step-by-step with the substitution of capitalism for feudalism and disappeared everywhere as soon as socialism—whether the “right” model (German Nazism and Italian Fascism) or the “left” model (Russian Bolshevism)—supplanted the market economy. Despotism is the necessary political corollary of socialism just as representative government is the necessary constitutional corollary of capitalism.

  Unwitting Support of Socialism by Inflationary Policies

  Certainly there are many among the “left” wing leaders of both political parties who are consciously intent upon abolishing any trace of freedom and converting America into a full replica of the Soviet system. But most of our politicians and the rank and file of the voters are not guilty of such a betrayal. On the contrary, they are anxious to preserve the traditional system of government, the free institutions, established by the founding fathers, the institutions that were the foundations of this country’s greatness, glory, and prosperity, as they were the essential features of the civilization of Western Europe. But even these sincere advocates of liberty are, unbeknown to themselves, undermining the “American way of life.” They are lending a helping hand to allegedly beneficial economic policies that, on the one side, sabotage the operation of the market economy and, on the other side, restrict the individuals’ self-determination by expanding the field of government control, euphemistically called “social” control.

  The most detrimental of all varieties of economic policies is inflation, i.e., the policy of increasing the supply of money and money substitutes. If additional legal-tender banknotes are issued or if additional bank balances subject to check (checkbook money) are created, nothing is added to the material wealth of a country. But those persons into whose pockets these newly created means of payment are flowing are thereby in a position to expand their purchases. Thus an additional demand for commodities and services comes into being while the supply of such commodities and services has not been increased. The inevitable outcome is a tendency for prices to soar.

  There is no need to depict in detail the unwelcome, nay the catastrophic effects of such a state of affairs. Everybody is familiar with them; everybody knows how he was hurt by them. Among reasonable men there is hardly anybody who would dare to advocate openly a policy of inflation. Nonetheless this country, and most other countries of the world, have for many decades been committed to inflationist measures.

  The fault rests with a lack of responsibility and a fickleness of character on the part of statesmen and politicians as well as with the greed of powerful pressure groups who want to get handouts from the government, the notorious “something for nothing.” A government cannot spend but at the expense of the people. As taxes have already long since overstepped the optimum of returns and there is hardly any sizeable increase to be expected from further raising the already levied taxes or devising new ones, the main way to finance additional government spending is with inflation.

  It is a serious error to assume that a nation can win and can become richer by increasing the supply of money and money substitutes. What one group of people may gain, is lost by other groups.

  Inflation and the Creditors

  Let us look upon one important aspect of the problem, the nexus of creditor and debtor. One of inflation’s main effects is the progressive dilution of debts. The more inflation progresses, the more is the debtor favored at the expense of the creditor. While the nominal value of a loan remains unchanged, its purchasing power shrinks more and more. Of course, some people believe that this is after all not too bad, or that it may even be desirable. The creditors, they think, are rich and will get over such losses. But the debtors are poor and will be benefited by a reduction in the burden of their debt.

  Yet, this way of reasoning is entirely fallacious. It is based upon a fateful misconstruction of essential features of the capitalistic system, under which a continually increasing multitude of people with moderate means are becoming creditors.

  One of the main achievements of the capitalistic system is to be seen in the opportunity it offers to the masses of citizens to save and thereby to improve their material well-being.

  In the “good old days,” effectual saving was possible only for the well-to-do. The farmer, the artisan, and the owner of urban real estate could fructify their thrift into improvement of their own farms, shops, and buildings. But the landless worker had only one method of saving, to hoard by burying a few coins or hiding them in some other way. This was a very unsatisfactory method of saving. Its main deficiency was that it did not bear any interest and did not give the saver an opportunity to acquire a share of the material factors of production. While new capital stock was added to the already previously available equipment, while new houses and workshops were built and were better equipped, the manual worker saw no way to contribute to this effort, nor to participate directly in its fruits. In this sense, he could feel that he was a “proletarian,” a man who did not own any property and who was forever destined to live from hand to mouth.

  The financial techniques of capitalism radically altered this state of affairs. Capitalism not only increased the marginal productivity of labor spectacularly and thereby raised wage rates and the employees’ standard of living. It also made it possible for thrifty laborers to join in the endeavors of accumulating capital. It inaugurated institutions to fructify everybody’s parsimony, first of all savings banks and insurance organizations. Even the smallest savings deposit bears interest. The success of these schemes was overwhelming. Billions were added to the capital working in the plants, farms, mines, and transportation facilities. A continually growing part of the nation’s wealth is the counterpart of these holdings of the common man.

  The Common Man a Creditor

  These conditions manifest themselves in the fact that the average man is today a creditor rather than a debtor. The much talked-about rise in consumers’ credit lending, originating from installment selling and buying must not deceive us. In the balance the common man is by far a creditor, not a debtor. The billions of dollars that big business and real estate owe to mortgage banks, commercial banks, savings banks, and insurance companies belong—virtually, although not formally—to the common man. He owns corporate bonds as well as bonds issued by the U.S. Treasury and by various subdivisions of the government. And finally familiarity with these types of investment provides him with a better understanding of the ways and practices of business and thus enables him also to venture on the acquisition of common stock. One of the most characteristic developments of present-day finance, the mutual funds and kindred schemes, shows the extent to which what is called risk capital also turns into a popular way of saving and investing.

  Yet, however momentous these attempts to make the common man an owner of common stock may be, the main method of making employees, in their capacity as capitalists, participate in the well-being created by the free economy is by the acquisition of titles and claims payable in definite amounts of the nation’s monetary unit. From this point too the masses acquire a lively interest in the stability of the nation’s legal tender, for the value of all kinds of deposits, bonds, and insurance policies is inseparably linked to the purchasing power of the dollar. A policy of “creeping inflation” such as this country has now pursued for a long series of years—apart from all the other detrimental effects it produces—is in the strict meaning of the words antisocial and antidemocratic. It is a policy against the vital material interests of the common man. It hurts seriously those judicious and conscientious earners of wages and salaries who are intent upon improving their own and their families’ lot by thrift.

  Under a sound money policy these people would become more and more deproletarianized. They would acquire a continually rising share in the nation’s wealth and become interested in the nation’s economic effort, not only as employees, but also as owners of interest-bearing investments. But under inflationary policies they see how the purchasing power of their savings, their insurance policies, and their pensions is persistently dwindling. Their hopes for steady material improvement are dispelled. Their attempts to join those strata of the population who, by saving and capital accumulation, are cooperating in the improvement of economic conditions are thwarted. They become desperate and lose their confidence in the fairness and efficiency of the market economy.

  The Communists Favor Inflation

  The communist chiefs know very well how their cause is furthered by undermining the purchasing power of the dollar. They know they cannot succeed in a country in which the masses of the wage earners rely upon their savings and upon other income such as pensions and social security benefits determined in fixed amounts of the nation’s legal tender. The main obstacle which their propaganda encounters in this country is the fact that the “common man” is more and more deproletarianized and sees his personal economic condition improved, not only by rising wages and salaries, but also by his claims to pensions and interest from savings. The 65 percent of the American population who hold life insurance policies are proof against the venom of the communist slogans and so are the 47 percent of the entire population who are time depositors in mutual savings and commercial banks. But when these people see the value of their thrift continually diminished by inflation, they lose their faith in the system and become an easy prey to the mendacious incitation of the subversive parties.

  It is a really diabolic makeshift to egg various pressure groups on to ask for more and more government spending to be financed by credit expansion. The bill for such government extravagance is always footed by the most industrious and provident people. It is their claims that are shrinking with the dollar’s purchasing power.

  A sound monetary policy is one of the foremost means to thwart the insidious schemes of communism.

  22

  Inflation Must End in a Slump*

  This country, and with it most of the Western world, is presently going through a period of inflation and credit expansion. As the quantity of money in circulation and deposits subject to check increases, there prevails a general tendency for the prices of commodities and services to rise. Business is booming.

  Yet such a boom, artificially engineered by monetary and credit expansion, cannot last forever. It must come to an end sooner or later. For paper money and bank deposits are not a proper substitute for nonexisting capital goods.

  Economic theory has demonstrated in an irrefutable way that a prosperity created by an expansionist monetary and credit policy is illusory and must end in a slump, an economic crisis. It has happened again and again in the past, and it will happen in the future, too.

  If one wants to avoid the recurrence of periods of economic depression, one must start by preventing the emergence of artificial booms. One must prevent the governments from embarking upon a policy of cheap interest rates, deficit spending, and borrowing from the commercial banks.

  This is, of course, a very difficult task. Governments are in this regard very obstinate. They long for the popularity that booming business conditions seldom fail to win for the party in power. The unavoidable crash, they think, will appear only later; then the other party will be in power and will have to account to the voters for the evils which their predecessors have sown.

  Thus there is no doubt that we shall one day have to face again an economic recession, although it is impossible to determine the date of its outbreak and the degree of its severity. It will be bad indeed. But worse than the crisis itself could prove the psychological and ideological consequences of an erroneous interpretation of its causes.

  For the spokesmen of the artificial expansionist policy are busy denying that economic crises are the inevitable effect of the preceding expansionist policy. They are anxious to exonerate the governments. As they see it, inherent shortcomings of the capitalist mode of production cause the periodical recurrence of bad business. There is no other means, they conclude, to avoid a crisis than to put the economic system under the full tutelage of a central planning board.

  This is essentially the doctrine of Karl Marx. Those supporting it, those passionately attacking the insight that it is the policy of inflation and credit expansion which produces economic depressions, are—sometimes unwittingly—serving the cause of the Communists. When the slump comes, people indoctrinated by their teachings will argue precisely as Stalin expects them to. They will think: The efforts to preserve capitalism have proved vain; capitalism necessarily results in the recurrence of economic catastrophes; if we want stability, we must turn toward Communism.

  In the antagonism between the doctrine of the economists who ascribe the emergence of economic crises to the policy of credit expansion and the official doctrine that ascribes them to alleged inherent defects of capitalism there is much more at stake than a merely doctrinal quarrel. The way in which people will react to the—unfortunately hardly avoidable—letdown of business that will follow the end of the present armament boom may decide the fate of our civilization.

  People must learn in time what the inevitable consequences are of the monetary and credit policies adopted by the present administration. They must realize that what the collapse of the artificial boom will establish will not be any insufficiency of capitalism, private enterprise, and the market economy, but the failure of the methods of financing public expenditure as practiced by the New Deal and the Fair Deal.

  A comprehension of the nature of the boom will also make people more cautious in their business dealings. They will not fall victim to the deception that the boom will go on forever.

  23

  The Plight of Business Forecasting*

  People by and large know today that a boom brought forth by a policy of credit expansion and “easy money” cannot last forever and must sooner or later lead to a slump. They do not want to be taken by surprise and ruined. They are anxious to learn in time when the turning point will come because they plan to arrange their affairs early enough so as not to be hurt by, or even to profit from, the crash. As they believe that economics is the art of predicting tomorrow’s business conditions, they consult the economists.

  “How will business be in the coming months?” asks the newspaperman when interviewing the economist. No convention of businessmen is held without the solicited presence of a professor of economics, or the head of a bank’s research department, who in guarded language produces a cautiously qualified prediction about the nation’s, or the world’s business. Whenever and wherever a businessman catches sight of an economist, he tries to sound him out about the future state of the market.

  What Brings About the Slump

  Economics explains the phenomenon of the trade cycle (i.e., the repeated emergence of periods of unusually good business that are invariably followed after some time by a reversal into unusually bad business) as the necessary effect of the attempts to manipulate the rate of interest. Governments and political parties are committed to the idea that it is good policy to lower the rate of interest below the height it would attain on a free market. And they believe that the expansion of bank credit is the right means to produce this desired effect. They do not realize that the boom which they artificially create by such credit expansion must finally result in the catastrophe of the depression.

  Spokesmen of governments tried to disparage the economists’ explanation of the recurrence of economic depressions. They tried in vain. This economic doctrine, the so-called monetary or circulation-credit theory of the business cycle, is irrefutable. The fanatical supporters of inflationism, unbalanced budgets, and reckless government spending have, it is true, succeeded in banning sound theory from universities and textbooks. And they have founded special research institutions whose main purpose it is to put the monetary theory into oblivion. But their triumph is always shortlived. Today people are fully aware of the fact that credit expansion is the ultimate cause of the slump. All public declarations on the state of business, even those uttered by bureaucrats, are based upon a full acknowledgment of the monetary doctrine of the trade cycle. It is precisely the cognition of this theory’s correctness that in the present boom period alarms businessmen and prompts them to inquire nervously about the date of the turning point.

  Economics: Not Quantitative

  Economics predicts the outcome of definite modes of conduct, in our case, of a policy of credit expansion. But this prediction is qualitative only. Economic prediction can never disclose anything about the quantitative relations concerned. There is not, and there cannot be such a thing as quantitative economics.

  In the field of the natural sciences there prevail constant relations between definite magnitudes. By means of laboratory experiments the scientists are in a position to determine these constants and to make practical use of them in predictions and in technological design. But in human action there are no such constant relations between magnitudes. There, all quantities are variables or, as a more appropriate term describes them, historical data. It is, therefore, not due to alleged backwardness, or to the much-talked-about “youth” of economic science, that it is not quantitative but, as people say, “merely” qualitative. No constant, fixed quantitative economic relationships exist, on which quantitative economic predictions would have to be based. And what does not exist cannot become a matter of scientific inquiry.

  Economics can only tell us that a boom engendered by credit expansion will not last. It cannot tell us after what amount of credit expansion the slump will start or when this event will occur. All that economists and other people say about these quantitative and calendar problems partakes of neither economics nor any other science. What they say in the attempt to anticipate future events makes use of specific “understanding,” the same method which is practiced by everybody in all dealings with his fellow man. Specific “understanding” has the same logical character as that which characterizes all anticipations of future events in human affairs—anticipations concerning the course of Russia’s foreign policy, religious and racial conditions in India or Algeria, ladies’ fashions in 1960, the political divisions in the U.S. Senate in 1970; and even such anticipations as the future marital relations between Mr. X and his wife, or the success in life of a boy who has just celebrated his tenth birthday. There are people who assert that psychology may provide some help in such prognostications. However that may be, it is not our task to examine this problem. We have merely to establish the fact that forecasts about the course of economic affairs cannot be considered scientific.

  Statistics: Necessarily Retrospective

  The usual method employed in business forecasts is statistical and, thereby, retrospective.

  The statistician recites a mass of statistical information, which necessarily refers to the past only, and he works it into charts and curves. He is so preoccupied with arranging and rearranging the data available that he entirely fails to realize that they do not have any relevance to the problems in question. They refer to the past, not to the future. They depict trends that prevailed in the past and are, by and large, familiar to everybody. They in no way answer the questions that all people, and especially businessmen, are asking. People know that trends can change; they are afraid that they will change; and they would like to know when the change will occur. But the statistician knows only what everybody knows, namely, that they have not yet changed.

  In the sphere of human action statistics are a special method of historical research. They record historical facts in quantitative terms. But history deals always with the past, never with the future. If the future were merely a continuation of the trends that prevailed in the past, it would not be uncertain and we would not then be in need of any forecasting. But as this is not the case, what is called economic forecasting is merely guesswork.

  Professional forecasters blame their much talked about failures on the fact that the figures available are insufficient and reach them too late. This apology misses the point. However complete and recent statistical information may be, it always remains information about the past and does not assert anything about the future.

  The Self-Contradiction of Forecasting

  People’s ideas about the possibility of business forecasting, and its practical value for the conduct of one’s own affairs, are self-contradictory and unrealizable.

  The businessman thinks: If I know the date of the boom’s collapse some time in advance, I will be in a position to sell my stocks and reduce my inventories of both raw materials and products at boom prices. Then, at the critical moment, I will have cash and no debts. The man who entertains such ideas overlooks the fact that this knowledge could be helpful to him only if he alone has it, while all other people are still bullish. But how could this occur if, as popular opinion assumes, economic doctrine enables the economists to predict the day of the crisis? If economists really could predict when the crisis would occur, then all people would learn simultaneously the date of the impending crash. Consequently, they would all immediately try to adjust their transactions to this expectation. They would all stop buying forthwith and start selling. But then, as a consequence of this attitude, the catastrophic drop in prices, the slump, would appear at once; it would not wait for the distant day the economists had predicted. Nobody would derive any advantage from the economists’ forecast; at the very instant this forecast was uttered and accepted as correct, the crisis would already be consummated.

  From time immemorial people have known that the very act of predicting may change the actions of men and thus eliminate the forces that are required to bring about the predicted outcome. Obstinate fatalists have acquiesced in the illusion that all attempts to avoid a prognosticated evil are futile; and that frequently, in some mysterious way, against the intention of the actor, they even bring the prophecy about. No such subterfuge is permissible in our case. The very fact that people are putting faith in the forecast of a crash results in the annulment of the prediction: it instantly produces the crash. Thus, what the businessman wants to attain by asking the economist for information about the future of the market could not be realized, even if the economist were in a position to answer.

  [* ]Reprinted from Plain Talk, September 1949.

  [1. ]Die Theorie des Geldes und der Umlaufsmittel, first German-language edition, 1912; English translation, The Theory of Money and Credit (J. Cape, 1934; Yale, 1953; FEE, 1971; Liberty Fund, 1980).

  [* ]F. A. Hayek (1899–1992), author of The Road to Serfdom (1944), was appointed Nobel Laureate economist in 1974. Henry Hazlitt (1894–1993), economic journalist, was the author of the popular Economics in One Lesson (1946). B. M. Anderson (1886–1949) was well known as the economist for the Chase Bank.

  [2. ]Die Gemeinwirtschaft, first German-language edition, 1922; English language translation, Socialism (J. Cape, 1936; Yale, 1951; J. Cape, 1969; Liberty Fund, 1981).

  [* ]Reprinted from Christian Economics, February 4, 1964.

  [* ]Reprinted from The Freeman, May 4, 1953.

  [* ]On January 1, 1990, the fare on the New York City subway was raised to $1.15.

  [* ]The foreign aid plan sparked June 5, 1947, by General George C. Marshall, then Secretary of State, which became the European Recovery Program.

  [* ]Reprinted from Christian Economics, April 28, 1964.

  [* ]The General Theory of Employment, Interest and Money (London, 1936), p. 264.

  [* ]Reprinted from Christian Economics, April 18, 1961.

  [* ]Keynes, General Theory (1936), p. 264.

  [* ]January 9, 1961, pp. 101–3. Mr. Elliott’s “Save-a-Plant Plan” could have helped his economically depressed area insofar as above-market wage rates were the cause of its problems. However, since 1961, traditional smokestack industries in the United States have been beset by other exorbitant and mandatory costs, notably for federally imposed pollution control and safety standards.

  [* ]Transcript of radio broadcast made during intermission of the U.S. Steel Concert Hour, May 17, 1962; first published in The Freeman, May 1988. Mises had been asked to respond to the question: “Are the interests of the American wage earners in conflict with those of their employers, or are the two in agreement?”

  [* ]Reprinted from National Review, June 22, 1957; © 1957 by National Review, Inc., 215 Lexington Avenue, New York, N.Y. Reprinted by permission.

  [* ]Beardsley Ruml in American Affairs, 8 (1946): pp. 45–46.

  [† ]Abba P. Lerner, The Economics of Control (1944; New York: Augustus M. Kelly, 1970), 307.

  [* ]Reprinted from The Freeman, July 13, 1953.

  [* ]This right to own gold was restored to U.S. citizens as of January 1, 1975.

  [* ]Reprinted from Mercury, July 1942.

  [* ]From 1933 to 1975, U.S. citizens were prohibited by law from owning monetary gold.

  [* ]In October of 1942, Congress “authorized and directed” President Roosevelt to control prices, wages, salaries, and rents. Nationwide price, wage, and rent controls continued throughout the war, but were ended shortly thereafter. However, some cities chose to continue rent controls thus distorting the market and prices, and producing persistent shortages of rental housing in those localities.

  [* ]Reprinted from the New York World Telegram & Sun, May 7, 1951.

  [* ]After the outbreak of the Korean conflict in June 1950, President Truman was authorized under the Defense Production Act (signed September 8, 1950) to “stabilize prices and wages.” This price control law was revised several times and extended until April 30, 1953. Eisenhower, who had become president in January 1953, did not request a further extension and it was allowed to expire.

  [* ]Transcript of remarks before the Conference on the Economics of Mobilization, held at White Sulphur Springs, West Virginia, April 6–8, 1951, under the sponsorship of the University of Chicago Law School. Reprinted from The Commercial and Financial Chronicle, April 26, 1951.

  [* ]Reprinted from Christian Economics, October 18, 1960.

  [* ]Reprinted from the New York World Telegram & Sun, August 28, 1951.

  [* ]Reprinted from National Review, April 4, 1956; © 1956 by National Review, Inc., 215 Lexington Avenue, New York, N.Y. Reprinted by permission.

• Back to Top

  15: Session V Reading 4: The Slippery Slope of Interventionism

  Ludwig von Mises, Liberalism: The Classical Tradition, trans. Ralph Raico, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2005). Chapter: 5: Interventionism

  Accessed from oll.libertyfund.org/title/1463/67419 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  5

  Interventionism

  The socialist ideal is now beginning to lose more and more of its adherents. The penetrating economic and sociological investigations of the problems of socialism that have shown it to be impracticable have not remained without effect, and the failures in which socialist experiments everywhere have ended have disconcerted even its most enthusiastic supporters. Gradually people are once more beginning to realize that society cannot do without private property. Yet the hostile criticism to which the system of private ownership of the means of production has been subjected for decades has left behind such a strong prejudice against the capitalist system that, in spite of their knowledge of the inadequacy and impracticability of socialism, people cannot make up their minds to admit openly that they must return to liberal views on the question of property. To be sure, it is conceded that socialism, the communal ownership of the means of production, is altogether, or at least for the present, impracticable. But, on the other hand, it is asserted that unhampered private ownership of the means of production is also an evil. Thus people want to create a third way, a form of society standing midway between private ownership of the means of production, on the one hand, and communal ownership of the means of production, on the other. Private property will be permitted to exist, but the ways in which the means of production are employed by the entrepreneurs, capitalists, and landowners will be regulated, guided, and controlled by authoritarian decrees and prohibitions. In this way, one forms the conceptual image of a regulated market, of a capitalism circumscribed by authoritarian rules, of private property shorn of its allegedly harmful concomitant features by the intervention of the authorities.

  One can best acquire an insight into the meaning and nature of this system by considering a few examples of the consequences of government interference. The crucial acts of intervention with which we have to deal aim at fixing the prices of goods and services at a height different from what the unhampered market would have determined.

  In the case of prices formed on the unhampered market, or which would have been formed in the absence of interference on the part of the authorities, the costs of production are covered by the proceeds. If a lower price is decreed by the government, the proceeds will fall short of the costs. Merchants and manufacturers will, therefore, unless the storage of the goods involved would cause them to deteriorate rapidly in value, withhold their merchandise from the market in the hope of more favorable times, perhaps in the expectation that the government order will soon be rescinded. If the authorities do not want the goods concerned to disappear altogether from the market as a result of their interference, they cannot limit themselves to fixing the price; they must at the same time also decree that all stocks on hand be sold at the prescribed price.

  But even this does not suffice. At the price determined on the unhampered market, supply and demand would have coincided. Now, because the price was fixed lower by government decree, the demand has increased while the supply has remained unchanged. The stocks on hand are not sufficient to satisfy fully all who are prepared to pay the prescribed price. A part of the demand will remain unsatisfied. The mechanism of the market, which otherwise tends to equalize supply and demand by means of price fluctuations, no longer operates. Now people who would have been prepared to pay the price prescribed by the authorities must leave the market with empty hands. Those who were on line earlier or who were in a position to exploit some personal connection with the sellers have already acquired the whole stock; the others have to go unprovided. If the government wishes to avoid this consequence of its intervention, which runs counter to its intentions, it must add rationing to price control and compulsory sale: a governmental regulation must determine how much of a commodity may be supplied to each individual applicant at the prescribed price.

  But once the supplies already on hand at the moment of the government’s intervention are exhausted, an incomparably more difficult problem arises. Since production is no longer profitable if the goods are to be sold at the price fixed by the government, it will be reduced or entirely suspended. If the government wishes to have production continue, it must compel the manufacturers to produce, and, to this end, it must also fix the prices of raw materials and half-finished goods and the wages of labor. Its decrees to this effect, however, cannot be limited to only the one or the few branches of production that the authorities wish to regulate because they deem their products especially important. They must encompass all branches of production. They must regulate the price of all commodities and all wages. In short, they must extend their control over the conduct of all entrepreneurs, capitalists, landowners, and workers. If some branches of production are left free, capital and labor will flow into these, and the government will fail to attain the goal that it wished to achieve by its first act of intervention. But the object of the authorities is that there should be an abundance of production in precisely that branch of industry which, because of the importance they attach to its products, they have especially singled out for regulation. It runs altogether counter to their design that precisely in consequence of their intervention this branch of production should be neglected.

  It is therefore clearly evident that an attempt on the part of the government to interfere with the operation of the economic system based on private ownership of the means of production fails of the goal that its authors wished to achieve by means of it. It is, from the point of view of its authors, not only futile, but downright contrary to purpose, because it enormously augments the very “evil” that it was supposed to combat. Before the price controls were decreed, the commodity was, in the opinion of the government, too expensive; now it disappears from the market altogether. This, however, is not the result aimed at by the government, which wanted to make the commodity accessible to the consumer at a cheaper price. On the contrary: from its viewpoint, the absence of the commodity, the impossibility of securing it, must appear as by far the greater evil. In this sense one can say of the intervention of the authorities that it is futile and contrary to the purpose that it was intended to serve, and of the system of economic policy that attempts to operate by means of such acts of intervention that it is impracticable and unthinkable, that it contradicts economic logic.

  If the government will not set things right again by desisting from its interference, i.e., by rescinding the price controls, then it must follow up the first step with others. To the prohibition against asking any price higher than the prescribed one it must add not only measures to compel the sale of all stocks on hand under a system of enforced rationing, but price ceilings on goods of higher order, wage controls, and, ultimately, compulsory labor for entrepreneurs and workers. And these regulations cannot be limited to one or a few branches of production, but must encompass them all. There is simply no other choice than this: either to abstain from interference in the free play of the market, or to delegate the entire management of production and distribution to the government. Either capitalism or socialism: there exists no middle way.

  The mechanism of the series of events just described is well known to all who have witnessed the attempts of governments in time of war and during periods of inflation to fix prices by fiat. Everyone knows nowadays that government price controls had no other result than the disappearance from the market of the goods concerned. Wherever the government resorts to the fixing of prices, the result is always the same. When, for instance, the government fixes a ceiling on residential rents, a housing shortage immediately ensues. In Austria, the Social Democratic Party has virtually abolished residential rent. The consequence is that in the city of Vienna, for example, in spite of the fact that the population has declined considerably since the beginning of the World War and that several thousand new houses have been constructed by the municipality in the meantime, many thousands of persons are unable to find accommodations.

  Let us take still another example: the fixing of minimum wage rates.

  When the relationship between employer and employee is left undisturbed by legislative enactments or by violent measures on the part of trade unions, the wages paid by the employer for every type of labor are exactly as high as the increment of value that it adds to the materials in production. Wages cannot rise any higher than this because, if they did, the employer could no longer make a profit and hence would be compelled to discontinue a line of production that did not pay. But neither can wages fall any lower, because then the workers would turn to other branches of industry where they would be better rewarded, so that the employer would be forced to discontinue production because of a labor shortage.

  There is, therefore, in the economy always a wage rate at which all workers find employment and every entrepreneur who wishes to undertake some enterprise still profitable at that wage finds workers. This wage rate is customarily called by economists the “static” or “natural” wage. It increases if, other things being equal, the number of workers diminishes; it decreases if, other things being equal, the available quantity of capital for which employment in production is sought suffers any diminution. However, one must, at the same time, observe that it is not quite precise to speak simply of “wages” and “labor.” Labor services vary greatly in quality and quantity (calculated per unit of time), and so too do the wages of labor.

  If the economy never varied from the stationary state, then in a labor market unhampered by interference on the part of the government or by coercion on the part of the labor unions there would be no unemployed. But the stationary state of society is merely an imaginary construction of economic theory, an intellectual expedient indispensable for our thinking, that enables us, by contrast, to form a clear conception of the processes actually taking place in the economy which surrounds us and in which we live. Life—fortunately, we hasten to add—is never at rest. There is never a standstill in the economy, but perpetual changes, movement, innovation, the continual emergence of the unprecedented. There are, accordingly, always branches of production that are being shut down or curtailed because the demand for their products has fallen off, and other branches of production that are being expanded or even embarked upon for the first time. If we think only of the last few decades, we can at once enumerate a great number of new industries that have sprung up: e.g., the automobile industry, the airplane industry, the motion picture industry, the rayon industry, the canned goods industry, and the radio broadcasting industry. These branches of industry today employ millions of workers, only some of whom have been drawn from the increase in population. Some came from branches of production that were shut down, and even more from those that, as a result of technological improvements, are now able to manage with fewer workers.

  Occasionally the changes that occur in the relations among individual branches of production take place so slowly that no worker is obliged to shift to a new type of job; only young people, just beginning to earn their livelihood, will enter, in greater proportion, the new or expanding industries. Generally, however, in the capitalist system, with its rapid strides in improving human welfare, progress takes place too swiftly to spare individuals the necessity of adapting themselves to it. When, two hundred years or more ago, a young lad learned a craft, he could count on practicing it his whole life long in the way he had learned it, without any fear of being injured by his conservatism. Things are different today. The worker too must adjust himself to changing conditions, must add to what he has learned, or begin learning anew. He must leave occupations which no longer require the same number of workers as previously and enter one which has just come into being or which now needs more workers than before. But even if he remains in his old job, he must learn new techniques when circumstances demand it.

  All this affects the worker in the form of changes in wage rates. If a particular branch of business employs relatively too many workers, it discharges some, and those discharged will not easily find new work in the same branch of business. The pressure on the labor market exercised by the discharged workers depresses wages in this branch of production. This, in turn, induces the worker to look for employment in those branches of production that wish to attract new workers and are therefore prepared to pay higher wages.

  From this it becomes quite clear what must be done in order to satisfy the workers’ desire for employment and for high wages. Wages in general cannot be pushed above the height that they would normally occupy in a market unhampered either by government interference or other institutional pressures without creating certain side effects that cannot be desirable for the worker. Wages can be driven up in an individual industry or an individual country if the transfer of workers from other industries or their immigration from other countries is prohibited. Such wage increases are effected at the expense of the workers whose entrance is barred. Their wages are now lower than they would have been if their freedom of movement had not been hindered. The rise in wages of one group is thus achieved at the expense of the others. This policy of obstructing the free movement of labor can benefit only the workers in countries and industries suffering from a relative labor shortage. In an industry or a country where this is not the case, there is only one thing that can raise wages: a rise in the general productivity of labor, whether by virtue of an increase in the capital available or through an improvement in the technological processes of production.

  If, however, the government fixes minimum wages by law above the height of the static or natural wage, then the employers will find that they are no longer in a position to carry on successfully a number of enterprises that were still profitable when wages stood at the lower point. They will consequently curtail production and discharge workers. The effect of an artificial rise in wages, i.e., one imposed upon the market from the outside, is, therefore, the spread of unemployment.

  Now, of course, no attempt is being made today to fix minimum wage rates by law on a large scale. But the position of power that the trade unions occupy has enabled them to do so even in the absence of any positive legislation to that effect. The fact that workers form unions for the purpose of bargaining with the employers does not, in and of itself, necessarily provoke disturbances in the operation of the market. Even the fact that they successfully arrogate to themselves the right to break, without notice, contracts duly entered into by them and to lay down their tools would not itself result in any further disturbance in the labor market. What does create a new situation in the labor market is the element of coercion involved in strikes and compulsory union membership that prevails today in most of the industrial countries of Europe. Since the unionized workers deny access to employment to those who are not members of their union, and resort to open violence during strikes to prevent other workers from taking the place of those on strike, the wage demands that the unions present to the employers have precisely the same force as government decrees fixing minimum wage rates. For the employer must, if he does not wish to shut down his whole enterprise, yield to the demands of the union. He must pay wages such that the volume of production has to be restricted, because what costs more to produce cannot find as large a market as what costs less. Thus, the higher wages exacted by the trade unions become a cause of unemployment.

  The unemployment originating from this source differs entirely in extent and duration from that which arises from the changes constantly taking place in the kind and quality of the labor demanded in the market. If unemployment had its cause only in the fact that there is constant progress in industrial development, it could neither assume great proportions nor take on the character of a lasting institution. The workers who can no longer be employed in one branch of production soon find accommodation in others which are expanding or just coming into being. When workers enjoy freedom of movement and the shift from one industry to another is not impeded by legal and other obstacles of a similar kind, adjustment to new conditions takes place without too much difficulty and rather quickly. For the rest, the setting up of labor exchanges would contribute much toward reducing still further the extent of this type of unemployment.

  But the unemployment produced by the interference of coercive agencies in the operation of the labor market is no transitory phenomenon continually appearing and disappearing. It is incurable as long as the cause that called it into existence continues to operate, i.e., as long as the law or the violence of the trade unions prevents wages from being reduced, by the pressure of the jobless seeking employment, to the level that they would have reached in the absence of interference on the part of the government or the unions, namely, the rate at which all those eager for work ultimately find it.

  For the unemployed to be granted support by the government or by the unions only serves to enlarge the evil. If what is involved is a case of unemployment springing from dynamic changes in the economy, then the unemployment benefits only result in postponing the adjustment of the workers to the new conditions. The jobless worker who is on relief does not consider it necessary to look about for a new occupation if he no longer finds a position in his old one; at least, he allows more time to elapse before he decides to shift to a new occupation or to a new locality or before he reduces the wage rate he demands to that at which he could find work. If unemployment benefits are not set too low, one can say that as long as they are offered, unemployment cannot disappear.

  If, however, the unemployment is produced by the artificial raising of the height of wage rates in consequence of the direct intervention of the government or of its toleration of coercive practices on the part of the trade unions, then the only question is who is to bear the costs involved, the employers or the workers. The state, the government, the community never do so; they load them either onto the employer or onto the worker or partially onto each. If the burden falls on the workers, then they are deprived entirely or partially of the fruits of the artificial wage increase they have received; they may even be made to bear more of these costs than the artificial wage increase yielded them. The employer can be saddled with the burden of unemployment benefits to some extent by having to pay a tax proportionate to the total amount of wages paid out by him. In this case, unemployment insurance, by raising the costs of labor, has the same effect as a further increase in wages above the static level: the profitability of the employment of labor is reduced, and the number of workers who still can be profitably engaged is concomitantly decreased. Thus, unemployment spreads even further, in an ever widening spiral. The employers can also be drawn on to pay the costs of the unemployment benefits by means of a tax on their profits or capital, without regard for the number of workers employed. But this too only tends to spread unemployment even further. For when capital is consumed or when the formation of new capital is at least slowed down, the conditions for the employment of labor become, ceteris paribus, less favorable.2

  It is obviously futile to attempt to eliminate unemployment by embarking upon a program of public works that would otherwise not have been undertaken. The necessary resources for such projects must be withdrawn by taxes or loans from the application they would otherwise have found. Unemployment in one industry can, in this way, be mitigated only to the extent that it is increased in another.

  From whichever side we consider interventionism, it becomes evident that this system leads to a result that its originators and advocates did not intend and that, even from their standpoint, it must appear as a senseless, self-defeating, absurd policy.

  [2. ]Even if wages were artificially raised (by intervention on the part of the government or by coercion on the part of the trade unions), simultaneously throughout the whole world and in all branches of production, the result would simply be capital consumption and ultimately, as a further consequence of the latter, a still further reduction in wages. I have treated this question in detail in the writings listed in the appendix.

• Back to Top

  16: Session VI Reading 1: The Liberal Alternative

  Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981). Chapter: CHAPTER 11: The Impracticability of Socialism

  Accessed from oll.libertyfund.org/title/1060/103905 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  CHAPTER 11

  The Impracticability of Socialism

  1

  The Fundamental Problems of a Socialist Economy Under Conditions of Change

  The preceding investigations have shown the difficulties confronting the establishment of a socialist order of society. In a socialist community the possibility of economic calculations is lacking: it is therefore impossible to ascertain the cost and result of an economic operation or to make the result of the calculation the test of the operation. This in itself would be sufficient to make Socialism impracticable. But, quite apart from that, another insurmountable obstacle stands in its way. It is impossible to find a form of organization which makes the economic action of the individual independent of the co-operation of other citizens without leaving it open to all the risks of mere gambling. These are the two problems, and without their solution the realization of Socialism appears impracticable unless in a completely stationary state.

  Too little attention has hitherto been given to these fundamental questions. The first has generally been almost ignored. The reason for this is that people have not been able to get rid of the idea that labour time can afford an efficient measure of value. But even many of those who recognize that the labour theory of value is untenable continue to believe that value can be measured. The frequent attempts which have been made to discover a standard of value prove this. To understand the problem of economic calculation it was necessary to recognize the true character of the exchange relations expressed in the prices of the market.

  The existence of this important problem could be revealed only by the methods of the modern subjective theory of value. In actual practice although the tendency has been all in the direction of Socialism, the problem has not become so urgent as to attract general attention.

  It is quite otherwise with the second problem. The more communal enterprise extends, the more attention is drawn to the bad business results of nationalized and municipalized undertakings. It is impossible to miss the cause of the difficulty: a child could see where something was lacking. So that it cannot be said that this problem has not been tackled. But the way in which it has been tackled has been deplorably inadequate. Its organic connection with the essential nature of socialist enterprise has been regarded as merely a question of better selection of persons. It has not been realized that even exceptionally gifted men of high character cannot solve the problems created by socialist control of industry.

  2

  Attempted Solutions

  As far as most socialists are concerned, recognition of these problems is obstructed, not only by their rigid adherence to the labour theory of value but also by their whole conception of economic activity. They fail to realize that industry must be constantly changing: their conception of the socialist community is always static. As long as they are criticizing the capitalist order they deal throughout with the phenomena of a progressive economy and they paint in glaring colours the friction caused by economic change. But they seem to regard all change and not only the friction caused by it, as a peculiar attribute of the capitalist order. In the happy kingdom of the future everything will develop without movement or friction.

  We can see this best if we think of the picture of the entrepreneur which is generally drawn by socialists. In such a picture the entrepreneur is characterized only by the special way he derives his income. Clearly any analysis of the capitalist order must take as its central point not capital nor the capitalists but the entrepreneur. But Socialism, including Marxian Socialism, sees in the entrepreneur someone alien to the process of production, someone whose whole work consists in the appropriation of surplus value. It will be sufficient to expropriate these parasites to bring about a socialist society. The recollection of the liberation of the peasants and the abolition of slavery hovers vaguely in Marx’s mind and even more so in the minds of many other socialists. But they fail to see that the position of the feudal lord was quite different from that of the entrepreneur. The feudal lord had no influence on production. He stood outside the process of production: only when it was finished did he step in with a claim to a share in the yield. But in so far as the lord of the manor and the slave owner were also leaders of production they retained their position even after the abolition of serfdom and slavery. The fact that henceforward they had to give the workers the value of their labour did not change their economic function. But the entrepreneur fulfils a task which must be performed even in a socialist community. This the Socialist does not see; or at least refuses to see.

  Socialism’s misunderstanding of the entrepreneur degenerates into idiosyncrasy whenever the word speculator is mentioned. Even Marx, unmindful of the good resolutions which animated him, proceeds entirely along “petty bourgeois” lines in this connection and his school has even surpassed him. All socialists overlook the fact that even in a socialist community every economic operation must be based on an uncertain future, and that its economic consequence remains uncertain even if it is technically successful. They see in the uncertainty which leads to speculation a consequence of the anarchy of production, whilst in fact it is a necessary result of changing economic conditions.

  The great mass of people are incapable of realizing that in economic life nothing is permanent except change. They regard the existing state of affairs as eternal; as it has been so shall it always be. But even if they were in a position to envision the πάντα ΄ρεῑ (everything simple or all so easy) they would be baffled by the problems to be solved. To see and to act in advance, to follow new ways, is always the concern only of the few, the leaders. Socialism is the economic policy of the crowd, of the masses, remote from insight into the nature of economic activity. Socialist theory is the precipitate of their views on economic matters—it is created and supported by those who find economic life alien, and do not comprehend it.

  Among socialists only Saint-Simon realized to some extent the position of the entrepreneurs in the capitalistic economy. As a result he is often denied the name of Socialist. The others completely fail to realize that the functions of entrepreneurs in the capitalist order must be performed in a socialist community also. This is reflected most clearly in the writings of Lenin. According to him the work performed in a capitalist order by those whom he refused to designate as “working” can be boiled down to “Auditing of Production and Distribution” and “keeping the records of labour and products.” This could easily be attended to by the armed workers, “by the whole of the armed people.”91 Lenin quite rightly separates these functions of the “capitalists and clerks” from the work of the technically trained higher personnel, not however missing the opportunity to take a side thrust at scientifically trained people by giving expression to that contempt for all highly skilled work which is characteristic of Marxian proletarian snobbishness. “This recording, this exercise of audit,” he says, “Capitalism has simplified to the utmost and has reduced to extremely simple operations of superintendence and book-entry within the grasp of anyone able to read and write. To control these operations a knowledge of elementary arithmetic and the drawing of correct receipts is sufficient.”92 It is therefore possible straight-way to enable all members of society to do these things for themselves.93 This is all, absolutely all that Lenin had to say on this problem; and no socialist has a word more to say. They have no greater perception of the essentials of economic life than the errand boy, whose only idea of the work of the entrepreneur is that he covers pieces of paper with letters and figures.

  It was for this reason that it was quite impossible for Lenin to realize the causes of the failure of his policy. In his life and his reading he remained so far removed from the facts of economic life that he was as great a stranger to the work of the bourgeoisie as a Hottentot to the work of an explorer taking geographical measurements. When he saw that his work could proceed no further on the original lines he decided to rely no longer on references to “armed workers” in order to compel the “bourgeois” experts to co-operate: instead they were to receive “high remuneration” for “a short transition period” so that they could set the socialist order going and thus render themselves superfluous. He even thought it possible that this would take place within a year.94

  Those socialists who do not think of the socialist community as the strongly centralized organization conceived by their more clearheaded brethren and which alone is logically conceivable, believe that the difficulties confronting the management of industry can be solved by democratic institutions inside undertakings. They believe that individual industries could be allowed to conduct their operations with a certain degree of independence without endangering the uniformity and the correct co-ordination of industry. If every enterprise were placed under the control of a workers’ committee, no further difficulties could exist. In all this there is a whole crop of fallacies and errors. The problem of economic management with which we are here concerned lies much less in the work of individual industries than in harmonizing the work of individual concerns in the whole economic system. It deals with such questions as dissolving, extending, transforming and limiting existing undertakings and establishing new undertakings—matters which can never be decided by the workers of one industry. The problems of conducting an industry stretch far beyond the individual concern.

  State and municipal Socialism have supplied enough unfavourable experience to compel the closest attention to the problem of economic control. But etatists in general have treated this problem no less inadequately than those who have dealt with it in Bolshevik Russia. General opinion seems to regard the main evil of communal undertakings to be due to the fact that they are not run on “business” lines. Now rightly understood this catchword could lead to a correct view on the problem. Communal enterprise does indeed lack the spirit of the business man, and the very problem for Socialism here is to create something to put in its place. But the catchword is not understood in this way at all. It is an offspring of the bureaucratic mind: that is to say it comes from people for whom all human activity represents the fulfillment of formal official and professional duties. Officialdom classifies activity according to the capacity for undertaking it formally acquired by means of examinations and a certain period of service. “Training” and “length of service” are the only things which the official brings to the “job.” If the work of a body of officials appears unsatisfactory, there can be only one explanation: the officials have not had the right training, and future appointments must be made differently. It is therefore proposed that a different training should be required of future candidates. If only the officials of the communal undertaking came with a business training, the undertaking would be more business-like. But for the official who cannot enter into the spirit of capitalist industry this means nothing more than certain external manifestations of business technique: prompter replies to inquiries, the adoption of certain technical office appliances, which have not yet been sufficiently introduced into the departments, such as typewriters, copying machines, etc., the reduction of unnecessary duplication, and other things. In this way “the business spirit” penetrates into the offices of communal enterprise. And people are greatly surprised when these men trained on these lines, also fail, fail even worse than the much-maligned civil servants, who in fact, show themselves superior at least in formal schooling.

  It is not difficult to expose the fallacies inherent in such notions. The attributes of the business man cannot be divorced from the position of the entrepreneur in the capitalist order. “Business” is not in itself a quality innate in a person; only the qualities of mind and character essential to a business man can be inborn. Still less is it an accomplishment which can be acquired by study, though the knowledge and the accomplishments needed by a business man can be taught and learned. A man does not become a business man by passing some years in commercial training or in a commercial institute, nor by a knowledge of book-keeping and the jargon of commerce, nor by a skill in languages and typing and shorthand. These are things which the clerk requires. But the clerk is not a business man, even though in ordinary speech he may be called a “trained business man.”

  When these obvious truths became clear in the end the experiment was tried of making entrepreneurs, who had worked successfully for many years, the managers of public enterprises. The result was lamentable. They did no better than the others; furthermore they lacked the sense for formal routine which distinguishes the life-long official. The reason was obvious. An entrepreneur deprived of his characteristic role in economic life ceases to be a business man. However much experience and routine he may bring to his new task he will still only be an official in it.

  It is just as useless to attempt to solve the problem by new methods of remuneration. It is thought that if the managers of public enterprises were better paid, competition for these posts would arise and make it possible to select the best men. Many go even further and believe that the difficulties will be overcome by granting the managers a share in the profits. It is significant that these proposals have hardly ever been put in practice, although they appear quite practicable as long as public undertakings exist alongside private enterprises, and as long as the possibility of economic calculation permits the ascertainment of the result achieved by the public enterprise which is not the case under pure Socialism. But the problem is not nearly so much the question of the manager’s share in the profit, as of his share in the losses which arise through his conduct of business. Except in a purely moral sense the property-less manager of a public undertaking can be made answerable only for a comparatively small part of the losses. To make a man materially interested in profits and hardly concerned in losses simply encourages a lack of seriousness. This is the experience, not only of public undertakings but also of all private enterprises, which have granted to comparatively poor employees in managerial posts rights to a percentage of the profits.

  It is an evasion of the problem to put one’s faith in the hope that the moral purification of mankind, which the socialists expect to occur when their aims are realized, will of itself make everything perfectly right. Whether Socialism will or will not have the moral effect expected from it may here be conveniently left undecided. But the problems with which we are concerned do not arise from the moral shortcomings of humanity. They are problems of the logic of will and action which must arise at all times and in all places.

  3

  Capitalism the Only Solution

  But let us disregard the fact that up to now all socialist efforts have been baffled by these problems, and let us attempt to trace out the lines on which the solution ought to be sought. Only by making such an attempt can we throw any light on the question whether such a solution is possible in the framework of a socialist order of society.

  The first step which would be necessary would be to form sections inside the socialist community to which the management of definite branches of business would be entrusted. As long as the industry of a socialist community is directed by one single authority which makes all arrangements and bears all the responsibility, a solution of the problems is inconceivable, because all the other workers are only acting instruments without independent delimited spheres of operation and consequently without any special responsibility. What we must aim at is precisely the possibility not only of supervising and controlling the whole process, but of considering and judging separately the subsidiary processes which take place within a narrower sphere.

  In this respect at least, our procedure runs parallel to all past attempts to solve our problem. It is clear to everyone that the desired aim can be achieved only if responsibility is built up from below. We must therefore start from a single industry or from a single branch of industry. It makes no difference whether the unit with which we start is large or small since the same principle which we have once used for our division can be again used when it is necessary to divide too large a unit. Much more important than the question where and how often the division shall be made is the question how in spite of the division of industry into parts we can preserve that unity of cooperation without which a social economy is impossible.

  We imagine then the economic order of the socialist community to be divided into any number of parts each of which is put in the charge of a particular manager. Every manager of a section is charged with the full responsibility for his operations. This means that the profit or a very considerable part of the profit accrues to him; on the other hand the burden of losses falls upon him, insomuch as the means of production which he squanders through bad measures will not be replaced by society. If he squanders all the means of production under his care he ceases to be manager of a section and is reduced to the ranks of the masses.

  If this personal responsibility of the section manager is not to be a mere sham, then his operations must be clearly marked off from that of other managers. Everything he receives from other section managers in the form of raw materials or partly manufactured goods for further working or for use as instruments in his section and all the work which he gets performed in his section will be debited to him; everything he delivers to other sections or for consumption will be credited to him. It is necessary, however, that he should be left free choice to decide what machines, raw materials, partly manufactured goods, and labour forces he will employ in his section and what he will produce in it. If he is not given this freedom he cannot be burdened with any responsibility. For it would not be his fault if at the command of the supreme controlling authority he had produced something for which, under existing conditions, there was no corresponding demand, or if his section was handicapped because it received its material from other sections in an unsuitable condition, or, what comes to the same thing, at too high a charge. In the first event, the failure of his section would be attributable to the dispositions of the supreme control, in the latter to the failures of the sections which produced the material. But on the other hand the community must also be free to claim the same rights which it allows to the section manager. This means that it takes the products which he has produced only according to its requirements, and only if it can obtain them at the lowest rate of charge, and it charges him with the labour, which it supplies to him at the highest rate it is in a position to obtain: that is to say it supplies the labour to the highest bidder.

  Society as a production community now falls into three groups. The supreme direction forms one. Its function is merely to supervise the orderly course of the process of production as a whole, the execution of which is completely detailed to the section managers. The third group is the citizens who are not in the service of the supreme administration and are not section managers. Between the two groups stand the section managers as a special group: they have received from the community once and for all at the beginning of the regime an allotment of the means of production for which they have had to pay nothing, and they continue to receive from it the labour force of the members of the third group, who are assigned to the highest bidders amongst them. The central administration which has to credit each member of the third group with everything it has received from the section managers for his labour power, or, in case it employs him directly in its own sphere of operation, with everything which it might have received from the section managers for his labour power, will then distribute the consumption goods to the highest bidders amongst the citizens of all three groups. The proceeds will be credited to the section managers who have delivered the products.

  By such an arrangement of the community, the section manager can be made fully responsible for his doings. The sphere for which he bears responsibility is sharply delimited from that for which others bear the responsibility. Here we are no longer faced with the total result of the economic activity of the whole industrial community in which the contribution of one individual cannot be distinguished from that of another. The “productive contribution” of each individual section manager is open to separate judgment, as is also that of each individual citizen in the three groups.

  It is clear that the section managers must be permitted to change, extend or contract their section according to the prevailing course of demand on the part of the citizens as indicated in the market for consumption goods. They must therefore be in a position to sell those means of production in their section which are more urgently required in other sections, to these other sections: and they ought to demand as much for them as they can obtain under the existing conditions....

  Section II.

  The Foreign Relations of a Socialist Community

  [91. ]Lenin, Staat und Revolution, p. 94. Publisher’s Note: p. 304 in the English edition.

  [92. ]Ibid., p. 95. Publisher’s Note: pp. 304-305 in the English edition.

  [93. ]Ibid., p. 96. Publisher’s Note: p. 305 in the English edition.

  [94. ]Lenin, Die nächsten Aufgaben der Sowjetmacht (Berlin, 1918), pp. 16 ff.

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  17: Session VI Reading 2: The Liberal Alternative

  Please read chapters 1, 2, and 7 from this Part.

  Ludwig von Mises, Economic Freedom and Interventionism: An Anthology of Articles and Essays, selected and edited by Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007). Chapter: PART I: Economic Freedom

  Accessed from oll.libertyfund.org/title/1887/109519 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  PART I

  Economic Freedom

  At one of his seminars, a student asked Professor Mises, “Why aren’t all businessmen in favor of capitalism?”

  “That very question,” Mises answered, “is Marxist.”

  Mises’s response shocked me at the time. It took me some time to realize what he meant. The questioner assumed, as had Karl Marx, that businessmen had a special group or “class” interest in capitalism that other people didn’t.

  “Capitalism,” Mises went on, “benefits everyone—consumers, the masses. It doesn’t benefit only businessmen. As a matter of fact, under capitalism some businessmen suffer losses. A businessman’s position on the market is never secure; the door is always open to competitors who may challenge his position and deprive him of profits. Yet it is this very competition under capitalism that assures consumers that businessmen will do their best to furnish them, the consumers, with the goods and services they want.”

  In the articles and papers in this first section, Mises reveals again and again that he is no apologist for business or businessmen. He is interested in determining the economic system which best improves the welfare of individuals and the living conditions of the masses. And that economic system is economic freedom under capitalism. Only with economic freedom, Mises says, are more goods and services produced. Only under capitalism do wages rise and the living standards of the masses improve. The reason? Consumers are sovereign in capitalist free markets. They are in a position to let entrepreneurs know what they want most urgently, by rewarding with profits those who satisfy their wants and by imposing losses and thus withdrawing wealth from those who fail. This system of rewards and penalties guides production and makes sure that more of the goods and services consumers want will be produced, thus raising the wages of workers and the living standards of everyone.

  The market is the outcome of peaceful social cooperation and economic freedom. And it is the market that makes individual freedom, justice, morality, innovation, and social harmony possible. As Mises writes in this section:

  “A man has freedom as far as he shapes his life according to his own plans,” and

  “[M]orality makes sense only when addressing individuals who are free agents.”

  1

  The Economic Foundations of Freedom*

  Animals are driven by instinctive urges. They yield to the impulse which prevails at the moment and peremptorily asks for satisfaction. They are the puppets of their appetites.

  Man’s eminence is to be seen in the fact that he chooses between alternatives. He regulates his behavior deliberatively. He can master his impulses and desires; he has the power to suppress wishes the satisfaction of which would force him to renounce the attainment of more important goals. In short: man acts; he purposively aims at ends chosen. This is what we have in mind in stating that man is a moral person, responsible for his conduct.

  Freedom as a Postulate of Morality

  All the teachings and precepts of ethics, whether based upon a religious creed or whether based upon a secular doctrine like that of the Stoic philosophers, presuppose this moral autonomy of the individual and therefore appeal to the individual’s conscience. They presuppose that the individual is free to choose among various modes of conduct and require him to behave in compliance with definite rules, the rules of morality. Do the right things, shun the bad things.

  It is obvious that the exhortations and admonishments of morality make sense only when addressing individuals who are free agents. They are vain when directed to slaves. It is useless to tell a bondsman what is morally good and what is morally bad. He is not free to determine his comportment; he is forced to obey the orders of his master. It is difficult to blame him if he prefers yielding to the commands of his master to the most cruel punishment threatening not only him but also the members of his family.

  This is why freedom is not only a political postulate, but no less a postulate of every religious or secular morality.

  The Struggle for Freedom

  Yet for thousands of years a considerable part of mankind was either entirely or at least in many regards deprived of the faculty to choose between what is right and what is wrong. In the status society of days gone by the freedom to act according to their own choice was, for the lower strata of society, the great majority of the population, seriously restricted by a rigid system of controls. An outspoken formulation of this principle was the statute of the Holy Roman Empire that conferred upon the princes and counts of the Reich (Empire) the power and the right to determine the religious allegiance of their subjects.

  The Orientals meekly acquiesced in this state of affairs. But the Christian peoples of Europe and their scions that settled in overseas territories never tired in their struggle for liberty. Step by step they abolished all status and caste privileges and disabilities until they finally succeeded in establishing the system that the harbingers of totalitarianism try to smear by calling it the bourgeois system.

  The Supremacy of the Consumers

  The economic foundation of this bourgeois system is the market economy in which the consumer is sovereign. The consumer, i.e., everybody, determines by his buying or abstention from buying what should be produced, in what quantity and of what quality. The businessmen are forced by the instrumentality of profit and loss to obey the orders of the consumers. Only those enterprises can flourish that supply in the best possible and cheapest way those commodities and services which the buyers are most anxious to acquire. Those who fail to satisfy the public suffer losses and are finally forced to go out of business.

  In the precapitalistic ages the rich were the owners of large landed estates. They or their ancestors had acquired their property as gifts—feuds or fiefs—from the sovereign who—with their aid—had conquered the country and subjugated its inhabitants. These aristocratic landowners were real lords as they did not depend on the patronage of buyers. But the rich of a capitalistic industrial society are subject to the supremacy of the market. They acquire their wealth by serving the consumers better than other people do and they forfeit their wealth when other people satisfy the wishes of the consumers better or cheaper than they do. In the free market economy the owners of capital are forced to invest it in those lines in which it best serves the public. Thus ownership of capital goods is continually shifted into the hands of those who have best succeeded in serving the consumers. In the market economy private property is in this sense a public service imposing upon the owners the responsibility of employing it in the best interests of the sovereign consumers. This is what economists mean when they call the market economy a democracy in which every penny gives a right to vote.

  The Political Aspects of Freedom

  Representative government is the political corollary of the market economy. The same spiritual movement that created modern capitalism substituted elected officeholders for the authoritarian rule of absolute kings and hereditary aristocracies. It was this much-decried bourgeois liberalism that brought freedom of conscience, of thought, of speech, and of the press and put an end to the intolerant persecution of dissenters.

  A free country is one in which every citizen is free to fashion his life according to his own plans. He is free to compete on the market for the most desirable jobs and on the political scene for the highest offices. He does not depend more on other people’s favor than these others depend on his favor. If he wants to succeed on the market, he has to satisfy the consumers; if he wants to succeed in public affairs he has to satisfy the voters. This system has brought to the capitalistic countries of Western Europe, America, and Australia an unprecedented increase in population figures and the highest standard of living ever known in history. The much talked-about common man has at his disposal amenities of which the richest men in precapitalistic ages did not even dream. He is in a position to enjoy the spiritual and intellectual achievements of science, poetry, and art that in earlier days were accessible only to a small elite of well-to-do people. And he is free to worship as his conscience tells him.

  The Socialist Misrepresentation of the Market Economy

  All the facts about the operation of the capitalistic system are misrepresented and distorted by the politicians and writers who arrogated to themselves the label of liberalism, the school of thought that in the nineteenth century crushed the arbitrary rule of monarchs and aristocrats and paved the way for free trade and enterprise. As these advocates of a return to despotism see it, all the evils that plague mankind are due to sinister machinations on the part of big business. What is needed to bring about wealth and happiness for all decent people is to put the corporations under strict government control. They admit, although only obliquely, that this means the adoption of socialism, the system of the Union of Soviet Socialist Republics. But they protest that socialism will be something entirely different in the countries of Western civilization from what it is in Russia. And anyway, they say, there is no other method to deprive the mammoth corporations of the enormous power they have acquired and to prevent them from further damaging the interests of the people.

  Against all this fanatical propaganda there is need to emphasize again and again the truth that it is big business that brought about the unprecedented improvement of the masses’ standard of living. Luxury goods for a comparatively small number of well-to-do can be produced by small-size enterprises. But the fundamental principle of capitalism is to produce for the satisfaction of the wants of the many. The same people who are employed by the big corporations are the main consumers of the goods turned out. If you look around in the household of an average American wage-earner, you will see for whom the wheels of the machines are turning. It is big business that makes all the achievements of modern technology accessible to the common man. Everybody is benefited by the high productivity of big scale production.

  It is silly to speak of the “power” of big business. The very mark of capitalism is that supreme power in all economic matters is vested in the consumers. All big enterprises grew from modest beginnings into bigness because the patronage of the consumers made them grow. It would be impossible for small- or medium-size firms to turn out those products which no present-day American would like to do without. The bigger a corporation is, the more does it depend on the consumers’ readiness to buy its wares. It was the wishes—or, as some say, the folly—of the consumers that drove the automobile industry into the production of ever bigger cars and forces it today to manufacture smaller cars. Chain stores and department stores are under the necessity to adjust their operations daily anew to the satisfaction of the changing wants of their customers. The fundamental law of the market is: the customer is always right.

  A man who criticizes the conduct of business affairs and pretends to know better methods for the provision of the consumers is just an idle babbler. If he thinks that his own designs are better, why does he not try them himself? There are in this country always capitalists in search of a profitable investment of their funds who are ready to provide the capital required for any reasonable innovations. The public is always eager to buy what is better or cheaper or better and cheaper. What counts in the market is not fantastic reveries, but doing. It was not talking that made the “tycoons” rich, but service to the customers.

  Capital Accumulation Benefits All of the People

  It is fashionable nowadays to pass over in silence the fact that all economic betterment depends on saving and the accumulation of capital. None of the marvelous achievements of science and technology could have been practically utilized if the capital required had not previously been made available. What prevents the economically backward nations from taking full advantage of all the Western methods of production and thereby keeps their masses poor is not unfamiliarity with the teachings of technology but the insufficiency of their capital. One badly misjudges the problems facing the underdeveloped countries if one asserts that what they lack is technical knowledge, the “know-how.” Their businessmen and their engineers, most of them graduates of the best schools of Europe and America, are well acquainted with the state of contemporary applied science. What ties their hands is a shortage of capital.

  A hundred years ago America was even poorer than these backward nations. What made the United States become the most affluent country of the world was the fact that the “rugged individualism” of the years before the New Deal did not place too serious obstacles in the way of enterprising men. Businessmen became rich because they consumed only a small part of their profits and plowed the much greater part back into their businesses. Thus they enriched themselves and all of the people. For it was this accumulation of capital that raised the marginal productivity of labor and thereby wage rates.

  Under capitalism the acquisitiveness of the individual businessman benefits not only himself but also all other people. There is a reciprocal relation between his acquiring wealth by serving the consumers and accumulating capital and the improvement of the standard of living of the wage-earners who form the majority of the consumers. The masses are in their capacity both as wage-earners and as consumers interested in the flowering of business. This is what the old liberals had in mind when they declared that in the market economy there prevails a harmony of the true interests of all groups of the population.

  Economic Well-Being Threatened by Statism

  It is in the moral and mental atmosphere of this capitalistic system that the American citizen lives and works. There are still in some parts of the United States conditions left which appear highly unsatisfactory to the prosperous inhabitants of the advanced districts which form the greater part of the country. But the rapid progress of industrialization would have long since wiped out these pockets of backwardness if the unfortunate policies of the New Deal had not slowed down the accumulation of capital, the irreplaceable tool of economic betterment. Used to the conditions of a capitalistic environment, the average American takes it for granted that every year business makes something new and better accessible to him. Looking backward upon the years of his own life, he realizes that many implements that were totally unknown in the days of his youth and many others which at that time could be enjoyed only by a small minority are now standard equipment of almost every household. He is fully confident that this trend will prevail also in the future. He simply calls it the “American way of life” and does not give serious thought to the question of what made this continuous improvement in the supply of material goods possible. He is not earnestly disturbed by the operation of factors that are bound not only to stop further accumulation of capital but may very soon bring about capital decumulation. He does not oppose the forces that—by frivolously increasing public expenditure, by cutting down capital accumulation, and even making for consumption of parts of the capital invested in business, and, finally, by inflation—are sapping the very foundations of his material well-being. He is not concerned about the growth of statism that wherever it has been tried resulted in producing and preserving conditions which in his eyes are shockingly wretched.

  No Personal Freedom Without Economic Freedom

  Unfortunately many of our contemporaries fail to realize what a radical change in the moral conditions of man, the rise of statism, the substitution of government omnipotence for the market economy, is bound to bring about. They are deluded by the idea that there prevails a clear-cut dualism in the affairs of man, that there is on the one side a sphere of economic activities and on the other side a field of activities that are considered as noneconomic. Between these two fields there is, they think, no close connection. The freedom that socialism abolishes is “only” the economic freedom, while freedom in all other matters remains unimpaired.

  However, these two spheres are not independent of each other as this doctrine assumes. Human beings do not float in ethereal regions. Everything that a man does must necessarily in some way or other affect the economic or material sphere and requires his power to interfere with this sphere. In order to subsist, he must toil and have the opportunity to deal with some material tangible goods.

  The confusion manifests itself in the popular idea that what is going on in the market refers merely to the economic side of human life and action. But in fact the prices of the market reflect not only “material concerns”—like getting food, shelter, and other amenities—but no less those concerns which are commonly called spiritual or higher or nobler. The observance or nonobservance of religious commandments—to abstain from certain activities altogether or on specific days, to assist those in need, to build and to maintain houses of worship, and many others—is one of the factors that determines the supply of, and the demand for, various consumers’ goods and thereby prices and the conduct of business. The freedom that the market economy grants to the individual is not merely “economic” as distinguished from some other kind of freedom. It implies the freedom to determine also all those issues which are considered as moral, spiritual, and intellectual.

  In exclusively controlling all the factors of production the socialist regime controls also every individual’s whole life. The government assigns to everybody a definite job. It determines what books and papers ought to be printed and read, who should enjoy the opportunity to embark on writing, who should be entitled to use public assembly halls, to broadcast and to use all other communication facilities. This means that those in charge of the supreme conduct of government affairs ultimately determine which ideas, teachings, and doctrines can be propagated and which not. Whatever a written and promulgated constitution may say about the freedom of conscience, thought, speech, and the press and about neutrality in religious matters must in a socialist country remain a dead letter if the government does not provide the material means for the exercise of these rights. He who monopolizes all media of communication has full power to keep a tight hand on the individuals’ minds and souls.

  What makes many people blind to the essential features of any socialist or totalitarian system is the illusion that this system will be operated precisely in the way which they themselves consider as desirable. In supporting socialism, they take it for granted that the “state” will always do what they themselves want it to do. They call only that brand of totalitarianism “true,” “real,” or “good” socialism the rulers of which comply with their own ideas. All other brands they decry as counterfeit. What they first of all expect from the dictator is that he will suppress all those ideas of which they themselves disapprove. In fact, all these supporters of socialism are, unbeknown to themselves, obsessed by the dictatorial or authoritarian complex. They want all opinions and plans with which they disagree to be crushed by violent action on the part of the government.

  The Meaning of the Effective Right to Dissent

  The various groups that are advocating socialism, no matter whether they call themselves communists, socialists, or merely social reformers, agree in their essential economic program. They all want to substitute state control—or, as some of them prefer to call it, social control—of production activities for the market economy with its supremacy of the individual consumers. What separates them from one another are not issues of economic management, but religious and ideological convictions. There are Christian socialists—Catholic and Protestant of different denominations—and there are atheist socialists. Each of these varieties of socialism takes it for granted that the socialist commonwealth will be guided by the precepts of their own faith or of their rejection of any religious creed. They never give a thought to the possibility that the socialist regime may be directed by men hostile to their own faith and moral principles who may consider it as their duty to use all the tremendous power of the socialist apparatus for the suppression of what in their eyes is error, superstition, and idolatry.

  The simple truth is that individuals can be free to choose between what they consider as right or wrong only where they are economically independent of the government. A socialist government has the power to make dissent impossible by discriminating against unwelcome religious and ideological groups and denying them all the material implements that are required for the propagation and the practice of their convictions. The one-party system, the political principle of socialist rule, implies also the one-religion and one-morality system. A socialist government has at its disposal means that can be used for the attainment of rigorous conformity in every regard, Gleichschaltung (political conformity) as the Nazis called it. Historians have pointed out what an important role in the Reformation was played by the printing press. But what chances would the reformers have had if all the printing presses had been operated by the governments headed by Charles V of Germany and the Valois kings of France?* And, for that matter, what chances would Marx have had under a system in which all the means of communication had been in the hands of the governments?

  Whoever wants freedom of conscience must abhor socialism. Of course, freedom enables a man not only to do the good things but also to do the wrong things. But no moral value can be ascribed to an action, however good, that has been performed under the pressure of an omnipotent government.

  2

  The Individual in Society*

  The words freedom and liberty signified for the most eminent representatives of mankind one of the most precious and desirable goods. Today it is fashionable to sneer at them. They are, trumpets the modern sage, “slippery” notions and “bourgeois” prejudices.

  Freedom and liberty are not to be found in nature. In nature there is no phenomenon to which these terms could be meaningfully applied. Whatever man does, he can never free himself from the restraints which nature imposes upon him. If he wants to succeed in acting, he must submit unconditionally to the laws of nature.

  Freedom and liberty always refer to interhuman relations. A man is free as far as he can live and get on without being at the mercy of arbitrary decisions on the part of other people. In the frame of society everybody depends upon his fellow citizens. Social man cannot become independent without forsaking all the advantages of social cooperation.

  The fundamental social phenomenon is the division of labor and its counterpart—human cooperation.

  Experience teaches man that cooperative action is more efficient and productive than isolated action of self-sufficient individuals. The natural conditions determining man’s life and effort are such that the division of labor increases output per unit of labor expended. These natural facts are: (1) the innate inequality of men with regard to their ability to perform various kinds of labor, and (2) the unequal distribution of the nature-given, nonhuman opportunities of production on the surface of the earth. One may as well consider these two facts as one and the same fact, namely, the manifoldness of nature which makes the universe a complex of infinite varieties.

  Innate Inequality

  The division of labor is the outcome of man’s conscious reaction to the multiplicity of natural conditions. On the other hand, it is itself a factor bringing about differentiation. It assigns to the various geographic areas specific functions in the complex of the processes of production. It makes some areas urban, others rural; it locates the various branches of manufacturing, mining, and agriculture in different places. Still more important, however, is the fact that it intensifies the innate inequality of men. Exercise and practice of specific tasks adjust individuals better to the requirements of their performance; men develop some of their inborn faculties and stunt the development of others. Vocational types emerge, people become specialists.

  The division of labor splits the various processes of production into minute tasks, many of which can be performed by mechanical devices. It is this fact that made the use of machinery possible and brought about the amazing improvements in technical methods of production. Mechanization is the fruit of the division of labor, its most beneficial achievement, not its motive and fountain spring. Power-driven specialized machinery could be employed only in a social environment under the division of labor. Every step forward on the road toward the use of more specialized, more refined, and more productive machines requires a further specialization of tasks.

  Within Society

  Seen from the point of view of the individual, society is the great means for the attainment of all his ends. The preservation of society is an essential condition of any plans an individual may want to realize by any action whatever. Even the refractory delinquent who fails to adjust his conduct to the requirements of life within the societal system of cooperation does not want to miss any of the advantages derived from the division of labor. He does not consciously aim at the destruction of society. He wants to lay his hands on a greater portion of the jointly produced wealth than the social order assigns to him. He would feel miserable if antisocial behavior were to become universal and its inevitable outcome, the return to primitive indigence, resulted.

  Liberty and freedom are the conditions of man within a contractual society. Social cooperation under a system of private ownership of the means of production means that within the range of the market the individual is not bound to obey and to serve an overlord. As far as he gives and serves other people, he does so of his own accord in order to be rewarded and served by the receivers. He exchanges goods and services, he does not do compulsory labor and does not pay tribute. He is certainly not independent. He depends on the other members of society. But this dependence is mutual. The buyer depends on the seller and the seller on the buyer.

  Self-Interest

  The main concern of many writers of the nineteenth and twentieth centuries was to misrepresent and to distort this obvious state of affairs. The workers, they said, are at the mercy of their employers. Now, it is true that the employer has the right to fire the employee. But if he makes use of this right in order to indulge in his whims, he hurts his own interests. It is to his own disadvantage if he discharges a better man in order to hire a less efficient one. The market does not directly prevent anybody from arbitrarily inflicting harm on his fellow citizens; it only puts a penalty upon such conduct. The shopkeeper is free to be rude to his customers provided he is ready to bear the consequences. The consumers are free to boycott a purveyor provided they are ready to pay the costs. What impels every man to the utmost exertion in the service of his fellow men and curbs innate tendencies toward arbitrariness and malice is, in the market, not compulsion and coercion on the part of gendarmes, hangmen, and penal courts; it is self-interest. The member of a contractual society is free because he serves others only in serving himself. What restrains him is only the inevitable natural phenomenon of scarcity. For the rest he is free in the range of the market.

  In the market economy the individual is free to act within the orbit of private property and the market. His choices are final. For his fellow men his actions are data which they must take into account in their own acting. The coordination of the autonomous actions of all individuals is accomplished by the operation of the market. Society does not tell a man what to do and what not to do. There is no need to enforce cooperation by special orders or prohibitions. Noncooperation penalizes itself. Adjustment to the requirements of society’s productive effort and the pursuit of the individual’s own concerns are not in conflict. Consequently no agency is required to settle such conflicts. The system can work and accomplish its tasks without the interference of an authority issuing special orders and prohibitions and punishing those who do not comply.

  Compulsion and Coercion

  Beyond the sphere of private property and the market lies the sphere of compulsion and coercion; here are the dams which organized society has built for the protection of private property and the market against violence, malice, and fraud. This is the realm of constraint as distinguished from the realm of freedom. Here are rules discriminating between what is legal and what is illegal, what is permitted and what is prohibited. And here is a grim machine of arms, prisons, and gallows and the men operating it, ready to crush those who dare to disobey.

  It is important to remember that government interference always means either violent action or the threat of such action. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.

  Liberty and freedom are terms employed for the description of the social conditions of the individual members of a market society in which the power of the indispensable hegemonic bond, the state, is curbed lest the operation of the market be endangered. In a totalitarian system there is nothing to which the attribute “free” could be attached but the unlimited arbitrariness of the dictator.

  There would be no need to dwell upon this obvious fact if the champions of the abolition of liberty had not purposely brought about a semantic confusion. They realized that it was hopeless for them to fight openly and sincerely for restraint and servitude. The notions liberty and freedom had such prestige that no propaganda could shake their popularity. Since time immemorial in the realm of Western civilization, liberty has been considered as the most precious good. What gave to the West its eminence was precisely its concern about liberty, a social ideal foreign to the oriental peoples. The social philosophy of the Occident is essentially a philosophy of freedom. The main content of the history of Europe and the communities founded by European emigrants and their descendants in other parts of the world was the struggle for liberty. “Rugged” individualism is the signature of our civilization. No open attack upon the freedom of the individual had any prospect of success.

  New Definitions

  Thus the advocates of totalitarianism chose other tactics. They reversed the meaning of words. They call true or genuine liberty the condition of the individuals under a system in which they have no right other than to obey orders. They call themselves true liberals because they strive after such a social order. They call democracy the Russian methods of dictatorial government. They call the labor union methods of violence and coercion “industrial democracy.” They call freedom of the press a state of affairs in which only the government is free to publish books and newspapers. They define liberty as the opportunity to do the “right” things, and, of course, they arrogate to themselves the determination of what is right and what is not. In their eyes government omnipotence means full liberty. To free the police power from all restraints is the true meaning of their struggle for freedom.

  The market economy, say these self-styled liberals, grants liberty only to a parasitic class of exploiters, the bourgeoisie; that these scoundrels enjoy the freedom to enslave the masses; that the wage earner is not free; that he must toil for the sole benefit of his masters, the employers; that the capitalists appropriate to themselves what according to the inalienable rights of man should belong to the worker; that under socialism the worker will enjoy freedom and human dignity because he will no longer have to slave for a capitalist; that socialism means the emancipation of the common man, means freedom for all; that it means, moreover, riches for all.

  These doctrines have been able to triumph because they did not encounter effective rational criticism. It is useless to stand upon an alleged “natural” right of individuals to own property if other people assert that the foremost “natural” right is that of income equality. Such disputes can never be settled. It is beside the point to criticize nonessential, attendant features of the socialist program. One does not refute socialism by attacking the socialist stand on religion, marriage, birth control, and art.

  A New Subterfuge

  In spite of these serious shortcomings of the defenders of economic freedom it was impossible to fool all the people all the time about the essential features of socialism. The most fanatical planners were forced to admit that their projects involve the abolition of many freedoms people enjoy under capitalism and “plutodemocracy.” Pressed hard, they resorted to a new subterfuge. The freedom to be abolished, they emphasize, is merely the spurious “economic” freedom of the capitalists that harms the common man; that outside the “economic sphere” freedom will not only be fully preserved, but considerably expanded. “Planning for Freedom” has lately become the most popular slogan of the champions of totalitarian government and the Russification of all nations.

  The fallacy of this argument stems from the spurious distinction between two realms of human life and action, the “economic” sphere and the “noneconomic” sphere. Strictly speaking, people do not long for tangible goods as such, but for the services which these goods are fitted to render them. They want to attain the increment in well-being which these services are able to convey. It is a fact that people, in dealing on the market, are motivated not only by the desire to get food, shelter, and sexual enjoyment, but also by manifold “ideal” urges. Acting man is always concerned both with “material” and “ideal” things. He chooses between various alternatives, no matter whether they are to be classified as material or ideal. In the actual scales of value, material and ideal things are jumbled together.

  Freedom, as people enjoyed it in the democratic countries of Western civilization in the years of the old liberalism’s triumph, was not a product of constitutions, bills of rights, laws, and statutes. Those documents aimed only at safeguarding liberty and freedom, firmly established by the operation of the market economy, against encroachments on the part of officeholders. No government and no civil law can guarantee and bring about freedom otherwise than by supporting and defending the fundamental institutions of the market economy. Government means always coercion and compulsion and is by necessity the opposite of liberty. Government is a guarantor of liberty and is compatible with liberty only if its range is adequately restricted to the preservation of economic freedom. Where there is no market economy, the best-intentioned provisions of constitutions and laws remain a dead letter.

  Competition

  The freedom of man under capitalism is an effect of competition. The worker does not depend on the good graces of an employer. If his employer discharges him, he finds another employer. The consumer is not at the mercy of the shopkeeper. He is free to patronize another shop if he likes. Nobody must kiss other people’s hands or fear their disfavor. Interpersonal relations are businesslike. The exchange of goods and services is mutual; it is not a favor to sell or to buy, it is a transaction dictated by selfishness on either side.

  It is true that in his capacity as a producer every man depends either directly, as does the entrepreneur, or indirectly, as does the hired worker, on the demands of the consumers. However, this dependence upon the supremacy of the consumers is not unlimited. If a man has a weighty reason for defying the sovereignty of the consumers, he can try it. There is in the range of the market a very substantial and effective right to resist oppression. Nobody is forced to go into the liquor industry or into a gun factory if his conscience objects. He may have to pay a price for his conviction; there are in this world no ends the attainment of which is gratuitous. But it is left to a man’s own decision to choose between a material advantage and the call of what he believes to be his duty. In the market economy the individual alone is the supreme arbiter in matters of his satisfaction.

  Consumers Choose

  Capitalist society has no means of compelling a man to change his occupation or his place of work other than to reward those complying with the wants of the consumers by higher pay. It is precisely this kind of pressure that many people consider as unbearable and hope to see abolished under socialism. They are too dull to realize that the only alternative is to convey to the authorities full power to determine in what branch and at what place a man should work.

  In his capacity as a consumer man is no less free. He alone decides what is more and what is less important for him. He chooses how to spend his money according to his own will.

  The substitution of economic planning for the market economy removes all freedom and leaves to the individual merely the right to obey. The authority directing all economic matters controls all aspects of a man’s life and activities. It is the only employer. All labor becomes compulsory labor because the employee must accept what the chief deigns to offer him. The economic tsar determines what and how much the consumer may consume. There is no sector of human life in which a decision is left to the individual’s value judgments. The authority assigns a definite task to him, trains him for this job, and employs him at the place and in the manner it deems expedient.

  The “Planned” Life Is Not Free

  As soon as the economic freedom which the market economy grants to its members is removed, all political liberties and bills of rights become humbug. Habeas corpus and trial by jury are a sham if, under the pretext of economic expediency, the authority has full power to relegate every citizen it dislikes to the arctic or to a desert and to assign him “hard labor” for life. Freedom of the press is a mere blind if the authority controls all printing offices and paper plants. And so are all the other rights of men.

  A man has freedom as far as he shapes his life according to his own plans. A man whose fate is determined by the plans of a superior authority, in which the exclusive power to plan is vested, is not free in the sense in which the term “free” was used and understood by all people until the semantic revolution of our day brought about a confusion of tongues.

  3

  The Elite under Capitalism*

  A long line of eminent authors, beginning with Adam Ferguson,* tried to grasp the characteristic feature that distinguishes the modern capitalistic society, the market economy, from the older systems of the arrangement of social cooperation. They distinguished between warlike nations and commercial nations, between societies of a militant structure and those of individual freedom, between the society based on status and that based on contract. The appreciation of each of the two “ideal types” was, of course, different with the various authors. But they all agreed in establishing the contrast between the two types of social cooperation as well as in the cognition that no third principle of the arrangement of social affairs is thinkable and feasible.1 One may disagree with some of the characteristics that they ascribed to each of the two types, but one must admit that the classification as such makes us comprehend essential facts of history as well as of contemporary social conflicts.

  There are several reasons that prevent a full understanding of the significance of the distinction between these two types of society. There is in the first place the popular repugnance to assign to the inborn inequality of various individuals its due importance. There is furthermore the failure to realize the fundamental difference that exists between the meaning and the effects of private ownership of the means of production in the precapitalistic and in the capitalistic society. Finally, there is serious confusion brought about by the ambiguous employment of the term “economic power.”

  Inborn Inequality

  The doctrine that ascribed all differences among individuals to postnatal influences is untenable. The fact that human beings are born unequal in regard to physical and mental capacities is not denied by any reasonable man, certainly also not by pediatrists. Some individuals surpass their fellow men in health and vigor, in brain power and aptitude for various performances, in energy and resolution. Some people are better fit for the pursuit of earthly affairs, some less. From this point of view we may—without indulging in any judgment of value—distinguish between superior and inferior men. Karl Marx referred to “the inequality of individual endowment and therefore productive capacity (Leistungsfähigkeit) as natural privileges” and was fully aware of the fact that men “would not be different individuals if they were not unequal.”2

  In the precapitalistic ages the better endowed, the “superior” people, took advantage of their superiority by seizing power and enthralling the masses of weaker, i.e., “inferior” men. Victorious warriors appropriated to themselves all the land available for hunting and fishing, cattle raising and tilling. Nothing was left to the rest of the people than to serve the princes and their retinue. They were serfs and slaves, landless and penniless underlings.

  Such was by and large the state of affairs in most parts of the world in the ages in which the “heroes”3 were supreme and “commercialism” was absent. But then, in a process that, although again and again frustrated by a renascence of the spirit of violence, went on for centuries and is still going on, the spirit of business, i.e., of peaceful cooperation under the principle of the division of labor, undermined the mentality of the “good old days.” Capitalism—the market economy—radically transformed the economic and political organization of mankind.

  In the precapitalistic society the superior men knew no other method of utilizing their own superiority than to subdue the masses of inferior people. But under capitalism the more able and more gifted men can profit from their superiority only by serving to the best of their abilities the wishes and wants of the majority of less gifted men.

  In the market economy the consumers are supreme. Consumers determine, by their buying or abstention from buying, what should be produced, by whom and how, of what quality and in what quantity. The entrepreneurs, capitalists, and landowners who fail to satisfy in the best possible and cheapest way the most urgent of the not yet satisfied wishes of the consumers are forced to go out of business and forfeit their preferred position. In business offices and in laboratories the keenest minds are busy fructifying the most complex achievements of scientific research for the production of ever better implements and gadgets for people who have no inkling of the scientific theories that make the fabrication of such things possible. The bigger an enterprise is, the more it is forced to adjust its production activities to the changing whims and fancies of the masses, its masters. The fundamental principle of capitalism is mass production to supply the masses. It is the patronage of the masses that makes enterprises grow into bigness. The common man is supreme in the market economy. He is the customer “who is always right.”

  In the political sphere representative government is the corollary of the supremacy of the consumers in the market. The officeholders depend on the voters in a way similar to that in which the entrepreneurs and investors depend on the consumers. The same historical process that substituted the capitalistic mode of production for precapitalistic methods substituted popular government—democracy—for royal absolutism and other forms of government by the few. And wherever the market economy is superseded by socialism, autocracy makes a comeback. It does not matter whether the socialist or communist despotism is camouflaged by the use of aliases such as “dictatorship of the proletariat” or “people’s democracy” or “Führer (leader) principle.” It always amounts to a subjection of the many to the few.

  It is hardly possible to misconstrue more improperly the state of affairs prevailing in the capitalistic society than by dubbing the capitalists and entrepreneurs a “ruling” class intent upon “exploiting” the masses of decent men. We do not have to raise the question as to how the men who under capitalism are businessmen would have tried to take advantage of their superior talents in any other thinkable organization of production activities. Under capitalism they are vying with one another in serving the masses of less gifted men. All their thoughts aim at perfecting the methods of supplying the consumers. Every year, every month, every week, something unheard of before appears on the market and is very soon made accessible to the many. Precisely because they are producing for profit, the businessmen are producing for the use of the consumers.

  Confusion Concerning Property

  The second deficiency of the customary treatment of the problems of society’s economic organization is the confusion produced by the indiscriminate employment of juridical concepts, first of all the concept of private property.

  In the precapitalistic ages there prevailed by and large economic self-sufficiency, first of every household, later—with the gradual progress toward commercialism—of small regional units. The much greater part of all products did not reach the market. They were consumed without having been sold and bought. Under such conditions there was no essential difference between private ownership of producers’ goods and that of consumers’ goods. In each case property served the owner exclusively. To own something, whether a producers’ good or a consumers’ good, meant to have it for oneself alone and to deal with it for one’s own satisfaction.

  But it is different in the frame of a market economy. The owner of producers’ goods, the capitalist, can derive advantage from his ownership only by employing them for the best possible satisfaction of the wants of the consumers. In the market economy property in the means of production is acquired and preserved by serving the public and is lost if the public becomes dissatisfied with the way in which it is served. Private property of the material factors of production is a public mandate, as it were, which is withdrawn as soon as the consumers think that other people would employ the capital goods more efficiently for their, viz., the consumers’, benefit. By the instrumentality of the profit and loss system the capitalists are forced to deal with “their” property as if it were other people’s property entrusted to them under the obligation to utilize it for the best possible provision of the virtual beneficiaries, the consumers. This real meaning of private ownership of the material factors of production under capitalism could be ignored and misinterpreted because all people—economists, lawyers, and laymen—had been led astray by the fact that the legal concept of property as developed by the juridical practices and doctrines of precapitalistic ages has been retained unchanged or only slightly altered while its effective meaning has been radically transformed.4

  In the feudal society the economic situation of every individual was determined by the share allotted to him by the powers that be. The poor man was poor because little land or no land at all had been given to him. He could with good reason think (to say it openly would have been too dangerous): “I am poor because other people have more than a fair share.” But in the frame of a capitalistic society the accumulation of additional capital by those who succeeded in utilizing their funds for the best possible provision of the consumers enriches not only the owners but all of the people, on the one hand by raising the marginal productivity of labor and thereby wages, and on the other hand by increasing the quantity of goods produced and brought to the market. The peoples of the economically backward countries are poorer than the Americans because their countries lack a sufficient number of successful capitalists and entrepreneurs.

  A tendency toward an improvement of the standard of living of the masses can prevail only when and where the accumulation of new capital outruns the increase in population figures.

  The formation of capital is a process performed with the cooperation of the consumers: only those entrepreneurs can earn surpluses whose activities best satisfy the public. And the utilization of the once accumulated capital is directed by the anticipation of the most urgent of the not yet fully satisfied wishes of the consumers. Thus capital comes into existence and is employed according to the wishes of the consumers.

  Two Kinds of Power

  When in dealing with market phenomena we apply the term “power,” we must be fully aware of the fact that we are employing it with a connotation that is entirely different from the traditional connotation attached to it in dealing with issues of government and affairs of state.

  Governmental power is the faculty to beat into submission all those who would dare to disobey the orders issued by the authorities. Nobody would call government an entity that lacks this faculty. Every governmental action is backed by constables, prison guards, and executioners. However beneficial a governmental action may appear, it is ultimately made possible only by the government’s power to compel its subjects to do what many of them would not do if they were not threatened by the police and the penal courts. A government-supported hospital serves charitable purposes. But the taxes collected that enable the authorities to spend money for the upkeep of the hospital are not paid voluntarily. The citizens pay taxes because not to pay them would bring them to prison and physical resistance to the revenue agents could bring them to the gallows.

  It is true that the majority of the people willy-nilly acquiesce in this state of affairs and, as David Hume* put it, “resign their own sentiments and passions to those of their rulers.” They proceed in this way because they think that in the long run they serve better their own interests by being loyal to their government than by overturning it. But this does not alter the fact that governmental power means the exclusive faculty to frustrate any disobedience by the recourse to violence. As human nature is, the institution of government is an indispensable means to make civilized life possible. The alternative is anarchy and the law of the stronger. But the fact remains that government is the power to imprison and to kill.

  The concept of economic power as applied by the socialist authors means something entirely different. The fact to which it refers is the capacity to influence other people’s behavior by offering them something the acquisition of which they consider as more desirable than the avoidance of the sacrifice they have to make for it. In plain words: it means the invitation to enter into a bargain, an act of exchange. I will give you a if you give me b. There is no question of any compulsion nor of any threats. The buyer does not “rule” the seller and the seller does not “rule” the buyer.

  Of course, in the market economy everybody’s style of life is adjusted to the division of labor, and a return to self-sufficiency is out of the question. Everybody’s bare survival would be jeopardized if he were forced suddenly to experience the autarky of ages gone by. But in the regular course of market transactions there is no danger of such a relapse into the conditions of the primeval household economy. A faint image of the effects of any disturbance in the usual course of market exchanges is provided when labor union violence, benevolently tolerated or even openly encouraged and aided by the government, stops the activities of vital branches of business.

  In the market economy every specialist—and there are no other people than specialists—depends on all other specialists. This mutuality is the characteristic feature of interpersonal relations under capitalism. The socialists ignore the fact of mutuality and speak of economic power. For example, as they see it, “the capacity to determine product” is one of the powers of the entrepreneur.5 One can hardly misconstrue more radically the essential features of the market economy. It is not business, but the consumers who ultimately determine what should be produced. It is a silly fable that nations go to war because there is a munitions industry and that people are getting drunk because the distillers have “economic power.” If one calls economic power the capacity to choose—or, as the socialists prefer to say, to “determine”—the product, one must establish the fact that this power is fully vested in the buyers and consumers.

  “Modern civilization, nearly all civilization,” said the great British economist Edwin Cannan, “is based on the principle of making things pleasant for those who please the market and unpleasant for those who fail to do so.”6 The market, that means the buyers; the consumers, that means all of the people. To the contrary, under planning or socialism the goals of production are determined by the supreme planning authority; the individual gets what the authority thinks he ought to get. All this empty talk about the economic power of business aims at obliterating this fundamental distinction between freedom and bondage.

  The “Power” of the Employer

  People refer to economic power also in describing the internal conditions prevailing within the various enterprises. The owner of a private firm or the president of a corporation, it is said, enjoys within his outfit absolute power. He is free to indulge in his whims and fancies. All employees depend on his arbitrariness. They must stoop and obey or else face dismissal and starvation.

  Such observations, too, ascribe to the employer powers that are vested in the consumers. The requirement to outstrip its competitors by serving the public in the cheapest and best possible way enjoins upon every enterprise the necessity to employ the personnel best fitted for the performance of the various functions entrusted to them. The individual enterprise must try to outdo its competitors not only by the employment of the most suitable methods of production and the purchase of the best fitted materials, but also by hiring the right type of workers. It is true that the head of an enterprise has the faculty to give vent to his sympathies or antipathies. He is free to prefer an inferior man to a better man; he may fire a valuable assistant and in his place employ an incompetent and inefficient substitute. But all the faults he commits in this regard affect the profitability of his enterprise. He has to pay for them in full. It is the very supremacy of the market that penalizes such capricious behavior. The market forces the entrepreneurs to deal with every employee exclusively from the point of view of the services he renders to the satisfaction of the consumers.

  What curbs in all market transactions the temptation of indulging in malice and venom is precisely the costs involved in such behavior. The consumer is free to boycott for some reasons, popularly called noneconomic or irrational, the purveyor who would in the best and cheapest way satisfy his wants. But then he has to bear the consequences; he will either be less perfectly served or he will have to pay a higher price. Civil government enforces its commandments by recourse to violence or the threat of violence. The market does not need any recourse to violence because neglect of its rationality penalizes itself.

  The critics of capitalism fully acknowledge this fact in pointing out that for private enterprise nothing counts but the striving after profit. Profit can be made only by satisfying the consumers better or cheaper or better and cheaper, than others do. The consumer has in his capacity as customer the right to be full of whim and fancies. The businessman qua producer has only one aim: to provide for the consumer. If one deplores the businessman’s unfeeling preoccupation with profit-seeking, one has to realize two things. First, that this attitude is prescribed to the entrepreneur by the consumers who are not prepared to accept any excuse for poor service. Secondly, that it is precisely this neglect of “the human angle” that prevents arbitrariness and partiality from affecting the employer-employee nexus.

  To establish these facts does not amount either to a commendation or to a condemnation of the market economy or its political corollary, government by the people (representative government, democracy). Science is neutral with regard to any judgments of value. It neither approves nor condemns; it just describes and analyzes what is.

  A Duty of the Elite

  Stressing the fact that under unhampered capitalism the consumers are supreme in determining the goals of production does not imply any opinion about the moral and intellectual capacities of these individuals. The individuals qua consumers as well as qua voters are mortal men liable to error and may very often choose what in the long run will harm them. Philosophers may be right in severely criticizing the conduct of their fellow citizens. But there is, in a free society, no other means to avoid the evils resulting from one’s fellows’ bad judgment than to induce them to alter their ways of life voluntarily. Where there is freedom, this is the task incumbent upon the elite.

  Men are unequal and the inherent inferiority of the many manifests itself also in the manner in which they enjoy the affluence capitalism bestows upon them. It would be a boon for mankind, say many authors, if the common man would spend less time and money for the satisfaction of vulgar appetites and more for higher and nobler gratifications. But should not distinguished critics rather blame themselves than the masses? Why did they, whom fate and nature have blessed with moral and intellectual eminence, not better succeed in persuading the masses of inferior people to drop their vulgar tastes and habits? If something is wrong with the behavior of the many, the fault rests no more with the inferiority of the masses than with the inability or unwillingness of the elite to induce all other people to accept their own higher standards of value. The serious crisis of our civilization is caused not only by the shortcomings of the masses. It is no less the effect of a failure of the elite.

  4

  The Economic Role of Saving and Capital Goods*

  As the popular philosophy of the common man sees it, human wealth and welfare are the products of the cooperation of two primordial factors: nature and human labor. All the things that enable man to live and to enjoy life are supplied either by nature or by work or by a combination of nature-given opportunities with human labor. As nature dispenses its gifts gratuitously, it follows that all the final fruits of production, the consumers’ goods, ought to be allotted exclusively to the workers whose toil has created them. But unfortunately in this sinful world conditions are different. There the “predatory” classes of the “exploiters” want to reap although they have not sown. The landowners, the capitalists, and the entrepreneurs appropriate to themselves what by rights belongs to the workers who have produced it. All the evils of the world are the necessary effect of this originary wrong.

  Such are the ideas that dominate the thinking of most of our contemporaries. The socialists and the syndicalists conclude that in order to render human affairs more satisfactory it is necessary to eliminate those whom their jargon calls the “robber barons,” i.e., the entrepreneurs, the capitalists, and the landowners, entirely; the conduct of all production affairs ought to be entrusted either to the social apparatus of compulsion and coercion, the state (in the Marxian terminology called Society), or to the men employed in the individual plants or branches of production.

  Other people are more considerate in their reformist zeal. They do not intend to expropriate those whom they call the “leisure class” entirely. They want only to take away from them as much as is needed to bring about “more equality” in the “distribution” of wealth and income.

  But both groups, the party of the thoroughgoing socialists and that of the more cautious reformers, agree on the basic doctrine according to which profit and interest are “unearned” income and therefore, morally objectionable. Both groups agree that profit and interest are the cause of the misery of the great majority of all honest workingmen and their families, and, in a decent and satisfactory organization of society, ought to be sharply curbed, if not entirely abolished.

  Yet this whole interpretation of human conditions is fallacious. The policies engendered by it are pernicious from whatever point of view we may judge them. Western civilization is doomed if we do not succeed very soon in substituting reasonable methods of dealing with economic problems for the present disastrous methods.

  Three Factors of Production

  Mere work—that is, effort not guided by a rational plan and not aided by the employment of tools and intermediary products—brings about very little for the improvement of the worker’s condition. Such work is not a specifically human device. It is what man has in common with all other animals. It is bestirring oneself instinctively and using one’s bare hands to gather whatever is eatable and drinkable that can be found and appropriated.

  Physical exertion turns into a factor of human production when it is directed by reason toward a definite end and employs tools and previously produced intermediary products. Mind—reason—is the most important equipment of man. In the human sphere, labor counts only as one item in a combination of natural resources, capital goods, and labor; all these three factors are employed, according to a definite plan devised by reason, for the attainment of an end chosen. Labor, in the sense in which this term is used in dealing with human affairs, is only one of several factors of production.

  The establishment of this fact demolishes entirely all the theses and claims of the popular doctrine of exploitation. Those saving and thereby accumulating capital goods, and those abstaining from the consumption of previously accumulated capital goods, contribute their share to the outcome of the processes of production. Equally indispensable in the conduct of affairs is the role played by the human mind. Entrepreneurial judgment directs the toil of the workers and the employment of the capital goods toward the ultimate end of production, the best possible removal of what causes people to feel discontented and unhappy.

  What distinguishes contemporary life in the countries of Western civilization from conditions as they prevailed in earlier ages—and still exist for the greater number of those living today—is not the changes in the supply of labor and the skill of the workers and not the familiarity with the exploits of pure science and their utilization by the applied sciences, by technology. It is the amount of capital accumulated. The issue has been intentionally obscured by the verbiage employed by the international and national government agencies dealing with what is called foreign aid for the underdeveloped countries. What these poor countries need in order to adopt the Western methods of mass production for the satisfaction of the wants of the masses is not information about a “know how.” There is no secrecy about technological methods. They are taught at the technological schools and they are accurately described in textbooks, manuals, and periodical magazines. There are many experienced specialists available for the execution of every project that one may find practicable for these backward countries. What prevents a country like India from adopting the American methods of industry is the paucity of its supply of capital goods. As the Indian government’s confiscatory policies are deterring foreign capitalists from investing in India and as its prosocialist bigotry sabotages domestic accumulation of capital, their country depends on the alms that Western nations are giving to it.

  Consumers Direct the Use of Capital

  Capital goods come into existence by saving. A part of the goods produced is withheld from immediate consumption and employed for processes the fruits of which will only mature at a later date. All material civilization is based upon this “capitalistic” approach to the problems of production.

  “Roundabout methods of production,” as Böhm-Bawerk* called them, are chosen because they generate a higher output per unit of input. Early man lived from hand to mouth. Civilized man produces tools and intermediary products in the pursuit of long-range designs that finally bring forth results which direct, less time-consuming methods could never have attained, or could have attained only with an incomparably higher expenditure of labor and material factors.

  Those saving—that is consuming less than their share of the goods produced—inaugurate progress toward general prosperity. The seed they have sown enriches not only themselves but also all other strata of society. It benefits the consumers.

  The capital goods are for the owner a dead fund, a liability rather than an asset, if not used in production for the best possible and cheapest provision of the people with the goods and services they are asking for most urgently. In the market economy the owners of capital goods are forced to employ their property as if it were entrusted to them by the consumers under the stipulation to invest it in those lines in which it best serves those consumers. The capitalists are virtually mandataries of the consumers, bound to comply with their wishes.

  In order to attend to the orders received from the consumers, their real bosses, the capitalists must either themselves proceed to investment and the conduct of business or, if they are not prepared for such entrepreneurial activity or distrust their own abilities, hand over their funds to men whom they consider as better fitted for such a function. Whatever alternative they may choose, the supremacy of the consumers remains intact. No matter what the financial structure of the firm or company may be, the entrepreneur who operates with other people’s money depends no less on the market, that is, the consumers, than the entrepreneur who fully owns his outfit.

  There is no other method to make wage rates rise than by investing more capital per worker. More investment of capital means to give to the laborer more efficient tools. With the aid of better tools and machines, the quantity of the products increases and their quality improves. As the employer consequently will be in a position to obtain from the consumers more for what the employee has produced in one hour of work, he is able—and, by the competition of other employers, forced—to pay a higher price for the man’s work.

  Intervention and Unemployment

  As the labor union doctrine sees it, the wage increases that they are obtaining by what is euphemistically called “collective bargaining” are not to burden the buyers of the products but should be absorbed by the employers. The latter should cut down what in the eyes of the communists is called “unearned income,” that is, interest on the capital invested and the profits derived from success in filling wants of the consumers that until then had remained unsatisfied. Thus the unions hope to transfer step-by-step all this allegedly “unearned income” from the pockets of the capitalists and entrepreneurs into those of the employees.

  What really happens on the market is, however, very different. At the market price m of the product p, all those who were prepared to spend m for a unit of p could buy as much as they wanted. The total quantity of p produced and offered for sale was s. It was not larger than s because with such a larger quantity the price, in order to clear the market, would have to drop below m to m−. But at this price of m− the producers with the highest costs would suffer losses and would thereby be forced to stop producing p. These marginal producers likewise incur losses and are forced to discontinue producing p if the wage increase enforced by the union (or by a governmental minimum wage decree) causes an increase of production costs not compensated by a rise in the price of m to m+. The resulting restriction of production necessitates a reduction of the labor force. The outcome of the union’s “victory” is the unemployment of a number of workers.

  The result is the same if the employers are in a position to shift the increase in production costs fully to the consumers, without a drop in the quantity of p produced and sold. If the consumers are spending more for the purchase of p, they must cut down their buying of some other commodity q. Then the demand for q drops and brings about unemployment of a part of the men who were previously engaged in turning out q.

  The union doctrine qualifies interest received by the owners of the capital invested in the enterprise as “unearned” and concludes that it could be abolished entirely or considerably shortened without any harm to the employees and the consumers. The rise in production costs caused by wage increases could therefore be borne by shortening the company’s net earnings and a corresponding reduction of the dividends paid to the shareholders. The same idea is at the bottom of the unions’ claim that every increase in what they call productivity of labor (that is, the sum of the prices received for the total output divided by the number of man hours spent in its production) should be added to wages. Both methods mean confiscating for the benefit of the employees the whole or at least a considerable part of the returns on the capital provided by the saving of the capitalists. But what induces the capitalists to abstain from consuming their capital and to increase it by new saving is the fact that their forbearance is counterbalanced by the proceeds of their investments. If one deprives them of these proceeds, the only use they can make of the capital they own is to consume it and thus to inaugurate general progressive impoverishment.

  The Only Sound Policy

  What elevates the wage rates paid to the American workers above the rates paid in foreign countries is the fact that the investment of capital per worker is higher in this country than abroad. Saving, the accumulation of capital, has created and preserved up to now the high standard of living of the average American employee.

  All the methods by which the federal government and the governments of the states, the political parties, and the unions are trying to improve the conditions of people anxious to earn wages and salaries are not only vain but directly pernicious. There is only one kind of policy that can effectively benefit the employees, namely, a policy that refrains from putting any obstacles in the way of further saving and accumulation of capital.

  5

  Luxuries into Necessities*

  About sixty years ago Gabriel Tarde (1843–1904), the great French sociologist, dealt with the problem of the popularization of luxuries. An industrial innovation, he pointed out, enters the market as the extravagance of an elite before it finally turns, step-by-step, into a need of each and all and is considered indispensable. What was once a luxury becomes in the course of time a necessity.

  The history of technology and marketing provides ample exemplification to confirm Tarde’s thesis. There was in the past a considerable time lag between the emergence of something unheard of before and its becoming an article of everybody’s use. It sometimes took many centuries until an innovation was generally accepted at least within the orbit of Western civilization. Think of the slow popularization of the use of forks, of soap, of handkerchiefs, and of a great variety of other things.

  From its beginnings capitalism displayed the tendency to shorten this time lag and finally to eliminate it almost entirely. This is not a merely accidental feature of capitalistic production; it is inherent in its very nature. Capitalism is essentially mass production for the satisfaction of the wants of the masses. Its characteristic mark is big-scale production by big business. For big business there cannot be any question of producing limited quantities for the sole satisfaction of a small elite. The bigger big business becomes, the more and the quicker it makes accessible to the whole people the new achievements of technology.

  Centuries passed before the fork turned from an implement of effeminate weaklings into a utensil of all people. The evolution of the motor car from a plaything of wealthy idlers into a universally used means of transportation required more than twenty years. But nylon stockings became, in this country, an article of every woman’s wear within hardly more than two or three years. There was practically no period in which the enjoyment of such innovations as television or the products of the frozen food industry was restricted to a small minority.

  The disciples of Marx are anxious to describe in their textbooks the “unspeakable horrors of capitalism” which, as their master had prognosticated, results “with the inexorability of a law of nature” in the progressing impoverishment of the “masses.” Their prejudices prevent them from noticing the fact that capitalism tends, by the instrumentality of big-scale production, to wipe out the striking contrast between the mode of life of a fortunate elite and that of the rest of a nation.

  The gulf that separated the man who travelled in a coach-and-six and the man who stayed at home because he lacked the fare has been reduced to the difference between the railroad traveller who went by Pullman car, or first class, and the traveller who went coach class.

  6

  The Saver as a Voter*

  In the phrase, “protection of savers,” the word “protection” has a different meaning from that usually attributed to it in present-day political circles. Generally speaking, protection of the “little man” or of agriculture means protecting firms from competition on the market at the expense of consumers. Privileges to advance the special interests of particular groups at the expense of the entire population are recommended. Policies are proposed which must reduce total production.

  Protection of savers and of savings involves something very different from this, namely, preservation of the very foundations of justice on which the capitalistic order of society is based and, consequently, of capitalism itself. The unprecedented increase in the standard of living of the masses in the capitalistic West is due to the fact that the formation of capital increased much more than the population. Real wages went up because the marginal productivity of capital goods went down in comparison with that of labor or, more popularly expressed, because the worker in a modern, well-equipped plant can produce many times more than can a worker with primitive tools.

  Unrecognized Dangers

  It was possible for savings and capital accumulation to increase on an ever larger scale in the West because the right of private property, in contrast to the arbitrary might of military and political rulers, had been firmly established as the result of a gradual development based on Roman law. Conditions in the constitutional state permitted sizeable accumulations of savings and capital investment. What separates West from East is precisely the idea which social reformers ridicule as the “sanctity” of property, and which has not penetrated the Orient at all.* Capitalistic saving and investment cannot develop in lands where it is generally believed that the wealth of the businessman causes the poverty of the many, and where the successful trader is sacrificed to the predatory desires of the rulers and their representatives. The short interlude of “colonialism” and “imperialism” now belongs to history. One day, also, the United States will discontinue its gifts of billions to the enemies of capitalism. Many hundreds of millions in Asia and Africa will suffer increasing want because the policies of their governments obstruct domestic saving and capital formation and keep foreign capital out.

  In view of the situation in the United States, there is certainly no cause to wonder that the Orientals lack understanding of the problem of capital creation and capital preservation. The fact that every year the quantity of newly accumulated capital in the United States far exceeds the amount consumed in production and otherwise used up is due neither to the policies of the government nor to the doctrines propagated by the universities, the two political parties, and the press. It is a result of the fact that American capitalism still operates satisfactorily in spite of all the obstacles placed in its way under the misleading label of “welfare economics.”

  The market economy under the directorship of the entrepreneur has never better demonstrated its unparalleled productivity than in its adaptation to this system so full of traps and snares. Still the official political economists, self-styled “progressives,” misinterpret this great success of entrepreneurial initiative. Prejudiced by their socialistic ideas, they seek to discover in every improvement in the standard of living of the masses a new argument for the continuation of the New and Fair Deal reforms and the related policies of inflation and credit expansion through low interest rates.

  For some time it has seemed that public opinion was beginning to recognize the dangers of continued inflation, and that this would lead to an end of the policy of credit expansion. Yet the Federal Reserve Banks’ interest rate was allowed to increase only slightly before a strong countermovement set in. Everyone protests that he is against inflation. Yet what is usually meant by “inflation” is not an increase in the supply of money and credit but an increase of prices. People do not want to hear that an increase in prices is the inevitable consequence of an increase in the money supply. To bolster purchasing power, they demand cheap credit and price ceilings.

  After a period of decreased saving, the amount of new savings is once again rising in the United States. Also, the increase in the amount of life insurance taken out each year is considerable. Nevertheless it would be premature to conclude from this that the masses do not realize that the progressive decline in the dollar’s purchasing power is a threat to their savings and their provision for the future. However, there is no other possible means of saving open to the employee or worker who is not familiar with business or the stock market. (Even the entirely insufficient makeshift of hoarding gold coins is in the United States illegal and practically impossible.* ) The people cling to the hope that no further decline in the dollar’s purchasing power will take place.

  “Do You Know That You Are a Creditor?”

  The coming years will determine whether the United States, whose spokesmen never tire of noting that the American standard of living is much higher and better than that of any other time or place, will succeed in managing its finances without inflation or credit expansion. The number of persons is not large who fully recognize the dangers of government’s mislabelled “expansionist” monetary policy, and only a few politicians are ready to listen to their words of warning. The “practical” person has no interest in “long-run” policies. For him, nothing matters but the outcome of the next Congressional election, which is never more than two years off.

  When National Socialism (Nazism) attained success in Germany with its slogan “Wipe out interest slavery!” one daily paper—I believe it was the Frankfurter Zeitung—carried an article under the headline “Do you know that you are a creditor?” The American “common man,” as a saver and especially as an owner of life insurance policies, is a creditor to a much greater degree than was the average German of the Weimar Republic. Still he is not aware of it. He trusts the inflationists who tell him that “cheap money” hurts only the “international bankers.” Just as he supports politicians, who spend billions in tax dollars to raise food prices, he is supporting a monetary policy that threatens his economic future.

  There is only one way to improve the situation. That is to try to explain these matters to the voter.

  7

  The Market and the State*

  For every species of animals and plants the means of subsistence are limited. Hence every living being’s vital interests are implacably opposed to those of all members of its own species. Only human beings know how to overcome this irreconcilable nature-given conflict by embarking upon cooperation. The higher productivity of work performed under the principle of the division of labor substitutes for the grim antagonism created by the scarcity of food the solidarity of interests of people intentionally aiming at common goals. The peaceful exchange of commodities and services, the market process, becomes the standard type of interhuman relations. Mutual agreement of the parties displaces the recourse to violence, to the law of the stronger.

  Cooperation versus Violence

  The inherent deficiency of this method of solving mankind’s fundamental problem (and there is no other method available) is to be seen in the fact that it depends on full and unconditional cooperation of all human beings and can be frustrated by the noncooperation of any individual. There is no other means available to eliminate violent interference with human affairs than the recourse to more powerful violence. Against individuals or groups of individuals who are resorting to violence or are not complying with their obligations resulting from contracts nothing avails but the recourse to violent action. The market system of voluntary agreements cannot work if not backed up by an apparatus of compulsion and coercion ready to resort to violence against individuals who are not strictly abiding by the terms and rules of mutual agreement. The market needs the support of the state.

  The market in the broadest sense of the term is the process that encompasses all voluntary and spontaneous actions of men. It is the realm of human initiative and freedom and the soil upon which all human achievements thrive.

  The state, the power protecting the market against destructive recourse to violence, is a grim apparatus of coercion and compulsion. It is a system of orders and prohibitions, and its armed servants are always ready to enforce these laws. Whatever the state does is done by those subject to its commands. State power forced its subjects to build pyramids and other monuments, hospitals, research institutes, and schools. People see these achievements and praise their authors to the skies. They do not see the buildings that state power destroyed. Nor do they see those structures that were never constructed because the government had taxed away the means that individual citizens had destined for their erection.

  There is today practically no limit to the people’s and their rulers’ prostatist or, as one says today, prosocialist enthusiasm. Hardly anybody is courageous enough to raise objections if some expansion of state power—popularly styled the “public sector of the economy”—is suggested. What slows down and in most fields almost stops the progress toward more socialization of business enterprises is the manifest financial failure of almost all nationalization and municipalization ventures. In this regard reference to the U.S. Post Office plays an important role in present-day social philosophies and economic policies. Its well-known inefficiency and its enormous financial deficit demolish the popular fables about the virtues of the conduct of affairs by the state, the social apparatus of violent action.

  It is impossible to defend honestly the case for violence against the case for peaceful cooperation. Thus the advocates of violence are resorting to the trick of calling the methods of violence and threat of violence to which they resort “non-violence.” The outstanding case is that of labor-unionism. Its essential procedure, the use of violent action of various kinds1 or the threat of such action, is to prevent enterprises from working with the aid of people who do not obey the unions’ orders. They have succeeded in giving to the military term “picketing” a “peaceful” connotation. Yet, precisely in the way they apply it, it includes the willingness to kill and destroy by brute force.

  The fundamental antagonism between the realm of mutual peaceful agreement and that of compulsion and coercion cannot be eradicated by idle talk about two “sectors” of the economy, the private and the public. There is no conciliation between constraint and spontaneity. The attempts to resuscitate the totalitarianism of the Pharaohs of Egypt or of the Incas of Peru are doomed. And violence does not lose its antisocial character by being rebaptized “nonviolence.” All that man has created was a product of voluntary human cooperation. All that violence has contributed to civilization consists in the—certainly indispensable—services it renders to the endeavors of peace-loving people to restrain potential peace-breakers.

  Socialist Planning

  Western civilization appreciates and always appreciated liberty as the greatest good. The history of the West is a record of struggles against tyranny and for freedom. In the nineteenth century the idea of the individual’s freedom as developed by the ancient Greeks and resuscitated by the Europeans of the Renaissance and the Enlightenment seemed even to work upon the backward people of the East. Optimists were talking about a coming age of freedom and peace.

  What really happened was just the opposite. The nineteenth century, very successful in the natural sciences and their technological utilization, begot and made popular social doctrines that depicted the total state as the ultimate design of human history. Pious Christians as well as radical atheists rejected the market economy, vilifying it as the worst of all evils. While capitalism increased the productivity of economic effort in an unprecedented degree and the standard of living of the masses in the capitalistic countries improved from year to year, the Marxian doctrine of the unavoidable progressive pauperization of the “exploited classes” was accepted as an incontestable dogma. Self-styled intellectuals, yearning and striving hard for what they style the dictatorship of the proletariat, pretend to continue the endeavors of all the great champions of freedom.

  The social and political ideal of our age is planning. No longer should the individuals have the right and the opportunity of choosing the mode of their integration into the system of social cooperation. Everybody will have to comply with the orders issued by society’s—i.e., the state’s, the police power’s—supreme office. From the cradle to the coffin everybody will be forced to behave precisely as he is ordered to behave by the makers of the “plan.” These orders will determine his training and the place and the kind of his work as well as the wages he will receive. He will not be in a position to raise any objections against the orders received; according to the philosophy underlying the system, the planning authority alone is in a position to know whether or not the order is or is not in accordance with its plan for the “socially” most desirable conduct of affairs.

  The total enslavement of all members of society is not a merely accidental attendant phenomenon of the socialist management. It is rather the essential feature of the socialist system, the very effect of any thinkable kind of a socialist conduct of business. It is precisely this that the socialist authors had in mind when they stigmatized capitalism as “anarchy of production” and asked for the transfer of all authority and power to “society.” Either a man is free to live according to his own plan or he is forced to submit unconditionally to the plan of the great god state.

  It does not matter that the socialists call themselves today “leftists” and smear the advocates of limited government and the market economy as “rightists.” These terms “left” and “right” have lost any political significance. The only meaningful distinction is that between the advocates of the market economy and its corollary, limited government, and the advocates of the total state.

  For the first time in human history there is perfect agreement between the majority of the so-called intellectuals and the vast majority of all other classes and groups of people. Passionately and vehemently they all want planning, i.e., their own total enslavement.

  Individual Freedom and the Market Economy

  The characteristic feature of the capitalistic society is the sphere of activity it assigns to the initiative and responsibility of its members. The individual is free and supreme as long as he does not restrict the freedom of his fellow citizens in pursuance of his own ends. In the market he is sovereign in his capacity as a consumer. In the governmental sphere he is a voter and in this capacity a part of the sovereign lawgiver. Political democracy and democracy of the market are congeneric. In the terminology of Marxism one would have to say: Representative government is the superstructure of the market economy as despotism is the superstructure of socialism.

  The market economy is not merely one of various thinkable and possible systems of mankind’s economic cooperation. It is the only method that enables man to establish a social system of production to which the unswerving tendency is inwrought to aim at the best possible and cheapest provisioning of the consumers.

  8

  The Outlook for Saving and Investment*

  Writing in 1817, David Ricardo in his Principles of Political Economy and Taxation pointed to the experience that “the fancied or real insecurity of capital, when not under the immediate control of its owner,” checks the emigration of capital. Thus most men of property prefer a low rate of profit in their own country to a more advantageous employment for their wealth in foreign nations.1 This was said precisely on the eve of the age that will be remembered in history as the period in which the insulation of the various local and national markets gave way to the evolution of an effective world trade not only in consumers’ goods but also in capital goods.

  Foreign Investment

  British capitalists inaugurated the new methods of foreign investment; they were very soon followed by the businessmen of Western and Central Europe and of the United States. An unprecedented improvement in the average standard of living resulted. Observing the benefits that this system brought both to the investors and to the people of the countries in which the investments were made, optimists hopefully looked forward to the coming of an era of perpetual peace and goodwill among all nations. They were poor prophets.

  They overrated the mental power and they underrated the malicious envy not only of the uncultured masses but no less of the crowd of self-styled intellectuals. They did not foresee that in the light of doctrines, elaborated in England and France and perfected in Germany and Russia, foreign investors would appear as the worst enemies of all decent people, as exploiters and usurers. They could not divine the impetuous vehemence of the passions stirred up by unscrupulous demagogues. The Americans and the British are hated in the economically underdeveloped countries because they have provided the capital for investments the inhabitants were not able to provide.

  Every account of the history of modern culture must first of all distinguish between two groups of nations, viz. those that have developed a system which made domestic saving and the large-scale accumulation of capital possible and those that did not. The lamentable failure of all “leftist” economic doctrines from Saint-Simonism and Marxism down to the “imperialism” theory of Luxembourg, Lenin, and Hilferding and to Keynesianism is precisely to be seen in their misconstruction of the meaning of saving, capital accumulation, and investment.* In the great ideological conflict of the nineteenth century the Liberals and their spokesmen, the much abused “vulgar economists,” were right in proclaiming as their main thesis: there is but one means to improve the material conditions of all of the people, viz., to accelerate the accumulation of capital as against the increase in population.

  The great age of foreign investment came to an inglorious end when the twentieth century’s doctrinaires were no longer prepared to see any difference between the devastation of a country by military action and the investment of foreign capital for the construction of factories and transportation facilities. Each of these two entirely different procedures is called conquest and imperialism. The expropriation of foreign investments is styled “liberation.” It is, if at all, only mildly censured by the jurists and economists of the “capitalistic sector” of the world. No wonder that the eagerness to invest in foreign countries disappeared. Foreign aid tries now to fill the gap. As Miss Ayn Rand defined it, this new doctrine requests that our wealth should be given away to the peoples of Asia and Africa, “with apologies for the fact that we have produced it while they haven’t.”2

  The joint operation of the ideas of socialism and nationalism has not only almost entirely suppressed saving and the accumulation of capital (for non-military purposes) in the communist countries and in the orbit of the nations commonly called today underdeveloped. It made the industrial countries of Western and Central Europe and North America adopt conceptions the application of which must sooner or later result in the complete cessation of any voluntary saving and capital formation on the part of individual citizens.

  The “Productivity of Labor”

  Thus the official doctrine of the United States operates with a concept of productivity of labor that defines it as the market value (in terms of money) added to the products by the processing (of the firm in question or by all the firms of the branch of industry), divided by the number of workers employed. Or, in other words, output per man-hour of work. It pretends that every improvement in this figure means an “increase in the productivity of labor” that is caused by the workers’ effort and which by rights belongs entirely to them. In wage negotiations the unions claim this “productivity gain” as their members’ due. The employers as a rule neither question this concept of productivity of labor nor do they contest the resulting claims of the unions. They accept it implicitly in occasionally pointing out that wage rates have already risen to the extent of the increase in productivity, computed according to this method. The government in formulating its “guidelines” for the determination of wage rates and product prices adopts the unions’ point of view.

  It is obvious that the theory underlying this doctrine radically misconstrues the essential facts about industrial production. The difference between the “productivity” of a worker handling the tools of a bygone state of technology and another working in a plant equipped with the most modern machines is not due to the personal qualities and the effort of the worker but to the quality of the shop’s equipment. If the worker is to get all the “increase in productivity” brought about by the investment of additional capital, nothing is left for the people whose saving created this capital and made its investment possible. (For the sake of simplicity we may omit referring to the role of the entrepreneurs and to that of the managers and the technologists.) Saving, capital accumulation and investment will no longer pay and will come to an end. There will no longer be any economic progress.3

  Anti-capitalistic Ideas

  It cannot be denied that also in the noncommunist countries an outspoken anti-capitalistic tendency prevails in fiscal policies. The taxation of personal incomes, corporations, and inheritance tends more or less openly toward a complete confiscation of such allegedly “unearned” intake. The joint effects of these anti-capitalistic measures are to some extent still veiled by inflationary monetary and banking policies. But sooner or later the main problem will become visible: how to provide for new additional investments when the individuals and corporations are prevented—either by the methods of taxation or by the methods applied to the determination of wage rates—from deriving any benefit from saving and capital investment.

  9

  Inequality of Wealth and Incomes*

  The market economy—capitalism—is based on private ownership of the material means of production and private entrepreneurship. The consumers, by their buying or abstention from buying, ultimately determine what should be produced and in what quantity and quality. They render profitable the affairs of those businessmen who best comply with their wishes and unprofitable the affairs of those who do not produce what they are asking for most urgently. Profits convey control of the factors of production into the hands of those who are employing them for the best possible satisfaction of the most urgent needs of the consumers, and losses withdraw them from the control of the inefficient businessmen. In a market economy not sabotaged by the government the owners of property are mandataries of the consumers as it were. On the market a daily repeated plebiscite determines who should own what and how much. It is the consumers who make some people rich and other people penniless.

  Inequality of wealth and incomes is an essential feature of the market economy. It is the implement that makes the consumers supreme in giving them the power to force all those engaged in production to comply with their orders. It forces all those engaged in production to the utmost exertion in the service of the consumers. It makes competition work. He who best serves the consumers profits most and accumulates riches.

  In a society of the type that Adam Ferguson, Saint-Simon, and Herbert Spencer (1820–1903) called militaristic and present-day Americans call feudal, private property of land was the fruit of violent usurpation or of donations on the part of the conquering warlord. Some people owned more, some less, and some nothing because the chieftain had determined it that way. In such a society it was correct to assert that the abundance of the great landowners was the corollary of the indigence of the landless. But it is different in a market economy. Bigness in business does not impair, but improves the conditions of the rest of the people. The millionaires are acquiring their fortunes in supplying the many with articles that were previously beyond their reach. If laws had prevented them from getting rich, the average American household would have to forgo many of the gadgets and facilities that are today its normal equipment. This country enjoys the highest standard of living ever known in history because for several generations no attempts were made toward “equalization” and “redistribution.” Inequality of wealth and incomes is the cause of the masses’ well-being, not the cause of anybody’s distress. Where there is a “lower degree of inequality,” there is necessarily a lower standard of living of the masses.

  Demand for “Distribution”

  In the opinion of the demagogues inequality in what they call the “distribution” of wealth and incomes is in itself the worst of all evils. Justice would require an equal distribution. It is therefore both fair and expedient to confiscate the surplus of the rich or at least a considerable part of it and to give it to those who own less. This philosophy tacitly presupposes that such a policy will not impair the total quantity produced. But even if this were true, the amount added to the average man’s buying power would be much smaller than extravagant popular illusions assume. In fact the luxury of the rich absorbs only a slight fraction of the nation’s total consumption. The much greater part of the rich men’s incomes is not spent for consumption, but saved and invested. It is precisely this that accounts for the accumulation of their great fortunes. If the funds which the successful businessmen would have ploughed back into productive employments are used by the state for current expenditure or given to people who consume them, the further accumulation of capital is slowed down or entirely stopped. Then there is no longer any question of economic improvement, technological progress, and a trend toward higher average standards of living.

  When Marx and Engels in the Communist Manifesto recommended “a heavy progressive or graduated income tax” and “abolition of all right of inheritance” as measures “to wrest, by degrees, all capital from the bourgeoisie,” they were consistent from the point of view of the ultimate end they were aiming at, viz., the substitution of socialism for the market economy. They were fully aware of the inevitable consequences of these policies. They openly declared that these measures are “economically untenable” and that they advocated them only because “they necessitate further inroads” upon the capitalist social order and are “unavoidable as a means of entirely revolutionizing the mode of production,” i.e., as a means of bringing about socialism.

  But it is quite a different thing when these measures which Marx and Engels characterized as “economically untenable” are recommended by people who pretend that they want to preserve the market economy and economic freedom. These self-styled middle-of-the-road politicians are either hypocrites who want to bring about socialism by deceiving the people about their real intentions, or they are ignoramuses who do not know what they are talking about. For progressive taxes upon incomes and upon estates are incompatible with the preservation of the market economy.

  The middle-of-the-road man argues this way: “There is no reason why a businessman should slacken in the best conduct of his affairs only because he knows that his profits will not enrich him but will benefit all people. Even if he is not an altruist who does not care for lucre and who unselfishly toils for the common weal, he will have no motive to prefer a less efficient performance of his activities to a more efficient. It is not true, that the only incentive that impels the great captains of industry is acquisitiveness. They are no less driven by the ambition to bring their products to perfection.”

  Supremacy of the Consumers

  This argumentation entirely misses the point. What matters is not the behavior of the entrepreneurs but the supremacy of the consumers. We may take it for granted that the businessmen will be eager to serve the consumers to the best of their abilities even if they themselves do not derive any advantage from their zeal and application. They will accomplish what according to their opinion best serves the consumers. But then it will no longer be the consumers that determine what they get. They will have to take what the businessmen believe is best for them. The entrepreneurs, not the consumers, will then be supreme. The consumers will no longer have the power to entrust control of production to those businessmen whose products they like most and to relegate those whose products they appreciate less to a more modest position in the system.

  If the present American laws concerning the taxation of the profits of corporations, the incomes of individuals, and inheritances had been introduced about sixty years ago, all those new products whose consumption has raised the standard of living of the “common man” would either not be produced at all or only in small quantities for the benefit of a minority. The Ford enterprises would not exist if Henry Ford’s profits had been taxed away as soon as they came into being. The business structure of 1895 would have been preserved. The accumulation of new capital would have ceased or at least slowed down considerably. The expansion of production would lag behind the increase of population. There is no need to expatiate about the effects of such a state of affairs.

  Profit and loss tell the entrepreneur what the consumers are asking for most urgently. And only the profits the entrepreneur pockets enable him to adjust his activities to the demand of the consumers. If the profits are expropriated, he is prevented from complying with the directives given by the consumers. Then the market economy is deprived of its steering wheel. It becomes a senseless jumble.

  People can consume only what has been produced. The great problem of our age is precisely this: Who should determine what is to be produced and consumed, the people or the State, the consumers themselves or a paternal government? If one decides in favor of the consumers, one chooses the market economy. If one decides in favor of the government, one chooses socialism. There is no third solution. The determination of the purpose for which each unit of the various factors of production is to be employed cannot be divided.

  Demand for Equalization

  The supremacy of the consumers consists in their power to hand over control of the material factors of production and thereby the conduct of production activities to those who serve them in the most efficient way. This implies inequality of wealth and incomes. If one wants to do away with inequality of wealth and incomes, one must abandon capitalism and adopt socialism. (The question whether any socialist system would really give income equality must be left to an analysis of socialism.)

  But, say the middle-of-the-road enthusiasts, we do not want to abolish inequality altogether. We want merely to substitute a lower degree of inequality for a higher degree.

  These people look upon inequality as upon an evil. They do not assert that a definite degree of inequality which can be exactly determined by a judgment free of any arbitrariness and personal evaluation is good and has to be preserved unconditionally. They, on the contrary, declare inequality in itself as bad and merely contend that a lower degree of it is a lesser evil than a higher degree in the same sense in which a smaller quantity of poison in a man’s body is a lesser evil than a larger dose. But if this is so, then there is logically in their doctrine no point at which the endeavors toward equalization would have to stop. Whether one has already reached a degree of inequality which is to be considered low enough and beyond which it is not necessary to embark upon further measures toward equalization is just a matter of personal judgments of value, quite arbitrary, different with different people and changing in the passing of time. As these champions of equalization appraise confiscation and “redistribution” as a policy harming only a minority, viz., those whom they consider to be “too” rich, and benefiting the rest—the majority—of the people, they cannot oppose any tenable argument to those who are asking for more of this allegedly beneficial policy. As long as any degree of inequality is left, there will always be people whom envy impels to press for a continuation of the equalization policy. Nothing can be advanced against their inference: If inequality of wealth and incomes is an evil, there is no reason to acquiesce in any degree of it, however low; equalization must not stop before it has completely leveled all individuals’ wealth and incomes.

  The history of the taxation of profits, incomes, and estates in all countries clearly shows that once the principle of equalization is adopted, there is no point at which the further progress of the policy of equalization can be checked. If, at the time the Sixteenth Amendment was adopted, somebody had predicted that some years later the income tax progression would reach the height it has really attained in our day, the advocates of the Amendment would have called him a lunatic. It is certain that only a small minority in Congress will seriously oppose further sharpening of the progressive element in the tax rate scales if such a sharpening should be suggested by the Administration or by a congressman anxious to enhance his chances for reelection. For, under the sway of the doctrines taught by contemporary pseudo-economists, all but a few reasonable men believe that they are injured by the mere fact that their own income is smaller than that of other people and that it is not a bad policy to confiscate this difference.

  There is no use in fooling ourselves. Our present taxation policy is headed toward a complete equalization of wealth and incomes and thereby toward socialism. This trend can be reversed only by the cognition of the role that profit and loss and the resulting inequality of wealth and incomes play in the operation of the market economy. People must learn that the accumulation of wealth by the successful conduct of business is the corollary of the improvement of their own standard of living and vice versa. They must realize that bigness in business is not an evil, but both the cause and effect of the fact that they themselves enjoy all those amenities whose enjoyment is called the “American way of life.”

  [* ]Reprinted from The Freeman, April 1960.

  [* ]Charles V of Germany (1500–1558), a devoted Catholic, persecuted religious heresy in the Netherlands and struggled to suppress Lutheranism in the German principalities. During the reign of the Valois kings of France (1328–1589) religious wars were fought as French Protestants, including the Huguenots, struggled for freedom of worship.

  [* ]Excerpts from Human Action (1949). Reprinted from the pamphlet published by the Foundation for Economic Education in 1952, with the permission of the publisher.

  [* ]Reprinted from The Freeman, January 1962.

  [* ]Adam Ferguson (1723–1816), Scottish philosopher and historian, a contemporary and friend of Adam Smith (1723–90).

  [1. ]See Ludwig von Mises, Human Action (New Haven: Yale, 1949), pp. 196–99; (Chicago: Regnery, 1966), pp. 195–98.

  [2. ]Karl Marx, Critique of the Social-Democratic Program of Gotha (Letter to Bracke, May 5, 1875).

  [3. ]Werner Sombart, Händler und Helden (Hucksters and Heroes) (Munich, 1915).

  [4. ]It was the great Roman poet Quintus Horatius Flaccus who first alluded to this characteristic feature of property of producers’ goods in a market economy. See Mises, Socialism (Yale, 1951), p. 42 n; (Liberty Fund, 1981), p. 31 n.

  [* ]David Hume (1711–76), prominent Scottish philosopher and historian. His skeptical philosophy had a profound influence on later thinkers.

  [5. ]Cf., for instance, A. A. Berle, Jr., Power without Property (New York: Harcourt, Brace, Inc., 1959), p. 82.

  [6. ]Edwin Cannan, An Economist’s Protest (London: P. S. King & Son, Ltd., 1928), pp. vi–vii.

  [* ]Reprinted from The Freeman, August 1963.

  [* ]Eugen von Böhm-Bawerk (1851–1914), Austrian economist, professor to Ludwig von Mises, renowned for his scholarly study of interest theory, Capital and Interest. Böhm-Bawerk also served as Finance Minister in the Austro-Hungarian government, 1895, 1897, and 1900–1904.

  [* ]Reprinted from the New York University Graduate School of Business Administration Newsletter 1, no. 4 (Spring 1956).

  [* ]Translated by Bettina Bien Greaves from the German, as it appeared in Zeitschrift für das gesamte Kreditwesen 10, no. 1 (January 1, 1957): pp. 24–25.

  [* ]A rigid system of privilege and castes prevailed for centuries in China and Japan; wealth was a question of rank, and the common man had little opportunity to improve his situation. Savings in Japan and the other nations of the Pacific Rim are a relatively recent development.

  [* ]For more than forty years, from June 5, 1933, until December 31, 1974, U.S. citizens were denied the right to own monetary gold.

  [* ]Reprinted from Mises’s original manuscript, first published in German translation in Schweizer Monatshefte 48, no. 1 (April 1968): pp. 13–16.

  [1. ]Cf. Roscoe Pound, Legal Immunities of Labor Unions (Washington, D.C.: American Enterprise Association, 1957).

  [* ]Reprinted from 75th anniversary issue of Farmand (Oslo, Norway), February 12, 1966.

  [1. ]Cf. Ricardo, Works, ed. by McCulloch, 2d ed. (London, 1852), p. 77.

  [* ]Claude Henri de Saint-Simon (1760–1825), founder of French socialism; Rosa Luxembourg (1870–1919), Marxist revolutionary; Nikolai Vladimir Lenin (1870–1924), leader of the 1917 Russian Communist revolution; and Rudolf Hilferding (1877–1941), German Social Democrat, were all ideological socialists.

  [2. ]Cf. Ayn Rand, For the New Intellectual (New York, 1961), p. 4.

  [3. ]See my Human Action, 4th rev. ed. (Chicago, 1996), pp. 608—10.

  [* ]Reprinted from Ideas on Liberty, May 1955.

• Back to Top

  18: Session VI Reading 3: The Liberal Alternative

  Ludwig von Mises, Human Action: A Treatise on Economics, in 4 vols., ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007). Vol. 3. Chapter: 5: The Meaning of Laissez Faire

  Accessed from oll.libertyfund.org/title/1895/110652 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  5

  The Meaning of Laissez Faire

  In eighteenth-century France the saying laissez faire, laissez passer was the formula into which some of the champions of the cause of liberty compressed their program. Their aim was the establishment of the unhampered market society. In order to attain this end they advocated the abolition of all laws preventing more industrious and more efficient people from outdoing less industrious and less efficient competitors and restricting the mobility of commodities and of men. It was this that the famous maxim was designed to express.

  In our age of passionate longing for government omnipotence the formula laissez faire is in disrepute. Public opinion now considers it a manifestation both of moral depravity and of the utmost ignorance.

  As the interventionist sees things, the alternative is “automatic forces” or “conscious planning.”3 It is obvious, he implies, that to rely upon automatic processes is sheer stupidity. No reasonable man can seriously recommend doing nothing and letting things go as they do without interference on the part of purposive action. A plan, by the very fact that it is a display of conscious action, is incomparably superior to the absence of any planning. Laissez faire is said to mean: Let the evils last, do not try to improve the lot of mankind by reasonable action.

  This is utterly fallacious talk. The argument advanced for planning is entirely derived from an impermissible interpretation of a metaphor. It has no foundation other than the connotations implied in the term “automatic” which it is customary to apply in a metaphorical sense for the description of the market process.4 Automatic, says the Concise Oxford Dictionary,5 means “unconscious, unintelligent, merely mechanical.” Automatic, says Webster’s Collegiate Dictionary,6 means “not subject to the control of the will, . . . performed without active thought and without conscious intention or direction.” What a triumph for the champion of planning to play this trump card!

  The truth is that the alternative is not between a dead mechanism or a rigid automatism on one hand and conscious planning on the other hand. The alternative is not plan or no plan. The question is whose planning? Should each member of society plan for himself, or should a benevolent government alone plan for them all? The issue is not automatism versus conscious action; it is autonomous action of each individual versus the exclusive action of the government. It is freedom versus government omnipotence.

  Laissez faire does not mean: Let soulless mechanical forces operate. It means: Let each individual choose how he wants to cooperate in the social division of labor; let the consumers determine what the entrepreneurs should produce. Planning means: Let the government alone choose and enforce its rulings by the apparatus of coercion and compulsion.

  Under laissez faire, says the planner, it is not those goods which people “really” need that are produced, but those goods from the sale of which the highest returns are expected. It is the objective of planning to direct production toward the satisfaction of the “true” needs. But who is to decide what the “true” needs are?

  Thus, for instance, Professor Harold Laski, the former chairman of the British Labor Party, would determine as the objective of the planned direction of investment “that the use of the investor’s savings will be in housing rather than in cinemas.”7 It is beside the point whether or not one agrees with the professor’s view that better houses are more important than moving pictures. It is a fact that the consumers, in spending part of their money for admission to the movies, have made another choice. If the masses of Great Britain, the same people whose votes swept the Labor Party into power, were to stop patronizing the moving pictures and to spend more for comfortable homes and apartments, profit-seeking business would be forced to invest more in building homes and apartment houses and less in the production of expensive pictures. It was Mr. Laski’s desire to defy the wishes of the consumers and to substitute his own will for that of the consumers. He wanted to do away with the democracy of the market and to establish the absolute rule of the production tsar. Perhaps he believed that he was right from a higher point of view, and that as a superman he was called upon to impose his own valuations on the masses of inferior men. But then he ought to have been frank enough to say so plainly.

  All this passionate praise of the supereminence of government action is but a poor disguise for the individual interventionist’s self-deification. The great god State is a great god only because it is expected to do exclusively what the individual advocate of interventionism wants to see achieved. Only that plan is genuine which the individual planner fully approves. All other plans are simply counterfeit. In saying “plan” what the author of a book on the benefits of planning has in mind is, of course, his own plan alone. He does not take into account the possibility that the plan which the government puts into practice may differ from his own plan. The various planners agree only with regard to their rejection of laissez faire, i.e., the individuals’ discretion to choose and to act. They entirely disagree with regard to the choice of the unique plan to be adopted. To every exposure of the manifest and incontestable defects of interventionist policies the champions of interventionism react in the same way. These faults, they say, were the results of spurious interventionism; what we are advocating is good interventionism, not bad interventionism. And, of course, good interventionism is the professor’s own brand.

  Laissez faire means: Let the common man choose and act; do not force him to yield to a dictator.

  [3. ]Cf. A. H. Hansen, “Social Planning for Tomorrow,” in The United States after the War (Cornell University Lectures, Ithaca, 1945), pp. 32–33.

  [4. ]See above, pp. 315–16.

  [5. ](3d ed. Oxford, 1934), p. 74.

  [6. ](5th ed. Springfield, 1946), p. 73.

  [7. ]Cf. Laski’s broadcast, “Revolution by Consent,” reprinted in Talks, X, no. 10 (October, 1945), 7.

• Back to Top

  19: Session VI Reading 4: The Liberal Alternative

  Please read sections 1-7, 11 from Chapter 1.

  Ludwig von Mises, Liberalism: The Classical Tradition, trans. Ralph Raico, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2005). Chapter: LIBERALISM The Classical Tradition: CHAPTER 1: The Foundations of Liberal Policy

  Accessed from oll.libertyfund.org/title/1463/67380 on 2008-08-21

  The copyright to this edition, in both print and electronic forms, is held by Liberty Fund, Inc.

  ---

  LIBERALISM
  
  The Classical Tradition

  CHAPTER 1

  The Foundations of Liberal Policy

  1

  Property

  Human society is an association of persons for cooperative action. As against the isolated action of individuals, cooperative action on the basis of the principle of the division of labor has the advantage of greater productivity. If a number of men work in cooperation in accordance with the principle of the division of labor, they will produce (other things being equal) not only as much as the sum of what they would have produced by working as self-sufficient individuals, but considerably more. All human civilization is founded on this fact. It is by virtue of the division of labor that man is distinguished from the animals. It is the division of labor that has made feeble man, far inferior to most animals in physical strength, the lord of the earth and the creator of the marvels of technology. In the absence of the division of labor, we would not be in any respect further advanced today than our ancestors of a thousand or ten thousand years ago.

  Human labor by itself is not capable of increasing our well-being. In order to be fruitful, it must be applied to the materials and resources of the earth that Nature has placed at our disposal. Land, with all the substances and powers resident within it, and human labor constitute the two factors of production from whose purposeful cooperation proceed all the commodities that serve for the satisfaction of our outer needs. In order to produce, one must deploy labor and the material factors of production, including not only the raw materials and resources placed at our disposal by Nature and mostly found in the earth, but also the intermediate products already fabricated of these primary natural factors of production by previously performed human labor. In the language of economics we distinguish, accordingly, three factors of production: labor, land, and capital. By land is to be understood everything that Nature places at our disposal in the way of substances and powers on, under, and above the surface of the earth, in the water, and in the air; by capital goods, all the intermediate goods produced from land with the help of human labor that are made to serve further production, such as machines, tools, half-manufactured articles of all kinds, etc.

  Now we wish to consider two different systems of human cooperation under the division of labor—one based on private ownership of the means of production, and the other based on communal ownership of the means of production. The latter is called socialism or communism; the former, liberalism or also (ever since it created in the nineteenth century a division of labor encompassing the whole world) capitalism. The liberals maintain that the only workable system of human cooperation in a society based on the division of labor is private ownership of the means of production. They contend that socialism as a completely comprehensive system encompassing all the means of production is unworkable and that the application of the socialist principle to a part of the means of production, though not, of course, impossible, leads to a reduction in the productivity of labor, so that, far from creating greater wealth, it must, on the contrary, have the effect of diminishing wealth.

  The program of liberalism, therefore, if condensed into a single word, would have to read: property, that is, private ownership of the means of production (for in regard to commodities ready for consumption, private ownership is a matter of course and is not disputed even by the socialists and communists). All the other demands of liberalism result from this fundamental demand.

  Side by side with the word “property” in the program of liberalism one may quite appropriately place the words “freedom” and “peace.” This is not because the older program of liberalism generally placed them there. We have already said that the program of present-day liberalism has outgrown that of the older liberalism, that it is based on a deeper and better insight into interrelationships, since it can reap the benefit of the advances that science has made in the last decades. Freedom and peace have been placed in the forefront of the program of liberalism, not because many of the older liberals regarded them as coordinate with the fundamental principle of liberalism itself, rather than as merely a necessary consequence following from the one fundamental principle of the private ownership of the means of production; but solely because freedom and peace have come under especially violent attack from the opponents of liberalism, and liberals have not wanted to give the appearance, through the omission of these principles, that they in any way acknowledged the justness of the objections raised against them.

  2

  Freedom

  The idea of freedom has become so ingrained in all of us that for a long time no one dared to call it into question. People were accustomed always to speaking of freedom only with the greatest of reverence; it remained for Lenin to call it a “bourgeois prejudice.” Although the fact is often forgotten today, all this is an achievement of liberalism. The very name of liberalism is derived from freedom, and the name of the party in opposition to the liberals (both designations arose in the Spanish constitutional struggles of the first decades of the nineteenth century) was originally the “servile.”

  Before the rise of liberalism even high-minded philosophers, founders of religions, clerics animated by the best of intentions, and statesmen who genuinely loved their people, viewed the thralldom of a part of the human race as a just, generally useful, and downright beneficial institution. Some men and peoples are, it was thought, destined by nature for freedom, and others for bondage. And it was not only the masters who thought so, but the greater number of the slaves as well. They put up with their servitude, not only because they had to yield to the superior force of the masters, but also because they found some good in it: the slave is relieved of concern for securing his daily bread, for the master is obliged to provide him with the necessities of life. When liberalism set out, in the eighteenth and the first half of the nineteenth century, to abolish the serfdom and subjection of the peasant population in Europe and the slavery of the Negroes in the overseas colonies, not a few sincere humanitarians declared themselves in opposition. Unfree laborers are used to their bondage and do not feel it as an evil. They are not ready for freedom and would not know how to make use of it. The discontinuation of the master’s care would be very harmful to them. They would not be capable of managing their affairs in such a way as always to provide more than just the bare necessities of life, and they would soon fall into want and misery. Emancipation would thus not only fail to gain for them anything of real value, but would seriously impair their material well-being.

  What was astonishing was that one could hear these views expressed even by many of the slaves whom one questioned. In order to counter such opinions, many liberals believed it necessary to represent as the general rule and even on occasion to depict in an exaggerated manner the exceptional cases in which serfs and slaves had been cruelly abused. But these excesses were by no means the rule. There were, of course, isolated instances of abuse, and the fact that there were such cases was an additional reason for the abolition of this system. As a rule, however, the treatment of bondsmen by their masters was humane and mild.

  When those who recommended the abolition of involuntary servitude on general humanitarian grounds were told that the retention of the system was also in the interest of the enslaved, they knew of nothing to say in rejoinder. For against this objection in favor of slavery there is only one argument that can and did refute all others—namely, that free labor is incomparably more productive than slave labor. The slave has no interest in exerting himself fully. He works only as much and as zealously as is necessary to escape the punishment attaching to failure to perform the minimum. The free worker, on the other hand, knows that the more his labor accomplishes, the more he will be paid. He exerts himself to the full in order to raise his income. One has only to compare the demands placed on the worker by the tending of a modern tractor with the relatively small expenditure of intelligence, strength, and industry that just two generations ago was deemed sufficient for the enthralled ploughmen of Russia. Only free labor can accomplish what must be demanded of the modern industrial worker.

  Muddleheaded babblers may therefore argue interminably over whether all men are destined for freedom and are as yet ready for it. They may go on contending that there are races and peoples for whom Nature has prescribed a life of servitude and that the master races have the duty of keeping the rest of mankind in bondage. The liberal will not oppose their arguments in any way because his reasoning in favor of freedom for all, without distinction, is of an entirely different kind. We liberals do not assert that God or Nature meant all men to be free, because we are not instructed in the designs of God and of Nature, and we avoid, on principle, drawing God and Nature into a dispute over mundane questions. What we maintain is only that a system based on freedom for all workers warrants the greatest productivity of human labor and is therefore in the interest of all the inhabitants of the earth. We attack involuntary servitude, not in spite of the fact that it is advantageous to the “masters,” but because we are convinced that, in the last analysis, it hurts the interests of all members of human society, including the “masters.” If mankind had adhered to the practice of keeping the whole or even a part of the labor force in bondage, the magnificent economic developments of the last hundred and fifty years would not have been possible. We would have no railroads, no automobiles, no airplanes, no steamships, no electric light and power, no chemical industry, just as the ancient Greeks and Romans, with all their genius, were without these things. It suffices merely to mention this for everyone to realize that even the former masters of slaves or serfs have every reason to be satisfied with the course of events after the abolition of involuntary servitude. The European worker today lives under more favorable and more agreeable outward circumstances than the pharaoh of Egypt once did, in spite of the fact that the pharaoh commanded thousands of slaves, while the worker has nothing to depend on but the strength and skill of his hands. If a nabob of yore could be placed in the circumstances in which a common man lives today, he would declare without hesitation that his life had been a beggarly one in comparison with the life that even a man of moderate means can lead at present.

  This is the fruit of free labor. It is able to create more wealth for everyone than slave labor once provided for the masters.

  3

  Peace

  There are high-minded men who detest war because it brings death and suffering. However much one may admire their humanitarianism, their argument against war, in being based on philanthropic grounds, seems to lose much or all of its force when we consider the statements of the supporters and proponents of war. The latter by no means deny that war brings with it pain and sorrow. Nevertheless, they believe it is through war and war alone that mankind is able to make progress. War is the father of all things, said a Greek philosopher, and thousands have repeated it after him. Man degenerates in time of peace. Only war awakens in him slumbering talents and powers and imbues him with sublime ideals. If war were to be abolished, mankind would decay into indolence and stagnation.

  It is difficult or even impossible to refute this line of reasoning on the part of the advocates of war if the only objection to war that one can think of is that it demands sacrifices. For the proponents of war are of the opinion that these sacrifices are not made in vain and that they are well worth making. If it were really true that war is the father of all things, then the human sacrifices it requires would be necessary to further the general welfare and the progress of humanity. One might lament the sacrifices, one might even strive to reduce their number, but one would not be warranted in wanting to abolish war and to bring about eternal peace.

  The liberal critique of the argument in favor of war is fundamentally different from that of the humanitarians. It starts from the premise that not war, but peace, is the father of all things. What alone enables mankind to advance and distinguishes man from the animals is social cooperation. It is labor alone that is productive: it creates wealth and therewith lays the outward foundations for the inward flowering of man. War only destroys; it cannot create. War, carnage, destruction, and devastation we have in common with the predatory beasts of the jungle; constructive labor is our distinctively human characteristic. The liberal abhors war, not, like the humanitarian, in spite of the fact that it has beneficial consequences, but because it has only harmful ones.

  The peace-loving humanitarian approaches the mighty potentate and addresses him thus: “Do not make war, even though you have the prospect of furthering your own welfare by a victory. Be noble and magnanimous and renounce the tempting victory even if it means a sacrifice for you and the loss of an advantage.” The liberal thinks otherwise. He is convinced that victorious war is an evil even for the victor, that peace is always better than war. He demands no sacrifice from the stronger, but only that he should come to realize where his true interests lie and should learn to understand that peace is for him, the stronger, just as advantageous as it is for the weaker.

  When a peace-loving nation is attacked by a bellicose enemy, it must offer resistance and do everything to ward off the onslaught. Heroic deeds performed in such a war by those fighting for their freedom and their lives are entirely praiseworthy, and one rightly extols the manliness and courage of such fighters. Here daring, intrepidity, and contempt for death are praiseworthy because they are in the service of a good end. But people have made the mistake of representing these soldierly virtues as absolute virtues, as qualities good in and for themselves, without consideration of the end they serve. Whoever holds this opinion must, to be consistent, likewise acknowledge as noble virtues the daring, intrepidity, and contempt for death of the robber. In fact, however, there is nothing good or bad in and of itself. Human actions become good or bad only through the end that they serve and the consequences they entail. Even Leonidas would not be worthy of the esteem in which we hold him if he had fallen, not as the defender of his homeland, but as the leader of an invading army intent on robbing a peaceful people of its freedom and possessions.

  How harmful war is to the development of human civilization becomes clearly apparent once one understands the advantages derived from the division of labor. The division of labor turns the self-sufficient individual into the ζῷον πολιτιϗόν [political animal] dependent on his fellow men, the social animal of which Aristotle spoke. Hostilities between one animal and another, or between one savage and another, in no way alter the economic basis of their existence. The matter is quite different when a quarrel that has to be decided by an appeal to arms breaks out among the members of a community in which labor is divided. In such a society each individual has a specialized function; no one is any longer in a position to live independently, because all have need of one another’s aid and support. Self-sufficient farmers, who produce on their own farms everything that they and their families need, can make war on one another. But when a village divides into factions, with the smith on one side and the shoemaker on the other, one faction will have to suffer from want of shoes, and the other from want of tools and weapons. Civil war destroys the division of labor inasmuch as it compels each group to content itself with the labor of its own adherents.

  If the possibility of such hostilities had been considered likely in the first place, the division of labor would never have been allowed to develop to the point where, in case a fight really did break out, one would have to suffer privation. The progressive intensification of the division of labor is possible only in a society in which there is an assurance of lasting peace. Only under the shelter of such security can the division of labor develop. In the absence of this prerequisite, the division of labor does not extend beyond the limits of the village or even of the individual household. The division of labor between town and country—with the peasants of the surrounding villages furnishing grain, cattle, milk, and butter to the town in exchange for the manufactured products of the townsfolk—already presupposes that peace is assured at least within the region in question. If the division of labor is to embrace a whole nation, civil war must lie outside the realm of possibility; if it is to encompass the whole world, lasting peace among nations must be assured.

  Everyone today would regard it as utterly senseless for a modern metropolis like London or Berlin to prepare to make war on the inhabitants of the adjacent countryside. Yet for many centuries the towns of Europe kept this possibility in mind and made economic provision for it. There were towns whose fortifications were, from the very beginning, so constructed that in case of need they could hold out for a while by keeping cattle and growing grain within the town walls.

  At the beginning of the nineteenth century by far the greater part of the inhabited world was still divided into a number of economic regions that were, by and large, self-sufficient. Even in the more highly developed areas of Europe, the needs of a region were met, for the most part, by the production of the region itself. Trade that went beyond the narrow confines of the immediate vicinity was relatively insignificant and comprised, by and large, only such commodities as could not be produced in the area itself because of climatic conditions. In by far the greater part of the world, however, the production of the village itself supplied almost all the needs of its inhabitants. For these villagers, a disturbance in trade relations caused by war did not generally mean any impairment of their economic well-being. But even the inhabitants of the more advanced countries of Europe did not suffer very severely in time of war. If the Continental System, which Napoleon I imposed on Europe in order to exclude from the continent English goods and those coming from across the ocean only by way of England, had been enforced even more rigorously than it was, it would have still inflicted on the inhabitants of the continent hardly any appreciable privations. They would, of course, have had to do without coffee and sugar, cotton and cotton goods, spices, and many rare kinds of wood; but all these things then played only a subordinate role in the households of the great masses.

  The development of a complex network of international economic relations is a product of nineteenth-century liberalism and capitalism. They alone made possible the extensive specialization of modern production with its concomitant improvement in technology. In order to provide the family of an English worker with all it consumes and desires, every nation of the five continents cooperates. Tea for the breakfast table is provided by Japan or Ceylon, coffee by Brazil or Java, sugar by the West Indies, meat by Australia or Argentina, cotton from America or Egypt, hides for leather from India or Russia, and so on. And in exchange for these things, English goods go to all parts of the world, to the most remote and out-of-the-way villages and farmsteads. This development was possible and conceivable only because, with the triumph of liberal principles, people no longer took seriously the idea that a great war could ever again break out. In the golden age of liberalism, war among members of the white race was generally considered a thing of the past.

  But events have turned out quite differently. Liberal ideas and programs were supplanted by socialism, nationalism, protectionism, imperialism, etatism, and militarism. Whereas Kant and Von Humboldt, Bentham and Cobden had sung the praises of eternal peace, the spokesmen of a later age never tired of extolling war, both civil and international. And their success came only all too soon. The result was the World War, which has given our age a kind of object lesson on the incompatibility between war and the division of labor.

  4

  Equality

  Nowhere is the difference between the reasoning of the older liberalism and that of neoliberalism clearer and easier to demonstrate than in their treatment of the problem of equality. The liberals of the eighteenth century, guided by the ideas of natural law and of the Enlightenment, demanded for everyone equality of political and civil rights because they assumed that all men are equal. God created all men equal, endowing them with fundamentally the same capabilities and talents, breathing into all of them the breath of His spirit. All distinctions between men are only artificial, the product of social, human—that is to say, transitory—institutions. What is imperishable in man—his spirit—is undoubtedly the same in rich and poor, noble and commoner, white and colored.

  Nothing, however, is as ill-founded as the assertion of the alleged equality of all members of the human race. Men are altogether unequal. Even between brothers there exist the most marked differences in physical and mental attributes. Nature never repeats itself in its creations; it produces nothing by the dozen, nor are its products standardized. Each man who leaves her workshop bears the imprint of the individual, the unique, the never-to-recur. Men are not equal, and the demand for equality under the law can by no means be grounded in the contention that equal treatment is due to equals.

  There are two distinct reasons why all men should receive equal treatment under the law. One was already mentioned when we analyzed the objections to involuntary servitude. In order for human labor to realize its highest attainable productivity, the worker must be free, because only the free worker, enjoying in the form of wages the fruits of his own industry, will exert himself to the full. The second consideration in favor of the equality of all men under the law is the maintenance of social peace. It has already been pointed out that every disturbance of the peaceful development of the division of labor must be avoided. But it is well-nigh impossible to preserve lasting peace in a society in which the rights and duties of the respective classes are different. Whoever denies rights to a part of the population must always be prepared for a united attack by the disenfranchised on the privileged. Class privileges must disappear so that the conflict over them may cease.

  It is therefore quite unjustifiable to find fault with the manner in which liberalism put into effect its postulate of equality, on the ground that what it created was only equality before the law, and not real equality. All human power would be insufficient to make men really equal. Men are and will always remain unequal. It is sober considerations of utility such as those we have here presented that constitute the argument in favor of the equality of all men under the law. Liberalism never aimed at anything more than this, nor could it ask for anything more. It is beyond human power to make a Negro white. But the Negro can be granted the same rights as the white man and thereby offered the possibility of earning as much if he produces as much.

  But, the socialists say, it is not enough to make men equal before the law. In order to make them really equal, one must also allot them the same income. It is not enough to abolish privileges of birth and of rank. One must finish the job and do away with the greatest and most important privilege of all, namely, that which is accorded by private property. Only then will the liberal program be completely realized, and a consistent liberalism thus leads ultimately to socialism, to the abolition of private ownership of the means of production.

  Privilege is an institutional arrangement favoring some individuals or a certain group at the expense of the rest. The privilege exists, although it harms some—perhaps the majority—and benefits no one except those for whose advantage it was created. In the feudal order of the Middle Ages certain lords had the hereditary right to hold a judgeship. They were judges because they had inherited the position, regardless of whether they possessed the abilities and qualities of character that fit a man to be a judge. In their eyes this office was nothing more than a lucrative source of income. Here judgeship was the privilege of a class of noble birth.

  If, however, as in modern states, judges are always drawn from the circle of those with legal knowledge and experience, this does not constitute a privilege in favor of lawyers. Preference is given to lawyers, not for their sake, but for the sake of the public welfare, because people are generally of the opinion that a knowledge of jurisprudence is an indispensable prerequisite for holding a judgeship. The question whether a certain institutional arrangement is or is not to be regarded as a privilege granted to a certain group, class, or person is not to be decided by whether or not it is advantageous to that group, class, or person, but according to how beneficial to the general public it is considered to be. The fact that on a ship at sea one man is captain and the rest constitute his crew and are subject to his command is certainly an advantage for the captain. Nevertheless, it is not a privilege of the captain if he possesses the ability to steer the ship between reefs in a storm and thereby to be of service not only to himself, but to the whole crew.

  In order to determine whether an institutional arrangement is to be regarded as the special privilege of an individual or of a class, the question one should ask is not whether it benefits this or that individual or class, but only whether it is beneficial to the general public. If we reach the conclusion that only private ownership of the means of production makes possible the prosperous development of human society, it is clear that this is tantamount to saying that private property is not a privilege of the property owner, but a social institution for the good and benefit of all, even though it may at the same time be especially agreeable and advantageous to some.

  It is not on behalf of property owners that liberalism favors the preservation of the institution of private property. It is not because the abolition of that institution would violate property rights that the liberals want to preserve it. If they considered the abolition of the institution of private property to be in the general interest, they would advocate that it be abolished, no matter how prejudicial such a policy might be to the interests of property owners. However, the preservation of that institution is in the interest of all strata of society. Even the poor man, who can call nothing his own, lives incomparably better in our society than he would in one that would prove incapable of producing even a fraction of what is produced in our own.

  5

  The Inequality of Wealth and Income

  What is most criticized in our social order is the inequality in the distribution of wealth and income. There are rich and poor; there are very rich and very poor. The way out is not far to seek: the equal distribution of all wealth.

  The first objection to this proposal is that it will not help the situation much because those of moderate means far outnumber the rich, so that each individual could expect from such a distribution only a quite insignificant increment in his standard of living. This is certainly correct, but the argument is not complete. Those who advocate equality of income distribution overlook the most important point, namely, that the total available for distribution, the annual product of social labor, is not independent of the manner in which it is divided. The fact that that product today is as great as it is, is not a natural or technological phenomenon independent of all social conditions, but entirely the result of our social institutions. Only because inequality of wealth is possible in our social order, only because it stimulates everyone to produce as much as he can and at the lowest cost, does mankind today have at its disposal the total annual wealth now available for consumption. Were this incentive to be destroyed, productivity would be so greatly reduced that the portion that an equal distribution would allot to each individual would be far less than what even the poorest receives today.

  The inequality of income distribution has, however, still a second function quite as important as the one already mentioned: it makes possible the luxury of the rich.

  Many foolish things have been said and written about luxury. Against luxury consumption it has been objected that it is unjust that some should enjoy great abundance while others are in want. This argument seems to have some merit. But it only seems so. For if it can be shown that luxury consumption performs a useful function in the system of social cooperation, then the argument will be proved invalid. This, however, is what we shall seek to demonstrate.

  Our defense of luxury consumption is not, of course, the argument that one occasionally hears, that is, that it spreads money among the people. If the rich did not indulge themselves in luxuries, it is said, the poor would have no income. This is simply nonsense. For if there were no luxury consumption, the capital and labor that would otherwise have been applied to the production of luxury goods would produce other goods: articles of mass consumption, necessary articles, instead of “superfluous” ones.

  To form a correct conception of the social significance of luxury consumption, one must first of all realize that the concept of luxury is an altogether relative one. Luxury consists in a way of living that stands in sharp contrast to that of the great mass of one’s contemporaries. The conception of luxury is, therefore, essentially historical. Many things that seem to us necessities today were once considered as luxuries. When, in the Middle Ages, an aristocratic Byzantine lady who had married a Venetian doge made use of a golden implement, which could be called the forerunner of the fork as we know it today, instead of her fingers, in eating her meals, the Venetians looked on this as a godless luxury, and they thought it only just when the lady was stricken with a dreadful disease; this must be, they supposed, the well-merited punishment of God for such unnatural extravagance. Two or three generations ago even in England an indoor bathroom was considered a luxury; today the home of every English worker of the better type contains one. Thirty-five years ago there were no automobiles; twenty years ago the possession of such a vehicle was the sign of a particularly luxurious mode of living; today in the United States even the worker has his Ford. This is the course of economic history. The luxury of today is the necessity of tomorrow. Every advance first comes into being as the luxury of a few rich people, only to become, after a time, the indispensable necessity taken for granted by everyone. Luxury consumption provides industry with the stimulus to discover and introduce new things. It is one of the dynamic factors in our economy. To it we owe the progressive innovations by which the standard of living of all strata of the population has been gradually raised.

  Most of us have no sympathy with the rich idler who spends his life in pleasure without ever doing any work. But even he fulfills a function in the life of the social organism. He sets an example of luxury that awakens in the multitude a consciousness of new needs and gives industry the incentive to fulfill them. There was a time when only the rich could afford the luxury of visiting foreign countries. Schiller never saw the Swiss mountains, which he celebrated in Wilhelm Tell, although they bordered on his Swabian homeland. Goethe saw neither Paris nor Vienna nor London. Today, however, hundreds of thousands travel, and soon millions will do so.

  6

  Private Property and Ethics

  In seeking to demonstrate the social function and necessity of private ownership of the means of production and of the concomitant inequality in the distribution of income and wealth, we are at the same time providing proof of the moral justification for private property and for the capitalist social order based upon it.

  Morality consists in the regard for the necessary requirements of social existence that must be demanded of each individual member of society. A man living in isolation has no moral rules to follow. He need have no qualms about doing anything he finds it to his advantage to do, for he does not have to consider whether he is not thereby injuring others. But as a member of society, a man must take into consideration, in everything he does, not only his own immediate advantage, but also the necessity, in every action, of affirming society as such. For the life of the individual in society is possible only by virtue of social cooperation, and every individual would be most seriously harmed if the social organization of life and of production were to break down. In requiring of the individual that he should take society into consideration in all his actions, that he should forgo an action that, while advantageous to him, would be detrimental to social life, society does not demand that he sacrifice himself to the interests of others. For the sacrifice that it imposes is only a provisional one: the renunciation of an immediate and relatively minor advantage in exchange for a much greater ultimate benefit. The continued existence of society as the association of persons working in cooperation and sharing a common way of life is in the interest of every individual. Whoever gives up a momentary advantage in order to avoid imperiling the continued existence of society is sacrificing a lesser gain for a greater one.

  The meaning of this regard for the general social interest has frequently been misunderstood. Its moral value was believed to consist in the fact of the sacrifice itself, in the renunciation of an immediate gratification. One refused to see that what is morally valuable is not the sacrifice, but the end served by the sacrifice, and one insisted on ascribing moral value to sacrifice, to renunciation, in and for itself alone. But sacrificing is moral only when it serves a moral end. There is a world of difference between a man who risks his life and property for a good cause and the man who sacrifices them without benefiting society in any way.

  Everything that serves to preserve the social order is moral; everything that is detrimental to it is immoral. Accordingly, when we reach the conclusion that an institution is beneficial to society, one can no longer object that it is immoral. There may possibly be a difference of opinion about whether a particular institution is socially beneficial or harmful. But once it has been judged beneficial, one can no longer contend that, for some inexplicable reason, it must be condemned as immoral.

  7

  State and Government

  The observance of the moral law is in the ultimate interest of every individual, because everyone benefits from the preservation of social cooperation; yet it imposes on everyone a sacrifice, even though only a provisional one that is more than counterbalanced by a greater gain. To perceive this, however, requires a certain insight into the connection between things, and to conform one’s actions in accordance with this perception demands a certain strength of will. Those who lack the perception, or, having the perception, lack the necessary will power to put it to use, are not able to conform to the moral law voluntarily. The situation here is no different from that involved in the observance of the rules of hygiene that the individual ought to follow in the interest of his own well-being. Someone may give himself over to unwholesome dissipation, such as indulgence in narcotics, whether because he does not know the consequences, or because he considers them less disadvantageous than the renunciation of the momentary pleasure, or because he lacks the requisite will power to adjust his behavior to his knowledge. There are people who consider that society is justified in resorting to coercive measures to set such a person on the right path and to correct anyone whose heedless actions imperil his own life and health. They advocate that alcoholics and drug addicts be forcibly deterred from indulging their vices and compelled to protect their good health.

  The question whether compulsion really answers the purpose in such cases we shall reserve for later consideration. What concerns us here is something quite different, namely, the question whether people whose actions endanger the continued existence of society should be compelled to refrain from doing so. The alcoholic and the drug addict harm only themselves by their behavior; the person who violates the rules of morality governing man’s life in society harms not only himself, but everyone. Life in society would be quite impossible if the people who desire its continued existence and who conduct themselves accordingly had to forgo the use of force and compulsion against those who are prepared to undermine society by their behavior. A small number of antisocial individuals, i.e., persons who are not willing or able to make the temporary sacrifices that society demands of them, could make all society impossible. Without the application of compulsion and coercion against the enemies of society, there could not be any life in society.

  We call the social apparatus of compulsion and coercion that induces people to abide by the rules of life in society, the state; the rules according to which the state proceeds, law; and the organs charged with the responsibility of administering the apparatus of compulsion, government.

  There is, to be sure, a sect that believes that one could quite safely dispense with every form of compulsion and base society entirely on the voluntary observance of the moral code. The anarchists consider state, law, and government as superfluous institutions in a social order that would really serve the good of all, and not just the special interests of a privileged few. Only because the present social order is based on private ownership of the means of production is it necessary to resort to compulsion and coercion in its defense. If private property were abolished, then everyone, without exception, would spontaneously observe the rules demanded by social cooperation.

  It has already been pointed out that this doctrine is mistaken in so far as it concerns the character of private ownership of the means of production. But even apart from this, it is altogether untenable. The anarchist, rightly enough, does not deny that every form of human cooperation in a society based on the division of labor demands the observance of some rules of conduct that are not always agreeable to the individual, since they impose on him a sacrifice, only temporary, it is true, but, for all that, at least for the moment, painful. But the anarchist is mistaken in assuming that everyone, without exception, will be willing to observe these rules voluntarily. There are dyspeptics who, though they know very well that indulgence in a certain food will, after a short time, cause them severe, even scarcely bearable pains, are nevertheless unable to forgo the enjoyment of the delectable dish. Now the interrelationships of life in society are not as easy to trace as the physiological effects of a food, nor do the consequences follow so quickly and, above all, so palpably for the evildoer. Can it, then, be assumed, without falling completely into absurdity, that, in spite of all this, every individual in an anarchist society will have greater foresight and will power than a gluttonous dyspeptic? In an anarchist society is the possibility entirely to be excluded that someone may negligently throw away a lighted match and start a fire or, in a fit of anger, jealousy, or revenge, inflict injury on his fellow man? Anarchism misunderstands the real nature of man. It would be practicable only in a world of angels and saints.

  Liberalism is not anarchism, nor has it anything whatsoever to do with anarchism. The liberal understands quite clearly that without resort to compulsion, the existence of society would be endangered and that behind the rules of conduct whose observance is necessary to assure peaceful human cooperation must stand the threat of force if the whole edifice of society is not to be continually at the mercy of any one of its members. One must be in a position to compel the person who will not respect the lives, health, personal freedom, or private property of others to acquiesce in the rules of life in society. This is the function that the liberal doctrine assigns to the state: the protection of property, liberty, and peace.

  The German socialist, Ferdinand Lassalle, tried to make the conception of a government limited exclusively to this sphere appear ridiculous by calling the state constituted on the basis of liberal principles the “night-watchman state.” But it is difficult to see why the night-watchman state should be any more ridiculous or worse than the state that concerns itself with the preparation of sauerkraut, with the manufacture of trouser buttons, or with the publication of newspapers. In order to understand the impression that Lassalle was seeking to create with this witticism, one must keep in mind that the Germans of his time had not yet forgotten the state of the monarchical despots, with its vast multiplicity of administrative and regulatory functions, and that they were still very much under the influence of the philosophy of Hegel, which had elevated the state to the position of a divine entity. If one looked upon the state, with Hegel, as “the self-conscious moral substance,” as the “Universal in and for itself, the rationality of the will,” then, of course, one had to view as blasphemous any attempt to limit the function of the state to that of serving as a night watchman.

  It is only thus that one can understand how it was possible for people to go so far as to reproach liberalism for its “hostility” or enmity towards the state. If I am of the opinion that it is inexpedient to assign to the government the task of operating railroads, hotels, or mines, I am not an “enemy of the state” any more than I can be called an enemy of sulphuric acid because I am of the opinion that, useful though it may be for many purposes, it is not suitable either for drinking or for washing one’s hands.

  It is incorrect to represent the attitude of liberalism toward the state by saying that it wishes to restrict the latter’s sphere of possible activity or that it abhors, in principle, all activity on the part of the state in relation to economic life. Such an interpretation is altogether out of the question. The stand that liberalism takes in regard to the problem of the function of the state is the necessary consequence of its advocacy of private ownership of the means of production. If one is in favor of the latter, one cannot, of course, also be in favor of communal ownership of the means of production, i.e., of placing them at the disposition of the government rather than of individual owners. Thus, the advocacy of private ownership of the means of production already implies a very severe circumscription of the functions assigned to the state.

  The socialists are sometimes wont to reproach liberalism with a lack of consistency. It is, they maintain, illogical to restrict the activity of the state in the economic sphere exclusively to the protection of property. It is difficult to see why, if the state is not to remain completely neutral, its intervention has to be limited to protecting the rights of property owners.

  This reproach would be justified only if the opposition of liberalism to all governmental activity in the economic sphere going beyond the protection of property stemmed from an aversion in principle against any activity on the part of the state. But that is by no means the case. The reason why liberalism opposes a further extension of the sphere of governmental activity is precisely that this would, in effect, abolish private ownership of the means of production. And in private property the liberal sees the principle most suitable for the organization of man’s life in society.

  8

  Democracy

  Liberalism is therefore far from disputing the necessity of a machinery of state, a system of law, and a government. It is a grave misunderstanding to associate it in any way with the idea of anarchism. For the liberal, the state is an absolute necessity, since the most important tasks are incumbent upon it: the protection not only of private property, but also of peace, for in the absence of the latter the full benefits of private property cannot be reaped.

  These considerations alone suffice to determine the conditions that a state must fulfill in order to correspond to the liberal ideal. It must not only be able to protect private property; it must also be so constituted that the smooth and peaceful course of its development is never interrupted by civil wars, revolutions, or insurrections.

  Many people are still haunted by the idea, which dates back to the preliberal era, that a certain nobility and dignity attaches to the exercise of governmental functions. Up to very recently public officials in Germany enjoyed, and indeed still enjoy even today, a prestige that has made the most highly respected career that of a civil servant. The social esteem in which a young “assessor”* or lieutenant is held far exceeds that of a businessman or an attorney grown old in honest labor. Writers, scholars, and artists whose fame and glory have spread far beyond Germany enjoy in their own homeland only the respect corresponding to the often rather modest rank they occupied in the bureaucratic hierarchy.

  There is no rational basis for this overestimation of the activities carried on in the offices of the administrative authorities. It is a form of atavism, a vestige from the days when the burgher had to fear the prince and his knights because at any moment he might be spoliated by them. In itself it is no finer, nobler, or more honorable to spend one’s days in a government office filling out documents than, for example, to work in the blueprint room of a machine factory. The tax collector has no more distinguished an occupation than those who are engaged in creating wealth directly, a part of which is skimmed off in the form of taxes to defray the expenses of the apparatus of government.

  This notion of the special distinction and dignity attaching to the exercise of all the functions of government is what constitutes the basis of the pseudodemocratic theory of the state. According to this doctrine, it is shameful for anyone to allow himself to be ruled by others. Its ideal is a constitution in which the whole people rules and governs. This, of course, never has been, never can be, and never will be possible, not even under the conditions prevailing in a small state. It was once thought that this ideal had been realized in the Greek city-states of antiquity and in the small cantons of the Swiss mountains. This too was a mistake. In Greece only a part of the populace, the free citizens, had any share in the government; the metics and slaves had none. In the Swiss cantons only certain matters of a purely local character were and still are settled on the constitutional principle of direct democracy; all affairs transcending these narrow territorial bounds are managed by the Federation, whose government by no means corresponds to the ideal of direct democracy.

  It is not at all shameful for a man to allow himself to be ruled by others. Government and administration, the enforcement of police regulations and similar ordinances, also require specialists: professional civil servants and professional politicians. The principle of the division of labor does not stop short even of the functions of government. One cannot be an engineer and a policeman at the same time. It in no way detracts from my dignity, my well-being, or my freedom that I am not myself a policeman. It is no more undemocratic for a few people to have the responsibility of providing protection for everyone else than it is for a few people to undertake to produce shoes for everyone else. There is not the slightest reason to object to professional politicians and professional civil servants if the institutions of the state are democratic. But democracy is something entirely different from what the romantic visionaries who prattle about direct democracy imagine.

  Government by a handful of people—and the rulers are always as much in the minority as against those ruled as the producers of shoes are as against the consumers of shoes—depends on the consent of the governed, i.e., on their acceptance of the existing administration. They may see it only as the lesser evil, or as an unavoidable evil, yet they must be of the opinion that a change in the existing situation would have no purpose. But once the majority of the governed becomes convinced that it is necessary and possible to change the form of government and to replace the old regime and the old personnel with a new regime and new personnel, the days of the former are numbered. The majority will have the power to carry out its wishes by force even against the will of the old regime. In the long run no government can maintain itself in power if it does not have public opinion behind it, i.e., if those governed are not convinced that the government is good. The force to which the government resorts in order to make refractory spirits compliant can be successfully applied only as long as the majority does not stand solidly in opposition.

  There is, therefore, in every form of polity a means for making the government at least ultimately dependent on the will of the governed, viz., civil war, revolution, insurrection. But it is just this expedient that liberalism wants to avoid. There can be no lasting economic improvement if the peaceful course of affairs is continually interrupted by internal struggles. A political situation such as existed in England at the time of the Wars of the Roses would plunge modern England in a few years into the deepest and most dreadful misery. The present level of economic development would never have been attained if no solution had been found to the problem of preventing the continual outbreak of civil wars. A fratricidal struggle like the French Revolution of 1789 cost a heavy loss in life and property. Our present economy could no longer endure such convulsions. The population of a modern metropolis would have to suffer so frightfully from a revolutionary uprising that could bar the importation of food and coal and cut off the flow of electricity, gas, and water that even the fear that such disturbances might break out would paralyze the life of the city.

  Here is where the social function performed by democracy finds its point of application. Democracy is that form of political constitution which makes possible the adaptation of the government to the wishes of the governed without violent struggles. If in a democratic state the government is no longer being conducted as the majority of the population would have it, no civil war is necessary to put into office those who are willing to work to suit the majority. By means of elections and parliamentary arrangements, the change of government is executed smoothly and without friction, violence, or bloodshed.

  9

  Critique of the Doctrine of Force

  The champions of democracy in the eighteenth century argued that only monarchs and their ministers are morally depraved, injudicious, and evil. The people, however, are altogether good, pure, and noble, and have, besides, the intellectual gifts needed in order always to know and to do what is right. This is, of course, all nonsense, no less so than the flattery of the courtiers who ascribed all good and noble qualities to their princes. The people are the sum of all individual citizens; and if some individuals are not intelligent and noble, then neither are all together.

  Since mankind entered the age of democracy with such high-flown expectations, it is not surprising that disillusionment should soon have set in. It was quickly discovered that the democracies committed at least as many errors as the monarchies and aristocracies had. The comparison that people drew between the men whom the democracies placed at the head of the government and those whom the emperors and kings, in the exercise of their absolute power, had elevated to that position, proved by no means favorable to the new wielders of power. The French are wont to speak of “killing with ridicule.” And indeed, the statesmen representative of democracy soon rendered it everywhere ridiculous. Those of the old regime had displayed a certain aristocratic dignity, at least in their outward demeanor. The new ones, who replaced them, made themselves contemptible by their behavior. Nothing has done more harm to democracy in Germany and Austria than the hollow arrogance and impudent vanity with which the Social-Democratic leaders who rose to power after the collapse of the empire conducted themselves.

  Thus, wherever democracy triumphed, an antidemocratic doctrine soon arose in fundamental opposition to it. There is no sense, it was said, in allowing the majority to rule. The best ought to govern, even if they are in the minority. This seems so obvious that the supporters of antidemocratic movements of all kinds have steadily increased in number. The more contemptible the men whom democracy has placed at the top have proved themselves to be, the greater has grown the number of the enemies of democracy.

  There are, however, serious fallacies in the antidemocratic doctrine. What, after all, does it mean to speak of “the best man” or “the best men”? The Republic of Poland placed a piano virtuoso* at its head because it considered him the best Pole of the age. But the qualities that the leader of a state must have are very different from those of a musician. The opponents of democracy, when they use the expression “the best,” can mean nothing else than the man or the men best fitted to conduct the affairs of the government, even if they understand little or nothing of music. But this leads to the same political question: Who is the best fitted? Was it Disraeli or Gladstone? The Tory saw the best man in the former; the Whig, in the latter. Who should decide this if not the majority?

  And so we reach the decisive point of all antidemocratic doctrines, whether advanced by the descendants of the old aristocracy and the supporters of hereditary monarchy, or by the syndicalists, Bolsheviks, and socialists, viz., the doctrine of force. The opponents of democracy champion the right of a minority to seize control of the state by force and to rule over the majority. The moral justification of this procedure consists, it is thought, precisely in the power actually to seize the reins of government. One recognizes the best, those who alone are competent to govern and command, by virtue of their demonstrated ability to impose their rule on the majority against its will. Here the teaching of l’Action Française coincides with that of the syndicalists, and the doctrine of Ludendorff and Hitler, with that of Lenin and Trotsky.

  Many arguments can be urged for and against these doctrines, depending on one’s religious and philosophical convictions, about which any agreement is scarcely to be expected. This is not the place to present and discuss the arguments pro and con, for they are not conclusive. The only consideration that can be decisive is one that bases itself on the fundamental argument in favor of democracy.

  If every group that believes itself capable of imposing its rule on the rest is to be entitled to undertake the attempt, we must be prepared for an uninterrupted series of civil wars. But such a state of affairs is incompatible with the stage of the division of labor that we have reached today. Modern society, based as it is on the division of labor, can be preserved only under conditions of lasting peace. If we had to prepare for the possibility of continual civil wars and internal struggles, we should have to retrogress to such a primitive stage of the division of labor that each province at least, if not each village, would become virtually autarkic, i.e., capable of feeding and maintaining itself for a time as a self-sufficient economic entity without importing anything from the outside. This would mean such an enormous decline in the productivity of labor that the earth could feed only a fraction of the population that it supports today. The antidemocratic ideal leads to the kind of economic order known to the Middle Ages and antiquity. Every city, every village, indeed, every individual dwelling was fortified and equipped for defense, and every province was as independent of the rest of the world as possible in its provision of commodities.

  The democrat too is of the opinion that the best man ought to rule. But he believes that the fitness of a man or of a group of men to govern is better demonstrated if they succeed in convincing their fellow citizens of their qualifications for that position, so that they are voluntarily entrusted with the conduct of public affairs, than if they resort to force to compel others to acknowledge their claims. Whoever does not succeed in attaining to a position of leadership by virtue of the power of his arguments and the confidence that his person inspires has no reason to complain about the fact that his fellow citizens prefer others to him.

  To be sure, it should not and need not be denied that there is one situation in which the temptation to deviate from the democratic principles of liberalism becomes very great indeed. If judicious men see their nation, or all the nations of the world, on the road to destruction, and if they find it impossible to induce their fellow citizens to heed their counsel, they may be inclined to think it only fair and just to resort to any means whatever, in so far as it is feasible and will lead to the desired goal, in order to save everyone from disaster. Then the idea of a dictatorship of the elite, of a government by the minority maintained in power by force and ruling in the interests of all, may arise and find supporters. But force is never a means of overcoming these difficulties. The tyranny of a minority can never endure unless it succeeds in convincing the majority of the necessity or, at any rate, of the utility, of its rule. But then the minority no longer needs force to maintain itself in power.

  History provides an abundance of striking examples to show that, in the long run, even the most ruthless policy of repression does not suffice to maintain a government in power. To cite but one, the most recent and the best known: when the Bolsheviks seized control in Russia, they were a small minority, and their program found scant support among the great masses of their countrymen. For the peasantry, who constitute the bulk of the Russian people, would have nothing to do with the Bolshevik policy of farm collectivization. What they wanted was the division of the land among the “landed poverty,” as the Bolsheviks call this part of the population. And it was this program of the peasantry, not that of the Marxist leaders, which was actually put into effect. In order to remain in power, Lenin and Trotsky not only accepted this agrarian reform, but even made it a part of their own program, which they undertook to defend against all attacks, domestic and foreign. Only thus were the Bolsheviks able to win the confidence of the great mass of the Russian people. Since they adopted this policy of land distribution, the Bolsheviks rule no longer against the will of the great mass of the people, but with their consent and support. There were only two possible alternatives open to them: either their program or their control of the government had to be sacrificed. They chose the first and remained in power. The third possibility, to carry out their program by force against the will of the great mass of the people, did not exist at all. Like every determined and well-led minority, the Bolsheviks were able to seize control by force and retain it for a short time. In the long run, however, they would have been no better able to keep it than any other minority. The various attempts of the Whites to dislodge the Bolsheviks all failed because the mass of the Russian people were against them. But even if they had succeeded, the victors too would have had to respect the desires of the overwhelming majority of the population. It would have been impossible for them to alter in any way after the event the already accomplished fact of the land distribution and to restore to the landowners what had been stolen from them.

  Only a group that can count on the consent of the governed can establish a lasting regime. Whoever wants to see the world governed according to his own ideas must strive for dominion over men’s minds. It is impossible, in the long run, to subject men against their will to a regime that they reject. Whoever tries to do so by force will ultimately come to grief, and the struggles provoked by his attempt will do more harm than the worst government based on the consent of the governed could ever do. Men cannot be made happy against their will.

  10

  The Argument of Fascism*

  If liberalism nowhere found complete acceptance, its success in the nineteenth century went so far at least as that some of the most important of its principles were considered beyond dispute. Before 1914, even the most dogged and bitter enemies of liberalism had to resign themselves to allowing many liberal principles to pass unchallenged. Even in Russia, where only a few feeble rays of liberalism had penetrated, the supporters of the Czarist despotism, in persecuting their opponents, still had to take into consideration the liberal opinions of Europe; and during the World War, the war parties in the belligerent nations, with all their zeal, still had to practice a certain moderation in their struggle against internal opposition.

  Only when the Marxist Social Democrats had gained the upper hand and taken power in the belief that the age of liberalism and capitalism had passed forever did the last concessions disappear that it had still been thought necessary to make to the liberal ideology. The parties of the Third International consider any means as permissible if it seems to give promise of helping them in their struggle to achieve their ends. Whoever does not unconditionally acknowledge all their teachings as the only correct ones and stand by them through thick and thin has, in their opinion, incurred the penalty of death; and they do not hesitate to exterminate him and his whole family, infants included, whenever and wherever it is physically possible.

  The frank espousal of a policy of annihilating opponents and the murders committed in the pursuance of it have given rise to an opposition movement. All at once the scales fell from the eyes of the non-Communist enemies of liberalism. Until then they had believed that even in a struggle against a hateful opponent one still had to respect certain liberal principles. They had had, even though reluctantly, to exclude murder and assassination from the list of measures to be resorted to in political struggles. They had had to resign themselves to many limitations in persecuting the opposition press and in suppressing the spoken word. Now, all at once, they saw that opponents had risen up who gave no heed to such considerations and for whom any means was good enough to defeat an adversary. The militaristic and nationalistic enemies of the Third International felt themselves cheated by liberalism. Liberalism, they thought, stayed their hand when they desired to strike a blow against the revolutionary parties while it was still possible to do so. If liberalism had not hindered them, they would, so they believe, have bloodily nipped the revolutionary movements in the bud. Revolutionary ideas had been able to take root and flourish only because of the tolerance they had been accorded by their opponents, whose will power had been enfeebled by a regard for liberal principles that, as events subsequently proved, was overscrupulous. If the idea had occurred to them years ago that it is permissible to crush ruthlessly every revolutionary movement, the victories that the Third International has won since 1917 would never have been possible. For the militarists and nationalists believe that when it comes to shooting and fighting, they themselves are the most accurate marksmen and the most adroit fighters.

  The fundamental idea of these movements—which, from the name of the most grandiose and tightly disciplined among them, the Italian, may, in general, be designated as Fascist—consists in the proposal to make use of the same unscrupulous methods in the struggle against the Third International as the latter employs against its opponents. The Third International seeks to exterminate its adversaries and their ideas in the same way that the hygienist strives to exterminate a pestilential bacillus; it considers itself in no way bound by the terms of any compact that it may conclude with opponents, and it deems any crime, any lie, and any calumny permissible in carrying on its struggle. The Fascists, at least in principle, profess the same intentions. That they have not yet succeeded as fully as the Russian Bolsheviks in freeing themselves from a certain regard for liberal notions and ideas and traditional ethical precepts is to be attributed solely to the fact that the Fascists carry on their work among nations in which the intellectual and moral heritage of some thousands of years of civilization cannot be destroyed at one blow, and not among the barbarian peoples on both sides of the Urals, whose relationship to civilization has never been any other than that of marauding denizens of forest and desert accustomed to engage, from time to time, in predatory raids on civilized lands in the hunt for booty. Because of this difference, Fascism will never succeed as completely as Russian Bolshevism in freeing itself from the power of liberal ideas. Only under the fresh impression of the murders and atrocities perpetrated by the supporters of the Soviets were Germans and Italians able to block out the remembrance of the traditional restraints of justice and morality and find the impulse to bloody counteraction. The deeds of the Fascists and of other parties corresponding to them were emotional reflex actions evoked by indignation at the deeds of the Bolsheviks and Communists. As soon as the first flush of anger had passed, their policy took a more moderate course and will probably become even more so with the passage of time.

  This moderation is the result of the fact that traditional liberal views still continue to have an unconscious influence on the Fascists. But however far this may go, one must not fail to recognize that the conversion of the Rightist parties to the tactics of Fascism shows that the battle against liberalism has resulted in successes that, only a short time ago, would have been considered completely unthinkable. Many people approve of the methods of Fascism, even though its economic program is altogether antiliberal and its policy completely interventionist, because it is far from practicing the senseless and unrestrained destructionism that has stamped the Communists as the arch-enemies of civilization. Still others, in full knowledge of the evil that Fascist economic policy brings with it, view Fascism, in comparison with Bolshevism and Sovietism, as at least the lesser evil. For the majority of its public and secret supporters and admirers, however, its appeal consists precisely in the violence of its methods.

  Now it cannot be denied that the only way one can offer effective resistance to violent assaults is by violence. Against the weapons of the Bolsheviks, weapons must be used in reprisal, and it would be a mistake to display weakness before murderers. No liberal has ever called this into question. What distinguishes liberal from Fascist political tactics is not a difference of opinion in regard to the necessity of using armed force to resist armed attackers, but a difference in the fundamental estimation of the role of violence in a struggle for power. The great danger threatening domestic policy from the side of Fascism lies in its complete faith in the decisive power of violence. In order to assure success, one must be imbued with the will to victory and always proceed violently. This is its highest principle. What happens, however, when one’s opponent, similarly animated by the will to be victorious, acts just as violently? The result must be a battle, a civil war. The ultimate victor to emerge from such conflicts will be the faction strongest in number. In the long run, a minority—even if it is composed of the most capable and energetic—cannot succeed in resisting the majority. The decisive question, therefore, always remains: How does one obtain a majority for one’s own party? This, however, is a purely intellectual matter. It is a victory that can be won only with the weapons of the intellect, never by force. The suppression of all opposition by sheer violence is a most unsuitable way to win adherents to one’s cause. Resort to naked force—that is, without justification in terms of intellectual arguments accepted by public opinion—merely gains new friends for those whom one is thereby trying to combat. In a battle between force and an idea, the latter always prevails.

  Fascism can triumph today because universal indignation at the infamies committed by the socialists and communists has obtained for it the sympathies of wide circles. But when the fresh impression of the crimes of the Bolsheviks has paled, the socialist program will once again exercise its power of attraction on the masses. For Fascism does nothing to combat it except to suppress socialist ideas and to persecute the people who spread them. If it wanted really to combat socialism, it would have to oppose it with ideas. There is, however, only one idea that can be effectively opposed to socialism, viz., that of liberalism.

  It has often been said that nothing furthers a cause more than creating martyrs for it. This is only approximately correct. What strengthens the cause of the persecuted faction is not the martyrdom of its adherents, but the fact that they are being attacked by force, and not by intellectual weapons. Repression by brute forc