Chapter 12 of 26 · Capitalism: A Treatise on Economics by George Reisman
Chapter 9. The Influence of the Division of Labor on the Institutions of Capitalism
CHAPTER 9
THE INFLUENCE OF THE DIVISION OF LABOR ON THE
INSTITUTIONS OF CAPITALISM
PART A
PRIVATE OWNERSHIP OF THE
MEANS OF PRODUCTION
1. The General Benefit from Private Ownership of the Means of Production
T he influence of the division of labor on the institution of private ownership of the means of production is almost universally ignored. Typically, people think of privately owned means of production in terms that would be appropriate only in a non-division-oflabor society. That is, they think of them in the same way that they think of privately owned consumers’ goods—namely, as being of benefit only to their owners. They believe that before the nonowners can benefit from the means of production, they must first become owners. 1
This belief underlies the popularity of all forms of “redistributionism” and socialism. 2 People believe that so long as wealth remains concentrated in the hands of a relatively small number of capitalists, the capitalists alone benefit from it. For the great mass of noncapitalists to benefit, it is believed, the wealth of the capitalists must first be taken away and given to the noncapitalists, or be held by the government and used for the collective good of all.
Closely related to these ideas, of course, is the belief—held virtually as a self-evident axiom—that capitalism is a system which operates only in the interests of the capitalists, and that the defenders of capitalism must therefore either be capitalists themselves or be in the pay of the capitalists, or else simply be perverse enemies of the great majority of mankind. So deeply rooted are such convictions that it is often thought to be a sufficient refutation of the arguments of an advocate of capitalism to intimate the size of his bank balance or stockholdings. 3
Similarly, in reporting election results, the news media routinely explain voting patterns on the basis of the voters’ wealth and income status. They take it for granted that only wealthy, upper-income voters will favor “conservative,” i.e., procapitalist policies, and that poorer, lower-income voters will automatically favor “liberal,” i.e., anticapitalist policies.
Even the alleged friends of capitalism often share the conviction that private ownership of the means of production and capitalism serve only the capitalists: very often their notion of how to fight the spread of communism is first to create more capitalists. Only then, they believe, will there be a sufficient number of people with an interest in opposing communism.
The Benefit of Capital to the Buyers of Products
The first thing that must be realized is that in a division-of-labor society, all private property that is in the form of means of production—i.e., of capital—serves everyone, nonowners as well as owners. In a division-of-labor society, the means of production are not used in produc—
THE INFLUENCE OF THE DIVISION OF LABOR ON CAPITALISM 297 ing for their owners’ personal consumption, but for the market. They are used in producing goods that are sold. The physical beneficiaries of this private property—and it is the far greater part of the capitalists’ wealth—are all those who buy the products it helps to produce. In other words, it is the general buying public who are the physical beneficiaries of the capitalists’ capital.
Consider, for example, the question of who are the physical beneficiaries of the auto plants of General Motors. That is, who physically receives the products of these plants? Is it the stockholders and bondholders of General Motors? Of course not. The number of GM’s cars that is produced for the capitalists who own GM is relatively insignificant. Almost 100 percent of General Motors’ auto output goes to people who do not own a single share of its stock or a single one of its bonds. The same is true of every other business enterprise.
Indeed, the proportion of General Motors’ auto output that is purchased by stockholders or bondholders of any enterprise—by capitalists of any description—out of the proceeds of profit or interest income, is relatively small when compared with the proportion that is purchased by wage and salary earners. The far greater part of the automobiles purchased from GM and almost all other auto manufacturers is purchased by wage and salary earners. Wages and salaries, not profits and interest, are the source of the overwhelming bulk of consumption expenditure throughout a capitalist economy. It is wage and salary earners who consume the overwhelming majority of the automobiles, television sets, housing, furniture, food, and clothing, and almost every other consumers’ good that is produced.
Thus, the overwhelmingly greater part of the physical benefit derived from the privately owned means of production in a capitalist economic system goes to nonowners of the means of production—to wage and salary earners.
It cannot be stressed too strongly: the simple fact is that in a division-of-labor society, one does not have to own the means of production in order to get their benefit. One has only to be able to buy the products. In a division-of-labor society, one gets the benefit of means of production owned by others—every time one appears in the market as a customer. Indeed, it is of the very essence of a division-of-labor society that one obtains the benefit of others’ means of production, just as one obtains the benefit of others’ labor and knowledge, and that this occurs by means of the purchase of products in the market. It is only in a non-division-oflabor society, in which there is little or no production for the market, in which the producer and the consumer are almost always one and the same person, that privately owned means of production benefit only their owners, or virtually only their owners.
Implicitly, it is such a society that the enemies of capitalism have in mind. They have not yet woken up to the fact that capitalism is a division-of-labor society. They are unaware that in a division-of-labor society, the means of production serve everyone who buys products, and that thus, under capitalism, there is a general benefit from the capital owned by the capitalists—a benefit which everyone shares in his capacity as a buyer of products, even if he himself does not own any means of production or capital.
This general benefit, it should be realized, applies to all of the means of production, not merely to those which are employed in the direct production of consumers’ goods. The benefit of the steel mills that produce the steel that enters into GM’s cars goes to the buyers of the cars, along with the benefit of the auto plants, as does the benefit of the iron mines that contribute to the production of that steel, and the benefit of the factories that produce iron-mining equipment. The benefit of the land that grows wheat goes to the buyers of bread, as does the benefit of the tractors used in the growing of wheat, and the benefit of the factories which produce those tractors, along with the benefit of the flour mills that make the wheat into flour, and of the bakeries that finally turn out the bread.
Furthermore, if we are to acknowledge the truth, we must recognize that the general buying public, composed overwhelmingly of wage and salary earners, not only obtains the benefit of all of the means of production owned by the capitalists, but exercises real and decisive power over the ways in which those means of production are employed. As was shown in Chapter 6 of this book, it is the general buying public which determines, by its pattern of buying and abstention from buying, which products it is profitable to produce and which it is unprofitable to produce. The buying public thus places the capitalists in a position in which, to make profits and avoid losses, they must produce what it wants to buy, and abstain from producing what it does not want to buy. 4 In a division-of-labor, capitalist society, it is ultimately the consumers—composed, it cannot be stated too often, overwhelmingly of wage and salary earners—who determine not only the pattern of production, including the relative size of the various industries, but even the specific methods of production used in every industry. For the demand of the consumers determines the relative prices of the factors of production, such as the wages of skilled versus unskilled labor, or the price of copper versus the price of aluminum, and thus which methods of production are more economical in any given case. 5
The power of the consumers under capitalism is such that businessmen and capitalists are constantly on the
298 CAPITALISM lookout for ways in which they might supply the consumers better. For example, a businessman or capitalist who has invested in a clothing store or clothing factory, in a restaurant, or in the manufacture of breakfast foods, or who is contemplating such an investment, is vitally interested in improving the clothing or the food he sells. He is interested not because he values the satisfaction of others’ needs for its own sake, but because he values his own wealth. The only way to increase his wealth, or prevent the competitive improvements introduced by others from decreasing it, is for him to serve his customers better and more efficiently. This, of course, applies to all branches of production that are privately owned and subject to the freedom of competition. It dictates the behavior not only of producers of consumers’ goods, but also of suppliers at all stages of production, such as those who sell cloth to the clothing factories, and raw material to the factories which make cloth. For the businessmen who sell to consumers seek to buy means of production that will enable them to produce products of the kind the consumers most want, and to do so at the lowest possible costs of production. The suppliers of these businessmen in turn are obliged to purchase means of production that produce products that best satisfy these criteria. The same principle guides the suppliers of these suppliers, and so on through all stages of production. In other words, the whole system operates so as to produce the best possible products for the final buyers, the consumers, and to do so at the lowest possible costs.
Indeed, as we have seen, even without being bidden, businessmen and capitalists are constantly on the lookout to anticipate any unmet needs of the consumers and to supply those needs. For example, let there be a new residential real-estate development somewhere, and profit-seeking businessmen race to provide the new inhabitants with all the stores they may require, from appliance stores to xerography centers. Let there be any need or desire whatever for whose satisfaction a sufficient number of consumers are willing to pay profitable prices, and, as soon as they become aware of it, as soon as they have discovered it by a process of actively searching out its existence, businessmen and capitalists race to meet that need or desire. This, of course, is in sharpest contrast to conditions under socialism, where, in the nature of the case, no incentives exist for the rulers to serve the general public. 6
Thus, under capitalism, privately owned means of production are employed for the benefit of all, nonowners as well as owners. They are employed for the benefit of all who buy the ultimate products of the means of production—the consumers’ goods—which to the far greater extent represents wage and salary earners. And thus it should be clear that capitalism, the system of self-interest, works to the interest of all. It is a system of the harmony of self-interests. It is a system in which each, together with any means of production he may own, serves the self-interest of others who in the meanwhile, together with any means of production they may own, serve his self-interest. It is a system in which the individual, and his means of production, serve the self-interests of all those others who pay for his products or services, whether those others own means of production or not, which preponderantly they do not to any great extent.
The Benefit of Capital to the Sellers of Labor
It is implicit in much of what I have just said, that there are, in fact, two aspects to the general benefit from the existence of the capitalists’ capital. The first of these is the one I have already explained: that of the buyers of products, ultimately consumers’ goods, benefitting from the capital directly or indirectly used in the production of those products. The second is in connection with the fact that capital constantly appears in the market as a demand—expenditure—by the capitalists for means of production, including labor. The capitalists begin their productive activities with outlays of money for labor, materials, and equipment. The revenues they subsequently take in from the sale of the products they produce are then almost entirely reexpended in the form of fresh outlays for labor, materials, and equipment. These outlays of the capitalists for labor are what make possible the purchase of products by noncapitalists. They are the incomes of the wage and salary earners.
Thus, there is a twofold benefit to the nonowners from other people’s private property in the form of means of production—of capital: Namely, it is the source of the supply of what the nonowners buy and of the demand for what the nonowners sell.
It should be obvious that the more economically capitalistic the economic system is, in the sense of the capitalists expending a larger proportion of their sales revenues for means of production and a smaller proportion on their own consumption, the higher will be the income and consumption of wage and salary earners in comparison with the consumption of the capitalists. In other words, the more the capitalists abstain from consumption, in order to accumulate or maintain their capitals, the larger the share of the economic system’s output of consumers’ goods that goes to wage and salary earners, and the smaller the share that goes to capitalists. 7
The Direct Relationship Between the General
Benefit from Capital and Respect for the Property
Rights of Capitalists
There is a conclusion that follows from all this which will appear highly paradoxical to many people, because
THE INFLUENCE OF THE DIVISION OF LABOR ON CAPITALISM 299 it totally contradicts all they have been mistakenly led to believe—by the educational system, by the media, and by our culture in general—but which is nonetheless perfectly logical and correct. That is, the more the private property rights of capitalists are respected, the greater are the benefits to noncapitalists. Because to the extent that their rights are respected, the capitalists are encouraged to save and accumulate capital; their own consumption is small in relation to their capital and grows only as their capital grows. In each year the demand for labor and for capital goods is correspondingly larger—because of the capitalists’ greater saving—and the share of consumers’ goods purchased by wage earners is likewise correspondingly larger.
The profound significance of a greater demand for capital goods relative to consumers’ goods, which results from the capitalists’ security of property and greater saving, for capital accumulation, for the productivity of labor, and thus for real wages will be explained in Chapter 14. 8 The vital significance of a higher degree of capital intensiveness—that is, a higher ratio of accumulated savings and capital to current consumption expenditure—for the ability to implement technological advances, and thus to raise the productivity of labor and real wages, will be explained in Chapters 14 and 17. 9
Also, of course, the more the property rights of the capitalists are respected, the more powerfully do the incentives of profit and loss operate to make the capitalists satisfy the demand of the consumers, because the profits of doing so are correspondingly less diluted by taxation. At the same time, the losses of failing to do so are not offset by reduced tax payments on other profits, since, to the extent that the property rights of the capitalists are respected, there are no tax payments on other profits. Thus losses are experienced with their full impact. Nor, when property rights are respected, are losses compensated for by subsidies of any kind. (The existence of subsidies is incompatible with the property rights of those who are forced to pay taxes to provide them.) In addition, respecting the property rights of the capitalists means leaving them legally free to enter any branch of production they wish. Thus it means the freedom of competition and therefore, in this way too, the full effect of profit and loss incentives in bringing about new and improved products and in improving the methods of producing already existing products and thereby continually reducing costs of production and prices.
Respecting the property rights of capitalists also means not imposing on them arbitrary requirements that raise costs of production and thus prices, such as compulsory bargaining with labor unions, zoning laws, government building codes, regulations for alleged product safety, and the regulations imposed by the ecology movement.
All of these regulations are actually at the expense of the consumers, in that anything which raises costs of production ultimately raises prices. 10 Still worse, as I will show in Chapter 14, all governmentally imposed cost increases and the inefficiencies they represent have a cumulative negative effect on the ability to accumulate capital and thus to raise the productivity of labor and real wages. 11
But what is most important of all in the long run, and subsumes all the other benefits, is that if the capitalists’ property rights are sufficiently respected, then from year to year the total production of consumers’ goods available to everyone tends to grow and thus the purchasing power of everyone’s income tends to rise. In other words, there is not only a general benefit from private ownership of the means of production, but a progressively increasing general benefit. This should be obvious merely on the basis of what was shown back in Chapter 6 about the effects of the uniformity-of-profit principle in bringing about economic progress. As indicated, however, later discussion will show how the stimulus to economic progress provided by the uniformity-of-profit principle combines with the saving and productive expenditure of the capitalists to achieve a steadily growing supply of capital goods, a rising productivity of labor, and thus rising real wage rates, and that this progress is the more rapid, the more the property rights of the capitalists are respected. 12
The conclusion should already be obvious that an individual is far better off as a nonowner of the means of production under capitalism than he is as an equal owner under socialism. For in his capacity both as a wage earner and as a consumer he obtains the benefit of the means of production owned by others. In a division-of-labor, capitalist society, others’ means of production are the source both of the demand for his labor and of the supply of the goods he buys. And his benefit in both capacities is the greater, indeed, becomes progressively greater, the more the property rights of those others are respected.
Of course, nothing I have said means that under capitalism the mass of people must be nonowners of means of production. It may be that everyone would own some means of production, if not directly, then indirectly, through such forms as stock or bond ownership, ownership of mutual-fund shares, and ownership of life-insurance policies. It is absolutely certain that everyone who chooses to save under capitalism can accumulate a substantial amount of personal savings representing either means of production or such assets as homes financed by means of mortgages. Nevertheless, the fundamental gain of the mass of people comes from means of production owned by others, above all, by large capitalists. This gain is the source of real incomes high enough to make
300 CAPITALISM possible significant saving on the part of the average person.
2. The Capitalists’ Special Benefit from Private Ownership of the Means of Production
The preceding section showed the general benefit— the progressively increasing general benefit—that everyone, capitalist and noncapitalist, derives from the institution of private ownership of the means of production in a division-of-labor society.
It is now necessary to consider the special benefit derived by the capitalists from their ownership of capital. Obviously, no matter what the gains that their capital provides to noncapitalists, it is better to be a capitalist than a noncapitalist, and better still to be a wealthier capitalist than a poorer capitalist. What needs to be answered now is the question of what precisely is the nature of these special gains that the capitalists derive from their capital that is over and above the gains that everyone else derives from it.
There is undoubtedly a temptation to answer that the capitalists earn profits or interest on their capital, which the rest of society does not, and that that is their special benefit. This answer is mistaken. It is true that only the capitalists earn the profits and interest on their capital. However, to the extent that they save and invest their profits and interest, the profits and interest provide the same kind of general benefit as their original capital— that is, the saved profits and interest represent additional means of production serving the general buying public and are the source of additional wage payments. Thus, the profits and interest that the capitalists earn are actually not the measure of the special benefits they derive from their ownership of the means of production.
There are two gains that the capitalists obtain which others do not. The first is the portion of their profits and interest that they do not save and invest, but consume. Even this overstates their special gains to the extent that their consumption includes such things as the support of universities, libraries, hospitals, and opera companies, because here again are general benefits. The second is the psychological value that the possession of capital has. To the extent that an individual possesses capital, he has the potential of consuming it. He thus has the psychological security of knowing that he could consume it if he had to or wanted to.
Now so long as the institution of private ownership of the means of production remains secure, this advantage of owning capital usually remains strictly psychological. That is to say, the potential the capitalists have of consuming their capital usually remains just that—a potential. The capital itself is generally not consumed, but left invested; and upon death, it is passed to heirs.
In part, this is because capitalists who are in business regard the possession of their capital as essential to their livelihood. Significant-sized capitalists, moreover, whether they are in business or not, are likely to regard the possession of their capital as being the means by which they can live for the remainder of their lives and provide for their children and grandchildren. (In today’s conditions, significant-sized capitalists can be taken to mean those with a capital of, say, $2 million or more.) As a result of these facts, the major instances in which the consumption of capital occurs is when the rate of profit or interest that is earned falls to the point that it cannot provide the standard of living the capitalists feel they can afford on the basis of their accumulated capital. 13 In such circumstances, they encroach upon their capital. Even then, they generally do so only to a relatively modest degree, because they require the great bulk of their capital as the means of providing for their future needs and wants. 14
On the basis of this and previous discussion, it should be clear that if the institution of private ownership of the means of production is secure, the actual consumption of businessmen and capitalists, whether out of current profits or interest or out of capital accumulated out of past profits or interest, is minor in comparison with wages and the consumption of wage earners. This is especially true of the consumption of the significant-sized businessmen and capitalists, who own the great bulk of the capital of the economic system and earn most of the profits and interest in the economic system. In fact, in a country with the degree of security of property that was historically enjoyed in the United States, the consumption of the significant-sized businessmen and capitalists, including whatever great mansions and ocean-going yachts and caviar and champagne they might consume, would most likely amount to not much more than about 10 percent of the total consumption taking place in the economic system. This is because the mansions and yachts, and the suppers of caviar and champagne, in their hundreds and thousands pale into insignificance alongside the consumption of wage and salary earners in their tens of millions enjoying ordinary houses and automobiles and even just hamburgers and Coca Cola. 15
Implications for Redistributionism
The above facts about the capitalists’ special benefit from the institution of private ownership of the means of production have an important bearing on the appraisal of demands for the redistribution of wealth and income, and for socialism, insofar as socialism is advocated as a method of redistribution. For after all is said and done, it is something on the order of a mere 10 percent of the
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overall, total consumption of the economic system that turns out to be the grand prize for which the redistributors and socialists have been clamoring all these years! This is the great fund of wealth by means of which they have expected to abolish all poverty, cure disease, and achieve utopia; and for the sake of which they have been ready to overturn existing society, seize private property, and shed rivers of blood—all in magnificent obliviousness to the fact that capitalism itself gratuitously provides such wealth over and over again every few years, through economic progress and an accompanying 2 or 3 percent annual rate of improvement in the productivity of labor. Indeed, if the approximately 10 percent of total consumption that is accounted for by the consumption of the significant-sized capitalists is divided by the approximately 90 percent of consumption that already takes place on the part of the rest of the population, the resulting 11 percent ratio would be made good for rest of the population over and over again approximately every four to five years, through economic progress. 16
These points need to be emphasized, in order to understand the actual nature of the demands for redistribution and socialism. The conclusion that follows from them is that even if the redistributors and socialists could succeed in expropriating the capitalists’ wealth without causing the destruction of that wealth or of its productivity—which, of course, they cannot—the utmost that they could obtain for the benefit of the average person that he would not already have is his share of the approximately 10 percent of total consumption that is accounted for by the consumption of the significant-sized capitalists. And this, of course, would be a one-time-only, nonrepeatable benefit. This would be the limit of the “benefit,” because anything beyond it would represent capital decumulation. 17
Obviously, even if it could be obtained, such a benefit would not be worth making into the leading objective of a political philosophy and movement, let alone fighting a revolution for. But the fact is, of course, that no such benefit can be obtained. The attempt to seize the 10 percent can only inflict injury on those intended to benefit from the seizure. It must deprive them both of all the vastly greater future gains they would have had from the further operation of capitalism, and of the continued enjoyment of the gains they have already obtained from the operation of capitalism up to that time. For the capitalists cannot be forcibly prevented from consuming without losing interest in the management of their capital, and in its accumulation in the first place. Their capital is valuable to them only insofar as it serves as a source of actual or potential consumption for them or their heirs. To the extent that their ability to consume is forcibly restricted, the value of their capital to them is destroyed.
For example, a forced limitation of a capitalist’s consumption to some fixed amount, such as $50,000 per year, would make all that portion of his capital valueless to him that was beyond what was required to provide the income needed for such consumption. If, for example, he had $5 million of capital and the rate of return on capital were 5 percent, so that $1 million of capital was sufficient to provide the income needed for the maximum permitted consumption, he could well lose interest in the management of $4 million of his capital, and in the accumulation of such capital in the first place. For the $4 million would arguably no longer be able to contribute anything to his life and wellbeing. Indeed, even if for reasons of financial security he always wished to possess capital equal to some definite greater multiple of his annual consumption than implied by the assumed 5 percent rate of return, such as 40 times his maximum permitted annual consumption of $50,000, he would have no motive to be interested in possessing any capital beyond $2 million in this case, and thus would still lose interest in the management of the other $3 million of his assumed capital, and in the accumulation of such capital in the first place.
All efforts to limit the consumption of capitalists must result in the destruction of incentives to accumulate and maintain capital. If the limits were set very high, at a level of consumption that the great majority of capitalists could never expect to reach, the effect would be to destroy the incentives of the most successful capitalists. As the limits were lowered, the effect would be to destroy the incentives of more and more capitalists. Whatever the level of interference, any possible per capita gains to the general public from obtaining funds the capitalists otherwise would have consumed must be far more than offset through declines in the incentive to improve and even maintain production. If, for example, the public attempts to reap the gains of limiting a capitalist’s consumption to, say, $50 million a year, so that only a bare handful of capitalists is affected, namely, multibillionaires, the possible gains to the treasury are absolutely minimal, while the losses in terms of innovation and the growth of major new industries are substantial. If the effort is made to capture any substantial part of the capitalists’ overall consumption, the disincentives to capital accumulation and the management and maintenance of capital are such that the socialization of the means of production would have to follow as a logical next step. Because in the absence of capitalists caring about their capital, the only party left to care would be the state. But, of course, for the reasons explained in the last chapter, socialism would also mean the collapse of production.
Essentially similar reasoning applies to proposals to limit the aftertax income of capitalists to some fixed amount, such as was advocated earlier in this century by
Eleanor Roosevelt and the labor union leader Walter Reuther. The enactment of such a proposal would first be accompanied by a decumulation of capital, to the extent that the capitalists considered their existing capital sufficient to enable them to consume in excess of their statutorily limited income. For example, a limitation of aftertax income to $50,000 a year would not stop capitalists from consuming in excess of $50,000 a year so long as they judged their capital to be sufficient to provide such consumption. In the words of von Mises, “If one eliminates the capitalist’s role as receiver of interest [profit], one replaces it by the capitalist’s role of consumer of capital.” 18 Such a limitation of income would obviously have to be followed by a limitation of the capitalists’ consumption and then, for the reasons just explained, by the government taking over the management of their capital as well.
The destructiveness of redistributionism is evident in the decline of the American economic system that has taken place in recent decades. The redistributors have succeeded in depriving the significant-sized capitalists of perhaps as much as half of what they would otherwise have consumed, and the American economic system of perhaps as much as half of the capital that such capitalists would otherwise have accumulated and used to the advantage of everyone. This conclusion is supported by the fact that in the nineteenth century and the first few decades of the twentieth century, the ratio of total accumulated capital in the United States to the socalled national income of the United States (viz., the sum of all wages and salaries and profits and interest earned in the country), was on the order of five or six to one. However, as the redistributors gained ground in imposing and expanding the welfare state and enacting policies of confiscatory taxation, government budget deficits, and inflation to pay for it—all of which policies undermine the ability to accumulate capital—this ratio, which is typically called the capital-output ratio, has fallen to three to one. 19
The reduction in the ratio of capital to national income represents a reduction in the overall degree of capital intensiveness of the American economic system. 20 As I will explain in Chapters 14 and 17, reduction in the degree of capital intensiveness signifies a reduced ability to implement technological advances. 21 A second, closely related result that redistributionism has caused and that operates against economic progress, is a reduced demand for capital goods relative to the demand for consumers’ goods. This is the necessary consequence of taxing away funds that would otherwise have been saved and productively expended, that is, expended for business purposes, and using those funds instead to finance consumption expenditures by the government or those to whom the government gives money. The reduction in the demand for capital goods relative to the demand for consumers’ goods causes a reduction in the production of capital goods relative to the production of consumers’ goods. It thereby reduces the ability of the economic system to increase or even to maintain its supply of capital goods. 22
These destructive results stand alongside of and reinforce the destructive results of redistributionism that can be understood in the light of the uniformity-of-profit principle, namely, the effects of depriving businessmen of the financial incentives and means that the freedom to earn and keep the profit one earns provides for improving and expanding production. Thus, it should not be at all surprising that as a result of the destructiveness of redistributionism, the economic system of the United States is now stagnating. In effect, for the sake of denying wealthy capitalists a portion of their luxuries—for the sake of depriving them of an amount of consumption equal perhaps to 5 percent of the total consumption of the economic system—the average American wage earner has been deprived of the benefits of economic progress and the annual improvement in his standard of living, which would have added up to far more than that 5 percent within a very few years and would have done so over and over again. Further substantial implementation of redistributionism will almost certainly result in an annual rate of decline in the standard of living of the average American wage earner.
The destructive effects of redistributionism on capital accumulation have been evident all along in the very size of what the redistributors have expected to accomplish and have believed to be available as the means of accomplishing it. As they have depicted matters, what is available for raising the standard of living of the masses is not the small percentage of the output of consumers’ goods that the capitalists personally consume, but the whole of the capitalists’ existing wealth. The propaganda of the redistributors and socialists has always depicted the capitalists as rich fat men, whose larders are overflowing, while the plates of the poor are empty. It has demanded that the capitalists’ wealth be shared for purposes of mass consumption. Since, in reality, the wealth of the capitalists is overwhelmingly in the form of factories and other capital goods, this has all along been a blatant demand for capital decumulation. The poor are to be benefitted by consuming the capital that underlies the productivity of labor and the payment of wages, and without which production must plunge. Thus, practically on its face, redistributionism has been a policy of destruction.
It is important to bear in mind that no undue emphasis should be placed on the consumption of the capitalists
constituting any definite percentage of total consumption at any definite time, such as 10 percent. The essential point is that their consumption will be the smaller, and their saving and demand for labor and capital goods the greater, the more fully are their property rights respected and secure. This is what in the long run guarantees the highest possible percentage of consumption stemming from wages and the lowest possible percentage stemming from profits and interest. Thus, if at some point it were found that the consumption of the capitalists relative to that of wage earners were far higher than what I have indicated, it would not at all follow that any kind of case for redistributionism then existed. On the contrary, such a situation would almost certainly largely be the result precisely of the threat of redistribution. The remedy would be the abandonment of all such threats and the establishment of the security of property. Then, a greatly intensified process of competition in saving would take place among the capitalists, in which those who consumed the least and saved the most came to own an ever increasing portion of the capital of the economic system and more and more determined the consumption and saving of all capitalists taken together. 23
I have already demonstrated the destructiveness of redistributionism insofar as it is a demand for the socialization of the economic system. Its destructiveness will become further evident as we consider the lesser measures that the redistributors have advocated for implementing their program: namely, government ownership of isolated industries and the progressive taxation of incomes and inheritances, and, in non-division-oflabor societies, land reform. In the discussion immediately following, we will consider government ownership of isolated industries. 24
Destructive Consequences of Government Ownership
The government’s ownership of a business supposedly makes every citizen an equal owner of that business, and in this way supposedly benefits him. Thus, every American is supposed to be an approximately one 260-millionth owner of the U.S. Postal Service, Amtrak, the national parks, and so on.
Yet, one need hardly do more than name such examples, in order to understand the destructiveness of government ownership. The citizen’s share in government enterprises does him no good whatever. The fact that the enterprise is government owned merely means that it is operated without benefit of profit-and-loss incentives and the freedoms of individual initiative and competition. 25 The result is almost always gross inefficiency, high costs, poor service, and low quality of products. In fact, in one major case—the government’s ownership of enormous areas of the Western states and of Alaska—the effect of government ownership is largely to deprive the citizen of all possible economic benefit from the existence of the property. For much of the property is set aside as “wildlife preserves” and “wilderness areas,” and its economic development is either totally prohibited or made extremely difficult and severely limited.
The average American is far better and more economically served by the privately owned telephone companies and airlines than he is by the U.S. Postal Service, Amtrak, and all the various municipally owned subway and bus lines. He is much better off dealing with them, even if he does not own a single share of their stock, than in dealing with the government enterprises, which are supposed to be his. For in dealing with the private enterprises, he obtains not only the benefit of the existence of their capital, but also the benefit of the employment of their capital under the incentives of profit and loss and the freedoms of individual initiative and competition, with the result that they are highly motivated to serve him and to serve him progressively better.
The adverse consequences of government ownership are, of course, enormously compounded when it goes beyond the case of isolated industries to embrace the entire economic system. Then, in addition to the far more serious problems created directly by the lack of profit-and-loss incentives and the freedoms of individual initiative and competition, there are the problems created by the destruction of the price system, which, as we saw in the last chapter, means the disintegration of the economic system into chaos.
Putting aside for the moment the consequences of a socialized economic system, as opposed to isolated socialized industries, it is worth noting that government ownership does not normally provide the alleged citizen-owners with any of the special benefits of ownership that exist under private ownership of the means of production. Government ownership does not give the alleged citizen-owner the psychological security that the possession of capital gives to a capitalist. Because, unlike the capitalist, he cannot sell his share in a government enterprise. He is born with his share and must die with it. Nor—except in the most unusual cases—does he receive dividends on his share. In no sense does his alleged ownership provide him with any actual or potential means for consuming and thus for enriching his life. Thus, in no way does it provide him with the distinctive benefits that private ownership of the means of production bestows. 26
In the case of government ownership of industry, the citizen’s share not only normally brings him none of the special gains of ownership, but, on the contrary, is almost always a liability to him, in that government enterprises almost inevitably incur deficits, which he, the average citizen must make good through his taxes. Government—
owned enterprises incur deficits precisely because it is the taxpayers who must make them good, under coercion. The administrators of the enterprises do not suffer any losses out of their own pockets, nor are they appointed or removable by those who do suffer the losses— the taxpayers. At best, they are appointed and removable by elected officials. When it becomes one of the powers of government to own and operate business enterprises, these officials owe their election and their prospects for reelection to promises to favor some groups at the expense of other groups—namely, large and vocal groups at the expense of small and quiet groups. The individual taxpayer is smaller and quieter than any group, and thus he ends up as the principal victim of pressure-group warfare. The politicians and the bureaucrats they appoint are free to use the government enterprises to provide costly vote-buying “services” and to have them operate with inefficient methods of production, which also buys votes by providing lucrative contracts or employment for pressure-group members; and he, the taxpayer, must keep still and simply cover the losses. 27
Thus, the average citizen is a loser in his dealings with government enterprises not only in his capacity as a consumer, but also, however ironically, in his capacity as an owner—in the very capacity in which he was above all supposed to benefit. He is a loser both ways. And, of course, the magnitude of his loss grows exponentially as the economic system approaches full socialization.
Government ownership is sometimes supported on the grounds that it keeps the use of property free, whereas private ownership would result in the imposition of charges. This argument comes up most clearly in such cases as government ownership of beaches and parks, but it is present in the support for government ownership of every kind. And, indeed, the case for government ownership in such instances is about as valid as would be an argument for government ownership of all other land based on such considerations. Thus, one might argue that if the government socialized all land, people could obtain food without having to pay for it. They would merely have to go into the forest and collect the nuts and berries that grew there, without having to pay anyone for the right to do so. 28 Of course, there would be nothing to eat but nuts and berries and no more of them than nature provided, with the result that most people would die of starvation.
In contrast, when the land becomes private property, the owners collect charges for its use, or for the products of its use. But those charges serve merely to make it worthwhile for the owners to apply their intelligence and labor to the improvement of their property, with the result that yields progressively improve and increase. Thus the payment of charges results in progressively growing supplies that continually raise the standard of living of those who pay them. Exactly the same is the case with beaches and parks. Private ownership would entail charges, but it would also be the foundation of progressive improvement in the benefits derived from the existence of beaches and parklands, because the charges would serve to introduce the incentives of profit and loss and the phenomena of individual initiative and competition. That is, it would serve to bring about the application of human intelligence and the progressive improvement that the use of intelligence makes possible. As a result, instead of the nonowners paying no charges and obtaining little more than nothing, they would pay something and obtain more and more. 29
Profit Management Versus Bureaucratic Management
A major factor bearing on the superiority of privately owned enterprises over government-owned enterprises is the fact that the former are characterized by what von Mises calls profit management, while the latter are characterized by what he calls bureaucratic management. In the absence of government interference, the ability to construct separate balance sheets and income statements for the constituent parts of an enterprise makes it possible for private enterprises to delegate substantial authority to subordinate managers, such as branch and division managers. Because their activities can be appraised on the basis of their separate profit-and-loss performance, such subordinate managers can be allowed to exercise major discretion within the framework of the one, overall guiding business directive which is simply to make profits and avoid losses. What is of the greatest importance, is that they can be given discretion in the spending of money, which they can be trusted to spend wisely, because they have a powerful incentive to hold down costs in order to show a greater profit on the operations for which they are responsible. In effect, such managers are made junior partners, which thereby extends throughout the firm not only the incentives provided by private ownership of the means of production but also a corollary freedom of individual initiative. 30
In contrast, bureaucratic management necessarily characterizes government-owned enterprises, owing to the inherent lack of profit-and-loss incentives at their very base, which incentives can be provided only by private ownership. Such enterprises—for example, a police department—very often do not and cannot sell their products, which by itself makes the construction of any kind of income statements for subordinate units out of the question. And even where they can sell their products, as in the case of a post office, the lack of profit-and-loss incentives at the very base of their operations rules out
any form of profit management at subordinate levels. Thus, government enterprises must be conducted bureaucratically—that is, in accordance with detailed rules and regulations rigidly prescribing every procedure and leaving virtually nothing to the discretion of the officials, who otherwise would have no reason to limit expenditures. 31 Indeed, when one considers that government is always the agency that resorts to the use of physical force against people, and that spends public funds obtained by taxes, the bureaucratic restriction of the discretion of its officials appears positively desirable. Bureaucratic management is actually the form of management that is appropriate to the conduct of government affairs. 32
The appropriateness of bureaucracy to government is an argument for the strict limitation of the functions of government, and thus the confinement of bureaucratic management to the sphere in which it is necessary to restrict the use of physical force. When the functions of government are not thus limited, bureaucratic management spreads to private enterprise. For then government interference undermines the strength of profit-and-loss incentives, makes business firms dependent on the decisions of government bureaus, and forces them to employ former bureaucrats in leading positions in order to be able to deal with the government bureaus. 33
Thus, business firms become less and less subject to the power of profit-and-loss incentives and more and more come to resemble the bureaus that determine their fate. For example, under affirmative-action laws and environmental-protection laws, it is out of the question to leave anything to the discretion of lower-level business managers, lest the wellbeing of the whole firm be jeopardized by the inadvertent violation of some government regulation. Under such conditions, the lower-level business managers must be as careful to “go by the book” as any government bureaucrat. 34
The “Successful” Nationalizations of Oil Deposits:
A Rebuttal
The leading exceptions to the principle that the citizen loses even in his capacity as an owner of government enterprises occur when such an enterprise has the good fortune to own lowcost mineral deposits and at the same time enjoys substantial monopoly privileges in selling outside the country. This is the position of the nationalized oil industries in various Arab countries.
These industries were established and developed by private oil companies, who continue to play a major role in their operation. Their success is principally the result of the fact that the government of the United States has granted them extensive monopoly privileges in the world market by severely hampering the activities of their major competitors—namely, the American producers of oil and other forms of energy—in all the ways I explained in Chapter 7. 35 In the absence of these measures by the U.S. government, the price of oil would not have risen any more than most other prices, and the inefficiencies of government ownership would have prevented the Arab countries from earning any very great profits, despite the high quality of their oil reserves. Further progress in the production of energy in a free United States would eventually have inflicted losses on such inefficiently run outfits.
As matters stand, the free telephones, free medical care, and so on, that the citizens of Kuwait, say, are able to enjoy, thanks to the dividends their government pays from its oil profits, and the lesser benefits that the citizens of other thinly populated Arab countries obtain—all this is paid for at the expense of the impoverishment of everyone else in the world who must pay the artificially enhanced price of oil. Scores of millions of people in the non-oil-producing countries are that much closer to starvation and death because the oil industries of the Arab countries are nationalized and enjoy monopoly privileges.
To summarize much of our discussion in this section: What we have seen is, first of all, that insofar as the capitalists’ special benefit from the ownership of the means of production takes the form of an enhanced consumption, it is quite small in relation to the size of overall consumption, and thus that nothing of great significance could be gained by the average person from its seizure, even if it were possible to seize it. And then we have seen that the attempt to seize it must backfire in a radical decline in production and the overall volume of goods available, because the capitalists’ incentive to accumulate and maintain their capitals would be destroyed and the ensuing socialization of the economic system would also cause collapse. We have seen that redistributionism is destructive practically on its face, in that it is a call for the wholesale consumption of the capitalists’ capital, and we have seen its destructive role in the present economic stagnation of the United States. And, finally, we have seen that the socialization of isolated industries causes losses to the average person both in his capacity as a buyer of the products of the socialized industries and in his capacity as an alleged owner of the socialized industries. That is, we have seen that in addition to depriving the buyers of the benefits of profit-and-loss incentives and the freedoms of individual initiative and competition in the industries’ operation, socialization also fails to deliver the special benefits of ownership that exist under capitalism. This is the case inasmuch as the citizen cannot sell his alleged shares, and, instead of receiving dividends, almost always ends up paying higher taxes to cover the socialized enterprises’ losses. We have
also seen that the socialization of business, and growing government interference, are responsible for the bureaucratization of business, even of business that still remains privately owned.
3. The General Benefit from the Institution of
Inheritance
It is necessary to consider the benefits of two particular forms of the institution of private property and private ownership of the means of production which have come under special attack, namely, the institution of inheritance and, in Section 5, the private ownership of land. These institutions are denounced even by people who in other respects consider themselves supporters of private property and private ownership of the means of production.
As in the case of the broader institution of private property and private ownership of the means of production as such, the institution of inheritance is perceived as being of benefit only to the owners of the property involved—in this case, those who are fortunate enough to be heirs—and not as being of benefit to anyone else. Indeed, the interests of the nonheirs are usually perceived as lying with the confiscation and redistribution of inheritances, and thus with the more or less complete abolition of the institution.
Despite the popularity of this view, the fact is that in a division-of-labor society, substantial inheritances are overwhelmingly in the form of means of production, precisely because the far greater part of the wealth of the bequestors—capitalists—is in the form of means of production. If such inherited wealth remains invested—and it almost always does when it is received in a large amount—its existence is to the benefit of everyone. In order to benefit from its existence, one need not be an heir; one need merely be a buyer of the products it helps to produce and whose supply is increased because of it. One need merely be a wage earner, whose labor is in additional demand and whose wages are higher because of it.
The institution of inheritance powerfully promotes the accumulation of capital. It provides a motive to people to maintain their capital, and even to go on accumulating additional capital, as long as they live—for the sake of their heirs. Its effect is that substantially more capital exists than would exist without it. Everyone in a division-of-labor society benefits from the existence of this additional capital, whether he himself is an heir or not. He benefits both in his capacity as a buyer of products and in his capacity as a wage earner. He benefits in the former capacity because the generation of additional capital raises and goes on raising the productivity of labor and thus the supply of goods available for all to buy. He benefits in the latter capacity because, at the same time, it increases the share of total consumption that is enjoyed by wage earners in comparison with nonwage earners. Rational self-interest dictates that everyone, nonheirs as well as heirs, uphold the institution of inheritance. From the point of view of the nonheirs, the rationale is that it enables their employers to pay them more and their suppliers to supply them with more, and, indeed, to supply them progressively better—at prices that are lower and lower relative to the wages they earn. This last is the effect of the greater relative demand for and production of capital goods and the higher degree of capital intensiveness that the institution of inheritance achieves. 36
As previously pointed out, however startling it may seem, the simple fact is that in a division-of-labor society one benefits from the property of others when those others are one’s employers or suppliers, because the effect of their property is a greater means of buying what one sells and of producing what one buys. The institution of inheritance enhances these sources of gain.
Indeed, the preceding observations have somewhat understated the case for the institution of inheritance from the point of view of the nonheirs. While it is true that most large inheritances do remain invested, the institution of inheritance promotes capital accumulation even in the cases in which the heirs consume some or all of what they receive—as an elderly widow or minor children must often do, or as spendthrift heirs simply choose to do. For even in these cases, the capital is first accumulated, and because estates are constantly being built to be left to heirs, there is permanently more capital. Even in these cases, in which all or most of an inheritance is consumed by the heirs, there is the capital that exists in the inheritance “pipeline,” so to speak, and which would not exist in the absence of the institution of inheritance.
It is necessary to realize that inherited wealth can easily be lost through unwise investments on the part of the heirs. In a division-of-labor society, wealth is never invested just once, for all time; it must constantly be reinvested, under ever-changing conditions. Materials and labor services are fully used up in the production of a single batch of products and must be replaced immediately thereafter if production is to continue. Machinery and factory buildings, while much longer lasting, are also constantly in process of wearing out; they too must be periodically replaced. On the other hand, as time goes on, new products and new methods of production are introduced and all those other dynamic changes occur that take place in connection with economic competition. These changes make it impossible for the heirs to con—
tinue with a routine established by the parent or grandparent who built their fortune. They must constantly reacquire their wealth through their own successful investments, investments which must win the approbation of the buyers of the products concerned, under the freedom of competition.
To the extent the heirs lack the ability to make the right investment decisions, but nonetheless attempt actively to manage their funds themselves, they risk the loss of their entire fortune. If they recognize their lack of business ability, or if it has been recognized for them by the bequestors of their wealth, they must be content with a sharply reduced rate of return on their capital, which is the necessary accompaniment of making investments recognized as having a high degree of safety of principal. And from that low rate of return must usually be deducted management or trustees’ fees.
The effect of these facts is that unless one or more of the heirs possesses extraordinary ability, the relative significance of any given fortune in the economic system tends steadily to diminish as time goes on. For even if the heirs do not lose it outright through poor investments, and even if they are content to live within the income afforded by the low rate of return they earn on their capital, their fortune is unable to grow in pace with the new capital being accumulated by more-talented investors earning higher rates of return and therefore able to save and accumulate capital more rapidly. Moreover, the significance of any given fortune is further diminished by a tendency toward its constant subdivision among a growing number of descendants, as one generation succeeds another.
In just this way, the wealth of the present-day Astors and Vanderbilts, once among the greatest fortunes in the country, is now not nearly so large in relation to the rest of the American economic system; and that of any given individual Astor or Vanderbilt is no greater than what hundreds of thousands of individuals have accumulated purely by their own efforts, all within the present generation. Even the much more recent and initially much greater fortunes of the Rockefellers, Fords, and Mellons show the same tendencies toward decline in their relative significance.
The Destructive Consequences of Inheritance Taxes
The inheritance tax, especially on large inheritances, where it is often confiscatory, is practically a pure tax on capital. To the extent it exists and is actually carried out—that is, to the extent the socalled loopholes are closed, so that the tax cannot be avoided—the longrun effect is to reduce the accumulation of capital by reducing the building of estates in the first place. It is pointless for people to accumulate fortunes, intended to be bequeathed to heirs, which, upon their death, the government confiscates and prevents from reaching the heirs. The effect of confiscatory inheritance taxes is to cause the builders of estates to consume their income more heavily and not to bother earning part of the income they might otherwise be capable of earning at any given time. For their motivation both to save and to earn the income out of which saving can occur is reduced.
Inheritance taxes which are not so high as to prevent heirs from substantially benefitting from the accumulation of estates do not deprive the builders of estates of the motive to earn and save. By the same token, they do not achieve the egalitarian objectives of the supporters of the inheritance tax. Nevertheless, even these more-modest inheritance taxes reduce capital accumulation to the extent that they are paid with funds that otherwise would have remained invested. Any inheritance tax whatever reduces capital to the extent that it is paid with funds that otherwise would have remained invested.
The specific way that this occurs is that the heirs or the executors of estates find it necessary to sell part of the estate to pay the taxes. This siphons funds from the buyers of these portions of the estates into the government’s treasury. If the heirs had not had to sell, the buyers of these portions of the estates would have had to use their funds essentially for the purchase of new capital assets, which would have existed alongside of and in addition to the inherited wealth of the heirs. Instead, as matters stand, the funds of the buyers are diverted from the purchase of such additional capital assets into the purchase of part of the heirs’ existing capital assets, and from there to the government’s treasury and its expenditures. The result is less accumulated capital.
This remains the result even if the government were to use the proceeds of the inheritance tax exclusively for such alleged capital purposes as the building of roads, bridges, canals, and tunnels, the making of river and harbor improvements, and the like. For even if government expenditures for such purposes really did represent capital formation, which they do not, they would be at the expense of that much less private capital formation, so long as they were financed by the inheritance tax. 37
The fact is, however, that most government spending is avowedly for purposes of consumption—such as welfare payments and expenditures for military preparations. And what is for alleged capital purposes is almost always carried out with enormous waste and inefficiency in comparison with what private enterprise would achieve if it were responsible for the same undertaking.
Thus, when they do the least damage conceivable, inheritance taxes represent a diversion of capital into financing activities that are necessary or useful to a country’s ability to produce, but which are carried on
inefficiently under government ownership. Such activities should not be carried on by the government in the first place; if they are carried on by the government, they should not be financed by an inheritance tax or by any other tax that significantly reduces capital accumulation. Finally, the use of the inheritance tax to finance such expenditures as welfare payments and outlays for defense, which is what, for the most part, it is actually used for, is nothing but an unmitigated assault on the foundations of a country’s standard of living.
In every case, an inheritance tax reduces the demand for labor that business firms are able to make and thus either the wage rates or volume of employment that they are able to offer. Simultaneously, it reduces the economic system’s overall degree of capital intensiveness, and thus its ability to implement technological advances. 38 Equally important, it reduces the demand for capital goods relative to the demand for consumers’ goods and thus the economic system’s degree of concentration on the production of capital goods, and, consequently, the ability of the economic system progressively to raise the productivity of labor and real wages. 39 An inheritance tax always represents a diversion of funds from capital to consumption and is thus a force working against both economic progress and the share of total consumption in the economic system that goes to the employees of business firms, whose wages are paid out of capital. 40 Thus, inheritance taxes are against the interests of everyone, nonheirs as well as heirs.
4. The General Benefit from Reducing Taxes on the “Rich”
The progressive personal income tax, the corporate income tax, and the capital gains tax all operate in essentially the same way as the inheritance tax. They are all paid with funds that otherwise would have been saved and invested. All of them reduce the demand for labor by business firms in comparison with what it would otherwise have been, and thus either the wage rates or the volume of employment that business firms can offer. For they deprive business firms of the funds with which to pay wages.
By the same token, they deprive business firms of the funds with which to buy capital goods. This, together with the greater spending for consumers’ goods emanating from the government, as it spends the tax proceeds, causes the production of capital goods to drop relative to the production of consumers’ goods. In addition, of course, they all operate to reduce the degree of capital intensiveness in the economic system and thus its ability to implement technological advances. 41 The individual and corporate income taxes, and the capital gains tax, of course, also powerfully reduce the incentive to introduce new products and improve methods of production. In all these ways, as will be shown at length in Chapters 14 and 17, these taxes, along with the inheritance tax, undermine capital accumulation and the rise in the productivity of labor and real wages, and thus the standard of living of everyone, not just of those on whom the taxes are levied.
What makes it difficult for people to recognize the fact that everyone would benefit from reductions, or, better still, the total abolition of all of these taxes on the socalled rich—made possible, of course, by equivalent reductions in government spending—is not only massive ignorance of economics, especially of the general benefit from private ownership of the means of production, but also collectivistic habits of thought inspired by Marxism and its doctrine of class interest. By this last, I mean that when it comes to matters of economics, most people tend to think of themselves essentially as members of the class of wage earners rather than as separate individual wage earners, and to think of their interests as indistinguishable from the interests of other wage earners.
Thus, an individual wage or salary earner knows that he would certainly be better off if his own taxes were reduced by some given amount than if the taxes of a millionaire or some large corporation were reduced by that same amount. As far as it relates just to himself, that conviction is absolutely correct. I, for example, would be much better off if my taxes were reduced by, say, a thousand dollars a year than if the taxes of some contemporary John D. Rockefeller or the taxes of General Motors were reduced by a thousand dollars a year. Where most wage earners go wrong is in generalizing from what is true of a reduction in their own, individual taxes, in comparison with an equal reduction in the taxes of businessmen and capitalists—the “rich”—to conclusions about the effects on them of reducing the taxes of other wage earners, in comparison with the same amount of reduction in taxes on businessmen and capitalists.
In considering, for example, whether the taxes of businessmen and capitalists as a class should be reduced by some massive sum, such as $100 billion, or whether the taxes of wage earners as a class should be reduced by that sum, almost everyone mistakenly assumes that the interest of the individual wage earner lies with the tax reduction going to the wage earners, as though all wage earners shared a common class interest against all capitalists. This, however, is a fallacy, which becomes apparent as soon as one objectively analyses the situation from the perspective of the individual wage earner. Then it becomes clear that much more is involved than the matter of a reduction in the taxes of the rich or an equal reduction in the individual wage earner’s own taxes. For example, while it is certainly true that I gain more from my own
taxes being cut by $1,000 rather than the taxes of a Henry Ford or a Bill Gates, it is absolutely false to believe that I gain more from the taxes of my random fellow wage earners—call them Henry Smiths and Bill Joneses— being cut by $1,000 each rather than the taxes of Ford and Gates being cut by $1,000 each.
What is actually involved in the question of a reduction in taxes on businessmen and capitalists as a class in the amount of $100 billion, versus an equal reduction in the taxes of wage earners as a class, is two separate, further questions, that represent constituent elements of this question. There is first the question of the benefit to an individual wage earner of his own taxes being cut by $1,000, versus the taxes of any businessman or capitalist being cut by $1,000. We know the answer to this question: it is more to the individual wage earner’s interest that his own taxes be cut. But then there is a second question. Namely, which is more to an individual wage earner’s self-interest: a reduction in the taxes of businessmen and capitalists in the remaining amount of $99,999,999,000, or a reduction in the taxes of wage earners other than himself in the same remaining amount, that is, of 99,999,999 other individuals very much like himself perhaps, but not himself, each getting a reduction of $1,000?
In other words, put aside the question of a cut in the individual wage earner’s own taxes of $1,000 versus a $1,000 cut in the taxes of businessmen or capitalists. Consider only the effect on his self-interest of a cut in the taxes of all other wage earners besides himself—all of the Henry Smiths and Bill Jonses of the country—in the combined amount of $99,999,999,000, versus an equivalent cut in the taxes of businessmen and capitalists—all of the Henry Fords and Bill Gateses of the country. A $99-billion-plus cut in the taxes of all those other wage earners will make each of them better off, but what will it do for him, for the particular, individual wage earner we are focusing on? To what extent will his fellow wage earners save and invest their tax cut and so raise the demand for his labor? To what extent will his fellow wage earners increase the demand for capital goods and the rate of business innovation and thus bring about improvements in the quantity and quality of the products he buys and thereby increase the buying power of the wages he earns?
It is obvious that the individual wage earner benefits far more from tax reductions on businessmen and capitalists, the socalled rich, than from equivalent tax reductions on his fellow wage earners, and that this is true of each and every individual wage earner, for any wage earner could take the place of the particular individual we have focused on. A tax reduction on businessmen and capitalists will promote capital accumulation, far, far more than a tax reduction on the mass of the individual wage earner’s fellow wage earners. The average businessman and capitalist will save and invest the taxes he no longer has to pay, in far greater proportion than would the average wage earner. 42 He will be induced to introduce more improvements in products and methods of production, which are also a major cause of capital accumulation, and is a process in which wage earners qua wage earners play little or no role. 43 (This is not to say that wage earners are never responsible for innovations. They often are. But as soon as they are, they typically become businessmen. Fundamentally, it is always the prospect of higher profits that stimulates innovations, not the earning of higher wages. It is the prospect of higher profits that leads employers to offer incentives to wage earners to make innovations.) And, on the basis of what has previously been pointed out, the greater saving of the businessmen and capitalists will promote innovation by virtue of making the economic system more capital intensive. 44 Thus the individual wage earner has far more to gain from the taxes of businessmen and capitalists being reduced than from the taxes of his fellow wage earners being reduced.
The gains from this aspect of the matter are so substantial that they almost certainly outweigh the fact that having them precludes the ability to have the benefit of one’s own taxes being reduced by a sum such as a thousand dollars a year. This is merely to say that the gains to an individual wage earner of his own taxes being cut by a sum such as $1,000 a year are far less than the gains to him of the taxes of businessmen and capitalists being cut by an immensely larger sum such as a $100 billion a year—that is, by an amount that equals the potential $1,000 tax cuts of all the millions of other wage earners in the economic system, which, in the hands of those fellow wage earners, would have been of little or no value to him.
As I have shown, the individual wage earner gains from cutting the taxes of businessmen and capitalists in part because the effect of their sharply increased saving is significantly to raise the demand for labor and thus, quite possibly, significantly to raise his own wage income. 45 But far more importantly, the effect of cutting the taxes of businessmen and capitalists rather than of wage earners will be a substantial rise in the demand for capital goods relative to the demand for consumers’ goods and a substantial rise in the rate of innovation, including under the latter head, it is worth pointing out, the ability of upstart new firms to grow rapidly and thus to challenge old, established firms.
The effect of this combination is continuing capital accumulation and thus a continually rising productivity of labor. The effect of this, in turn, is a continually
growing supply of consumers’ goods relative to the supply of labor, and thus prices of consumers’ goods that are progressively lower relative to the wages of labor, which means progressively rising real wage rates, so that in not too many years the average wage earner is far ahead of where he would have been on the strength of a cut in his own taxes. 46
Starting with tax cuts for the socalled rich—based on equivalent reductions in government spending—is the only hope for the resumption of significant economic progress, indeed, for the avoidance of economic retrogression and growing impoverishment. Because of this, it is actually the quickest and surest road to any major reduction in the tax burden of the average wage earner. It holds out the prospect of the average wage earner being able to double his standard of living in a generation or less. The average standard of living would double in a single generation if economic progress at a rate of just 3 percent a year could be achieved. Such economic progress would also mean a halving of the average wage earner’s tax burden in the same period of time—if government spending per capita in real terms were held fixed, for then he would have double the real income out of which to pay his present level of taxes. And then, of course, once all the taxes that most stood in the way of capital accumulation and economic progress were eliminated, further reductions in government spending and taxation could and should take place that would be of corresponding direct benefit to wage earners, that is, show up in the reduction of the taxes paid by them.
Ironically, an aspect of this approach exists in, of all places, Sweden! What has enabled Sweden to have one of the world’s highest burdens of taxation and, at the same time, to remain a modern country, more or less advancing, is the fact that the tax burden in Sweden falls far more heavily on the average Swedish wage earner than it does on Swedish business, whose tax burden is actually less than that of business in many other Western countries. (For example, when allowance is made for the fact that Swedish companies can automatically deduct 50 percent of their profits as a tax-free reserve for future investment, the effective corporate income tax rate in Sweden turns out to be below that in the United States: 26 percent versus 34 percent. 47 ) If Swedish business had had to bear the burden of taxation borne by Swedish wage earners, the Swedish economy would long since have been in ruins.
This is certainly not to argue for taxation of American workers at a level comparable to the taxation of Swedish workers, or for any increase in the taxes paid by American workers whatever. It is to argue for reductions in government spending sufficient both to eliminate the budget deficit and to make possible substantial tax cuts on businessmen and capitalists, the socalled rich. It is to argue that as soon as the resulting economic progress begins to increase the real revenues of the government, further tax cuts of the same kind occur, in order further to accelerate economic progress. It is to argue for the achievement first of the total elimination of the inheritance tax, the capital gains tax, the corporate income tax, and the progressive portion of the personal income tax, all taken together, and then, once that has been achieved, for the continuing reduction in the remaining personal income tax, until the personal income tax is totally eliminated. The essential mechanism for achieving these results is a combination of economic progress and continuing reductions in government spending. This is how radically to reduce the taxes of everyone. It is the only way.
Of course, many people will characterize the line of argument I have just given as the “trickle-down theory.” There is nothing trickle-down about it. There is only the fact that capital accumulation and economic progress depend on saving and innovation and that these in turn depend on the freedom to make high profits and accumulate great wealth. The only alternative to improvement for all, through economic progress, achieved in this way, is the futile attempt of some men to gain at the expense of others by means of looting and plundering. This, the loot-and-plunder theory, is the alternative advocated by the critics of the misnamed trickle-down theory.
5. Private Ownership of Land and Land Rent
The private ownership of land and natural resources is an aspect of the institution of private property and private ownership of the means of production that has been condemned by economists who in other respects were supporters of capitalism, most notably Henry George. Their case against private ownership of land and natural resources rests on the theory of land “rent” developed by David Ricardo, a theory which, as I will show, is grossly deficient in its failure to incorporate the actual effects of private ownership of land and natural resources. Thus, it is with an exposition of Ricardo’s theory of land rent that our discussion must begin.
To understand Ricardo’s theory, it is helpful to realize that Ricardo lived in late eighteenth and early nineteenth century England. It was a common practice in the England of that time for farmers to rent the land they worked from aristocratic landowners. Ricardo focused on the portion of such rents that were paid not as compensation for the use of the buildings or any kind of improvements that had been made on the land, but, as he put it, “for the use of the original and indestructible powers of the soil.” 48 This abstract portion of the rents actually paid
and received, Ricardo held, existed even when the land was farmed by its owner. In that case, he maintained, some part of the value of the produce was attributable not as compensation for any cost incurred, nor as a rate of profit on capital invested, but as a payment for the use of the socalled original and indestructible powers of the land itself.
Ricardo explained the origin and determination of land rent in the following way. In a country with an abundance of land of the first quality—that is, best quality—and that is thinly populated, land will yield no rent. In such conditions, people can obtain the best land merely by appropriating it from nature. They are therefore not under the necessity of paying anything for its use. They will pay for the use of buildings or improvements made upon the land, but nothing for the use of the land itself.
Land rent commences, says Ricardo, when the population of the country grows to the point where all land of the first quality has been brought under cultivation, and it becomes necessary to resort to land of the second quality. On land of the second quality, the same quantity of labor and capital produces less than on land of the first quality. It produces less because the soil is simply inferior or because part of the labor and capital must be expended in transporting the produce a greater distance to market or in first making improvements that land of the better quality already possesses naturally.
The rent that will be paid, according to Ricardo, depends on the difference in the productivity of labor and capital on the two grades of land. If, for example, the same labor and capital produce 100 units of product or $100 of product value on land of the first quality, and only 90 units of product or $90 of product value on land of the second quality, then people will be willing to pay a rent of 10 units or $10 for the right to produce on land of the first quality. They will be willing to pay 10 (whether physical units of product or dollars, it is indifferent here) for the use of first-quality land because their labor and capital produce 10 units more on that land than on land of the second quality, which is their next-best alternative. If they can rent land of the first quality for just the smallest amount less than 10, they have a gain in renting it. And thus their competition will drive its rent to 10. At that point, the product or income obtained by labor and capital becomes no greater on land of the first quality than it is on land of the second quality, because rent absorbs the difference.
If the population of the country grows further, to the point where all the land of the second quality has been brought under cultivation and resort must be had to land of the third quality, then, says Ricardo, rent will commence on land of the second quality and will increase on land of the first quality. For example, if the same labor and capital that produce 100 on land of the first quality, and 90 on land of the second quality, produce 80 on land of the third quality, then when it becomes necessary to resort to land of the third quality, land of the second quality will begin to yield a rent of 10, while the rent on land of the first quality will rise to 20. 49 Again, the reason is that so long as the rent remains below these amounts, there is an advantage in bidding up the rent, because even after paying it, the same labor and capital will earn more on the first two grades of land than on land of the third quality.
The land-rent theory is intimately bound up with Ricardo’s and the other classical economists’ ideas on diminishing returns and population growth. The law of diminishing returns held that successive equal doses of labor and capital, when applied to a given piece of land, yield smaller and smaller increments of product. 50 In effect, having to apply labor and capital to land of the second quality is comparable in its results to the application of a second dose of labor and capital on land of the first quality, and similarly for the extension of cultivation to still lower grades of land.
Ricardo’s and the other classical economists’ views on population entered in explaining the limits that exist to the formation of land rent at any given time. According to Malthus, whose views on population Ricardo largely accepted, population tends to grow up to the limit of the food supply. Taken in conjunction with the land rent theory, this means that population tends to grow until the land that must be cultivated is of such an inferior degree of fertility that it yields barely enough to enable its cultivators to survive and rear the number of children required to replace them. At that point, all output on better grades of land that is in excess of what is required for such minimum subsistence shows up as “land rent.”
If, for example, we assume that 80 units of product represents subsistence, then, as we have just seen, a rent of 10 would be reached on land of the second quality, and 20 on land of the first quality. This would represent a kind of equilibrium. Rent could not grow further, because population could not grow further—an additional population could not be sustained, because yields would be too low to support it. (Eighty units of agricultural output, remember is assumed to represent minimum subsistence. Land of the fourth quality yields less than subsistence, say, 70 units.)
To develop further the case thought to exist against private ownership of land, we must consider what allegedly would happen if some improvements in production were now made—improvements that would increase the output of labor and capital on all the different grades of land. For example, suppose that with the use of the same
labor and capital, first-quality land could now yield 110 units of product; second-quality land, 100 units of product; and third-quality land, 90 units of product. For a time, everyone would be better off. But then, precisely as a result of the greater prosperity, more children would survive to adulthood, population would grow, more land would need to be cultivated, and it would become necessary to resort to land of the fourth quality, which now yielded 80 units of product and could therefore support its cultivators.
The great mass of people, who lived by their labor, would end up no better off than they had been before. From their point of view, the longrun effect of the improvements would simply be that a larger number of them survived at the edge of subsistence. Land of the fourth quality, which before could not be cultivated, because it yielded less than subsistence, would now yield subsistence and would be cultivated. Rent would commence on land of the third quality, which previously yielded no rent, and would increase on all the higher grades of land. Thus, the increase in yields on all the different grades of land previously cultivated would end up in the pockets of the landowners as additional rent, while the great mass of people toiled on at subsistence.
It was on the basis of this analysis that Ricardo and many other classical economists concluded both that the “natural” or equilibrium level of wages is subsistence and that rent tends to constitute a larger and larger proportion of the total income of a country as the country grows in wealth and population. 51 (The alleged tendency of wages toward subsistence was widely believed to be so inescapable that the proposition gained the name “the iron law of wages.”) In fairness, it must be pointed out that Ricardo sometimes admitted that in an improving country wages might stay ahead of their socalled natural level for an indefinite period of time. 52 But he could not free himself from thinking of subsistence as representing the natural equilibrium.
Ricardo’s views are understandable if one keeps in mind when he lived, and that his knowledge of history referred to the centuries prior to the Industrial Revolution. The five hundred years from 1250 to 1750 strongly appeared to confirm his view that economic improvements benefit primarily the landowners, while leaving the position of the masses unchanged. Those five hundred years represented a period of significant improvement when considered from beginning to end. Yet the standard of living of most people was hardly touched. The major beneficiaries by far were the landowning aristocracy and those merchants and artisans who enjoyed their patronage. By the end of the period, the landowning aristocrats could afford magnificent homes, fine furniture, fancy clothing, and gilded coaches. But the mass of people still could not afford new clothing, meat, or, often, even enough bread to still their hunger.
While Ricardo himself did not advocate the nationalization of land or the confiscatory taxation of land rent, others did. 53 His theory led people to view landowners as receiving the greatest incomes in the society and doing the least to earn them—as passively sitting back and pocketing the fruits of progress and other people’s labor, by virtue merely of the growth of population. It should not be surprising that demands were soon made that these apparently unearned gains be used for the good of all.
These views on land and land rent exert an important, if not generally recognized, influence on public opinion in the present-day United States. They provide much of the intellectual basis for proposals that have been made to nationalize the American oil industry, and for the socalled windfall profits tax that was enacted when price controls on domestic crude oil were removed. For essentially the same analysis respecting the formation of rent applies to mining, and the extractive industries generally, as applies to agriculture. Thus, the rise in the world price of crude oil is widely seen as the result of a growth both in world population and in average oil usage per capita pressing upon limited reserves of oil. The owners of the reserves are perceived as undeserving beneficiaries of this process. The objective of the nationalization proposals and of the windfall profits tax is to seize these allegedly undeserved gains and use them for the alleged general welfare.
These views on land and land rent play a major role in perpetuating the U.S. government’s enormous landholdings in the Western states and in Alaska. In many of the Western states, the federal government owns over half the land; in Alaska, it owns about 99 percent. It is thought that in government hands the land serves everyone, while in private hands it would merely provide unearned income to its owners. These views also influence public opinion in its appraisal of conditions in other countries. It is taken for granted that a precondition of overcoming poverty in many of the backward countries is “land reform,” by which is meant the confiscation and redistribution of all significant-sized landholdings. The economic intent of these proposals is to give to small cultivators the allegedly unearned rents now going to the large landowners.
In this last connection, it must be pointed out that the Communists and socialists are more consistent than the advocates of land reform. Land reform would transfer land rents to a larger number of people than had received them before, but would leave the basic conditions complained of unaltered: those cultivators to whom the better grades of land were given would earn more for the same labor than those to whom the poorer grades were given.
And those working the poorest grades of land would receive no benefit at all. Nor would the dwellers of towns and cities receive any benefit. The Communists and socialists, on the other hand, advocate the nationalization of the land, rather than its redistribution, and thus the use of the land rents for the alleged benefit of the whole society.
How Private Ownership of Land Reduces Land Rent
The inference, so easily drawn from Ricardo’s theory, that private ownership of land enables landowners passively to sit back and pocket the fruits of economic progress and other people’s labor, is utterly mistaken. The truth is exactly the opposite: namely, private ownership of land is an essential foundation of economic progress, and the more it is respected, the more rapid is economic progress. Thus, it is precisely private ownership of land that prevents land rent from constituting an ever growing share of income. For private ownership of land operates to increase the productivity of land and thus reduce its scarcity value and rent.
We can begin to understand the effect of private ownership of land on land rent if we look again at the case of economic progress and a rise in yields on all grades of land. Only this time, let us consider a far more rapid rate of progress than before, the kind of rate of progress that results from the incentives and ability to increase production that is made possible by unrestricted private ownership of land and which is therefore rapid enough to outstrip the growth in population. For the sake of simplicity, let us assume that the rate of increase in output per worker in agriculture is twice the rate of increase in population. Thus, by the time that population doubles, the same absolute number of workers employed in agriculture is capable of producing quadruple the agricultural output.
In this case, there can be a doubled per capita consumption of agricultural commodities without the employment of any additional workers in agriculture whatever. If, as is entirely possible, a doubled per capita consumption of agricultural products is all that the public is prepared to pay prices for that are profitable to the producers, then the effect would in fact be that the number of workers employed in agriculture is no larger than before. Because the doubling of population would mean a doubling of the total number of workers in the economic system, the implication of agriculture continuing to employ only the same number of workers would be that the size of agriculture relative to the rest of the economic system is cut neatly in half. And with this halving of the relative size of agriculture would be a halving of the size of agricultural land rents relative to the total income of the economic system.
In terms of physical agricultural produce, agricultural land rents would quadruple: Where before there were three workers respectively producing 100, 90, and 80 on land of the first three qualities, there would now be three workers respectively producing 400, 360, and 320. Therefore, in terms of physical produce, land rents would now be 80 plus 40, instead of 20 plus 10, or four times as large. 54 That is, they would maintain the same proportional relationship to the four-times larger agricultural produce. What is different, however, and this is vital, is that agriculture itself would now be only half of its former size relative to the rest of the economic system, and thus those land rents as a percentage of the incomes earned in the economic system would be cut in half. And their relative significance would be halved again and again, every time the same set of developments was repeated.
Of course, it is not necessary that when the productivity of labor in agriculture doubles relative to the increase in population, the per capita consumption of agricultural commodities also doubles. It might increase by less than double or by more than double. If it increased by less than double, then a smaller absolute number of workers would be needed in agriculture than before, and thus the relative decline in agriculture and in the economic significance of land rent would be all the greater. Indeed, in this case, there would also be a need for less land under cultivation than before (and for the less intensive cultivation of the land that remained in production). For example, it might be that instead of the doubled population wanting to buy, at prices profitable to the sellers, the 1080 units of agricultural output now produced on the first three grades of land (400 + 360 + 320), they only wished to buy the 760 units now produced merely on the first two grades of land. This would still represent a significant increase in the per capita consumption of agricultural commodities, namely, a little over 40 percent. For 760, the output now produced on the first two grades of land is more than 2.8 times as large as the output previously produced on the first three grades of land (100 + 90 + 80, which equalled only 270), and thus, when divided by a doubled population, represents per capita consumption at a level 1.4 times as great. Yet it would also mean the withdrawal of land of the third quality from production. And this, in turn, would mean a further decline in land rents, this time even as a proportion of the physical volume of agricultural produce. In terms of the physical produce, land rent would now be 40 ⁄ 760 instead of 30 ⁄ 270 , that is, about 5 percent instead of about 11 percent.
It makes no fundamental difference if the increase in the per capita consumption of agricultural commodities is so great that to provide it, it is necessary to increase the absolute number of workers directly or indirectly
contributing to the production of agricultural commodities, so long as there continues to be a substantial enough decline in the relative number of workers so employed. In this case, even though more labor is directly or indirectly applied to each unit of land, and even though the amount of land under cultivation may be increased through the resort to land of relatively inferior quality, still the relative decline in the size of agriculture outweighs any increase in the proportion of agricultural produce which constitutes rent. Moreover, it should be realized that even when it is necessary to resort to additional land, it is possible for land rent as a proportion of the physical volume of the produce not to increase, or, indeed, even to decrease. This will be the case insofar as it becomes possible to make previously submarginal land the equivalent of land of above-marginal quality. To the extent that this occurs, the need to resort to additional land does not mean a need to resort to land of relatively inferior quality.
Under the kind of economic progress I have just described, which has been characteristic of the Western world since the Industrial Revolution, there is no tendency either toward a fall in real wage rates to subsistence or toward a rise in the economic significance of land rent—that is, no tendency toward a rise in the share of socalled national income constituted by land rent. On the contrary, under these conditions, real wages go on rising further and further above subsistence and the share of national income constituted by land rent is radically reduced. 55 And this is true despite rapid increases in population. Indeed, as will be shown later in this chapter, in the context of a division-of-labor, capitalist society, the very increase in population itself tends to become a major source of the productivity of labor outstripping the increase in population. 56
Historically, the rate of economic progress in Britain and North America began to accelerate markedly starting around 1750, and by the early nineteenth century was far outstripping increases in population and the consequent operation of the law of diminishing returns and the need to resort to inferior grades of land. In the course of the nineteenth century similar developments occurred in various countries on the European continent.
A succession of radical improvements, continuing right down to the present time, has enormously increased the productivity of labor and the yields per acre on all grades of agricultural land. As I pointed out previously, the poorest land cultivated in the Western world today is vastly more productive than the very best land in use a couple of generations ago, let alone in Ricardo’s day. Modern technology, it is worth repeating, is able to make mountains and deserts into land that is far more productive than the very best lands cultivated not many decades ago. 57
This same process, of converting previously submarginal land into very high-quality land, was exemplified in a different form by the improvements in ocean and overland transportation that took place throughout the nineteenth century. Before the days of lowcost ocean transport, practically all of the land of North America had to be considered submarginal from the point of view of Britain and Western Europe. Before the days of the railroad, most of the land of the American Midwest had to be considered submarginal from the point of view of the Eastern United States as well as the rest of the world. But with these improvements, the land of the American Midwest emerged as an enormous addition to the supply of very-best-quality land. In the Eastern United States, in places like New York, Vermont, and Massachusetts, there are actually substantial tracts of land that at one time were farmed, but have since been put back to forest, because they were displaced by the competition of far superior Midwestern lands. Similar developments occurred in Great Britain in the nineteenth century, where substantial acreages that had been farmed were turned to pasture.
The resulting sharp decline in the economic significance of land rent can be seen by comparing the locus of wealth in Great Britain in 1850 with its locus in 1750. In 1750, the locus of wealth in Britain was great landed estates. In 1850, it was far and away industry and commerce. This change in the locus of wealth was the result of the continual shrinkage in the relative size of agriculture and the corollary continual enlargement of the rest of the economic system, then principally consisting of manufacturing and commerce.
The same course of development that has been described with respect to agriculture took place, of course, with respect to mining as well. Since the Industrial Revolution, the poorest-quality mines in commercial operation at any given time have tended to be far more productive than the very best-quality mines in operation a generation or two before. And the proportion of the labor force employed in mining, and the relative economic significance of mining and mining rents, has sharply declined.
This rapid rate of increase in agricultural and mining productivity has not been a mysterious accident. It is the result, as I have said, precisely of the private ownership of land and natural resources. The private ownership of land and natural resources gives each individual owner the incentive to improve his property, to use it for the benefit of the market, and to go on seeking ways to increase its efficiency and yield. Competition among the various private owners leads to the rapid widespread adoption of whatever improvements are introduced and requires that anyone wishing to go on earning a high rate
of profit introduce still further improvements.
In other words, the combination of the incentive to save and accumulate capital, the profit motive, and the freedoms of individual initiative and competition that private ownership establishes, operates to increase the yield of agricultural and mining property rapidly and steadily, and thus to reduce land rent! Private ownership increases the productivity of land, which counteracts diminishing returns and the need to resort to inferior grades of land. In this way, private ownership of land reduces land rent.
To present the same idea in still different words, a growing significance of land rent is the reflection of an increasing scarcity of the better grades of land. Private ownership of land, on the other hand, provides the incentives and the means for making each piece of land more productive and for bringing into production every piece that is better than what is presently in use. It is thus the most powerful force operating in favor of abundance and against any growing scarcity of the better grades of land. Thus, it works to reduce land rent and its economic significance.
This principle—that private property is what reduces the significance of land rent—is confirmed if we examine the historical facts. The beginning of the more-rapid rate of progress in agriculture and mining coincides with a vast extension of the institution of private property in land. In the century and a quarter or so following 1750, practically the whole of the territory of the United States east of the Mississippi River and extending several hundred miles to the west of it became private property. In addition, the second half of the eighteenth century was the major period of the enclosure movement in Great Britain. This was a movement that established private property in land where before there had been communal property. The enclosure movement converted village-owned pastures and forests into separate private property holdings; it also consolidated into larger, compact units the small, scattered strips of land that many villagers had previously farmed. The result was the largescale creation of modern private farms in Britain. This was followed by the rise of scientific farming: selective animal breeding, the development of newer and better strains of seed, and the application of more modern tools and implements.
Furthermore, both in Britain and on the continent of Europe, the power of feudal laws and customs was broken in other respects as well. Property which had previously been prohibited from being sold, or even leased on a longterm basis, because it was viewed as having to provide support for an unbroken line of future aristocratic descendants rather than being the private possession of any living individual aristocrat, was now allowed to be sold or leased on long term. This made possible the transfer of such property to more efficient hands. Also, the corollary of the abolition of serfdom on the European continent—which did not take place in most countries until after the French Revolution—was that landowners could now fire unnecessary workers. (Serfdom had not only prohibited workers from leaving the feudal estates of their birth but also prohibited the feudal “owners” from removing them. 58 ) Thus, the abolition of serfdom gave landowners a powerful incentive to seek more efficient methods of production, which incentive had previously been lacking because of feudalism’s violation of the right to fire along with the right to quit.
In all these ways, it was the extension of private ownership over a vastly greater area that brought about continual doublings and redoublings of the productivity of labor in agriculture and mining. Thus it was private property in land and natural resources that made it possible for a steadily declining fraction of the labor force to supply a growing population ever more abundantly with agricultural commodities and minerals, and which thus reduced the scarcity of productive land and thereby the economic significance of the income derived from such land.
In our own day, the principle that private property reduces land rent is dramatically confirmed by the oil situation. As explained previously, the U.S. government’s ownership of vast land areas in the Western states and in Alaska operates to keep vast amounts of oil off the market. The same is true of its ownership of the continental shelf. If these areas were privately owned, or open to the establishment of private ownership, the most profitable use to which they could be put would be to develop them and extract and sell the oil they contained. The effect would be vastly more oil on the market and thus a lower price of oil. The effect of this, in turn, would be a reduction in the socalled mining rents derived from owning oil deposits and a reduced significance attaching to the ownership of oil deposits. This result would be achieved the more strongly, the more the territory throughout the world that was privately owned. For then the greater would be the volume of oil deposits under the control of people who had an incentive to develop them and extract and sell the oil they contained.
The result would also be achieved the more strongly, the more the property rights of the existing private owners of oil deposits, and of all other forms of energy deposits, were respected. If, for example, the owners of existing privately owned oil deposits are not forced to operate under price controls, rising taxes, or the threat of confiscation through nationalization or antitrust “divestitures,” they will invest more and produce more oil. By
the same token, if the property rights of the owners of natural gas deposits, coal mines, and uranium mines are not infringed, they will produce more of these forms of energy, which, of course, compete with oil and whose more abundant production would keep down the price of oil and any mining rents derived from the ownership of oil deposits.
Thus, private property and respect for the rights of its owners is what holds down and actually reduces the significance of land rent. However paradoxical it may seem, the objections and criticisms that Ricardo’s followers raised against private ownership of land should have been directed against the absence of private ownership of land and against violations of the rights of existing private owners. For it is the absence of private property, and the violation of property rights in land, that hold down the supply of agricultural and mineral products and thus bring about a scarcity of the better grades of land and mineral deposits and so increase the significance of land rent. It is precisely government intervention at home and the worldwide nationalization of oil deposits that have made possible the emergence of a new aristocratic class of officials and sheiks, who derive enormous revenues through absolutely no productive contribution on their part. Abolish that intervention and open more land to private ownership, and the rents derived from the ownership of oil deposits will be radically reduced.
It is worth pointing out in connection with the fact that private property is the basis for the reduction of land rent, that efforts to tax away the land rents that do exist under private property only serve to increase land rents. For in reducing the income that can be derived from the ownership of a piece of land, they reduce the incentive of landowners, and the means available to landowners, to improve their methods of production and thus to bring about reductions in land rent. Thus, such taxation deprives the average wage earner of an essential defense against the consequences of rising population, which, in the absence of rapid and continuing progress in agriculture and mining, would be the unleashing of the law of diminishing returns against him, and all that that implies.
In addition, of course, it should always be kept in mind, on the basis of the discussion of natural resources in Chapter 3, that the increase in the supply of agricultural and mineral products that private ownership of land achieves is not at the expense of the future. On the contrary, the increase is progressive and can go on virtually without limit, so long as man expands his knowledge of and power over the physical world in which he lives, which is precisely what private ownership of land and natural resources gives him the incentive to do. 59
Land Rent and Environmentalism
Knowledge of the role of private ownership of land and natural resources in preventing any tendency toward a progressive growth in land rents and decline in real wages toward an equilibrium of subsistence confirms the critique of environmentalism made in Chapter 3. We have already seen the role played by environmentalism in the rise in mining rents in connection with petroleum, and the consequent enrichment of Arab sheiks and terrorist governments at the expense of the rest of the population of the world. 60 It is necessary to realize that in general, as a matter of principle, the environmental movement is bent on stopping further increase in, indeed, on reducing, the productivity of labor in agriculture and mining, and thereby, whether it is aware of the fact or not, on driving down real wage rates and raising land rents. This is the meaning of its systematic efforts to stop the use of pesticides, herbicides, and chemical fertilizers, and of its further systematic efforts to stop the conversion of previously submarginal land and mineral deposits into highly productive land and mineral deposits—notably its efforts to stop the economic exploitation of “rainforests,” “wetlands,” the Arctic, Antarctica, and the ocean floors, as well as much of the American West and Alaska. The measure of its success must be the rise in the economic significance of land and mining rents and a decline in the level of real wages toward subsistence.
The environmental movement openly declares its hostility to the Industrial Revolution, which masses of unthinking people take to mean opposition merely to black smoke belching from factory chimneys. It should be clear from this analysis that the fact is that even if environmentalism does not succeed in removing modern technology from the world, it can easily succeed in recreating pre–1750 conditions for the masses of people in the presently advanced countries, merely through throttling further rapid progress in agriculture and mining. The environmental movement is often characterized as elitist. It is elitist. Economically, it is a latter-day movement of feudal aristocrats, seeking the existence of a privileged class able to pocket the benefits of the economic progress that has taken place up to now, while denying those benefits to the broad mass of the public. It is a movement of monopolists, typified by the mentality of homeowners of the type who, having gotten “theirs,” seek to stop all further development of land in their area. It is the movement of neofeudal mentalities who desire a world of broad open spaces for themselves, spaces that are essentially ownerless, and who care nothing for the plight of crowded, starving masses, who are to be denied the benefit of access to those open spaces, which are to be closed to all development. Essentially it is the old story of the feudal lords who are to have vast forests set
aside for their enjoyment, while the serfs dare not remove a log for their fires or kill an animal for their meal. 61
The Violent Appropriation Doctrine
It is necessary to consider the argument that the institution of private property in land is tainted insofar as present titles can be traced back to the violent dispossession of previous owners.
As noted in Chapter 1, this argument has its clearest application to conditions in Europe, in the course of whose long and bloody history probably many violent transfers of ownership can be found in connection with almost any particular piece of land. 62 It is doubtful that even on its own terms the argument has much application to the United States. To be sure, in the process of appropriating land, occasional injustices were committed against Indians. These injustices, however, arose only in those isolated cases in which individual Indians could claim legitimate rights of private ownership which the white settlers violated, such as having established a farm which white settlers appropriated. There was no injustice present in the settlers disregarding the claims of the Indian tribes to political sovereignty over territory, nor in their disregarding the collectivist claims of the tribes to economic ownership. By the principles set forth in the Declaration of Independence, governments are instituted among men to secure their inalienable individual rights and deserve to be overthrown when they become destructive of that end. If this was true of the relatively enlightened despotism of the British under George III, it was infinitely truer of the barbaric governments of the Indian tribes and their arbitrary claims to land ownership.
In the United States, the settlers found an almost empty continent, whose relative handful of inhabitants almost all lived by hunting and who had few or no fixed settlements, nor, therefore, any solid basis for claiming title to the land, over which they merely roamed. And, even so, the settlers frequently paid the Indian tribes for the relinquishment of their claims to rights of hunting and camping. In this sense, they purchased Manhattan Island and many other, far more substantial pieces of territory from the Indian tribes. Thus, in the United States, it is true to say that the historical record of the overwhelming majority of property holdings is free of violent appropriation—that practically all property holdings can be traced back through voluntary purchases and sales to a point of peaceable appropriation from nature on the part of their very first owners.
Moreover, it should be realized that in any case in which a division-of-labor, capitalist society supersedes a non–division-of-labor society, it is logically illegitimate to view matters in the light of forcible expropriation. The conditions of a non–division-of-labor society are necessarily those of recurring conflict and warfare, with successive waves of newcomers again and again forcibly displacing the previous inhabitants. This is the necessary outcome of population growth and the operation of the law of diminishing returns within the narrow constraints of a society of hunters, nomads, or self-sufficient farmers. In such circumstances, as soon as population growth reaches the limit of the ability of a group’s present territory to support it, its members must range further afield, in the quest for additional hunting grounds, pastures, or agricultural land. And thus they come into conflict with the members of other groups who seek the same territory or who already occupy it, and whose survival likewise depends on its possession. It is only the establishment of a division-of-labor, capitalist society, with its potential for continuing increases in production, that removes these economic causes of conflict and makes possible a harmony of interests among men. It is only within such a society that property rights or any other rights can be secure.
It should also be realized that in any conflict between a division-of-labor, capitalist society and a non–division-of-labor-society, such as existed between the society of the American settlers and those of the Indian tribes, the former possesses an overwhelming and decisive moral superiority over the latter, which absolutely entitles it to victory. This superiority is the fact that the division-of-labor society possesses the ability to assimilate all of the members of the non–division-of-labor society, and to enable them and their heirs to enjoy greater wealth and longer life, along with those who are already members of the division-of-labor society. But the non–division-of-labor society cannot assimilate the members of the division-of-labor society—it cannot even support all of its own members. Thus, while the division-of-labor society of the American settlers had the ability to offer the Indians the life of the settlers upon assimilation, the non–division-of-labor society of the Indians offered only the prospect of starvation and death if the settlers were to attempt to assimilate with it. The conflict between the settlers and the Indians was a conflict between a society easily capable of absorbing an additional million members, and a society capable of sustaining no more than a million members (despite the availability of most of the land mass of the North American continent), for that was the population limit that the Indians were apparently unable to go beyond, before encountering a shortage of hunting grounds. If any failing can be charged to the settlers, it was their failure sufficiently to seek to assimilate the Indians. But this was probably the result of the refusal of the Indians to be assimilated. 63
Furthermore, it must be stressed that in any case— even aside from that of conflict between a division-of—
labor society and a non–division-of-labor society—the legitimacy of the institution of private property and of the title of its present owners does not in any way depend on the absence of violent appropriations in the past. Private property in Britain and France, for example, and the title of its present owners, is fully as legitimate as it is in the United States, despite a record of violent appropriations in the past. The reason for this is that in a division-of-labor society, such as Britain and France represent, there is a powerful force at work which steadily operates to wash away all stains of past violence. This is the fact that in such a society production is carried on for the market and that property is gained or lost to the degree that one produces to the satisfaction of the market. 64
To illustrate this principle, let us assume the existence of a society in which every piece of property has been violently seized from its previous owners. But let us also assume that from this point forward there is an end to violent appropriation, because the law now recognizes the last group of violent appropriators as the legitimate owners. Henceforth, acts of violent appropriation occur in violation of the law and are prosecuted and severely punished, and thus, from this time forward, property which is not passed by inheritance must be acquired by no other means than by voluntary purchase and sale.
Thus, from this point on, the owners of property are secure in their possession and have the incentive to improve their property and its ability to produce. In the context of a division-of-labor society which grows up around them, the incentive to increase production means the incentive to produce more for the market, in order to be able to earn the money to buy the things one wants in the market. An essential means of increasing production for the market is the increasing use of capital in the form of money, so that one’s production can have the benefit of products previously produced by others and the benefit of services voluntarily performed by others. Capital must be used in order to purchase such things as animals, tools, building materials, equipment, and labor services, which are essential to being able to increase production for the market. There is no alternative to making such purchases if one wishes to be able to earn the money one would like to earn.
In the very process of raising capital, however, it becomes necessary either to sell land or to borrow against it. Such sales of land are obviously an important way in which land passes into the hands of people who have no necessary connection with violent appropriators.
Furthermore, the necessity of using capital—of making purchases in order to make sales—creates the possibility of financial losses. Such losses are certain to occur for many landowners as the widespread efforts of landowners to increase production for the market result in lower prices. Only the more efficient landowners—those with lower costs—can be profitable in the face of such lower prices. The less efficient ones suffer losses.
Thus, the newly established security of property and its incentives to save and invest and increase production result in market competition among the landowners. In this competition, some of the landowners succeed and grow richer, while others fail and lose their land. They lose their land either because they have borrowed against it, and their losses prevent them from meeting the interest and principal payments, or simply because to offset financial losses and continue producing with the aid of capital—of the means of production that can only be obtained with the expenditure of capital—it becomes necessary to sell more land. Ultimately, of course, a landowner who continues to sell at losses must lose all of his land.
Thus land more and more passes into the hands of those who acquire it on the basis of their success in serving the market, and is retained only by those who are successful in serving the market.
Moreover, the purchase of land, of course, is not limited to those who have been previous owners of land. It is open to everyone, including (very importantly in the context of the transition from feudalism to capitalism) former serfs and the descendants of serfs. Under these conditions, anyone, irrespective of his class of origin, or that of his ancestors, will be in a position to acquire land who earns the money necessary to buy it or who offers good prospect of efficiently using the land he acquires. (This second condition is a principal basis for being able to borrow money to buy land.) The money with which to buy land can, of course, be earned in any area of the economy, whether the accumulation of profits in manufacturing or commerce or the saving up of wages in any line of employment, whether in industry or in agriculture. And, as indicated, money to purchase land can be borrowed on the basis of demonstrated ability and good prospects for its profitable use.
Thus, the basis of acquiring and retaining property becomes the ability to produce efficiently for the market.
Initially, of course, the power to spend in the market of a country that recently experienced a forcible appropriation of property will reflect that forcible appropriation. To the extent that those who have appropriated others’ property, or the heirs of these appropriators, are richer, their power to spend is greater, and production for the market is, accordingly, production that serves them. But to the extent that the members of this group are not themselves as adept in producing for the market as those who have not seized property, or whose ancestors have
not seized property, property begins to gravitate away from the members of this group and toward the members of the second group. Soon, a substantial amount of property is held not by those who have seized property, or by their heirs, but by those who have supplied the wants of this group. And now their spending emerges as a growing factor in the market. And insofar as property is retained by descendants of forcible appropriators, it is so by virtue of their success in serving the market.
As more time passes, property is increasingly held not by those who seized it, nor by their heirs, but simply by those who are most adept at supplying the wants of others who have money to spend, who, for their part, possessed the same ability. In this way, the significance of the violent seizure of property in the past is steadily diminished and all property comes to be held by those who have fully earned their right to it.
How rapidly this cleansing process takes place depends on how free the market in land is allowed to be. The main obstacle delaying the process is entail legislation—i.e., laws that restrict the passage of property to a specific line of descendants, and which prohibit its sale, forfeiture in payment of debts, or even longterm lease, to parties outside this line of descendants. Such legislation (which existed in Europe even after the French Revolution) was enacted to preserve the holdings of aristocratic families in the face of the market forces just described. Of course, entail legislation is itself a gross violation of property rights—it denies the property rights of the living in the name of the alleged property rights of the unborn.
The Demand for Land Reform
The doctrine that present titles are invalid because of past acts of violence in the appropriation of property, is often associated with demands for “land reform.” Land reform is a demand that property be forcibly transferred from its present owners to a new group of owners. The connection to the violent-appropriation doctrine exists whenever this new group is alleged to be descended from earlier possessors whose rights the ancestors of the present owners allegedly violated.
It should be realized that no amount of past violence in the appropriation of land can justify land reform. Land reform is simply a new, fresh act of violent transfer of land. It is one thing for the actual victim of a dispossession, or his children or grandchildren, to demand to be put back in the possession of the property that was forcibly taken from him. But if for any reason these individuals are denied justice, it becomes a fresh injustice to later on dispossess an owner on the grounds that his ancestors, or the ancestors of some previous seller, lacked just title. In order for justice to be done, there must be a time limit on the recognition of claims for the redress of past injustices.
If this were not the case, no one could be secure in his property. At any time, parties could step forward claiming dispossession of their ancestors by the current owner’s ancestors or by the ancestors of some previous seller of the property. And claims of any one group of alleged victims could in turn be superseded by the claims of still another group of alleged victims able to trace the dispossession of its ancestors further back. In a country like England, for example, the same piece of ground might be contended for by those able to trace the dispossession of their ancestors to the War of the Roses, or, alternatively, to the Norman Conquest, or to the still earlier invasions of the Danes, Saxons, Romans, and even Picts and Celts.
It would certainly be a gross injustice to ask anyone to work and save to improve his property, and then take it from him on the basis of such claims. For justice to be done, conditions must be such that people can work and save to improve their property. And for such conditions to exist, property rights must be put beyond challenge as quickly and as completely as possible. This means, as a minimum, a strict time limit on the recognition of claims based on past injustices.
Once private property rights are made secure, not only are the effects of past injustices washed away, but, as should already be clear, the land of a country is quickly put to its most efficient uses. It is important to stress this point in dealing with the issue of land reform. As the advocates of land reform describe matters, the system of land ownership they seek to overthrow is highly inefficient and has no economic basis. According to them, the actual unit of agricultural production is almost always a small farm, a large share of whose output its peasant operator must turn over as rent to a wealthy landowner who has done nothing to earn it. “Land reform”—the forcible transfer of ownership to the peasant operators— is then urged not only as the means of rectifying past injustices, but also as the means of providing powerful incentives for the improvement of production. As owners, it is argued, the peasant operators will have the incentive to increase their production—something which they now lack, because the increase would allegedly be appropriated by the wealthy landowners.
What must be realized here is that if the “land reformers” were right in their description of the facts, a free market in land would automatically and peaceably operate to transfer ownership to the small operators. For if, as owners, the small operators would have greater incentives and would produce more, and there is no economic basis for the present, largescale ownership of land, then the present owners would have a powerful incentive to
sell out to the small operators. This is because if the same piece of land presently owned as a single unit would produce more when subdivided into a multiple of smaller property holdings, its total market value would also be greater when subdivided into such holdings. The situation would be perfectly analogous to what happens right now in the United States, as cities expand into surrounding farm or ranch land. The farmers or ranchers who own units of several hundred or several thousand acres find it profitable to subdivide and sell out their holdings in units as small as a quarter or eighth of an acre, or even less, to a larger number of home owners.
If, indeed, small units of ownership were in fact more efficient, the owners of large holdings would have exactly the same kind of incentive to sell out to small owners. And it is worth noting that the small owners would not have to be able to pay for their purchases right away, any more than home buyers need to be able for their purchases right away. The small owners could buy their holdings on credit—with mortgages on their property. This arrangement would probably be advantageous to the present, large owners even if they were the ones who had to hold the mortgages, because for twenty or thirty years they would receive far more as interest and principal payments from land used efficiently than they could otherwise receive as rent from land used inefficiently. This excess of funds received over twenty or thirty years would more than compensate them for the loss of all future rents—in exactly the same way that receipt of a sufficiently high price in the present would more than compensate them for the loss of every subsequent year’s receipts. 65
Thus, even if the advocates of land reform were correct in their claim that the system they want to overthrow is inefficient, all that would be necessary to achieve greater efficiency is not “land reform”—not the forcible expropriation of property—but the establishment of a free market in land. If the more efficient system is the breakup of large landholdings into small units, then this is what a free market in land will accomplish—without force or violence, and to the mutual self-interest of all concerned.
But the fact is that the breakup of large landholdings that the land reformers want to achieve by no means typically represents an improvement in efficiency. Often, it is precisely the large landholdings that are the more efficient arrangement and are the product of the market as far as it is free. This appears generally to be the case in instances in which large plantations produce and export such crops as bananas, sugar, pineapples, or coffee. Here the unit of production is not a farm of a few acres but perhaps the whole plantation, or at least some substantial portion of it. The large landholding is necessary
in order to utilize expensive modern equipment, such as tractors, which would be uneconomical if they had to be applied within the limits of separate farms consisting of only a few acres each.
In all cases of this kind, land reform represents a serious reduction in agricultural efficiency—over and above the disincentives its prospect creates for saving and any form of improvements to be undertaken by those likely to be expropriated by it. For it represents a forced reduction in the scale on which agriculture is undertaken, and thus a loss of the benefits of largescale production.
The advocates of land reform are actually oblivious to all such concerns. Their real goal is not greater efficiency in agriculture, but to enable the largest possible number of people to survive by means of subsistence farming. They want each family to be able to live by having its own few acres. And when there are more families, each will presumably have a little bit less land to farm, as the result of a further land reform if necessary.
If one thinks seriously about land reform as a solution to poverty in the backward countries, it becomes clear that it is actually incompatible with the real solution. The real solution to poverty in the backward countries requires not that more people there be able to squeeze by a little bit more easily as farmers, but that the populations of those countries become integrated into the international division of labor. If the people of most of Asia, Latin America, and Africa are ever to enjoy a high standard of living, it will not be as farmers on a few acres each, but as workers in the same kind of division-of-labor society as presently exists in the United States, Western Europe, and Japan.
Thus, land reform seeks the solution to poverty in totally the wrong direction. It actually operates to prevent the real solution from being achieved. In forcing the breakup of large plantations producing for the export market, it cuts backward countries off from such connection to the international division of labor as they have managed to achieve. In disrupting the exports of these countries, it deprives them of the ability to import from the more advanced countries, and thus deprives them of the ability to obtain technologically more advanced goods than they can produce for themselves. At the same time, of course, in reducing the production of goods for export and thus raising the prices of the goods affected, it operates to reduce the real wages of workers in the more advanced countries, since the buying power of their wages is correspondingly reduced.
Even more fundamentally, the forcible restriction of the scale on which agriculture is undertaken and the constant threat of renewed confiscations that land reform represents operate to prevent permanently the rise in the productivity of agricultural labor that is indispensable to
building a division-of-labor society. It should be remembered that labor can be spared for industry and commerce only to the degree that it is possible for a fraction of the working population to produce the food required by the whole. Land reform operates to keep down the productivity of the fraction required in agriculture and thus to keep up the size of that fraction. It thus works to prevent the development of industry and commerce and the establishment of a division-of-labor society in the countries in which it exists.
The solution to the agricultural problems of the backward countries is not land reform, but the establishment of a fully free market in land and thus, for the first time in those countries, the full recognition of private property rights in land. That will eliminate all vestiges of feudalism and feudal inefficiency and make possible the progressive improvement of agricultural production.
Our discussion of land reform has application to conditions in El Salvador in recent years. In that country, the government of the United States spearheaded a drive for land reform, even under the auspices of the avowedly conservative Reagan administration. It made land reform a precondition of American aid.
While the official policy of the U.S. government is, and was, supposed to be noninterference in the internal affairs of other countries, this policy was somehow forgotten in the case of land reform in El Salvador. (It has been scrupulously observed, however, in connection with almost all of the nationalizations of industries, including the expropriations of the property of American nationals, that have occurred throughout the world. It has also been observed in connection with Communist atrocities. But the same State Department that helped to lose China and Cuba to communism did not remember the policy of noninterference in connection with land reform in El Salvador.)
It is almost impossible to know the details of what actually happened in El Salvador as a result of land reform, because the representatives of the press lack the knowledge of economics that is required for intelligent reporting on the subject. Nevertheless, reports did come through that the socalled Right in El Salvador, whatever that designation may mean, denounced land reform as a violation of free enterprise and blamed it and the related nationalization of banks for destroying the economy of the country and fomenting the unrest on which the Communists thrived. In view of what has been established in principle concerning land reform, it would seem that such claims deserve thorough investigation. There is a strong likelihood that they are correct.
If they are correct, our government’s policy of having made land reform a precondition of American aid would be ironic in the extreme. It would mean that before we were willing to aid El Salvador in a defense against communism, we required that its government violate private property rights on a massive scale and create the chaos which the Communists needed in order to thrive. (Later, if the Communists had won their revolution, which, until the recent fall of communism in Eastern Europe and the Soviet Union, was the likely outcome, the State Department could have issued a white paper explaining why their victory was inevitable.)
In connection with the subject of land reform, it is necessary to mention the fact that the American military occupation under General MacArthur forced the policy on Japan after World War II. Large landowners were forced to sell at prices set by the government, and rapid inflation of the currency quickly made their compensation almost valueless.
On the basis of all that has been established concerning land reform, it should be clear that this policy must be condemned, even though it is almost universally regarded as having been a major element in establishing American “democracy” in place of Japanese feudalism. The only appropriate policy, the only one consistent with the American principle of individual rights, would have been the establishment of a free market in land—i.e., the abolition of all aspects of entail legislation and any elements of legal privilege for the large landowners, but not their expropriation.
The effect of land reform in Japan has been to hold down the efficiency of Japanese agriculture and to impose a drain on the rest of the Japanese economy, which is obliged to subsidize the inefficient agricultural sector. In Japan today, landholdings are typically no more than two or three acres and are operated on a part time basis, by people whose main employment is in industry.
This highly inefficient arrangement has not resulted in a catastrophe, because at the time it was instituted Japan was already a highly industrialized nation able to import most of its food supplies, and over the years it has greatly increased its ability to import food. The effect of land reform in Japan has thus worked out to be equivalent to that of the destruction of agriculture within the territory of a city, as it were. It has not been disastrous, because the role of agriculture was relatively small to begin with and the losses inflicted on it could easily be made good by a rapidly expanding industrial economy, through imports. Japan’s food supply would be affected far more seriously by land reform in the United States, Canada, Australia, Brazil, or Argentina than by land reform in Japan, because these are the places on which it actually depends for most of its food supply. The effect of the Japanese land reform would be virtually nil if not
for the protectionist measures against the import of foreign rice. These force Japanese consumers to bear the burden of the land reform as far as the consumption of rice is concerned.
It must be noted that Japan’s postwar industrial success is the result of following policies with respect to industry that are the opposite of land reform. Property rights in industry have been respected far more highly in Japan than in the Unites States—as manifested in sharply lower rates of taxation on profits and interest. This, of course, has resulted in much higher rates of saving, capital accumulation, and economic progress in Japan than in the United States. Furthermore, since the early postwar years, inflation in Japan has been at a significantly lower rate than in the United States. This is also very important in regard to a country’s real rate of taxation of profits and interest, since the greater the rate of inflation, the higher are the artificially inflated profit and interest incomes subject to taxation and thus the greater is the actual taxation of such incomes. 66
To summarize our discussion of land reform, we have seen how in a division-of-labor, capitalist society the stain of violent appropriations of land in the past is steadily washed away through the operation of market processes. In close connection with this, we have also seen how land reform represents a fresh act of injustice and is economically disruptive and against the interests not only of existing landowners, but also of everyone else in the long run. For land reform seeks to perpetuate agricultural inefficiency and thus to keep down the real income of all buyers of the agricultural products concerned. By the same token, it operates to prevent the development of the division of labor in the countries in which it exists by making impossible the release of labor for industry and commerce. Thus, in the long run, it holds down the real income even of those who are supposed to be benefitted by it. Whatever legitimate objectives the advocates of land reform might have would be achieved by the establishment of a free market in land, not by land reform.
6. Private Property and Territorial Sovereignty
The principles we have established concerning private ownership of the means of production have implications for the extent of the territorial sovereignty of countries.
In history books and discussions of current affairs, one frequently encounters such statements as: The motive of country A in going to war with country B was to obtain the latter’s coal mines—or steel industry, or whatever. It is taken as virtually self-evident in these discussions that the citizens of a country gain to the extent that their country’s territory is enlarged to contain more natural resources and more branches of industry.
Our discussion of the general benefits derived from privately owned means of production in a division-of-labor society shows that this belief is false. We have seen that an individual does not need to own property in order to benefit from it, so long as he is able to buy its products. In the same way, a country does not require sovereignty over a territory for its citizens to be able to obtain all the economic benefits that that territory can offer. For the most part, they obtain those benefits merely by being able to buy the products of that territory.
For example, in order for the citizens of Germany to obtain the economic benefits of the natural resources and industries of Alsace-Lorraine, it is absolutely unnecessary that Germany own Alsace-Lorraine or that fellow German nationals own those resources and industries. An individual German who wants something from that region obtains it by paying for it. What difference can it make to him whether the producers of the good he buys salute the French or the German flag? Or the Burgundian flag? What difference can it make to him whether they sing the “Marseillaise” or “Deutschland Über Alles”? How are the goods, or their price, affected by such matters?
The only rational political-economic interest that the citizens of a country have in the territory of other countries is that that territory be under a free government. (And that, of course, is their first and foremost real interest with regard to the territory of their own country as well.) If a country is under a free government—i.e., a government that is limited to defending the individuals in its territory from the initiation of physical force—then its territory offers to the entire world every economic benefit that can possibly be derived from it. Not only can all the world buy its products, but all the world is free to try to improve the development of its natural resources and industries. For in such a country, foreigners have the same right as nationals to own land, invest capital, and to live and work. Thus the products available for purchase from such a country are as good and as inexpensive as it is possible for them to be in the circumstances. Anyone anywhere in the world who sees a way to make them still better or cheaper is free to go ahead and try to do so.
There is absolutely no rational economic basis for any country to seek sovereignty over the territory of any other country that has a free government. For its citizens already derive all the economic benefits they could derive if it were under the sovereignty of their own government. Indeed, if their own government is less free than
that of the foreign country under consideration, they would almost certainly derive less benefit from the foreign country’s territory if it were brought under the sovereignty of their own government. As an extreme example, the citizens of Soviet Russia would have died of starvation if the territory of the United States had come under the sovereignty of the former Soviet Union and shared its economic chaos.
The major implication of this discussion is that in a world made up of free countries, there would be absolutely no rational economic basis for war or imperialism. It would make no difference to anyone what the extent of the territory controlled by his own government was. He would be perfectly free to buy and sell anywhere, to invest anywhere, and to live and work anywhere, irrespective of whose flag flew over the territory. Thus, there could be no rational economic motive for the citizens of any country to seek an extension of their own country’s sovereignty, and thus no economic grounds for war. 67
A rational economic motive for interfering with the sovereignty of other countries arises only insofar as they lack free governments. And then, the only rational economic purpose of such interference is to establish a free government. For example, if there is an area rich in lowcost natural resources, but anyone who tries to develop them has his property confiscated and runs the risk of being murdered, then the rest of the world is deprived of the benefit of those resources. Its interests would be served by the establishment of a free government in that area.
It must be acknowledged that the British Empire in the nineteenth century by and large served as just such an instrument. It was the means of establishing relatively free governments in many areas of the world that would otherwise have remained in a state of anarchy or despotism. Its existence served to open vast territories to economic development that benefitted the entire world. It was not only the citizens of Great Britain who gained by the entry of those territories into the world market, but people everywhere. Every buyer of rubber and tin everywhere in the world benefitted from the fact that British rule made possible the development of the Malayan rubber plantations and tin mines and thus a more abundant and less expensive supply of rubber and tin. Every buyer of cotton, flax, linen, jute, and all the other products of India benefitted from the fact that British rule made possible the development of the production of these things in India. This is not to excuse the racist attitudes that were often displayed by the British in their colonies, nor any of the injustices they committed in the course of colonial rule, but it is to acknowledge the genuinely great accomplishment that their empire represented.
A Defense of Foreign “Exploitation”
of Natural Resources
It is necessary to point out that foreign development and export of a country’s natural resources in no way represents a loss to the native population of that country. It is not economic “exploitation” in any evil or improper sense. For example, the fact that the British developed the tin mines of Malaya and then exported the tin throughout the world was no more a loss to the Malayan population than it is a loss to the people of Minnesota that the iron mines of their state were developed by businessmen from New York and Chicago, who in turn have exported the iron throughout the rest of the United States and the world as a whole.
The belief that such activity represents “exploitation” is based on the premise that natural resources are rightfully the collective property of the population of the territory in which they are found. Those who hold this view then observe that only the private owners are paid for the extraction of the resources sent abroad, and that much of the money received for the resources remains abroad. On this basis they conclude that a territory’s property is being taken from it without compensation.
The answer to this view is that land and natural resources do not properly belong to the people of a territory collectively, but to specific private individuals and companies. For all the reasons I have shown, private ownership is the key to the development of natural resources and thus to the general population of the world being able to benefit from their existence. Collective ownership means nondevelopment or, at best, inefficient development and therefore less general benefit from the existence of natural resources.
The inefficiencies of collective ownership operate to prevent much or any gain from being realized by the countries that enact collectivization—at least where the collectivized resource deposits must compete with privately owned deposits whose operators are not prevented from expanding their activities. Furthermore, whatever the citizens of a given area might gain by the collective ownership of a natural resource in their territory is always at the expense of the greater loss of others. There is not only the loss of the private owners, whose property is collectivized; there is also the loss of the buyers of the resource and its products, for whom the resource is made less abundant and more expensive. In addition, there is the loss of sellers of other products and resources whose sales revenues and incomes are diminished because buyers have less funds available to buy their products because of the necessity of paying more for the higherpriced collectivized resources. (For example, the gains of the members of OPEC were at the expense of the greater loss of the buyers of oil and of the sellers of other products
for which the demand was diminished because of the high price of oil.) The net effect of collective ownership and its inefficiencies is that while some sellers may take in more money, other sellers take in equivalently less money, and at the same time the same total expenditure of money, which constitutes the revenues of all sellers combined, buys less. Thus reduction in production is the net loss to the world.
And, finally, to the degree that collective ownership is carried further, any gains associated with it from the point of view of the citizens of any particular territory are lost back in the form of less abundant supplies and higher prices for everything that depends on natural resources found in all other territories where collective ownership exists. Thus, whatever the citizens of Malaya or Minnesota might gain by collectivizing the tin or iron mines of their country or state would not only be more than offset by the losses of others, but it would also be offset by less abundant supplies and higher prices of all the things consumed by Malayans or Minnesotans insofar as those things were also produced under conditions of collective ownership of the natural resources involved. The consequence of collective ownership of natural resources applied as a general principle is that everything would be more expensive to everyone. And many of the collectivized resource deposits would not even be able to operate at all for a lack of other resources or of products made from those resources. For example, some of the collectivized tin mines could be made inoperable by the inefficiencies of collectivized iron mines, which resulted in the cost of tin-mining equipment being made too high. The inefficiencies of collectivized iron and tin mining together would operate to reduce the availability of equipment for extracting oil and coal; the inefficiencies in the production of these latter would also work against the production of iron and tin, and so on.
It should be realized that in fact the foreign development and export of natural resources is a source of gain not only to the general population of the world, through bringing about a more abundant and less expensive supply of the resource, but also to the general population of the specific territory in which the resource is found. For it means foreign investment in the area and thus a greater demand for local labor and therefore higher local wage rates. It also means the ability of the local population to obtain imports from other countries, because to the extent that it produces products that are exported, its wages are paid with funds earned abroad. The imports obtainable with these funds include not only products made from natural resources found throughout the rest of the world, but also products of modern technology that it would otherwise be impossible to obtain in the area.
If the local population would like to see foreign investors spend locally a greater proportion of the revenues they earn abroad by exporting natural resources from the area, then the basic thing they must do is respect the rights of foreign investors. Foreign investors will spend more locally—in the form of increasing their investments—if they judge that investment in the area is profitable, which, in the long run, presupposes that it is secure from depredations by the local government and the local population.
It should also be realized that the profitability of foreign investment depends on the ability of the investors to withdraw their funds whenever they wish. It is one thing for an investor living in London or New York to be willing to invest his money in Malaya or Minnesota. It is a different thing to require, in effect, that he live there in order to be able to enjoy the profits from his investment. Yet that is the effect of laws that interfere with the remission of dividends and interest abroad. Outsiders will readily invest in an area that offers the prospect of high profits if they know that they are free to enjoy their profits elsewhere and free to withdraw their funds to take advantage of the possibility of still more profitable investment opportunities elsewhere.
To the extent that they possess free governments, backward countries naturally offer a very powerful attraction for outside investors—namely, their low wage rates. To the extent that foreign investment can raise the productivity of labor in the backward countries toward the level at which it exists in the more advanced countries, those low wages represent lower costs of production and thus higher profits in comparison with investment in the more advanced countries. If foreign investors judge that their investments are secure in such a country, it is able to attract a veritable flood of investments. And the high profits earned on those investments are plowed back to create still more local investment. On just this basis, we can observe spectacular rates of economic progress today in such countries as Taiwan, South Korea, and Singapore. The rapid progress of Japan, too, was explainable until not too many years ago on the basis of the constant reinvestment of high profits earned on the basis of relatively low wages.
The effect of all this additional investment, of course, is to raise local wage rates more and more, and to bring the economy and general standard of living of the area to a higher and higher level, until what began as a backward country is transformed into a fully modern country with a very high standard of living. This has already happened in Japan, where wages are now among the highest in the world and are comparable to those in the United States. The same process is well underway in the other countries named.
Moreover, it should be realized that as local wages rise, the ability of the local population to save and invest on its own increases, and thus that more and more businessmen can come from the ranks of the local population. In other words, the conduct of local business automatically comes to include a growing proportion of natives. And some of the native businessmen, of course, can themselves choose to operate internationally. In this and all other respects, the local area comes to be fully integrated into the world economy. Again, Japan, South Korea, and Taiwan are outstanding examples of this process.
Thus, if they possessed free governments, many of the backward countries of the world could be very rapidly developed into fully modern countries. What prevents this is their belief that foreign investors are their enemies and should be expropriated. This stops foreign investment and perpetuates the backwardness of these countries.
To avoid possible misunderstanding, there is no intent to imply here that the problems of the backward countries are purely political. More fundamentally, they are philosophical and cultural. In many cases the influence of irrational ideas is so great that even the establishment of a free government would not be able to produce very dramatic results. The establishment of a free government achieves dramatic results only in a culture which, among other things, is prepared to accept science and technology and individual self-responsibility. As I pointed out earlier in this book, this in turn rests on the acceptance of causality, the efficacy of the human mind, and human free will. Only on such a foundation is it possible to develop such vital economic attitudes as: improvement is possible, hard work pays, and the individual has a responsibility to save. At the deepest level, the development of a modern economic system depends on the cultural acceptance of the reliability and efficacy of human reason. 68
There is a peculiar consequence of the collectivist view of natural resources that deserves mention. I call it the “Argentine delusion,” since it is especially prominent in that country. It manifests itself in such statements as: “We are a rich country, but a poor people.” And: “We have tremendous wealth. None of our problems are real or fundamental. They’re just psychological.”
I heard these comments some years ago, when I was in Buenos Aires to give a series of lectures. What the people who made them were referring to is the fact that Argentina is a country of about one million square miles in territory, lying in a latitude comparable to that of the United States, and full of rich farm land and all kinds of mineral deposits. These people believed that somehow this automatically made Argentina rich, and that nothing could change that fact—not high taxes, not destructive labor unions, not extreme protectionism, not even hyperinflation.
The comments were made to me in Buenos Aires, where these people lived and worked. It is obvious that the speakers would have felt very differently if Buenos Aires had been a separate country, politically independent of the rest of Argentina. In that case, they would not have thought of counting the alleged wealth of Argentina as “theirs” in any sense. Yet if Buenos Aires had been a separate country and maintained mutual free trade with the rest of Argentina, including the ability of individuals in the two areas to come and go as they wished and to do business on the same terms as before, the real benefit of all those resources to the citizens of Buenos Aires would have been exactly the same.
The truth is that Argentina’s natural resources do not make her a “rich country.” They might make some individual Argentines or foreigners rich—i.e., whoever their private owners are or would be—but the only ways in which they could make the average Argentinean rich would be insofar as their development increased the demand for Argentine labor and thus raised Argentine wage rates, and insofar as their use in production increased the supply and lowered the price of various products. This latter benefit, of course, would be enjoyed not only by the citizens of Argentina but by all buyers of the products concerned throughout the world, no matter what their nationality.
Unfortunately, the policies of the Argentine government prevent both domestic capital accumulation and foreign investment, and thus make the more extensive development of Argentina’s natural resources impossible. Thus, in the delusion that they are somehow automatically rich, irrespective of the policies that their government follows, the Argentine people are likely to remain relatively poor. Given their mentality, the natural resources of their country are actually a liability to them: in being regarded as an automatic guarantee of wealth, no matter what their government does, the resources make it that much easier for them to allow the bad policies to go on.
Buenos Aires and the other cities of Argentina might actually be more prosperous as independent city states, devoid of all territorial sovereignty over natural resources, than as part of Argentina, with all of its alleged wealth. In such a case, they might realize that the only thing they had to rely on was the industry of their people and that everything they received had to be paid for, even if it came from the surrounding territory. The loss of the delusion of automatic wealth because of territorial sovereignty over natural resources might make them address their problems seriously and thus establish conditions in
which people would be more highly motivated to work and save than is now the case. If that were so, then they could obtain whatever natural resources and agricultural products they required either from the surrounding territories or from anywhere else in the world that offered better terms. Then, perhaps, with a new mentality that recognized the value of a free government, they might look about and see the opportunities awaiting if the neighboring countryside were opened up to free development. They might then reextend their sovereignty into the neighboring countryside and, in effect, reconstitute Argentina on the basis of a free government. Then and only then—under a free government, with full respect for private property rights—would the resources of Argentina finally realize their potential as a source of prosperity, both to the citizens of Argentina and to people all around the world.
The point here, of course, is not to urge the actual breakup of Argentina, even temporarily, but only to highlight the need to shatter the collectivist delusion of automatic wealth through sovereignty over natural resources, and the need to establish a free government in Argentina and in every other country where this collectivist delusion exists.
This section has shown that just as it is not necessary for people to own means of production in order to get the benefit of them, so long as they are free to buy the products of the means of production, so it is not necessary for a country to have sovereignty over any foreign territory so long as its citizens are free to purchase the products of that territory. Indeed, it has shown that the only legitimate interest of the citizens of one country in the territory of another is that it have a free government and thus that its land and natural resources be open to settlement and development by all and that they and their products be purchasable by all. In that way the whole rest of the world derives the maximum possible benefit from the territory of a country without having to have the least degree of sovereignty over it. Thus, a world comprised of capitalist countries would lack any rational economic motive for extensions of sovereignty or for wars of aggression.
In connection with this discussion, the doctrine was refuted that the development and exportation of natural resources by foreigners constitutes an exploitation of the people of a country. It was shown, on the contrary, that such activity is the basis of a higher demand for the labor of a country’s citizens and the ability of its citizens to import products of other countries’ natural resources as well as products of modern technology. It was also shown how the freedom of foreign investment would operate rapidly to modernize backward countries and raise their standard of living, if only the governments of those countries would allow investors to profit from the existence of low wages in those countries.
PART B
ECONOMIC INEQUALITY
1. Economic Inequality Under Capitalism
The influence of the division of labor on the institution of economic inequality is almost totally ignored. The views that are typically expressed concerning economic inequality would be plausible only if they referred to a non-division-oflabor, precapitalist society. Thus, typically, people take for granted the validity of such statements as “the rich get richer and the poor get poorer,” and the more fundamental proposition that “one man’s gain is another man’s loss.”
Now these propositions rest on the assumption that the total wealth that exists in the world, or which can be produced, is a fixed, static sum. Only on that assumption could it be true that one person’s gain necessarily implied an equivalent loss by others. Only then could it be true that an increase in the wealth of the rich necessarily implied a corresponding decrease in the wealth of the poor.
Yet this assumption of a fixed, static amount of wealth that can be produced is clearly incorrect in the context of a division-of-labor society. In such a society, a growing body of technological knowledge, manifested in ever improved tools and machines and in man’s growing power over the physical world in which he lives, makes possible a continuous increase in the sum total of what is produced. Where the total of what can be produced expands, it is simply false to conclude that one man’s gain implies another man’s loss, or that the greater wealth of the rich implies the greater poverty of the poor.
Indeed, these propositions are false even in the context of a non-division-oflabor society, so long as conditions are present that make possible an increase in the total of what is produced. To take the simplest and most obvious kind of case, imagine that initially Robinson Crusoe and Friday are each able to gather 10 coconuts a day on their desert island. And now Crusoe, say, devises a pole that enables him to bring down coconuts from higher up in the trees, so that from now on he is able to gather 20 coconuts a day. Crusoe’s gain is certainly not Friday’s loss. In fact, his gain is almost certain to be followed by Friday copying his new method and thus being able to gather more coconuts of his own. In other words, Crusoe’s gain will bring about a gain to Friday, as well.
This little example, it should be realized, also illustrates the absurdity of viewing matters in terms of a “distribution” of wealth and income and then complaining that the “distribution” is unfair insofar as it is unequal. When Crusoe increases his production from 10 coconuts a day to 20 coconuts a day, his “share” of the “national income” of his island rises from one-half to two-thirds. Now Crusoe receiving half of the island’s income is just, according to the egalitarians. But his receiving two-thirds is inherently unjust, according to them. Yet Crusoe’s larger “share” is nothing but the result of his increasing his production.
In opposition to the egalitarians, it should be realized first of all that there is no actual distribution of wealth or income here—that a “distribution” exists only in a purely mathematical sense. What actually exists is separate individuals producing different amounts of wealth. When we add up their separate outputs, we reach a sum, and can mathematically express each individual’s production as a percentage or “share” of the total and in this sense speak of a “distribution” of wealth and income. But there is no actual distribution in the sense of someone handing out more to Crusoe and less to Friday. In the same vein, there is no one who makes Crusoe “overprivileged” and Friday “underprivileged.” What each has is the result of what each produces. And, of course, to have what one produces, however great, is a matter of right, not privilege.
It follows from this discussion that what egalitarianism implies is that it is unjust for one person to produce more than another, even if that other not only does not lose, but in fact gains as a result of it. Egalitarianism rests on a mentality that actually ignores production and the ability to increase it. In the manner of a backward child, it assumes that everything comes miraculously from some kind of father, who distributes it this way or that way—fairly, if equally; unfairly, if unequally. It wants the government to compel the father to distribute wealth equally or for the government itself to become the father and distribute it equally.
Now it cannot be stressed too strongly that in a division-of-labor society, one person’s gain is not only not other people’s loss, but is other people’s gain.
The most fundamental and important instance of this kind, however much it may shock the egalitarians, who typically depict business as the domain of “robber barons,” is precisely the building of great business fortunes. Both in their origin and in their use, these fortunes are a source of gains to everyone who participates in the economic system.
Such fortunes originate in the earning of a high rate of profit on capital, almost all of which is constantly reinvested, so that the high rate of profit rapidly compounds. The fortunes emerge as the sum of the reinvestments of these compound profits over a period of many years. For example, to go from an initial investment of, say, $100 thousand to $100 million, requires that one earn a very high rate of profit on the $100 thousand, save and reinvest almost all of it, and then repeat the same process over and over again for a considerable number of years. Only in this way, through the combination of earning a high rate of profit and saving and reinvesting the far greater part of it over a protracted period of time, can one possibly transform a sum such as $100 thousand into $100 million. This is a matter of simple financial arithmetic.
Now as explained in Chapter 6, to earn a high rate of profit requires that one be a leader in the introduction of new and better products, in improving the methods of producing existing products, or in meeting changes in consumer demand inaugurated, for the most part, by economic progress. 69 And, as also shown in Chapter 6, because competitors copy innovations as fast as they can and try wherever possible to supersede them, with the result that the profits from any given innovation tend steadily to disappear and be replaced by losses, the earning of a high rate of profit over a long period of time requires that one repeatedly be a leader in innovation. Thus, the high profits out of which great fortunes are accumulated are the result of repeatedly introducing improvements in production. 70
These improvements, of course, represent better and less expensive goods for the general buying public. They thus represent a rise in the real income of everyone—everyone benefits in his capacity as a buyer. This is what I mean by the statement that in their origin great business fortunes are a source of gains to all.
What I refer to in the statement about the general gains great business fortunes represent in their use is simply the fact that the fortunes are invested: they represent factories, machines, inventories and work in progress, and the means of paying wages and salaries. Here again they are the base of additional goods coming to market and thus of gains to all buyers; in addition, they provide greater financial means for people to be buyers—insofar as they are the source of a greater demand for labor and thus of additional payments of wages and salaries.
Thus, in a division-of-labor, capitalist society, the accumulation of a great fortune is the mark of great contribution to general human wellbeing.
This principle is readily confirmed by an examination of the history of great fortunes in the United States. To take two leading examples from the age of the socalled robber barons, both Henry Ford and John D. Rockefeller began their careers in industries that were relatively small and backward. They devoted their lives to search—
328 CAPITALISM ing out and implementing all manner of improvements in those industries, on the basis of which they earned very high rates of profit, almost all of which they saved and reinvested. At the end of their lives, the industries in which they worked were enormously improved and expanded because of their efforts, and their wealth was embodied in the means of production of those industries.
Thus Ford increasing his capital from approximately $25,000 in 1903 to approximately $1 billion at the time of his death in 1946, was the result, and, indeed, the measure, of his introduction of one major improvement in automobile production after another, such as the use of moving assembly lines and interchangeable, mass-produced parts, and his use of the profits he made thereby to pay for the construction and equipping of one major automobile plant after another, each embodying the improvements he introduced. Similarly, Rockefeller’s fortune was founded on the introduction of improvements transforming the petroleum industry from the backward, inefficient production of kerosene into the highly modern, efficient production of a whole range of petroleum products previously unheard of. It was also based on his pioneering in the ability to use petroleum deposits that were previously unuseable—by virtue of the development of such innovations as refineries capable of chemically cracking petroleum molecules. Rockefeller’s billion was the measure of the improvements he introduced and of his continuous reinvestment of the profits resulting from those improvements. It was embodied in a host of modern oil refineries and pipelines, which did not exist before him and might very well never have come into existence without him.
Andrew Carnegie and Commodore Vanderbilt played comparable roles in the building of the American steel and railroad industries. Many great industrialists made great fortunes. As far as the fortunes were made in a free market, the essential principle underlying all of them was a process of repeated productive innovation and the reinvestment of the far greater part of the resulting profits. As the result of such fortune building, the American people obtained an increasingly more modern and more efficient economic system, from which they all greatly benefitted in their capacity as consumers and as wage earners. From the perspective of the general public, whatever people may have mistakenly believed, the objective significance of the fortunes was new and better products, new industries, and lower prices relative to wages. The gains of the great industrialists—the socalled robber barons—were overwhelmingly the gains of everyone who bought their products—or even the products of competitors, who were forced to meet the standard they set. Their gains were also the gains of everyone whose wages were increased by the additional demand for labor their savings created. Their wealth represented an enormous net increase in the total wealth of the economic system and was the source of a correspondingly great increase in the standard of living of the average person, since it served to increase the production and supply of products he could buy and the demand for the labor he wished to sell. These men were among the greatest innovators and accumulators of capital of all time, and everyone benefitted enormously from their success. They were neither robbers nor barons, but in the highest rank of capitalist producers, whose great self-enrichment was the measure of their enrichment of the general public. They did not steal their wealth but created it, in the process greatly enriching others, not impoverishing them. They were in fact among the greatest benefactors of mankind in all of history.
Consistent with the preceding discussion, in appraising the socalled distribution of wealth—that is, distribution in the sense of who owns what percentage of the total capital that is invested in the economic system—one should keep in mind the following essential facts. Namely, in a division-of-labor, capitalist society there are basically two elements determining such “distribution.” These are the relative amounts of income people earn and the relative degrees to which they save and invest those incomes.
In the case of large accumulations of wealth, the relative amount of income one earns typically reflects the relative rate of profit one earns on one’s capital. Basically, those individuals have the greatest accumulated wealth who earn the highest rates of profit and save and invest the greatest percentage of their profits. Thus, for example, an individual who earns a 25 percent annual rate of profit and saves and reinvests 80 percent of his profit increases his capital at a 20 percent compound annual rate. In contrast, an individual who earns a 3 percent annual rate of profit and consumes all of it does not increase his capital at all. By the same token, an individual who earns a zero rate of profit and consumes at an annual rate of 3 percent of his capital steadily depletes his capital; and if he incurs actual losses, he depletes it all the faster. 71 Thus, it should be clear that relative rates of growth or decline in accumulated wealth are the result of a combination of relative rates of profit and relative degrees of saving out of profits.
In both of these respects, the accumulation of wealth under capitalism is the measure of contribution to the economic wellbeing of the rest of society.
To the degree that businessmen and capitalists earn relatively high rates of profit, it is because they are in the forefront of introducing better products and better methods of production and in reshaping the economic system
to adapt to changes in demand originating mainly in economic progress. 72 To the degree that they save and invest a higher percentage of those profits, then along with increasing the economic system’s degree of capital intensiveness and thus receptiveness to technological progress, they increase both the demand for capital goods relative to the demand for consumers’ goods and wage payments relative to the personal consumption spending of businessmen and capitalists as a class. 73 The higher relative demand for capital goods leads to a correspondingly greater concentration on the production of capital goods in the economic system and thus to a more rapidly growing supply of capital goods, which is a critical factor in raising the average productivity of labor and thus real wages. 74 And the increase in wage payments relative to the personal consumption spending of businessmen and capitalists enables wage earners to enjoy a larger proportion of the overall consumption spending that does take place, which also serves to raise real wages. 75 In all these ways, inequality in the socalled distribution of wealth is an essential aspect of a high and rising absolute amount of wealth that is available to the average person under capitalism, in particular to the average wage earner. 76 It is thus the measure of the individual’s relative productive contribution to general economic wellbeing.
Mutuality of gains—one man’s gain being other men’s gain—is inherent in the very nature of a division-of-labor, capitalist society. It is inherent, first of all, in the fact that in such a society, cooperation takes place by means of exchanges, which are strictly voluntary and entered into only in the expectation of gain by both parties. In an exchange, each party gives only in order that he may receive something he values more. Unless both parties expect to gain by it, an exchange does not take place.
The objective foundation underlying mutual gains from exchange as an everyday, common occurrence—as a virtually omnipresent phenomenon—is the division of labor. Its existence ensures that gains are in fact available for all. For the division of labor raises the average productivity of labor and allows it and the total of what is produced to go on rising, without limit. At the same time, of course, it places every individual in a position in which he must exchange the overwhelmingly greater part of his goods or services for all the things that he himself does not produce and which others produce.
The progressive rise in the productivity of labor and the mutual gains from exchange are two aspects of the process by which one man’s gain becomes the gain of others in a division-of-labor society. A third aspect, present, as we saw, even in the context of Robinson Crusoe and Friday on their desert island, is the copying of others’
success. This last aspect is present in a division-of-labor society in the competitive quest for high profits, which constantly operates to deprive every innovation of its special profitability and to require fresh innovation as the means of maintaining a high rate of profit. It is equally present in the competition of wage earners for higher-paying jobs. As explained in Chapter 6 of this book, it is the element that, in the absence of further changes, operates to drive the rate of profit on capital invested toward uniformity in all branches of industry and the rate of wages for all workers of the same degree of skill and ability toward uniformity in the same labor market.
Indeed, as the example of Crusoe and Friday and their coconuts suggests, and as the tendencies toward uniform rates of profit and uniform wages for workers of the same degree of ability suggest, economic inequality in a division-of-labor, capitalist society can be understood as resting on an inequality in productive ability that is dynamic in several senses. The inequality in productive ability is dynamic in one sense in that those of outstanding ability succeed in steadily raising the productivity and real remuneration of those of lesser ability. It is dynamic in a second sense in that at each level of ability, it reflects uneven contribution or adaptation to the process of improvement. Finally, it is dynamic in that there are no legal barriers to individuals crossing over from one level of ability to another.
Thus, businessmen and capitalists have greater income and wealth than wage and salary earners. But their innovations and capital accumulation raise the productivity and remuneration of the wage and salary earners, and do so continually. Among businessmen and capitalists and among each grade of wage and salary earners, there are further inequalities that reflect uneven contribution or adaptation to the process of improvement. That is, there are businessmen and capitalists who earn very high rates of profit because they introduce innovations or adopt them relatively early, and there are others who earn low rates of profit or suffer losses because they lag too far behind in the adoption of innovations. Similarly, there are wage earners who earn relatively high wages because they adapt their skills relatively quickly to the kinds of labor being demanded for the implementation of the improvements introduced by the businessmen and capitalists, and, by the same token, there are wage earners who earn relatively low wages because they fail to adapt their skills quickly enough to the process of improvement. Finally, wage earners are always legally free to become businessmen and capitalists, and unsuccessful businessmen and capitalists are always being reduced to the ranks of the wage and salary earners. Indeed, there is constant movement up and down within and between all economic strata.
330 CAPITALISM
On the basis of all of the foregoing, it should be clear that the economic inequality that exists in a division-of-labor, capitalist society is an inequality in which the greater success of some is the cause not of the failure of others, but of their success too. It is in its most important respects simply an inequality of success and progress— an inequality in which some are merely further ahead than others on the road of improvement. The inequality of such a society is an inequality in which the “rich” and the “poor” both grow richer, and in which the classification of any given individual as belonging to the class of the “rich” or the “poor” is constantly subject to change by virtue of his own efforts and abilities.
This discussion, of course, provides the answer to those who make such complaints as that under capitalism 10 percent of the population owns 90 percent of the “wealth” (i.e., the capital) of the country. Even if the claim were accurate, there would be absolutely nothing wrong with such a situation. It would not be the result of wealth being unfairly “distributed.” It would be the result of some people contributing more to production than others—in the more important cases, introducing a series of major improvements into production, and then saving and investing very heavily out of the higher incomes they earned. The 90 percent of the wealth that is not only owned but also created and earned by the 10 percent who own it (or by their parents or grandparents), would then serve the 90 percent of the population that did not contribute as much to production. Because of the freedom of the 10 percent to create and earn the wealth and income they do, there is incalculably more wealth: there is more saving and the means of production that exist at any given time are more efficiently used, both of which facts are causes of the continuous further increase in the supply of means of production—of capital goods—that, as we have seen, are used to produce overwhelmingly for the benefit of the 90 percent of the population that allegedly owns only 10 percent of the wealth of the economic system.
For the 90 percent to seek to steal the wealth of the 10 percent is to destroy the creation of the wealth that serves them. It is to begin with no concept of the production of wealth and how it is accumulated, but instead with the myth of the “distribution fairy,” and from there to go to envy and resentment, from there to theft, and with theft, to the destruction of the incentives to saving, efficiency, and the accumulation of capital. The result is that those whose heads are empty of the knowledge of how wealth is produced and accumulated come to live in a world that is physically empty of the production and accumulation of wealth. Once having become maliciously ignorant thieves, they go on to end as starving wretches.
2. Critique of the Marxian Doctrine on Economic Inequality
On the basis of what has been established concerning the nature of economic inequality in a capitalist society, it is now possible to grasp the enormity of the injustice that Marxism and its supporters have perpetrated in connection with this subject.
According to Marxism, the inequality between capitalist and worker is essentially no different than the inequality that prevailed in earlier periods of history between master and slave or between lord and serf. All of history, declares Marxism, is the record of one continuous class struggle that has been carried on in different forms and under different guises. In the Ancient World, it was between master and slave; in the Middle Ages, between lord and serf; today, it is allegedly between capitalist and worker. The worker of capitalism, says Marxism, is also a slave—a “wage slave.” And the capitalist is an “exploiter” even more ruthless than the feudal lord or ancient slave owner. For capitalism, says Marxism, cannot even “assure an existence to its slave within his slavery,” but compels the worker to sink ever deeper into poverty and starvation. 77
Mankind’s only salvation from exploitation and class conflict—its only hope for elevation into a new world of peace and harmony—Marxism declares, is the establishment of socialism. Socialism, it claims, holds out the promise of a classless society, free of all exploitation and conflict—a society of perfect equality. In achieving the equality of wealth and income, it will allegedly complete the work of the socalled bourgeois revolutions of the eighteenth and early nineteenth centuries that established representative government and political equality. 78
These doctrines permeate the contemporary educational system—in history books, in socalled social-science courses, in literature courses, in every field and in every way in which it is possible to inculcate them.
Every aspect of the Marxian doctrine on inequality is false and vicious.
The Marxian doctrine claims to see as essential the mere existence of inequalities in wealth and income, absolutely irrespective of their nature and cause. It ignores the radical, day-and-night difference between economic inequality under capitalism and economic inequality under serfdom and slavery. Specifically, what it ignores is the fact that under capitalism economic inequality rests on differences in productive contribution, which contribution operates to the benefit of all. Those who have more under capitalism have it because they contribute more to production (or because their parents or grandparents did), and their contributions enable everyone else to have more also. In other words, the greater wealth and income
of the capitalists and of the higher-paid wage and salary earners is earned, and the process of earning it is the source of general benefits.
The greater wealth and income of a feudal lord or of a slave owner, on the other hand, was of an entirely opposite character. It was obtained not by means of any productive contribution on his part, but by means of physical force—essentially by theft and extortion. As such, his gain really was the loss of others: what a robber steals, his victim loses.
The Marxists seek to evade having to acknowledge the difference between a capitalist and the owner of serfs or slaves by means of an equivocation on the use of the word “force.” The owner of serfs or slaves obviously uses force or the threat of force against them. But, ask the Marxists, isn’t the fact that reality compels a man to work if he would eat, not also a kind of force? And isn’t it force that, for all practical purposes, a worker must work for a capitalist, unless he is in the exceptional position of having a substantial amount of savings of his own? Thus aren’t the workers “forced” after all to work for the capitalists?
Such ideas are expressed in a more subtle form by John Kenneth Galbraith in his book The New Industrial State:
The worker in a Calcutta jute mill who loses his job—like his American counterpart during the Great Depression— has no high prospect of ever finding another. He has no savings. Nor does he have unemployment insurance. The alternative to his present employment, accordingly, is slow but definite starvation. So though nominally a free worker, he is compelled. The fate of a defecting southern slave before the Civil War or a serf before Alexander II was not appreciably more painful. The choice between hunger and flogging may well be a matter of taste. 79
The essential point Galbraith seeks to make in this passage is that the distinction between freedom and slavery is nominal if a worker must work in order to avoid starvation. This idea is absolutely vicious. It is straight out of the world of 1984: it claims literally that freedom is slavery. It is a repetition of the apologetics for slavery offered in the South before the Civil War and more recently by the supporters of Soviet Russia.
The difference between freedom and slavery is as sharp as day and night, even when a worker must work to avoid the pain of hunger. For even in this case it is not the capitalist employer who causes the worker’s hunger. On the contrary, he provides the means of satisfying the worker’s hunger. The worker works for the capitalist always in order to receive a positive—his wages. The difference between a free worker and a slave can always be seen in this: A slave is someone who is kept at his work against his will: by chains, whips, and guns—i.e., by physical force applied by other people. In the absence of such things, he would run off. A free worker, on the other hand, is someone who works of his own choice and who, more likely, can be kept from his work only by means of physical force. The worker in Galbraith’s Calcutta jute mill, for example, is not kept there by the threat of being shot if he leaves, as is the case of a worker in a Communist or Nazi labor camp. On the contrary, from Galbraith’s description, it is probable that it would take the threat of being shot to keep that worker away from his job.
A worker is a slave not because he must choose to work as the means of eating, but when he chooses not to work and is compelled to do so nevertheless—by means of physical force. Of course, very few people can choose not to work at all for very long. But no matter how poor they are, they can always choose not to work for any particular employer, whenever any other employer offers them better terms. This fact, that while people must work in some capacity, they can choose in which particular capacity, Galbraith and the Marxists choose to ignore, by focusing on the case of unemployment and the unavailability of alternative jobs.
The existence of unemployment and the lack of alternative jobs is itself the consequence of violations of freedom and capitalism—specifically, violations such as prounion and minimum-wage legislation, which keep money wages artificially high relative to the demand for labor. 80 Yet even though mass unemployment exists, it does not prevent individuals from having alternative employment opportunities at some time or other in their lives. And the ability to choose among these alternatives is vital. Its importance to the individuals concerned is demonstrated by the fact that to deprive them of it, chains, whips, and guns are required.
So much then for the attempt to portray capitalist employers as slave or serf owners, on the basis of an equivocation between forced labor and the necessity of working imposed by the nature of reality.
By the same token, it should also be realized that slave and serf owners qua slave or serf owners did not at all derive their incomes in the manner in which a businessman or capitalist derives his. They did not, for example, derive their incomes by virtue of owning land or capital—the means of production. They derived their incomes by means of the initiation of force—by extortion and theft. It is necessary to clear up this confusion particularly in regard to feudal aristocrats, who, it is often assumed, held their position on the basis of their ownership of large tracts of land.
The feudal nobility were in fact not landowners at all in the proper sense of the term. Their position was more analogous to that of hereditary commanders of military bases. As mentioned earlier in this chapter, a feudal
nobleman did not have the right to sell his alleged property, or to pledge it as security for debt, or to contract away its use on a longterm basis. For the theory of feudal landholdings was that the land was intended to serve an unbroken line of succeeding generations of noblemen. Each of these would use it in part to maintain himself and his family at a level dictated by custom, and, for the rest, to maintain vassals, with whom he would appear at the side of the king or some other higher nobleman when called upon to do so. And the king himself was not to regard his domains as his private property, serving his personal pleasure, but as serving the purposes of the state.
The feudal nobleman both lacked essential rights of a private property owner and possessed powers that are absolutely no part of the rights of a private property owner. For all practical purposes, he was the local government: he combined in his person the powers of policeman, judge, and lawmaker. His workers were legally prohibited from leaving his estate. By the same token, no other nobleman was allowed to bid for the services of his workers.
Thus, a feudal nobleman did not earn his income in the manner of a landowner or capitalist, who must compete for labor, and who holds his position only by being able successfully to compete as a seller in the market for products as well. Rather, he derived his income in his capacity as a virtual slave owner and as a tax collector.
Consequently, every aspect of Marxism’s attempt to confuse economic inequality under capitalism with economic inequality under earlier systems is false. The greater income and wealth of the businessman and capitalist is the result of their positive productive contribution, which increases the income and wealth of everyone else as well; while the greater income and wealth of the owner of slaves or serfs is based on force and is thus at the expense of the income and wealth of everyone else. It is economic inequality based on positive productive contribution and resulting in general benefit, versus economic inequality based on force and resulting in others’ corresponding loss. That is the difference between economic inequality under capitalism and economic inequality under slavery and serfdom.
Ironically, the difference between the economic inequality of capitalism and that of slavery and serfdom is no less the difference between the economic inequality of capitalism and the economic inequality of socialism. Socialism, we have seen, is itself, both in fact and by its very nature—both economically and morally—a system of aristocratic privilege and of systematic exploitation of the masses by a ruling elite. It renders the ordinary citizen economically powerless by establishing the state as a universal monopoly employer and, at the same stroke, by destroying the incentive of profit and loss and the freedoms of individual initiative and competition in the production of goods. Morally, it demands that the individual live not as an end in himself, as he does under capitalism, but as a means to the ends of “Society,” which, of necessity, means that he live as a means to the ends of the rulers, who divine the ends of “Society.” 81
In no sense is socialism some kind of extension into the economic sphere of the noble principles associated with the words political democracy, or, more accurately, political freedom—as many people believe in naivïly repeating this popular Marxist theme. On the contrary, it constitutes the total destruction of all political freedom along with all economic freedom. As I have shown, socialism is necessarily a system of totalitarian dictatorship. 82
Thus, virtually every evil that the socialists allege of capitalism on the score of economic inequality, while not true of capitalism, is true of socialism. By the same token, the end of exploitation and the achievement for the first time in human history of a society based on the peaceful, harmonious cooperation of all men, which the socialists allege will come with the arrival of socialism, has already come—to the extent of the arrival and continued existence of capitalism.
Economic Inequality and the Law of
Diminishing Marginal Utility
The attempt is sometimes made to support the advocacy of economic equality on the basis of the law of diminishing marginal utility. Such writers as Oscar Lange and other socialists argue that any given-sized unit of wealth has a higher marginal utility to whoever has fewer such units. 83 They argue, for example, that $1,000 has a higher marginal utility to a man who is worth only $10,000 than to a man who is worth $100,000. It follows, they believe, that if $1,000 were taken from the man with $100,000 and given to the man with only $10,000 an increase in total marginal utility would result.
In their view, the law of diminishing marginal utility implies that some kind of gain in utility can be achieved so long as anyone has more than someone else and his wealth can be transferred to a party who has less: the marginal utility of the wealth gained by the poorer person will allegedly be greater than the marginal utility of the wealth lost by the richer person. Perfect equality of wealth and income appears to them to be a norm requisite for maximizing “utility”—in a country or in the world. Needless to say, this argument serves as an important rationalization for the progressive income and inheritance tax and for other forms of confiscation of wealth and income.
It is difficult to say which is the greater defect of this
argument: the lightness with which it takes the matter of property rights and the speed with which it is prepared to violate them, or its confusion concerning the nature of marginal utility. The argument assumes that all that has to be established is that something is wanted or needed by someone more than by its owner, and that that is sufficient to justify forcibly taking it from its owner and giving it to the nonowner.
That this is what the argument assumes is highlighted if we put aside any question of inequality of wealth or income for the moment, and consider the vast range of other cases in which something can have a higher marginal utility to someone who does not own it than to the person who does own it. Thus, for example, if anything, whether a painting or a puppy, is owned by someone who does not appreciate it or therefore value it as highly as someone else would who does not own it, the argument of the socialists concerning diminishing marginal utility implies that a prima facie case exists for taking the property from its owner and giving it to the other party. For this change in ownership too will allegedly result in an increase in total marginal utility. Thus, the argument implies not only that a poor person has a right to the property of those who are better off than he is, and who therefore need it less. It implies equally that anyone who would value something more highly than its present owner, whether on the basis of his education, character, or whatever, as much as on the basis of the smallness of the number of units he owns, has a right to it at the expense of the owner. 84
The supporters of this view, it should be clear, have no regard for rights of any kind, but merely for needs and desires. They have never outgrown the chaotic world of small children, who frequently act on the principle that whoever needs or wants something has the right to take it away from its owner, irrespective of the owner’s wishes. The only difference between them and such children is that they think it must be clear that they, or some other beneficiary, need the goods more than the owner before they seize them and that they use the government to seize the goods rather than seize them personally.
This brings us to the other fundamental defect of the argument for economic equality on the basis of the law of diminishing marginal utility. This is the fact that it divorces the concept of marginal utility from individual people and assumes that it pertains to a kind of collective organism, of which the individuals are mere cells serving as centers of pleasure and pain for the organism. It is only on this basis that it can be assumed that the loss of a thousand dollars by one person and the gain of a thousand dollars by another person represents any kind of overall net gain. The argument assumes that the individuals are mere cells of “Society,” which allegedly feels only a relatively small loss when the richer person’s wealth is diminished and a relatively great gain when the poorer person’s wealth is increased.
Of course, the problem with this view of things is that people are not cells of some greater organism. Each individual person is an organism. Thus, each individual person constitutes a separate base and standard for judging utility. It is only to the individual human being that there can be utility, marginal utility, or any other kind of value. 85
It is true that to one and the same person $1,000 would be of higher marginal utility if all he had was $10,000 than if he had $100,000. But it is a non sequitur and completely false to imply that the marginal utility of $1,000 to this individual is increased if, when he has $100,000, $1,000 is taken away and given to someone else, who has only $10,000. It is absurd to think that the eleventh $1,000 in the hands of someone else is of greater marginal utility to a person than the one-hundredth $1,000 in his own hands. And if it is not the marginal utility to this person, the man who has the $100,000, that is increased, then there is no universal, objective, or valid sense in which marginal utility could be increased by “redistribution.” Exactly the same point applies to “redistribution” in favor of those who appreciate and value things more highly on the basis of factors other than the smallness of the number of units they possess. It is no satisfaction to someone whose painting has been stolen that now it is in the collection of someone who looks at it more often and with greater pleasure than he, the owner, would. The most intense pleasure of the thief is of no account to the owner.
The fundamental philosophical issue that is present here is the conflict between altruism and egoism. Altruism demands that we regard the needs of others as though they were our own. If we were starving, we would value a bowl of rice as highly as our lives. Asiatic coolies and others are starving, and thus, according to altruism, we should be as concerned as if we ourselves were starving. Nevertheless, in fact, we value our last scoop of ice cream or bar of chocolate above their first bowl of rice, which rice we could buy for them with the price of the ice cream or chocolate, if we chose.
According to altruism, such a state of affairs is a moral abomination, and we deserve to feel profoundly guilty for allowing it to exist. Many of us, no doubt, do feel guilty for a while, when the plight of the coolies or other impoverished, suffering group is called before us; but our guilt rarely lasts so long or goes so deep that we are led to give up very much for the sake of such groups. We find that giving charitable assistance is also of diminishing marginal utility, just like any other activity, and we leave off at a point where the importance we attach to the
satisfaction of others’ needs is far less than if those needs were our own. There is good reason for this. The basic fact is that we are separate, independent organisms, and our survival, wellbeing, and enjoyment require that each of us devote his abilities to providing for himself.
This does not mean that we are unconcerned with the needs of others. There are some others, such as spouses, children, parents, and close friends, whose existence and wellbeing are very important to our happiness. We are very much concerned with the needs of these others, and often attach as much or even more importance to providing for their needs as for our own, because we regard their existence and happiness as vital to our own. For example, most parents would rather go hungry themselves than allow their children to go hungry.
Apart from this small number of other people, however, there is no connection between our lives and wellbeing and the lives and wellbeing of others that is of such a nature as would justify our expending any major portion of our energies or wealth for their sake. It is true that because of the harmony of rational self-interests that prevails under freedom, and which this book repeatedly demonstrates, we also derive major benefits from the existence, success, and prosperity of others whom we do not know or have any personal relationship with, and, indeed, potentially could each derive enormous benefit if the whole human race were successful, prosperous, and happy. Nevertheless, in the very nature of the case, the good will that we can reasonably feel for the rest of our countrymen and the whole rest of the human race that is founded upon their actual or potential success and prosperity precludes their being a drain upon us. This is because our benefit comes from the work and saving they do, which are the source of their success and prosperity along with contributing to our own. To the extent that others are successful and prosperous, of course, they do not need our charity.
Of course, the reasons for desiring to see other people in a state of wellbeing go beyond purely economic considerations. As rational beings, we practice induction. When we see another human being, we see another creature who in the most fundamental essentials is like us. When such a being is successful and happy, we see a confirmation that we can be successful and happy, and so we feel better as a result. By the same token, when we see another human being who is suffering and in pain, though he has done nothing to deserve it, we see evidence that we ourselves can be threatened, and thus we feel badly. As a result, when people are the victims of natural disasters beyond their control, such as earthquakes or floods, charity can be given in the name of the positive value of seeing them restored to their normal success. By its very nature, however, such assistance both has a selfish basis and is limited and temporary. It does not represent a blank check. It does not elevate the needs of others into any kind of mortgage on our lives or imply that we must make any form of sacrifice of our own wellbeing in order to serve them. On the contrary, it is given in the name of our own values and as part of the process of pursuing our own happiness. 86
In giving such assistance, the values involved for us are the same in nature as those which are involved in literature and drama, where we desire to see “happy endings”—that is, human success—and feel depressed at the vision of human failure. And just as our desire to see the success of human values does not lead us to spend more than a limited amount of time and money on novels, plays, and motion pictures, and so forth, so it does not lead us to devote more than a limited amount of time and money to charitable activities. Just as we find that after a point the marginal utility of all kinds of other goods outweighs the marginal utility of another novel or movie, we find that it also outweighs the marginal utility of charitable contributions.
In the present-day world, the apparent need for charitable assistance enormously dwarfs the self-interest of people in providing it. Over three-quarters of the world’s population live in or not far removed from a state of hunger. Even in the richest countries, there are large numbers of people who are unemployed, or who, even if they are employed, are still apparently unable to pay the cost of an education, an illness, or a modest home. If one looks back at the past, the situation was even worse: there were far fewer prosperous people, and those who were considered prosperous had much less.
Charity is obviously impossible as a solution to a problem of poverty on this scale. It can never be to the self-interest of people to attempt the support of so many others to such an extent. Even if, somehow, they were willing to try, they could not succeed.
Nevertheless, most moralists have proceeded as though charity were the solution. And they have vilified people to the extent they were able to prosper and devoted their wealth to the enjoyment of their own lives. They have attempted to make people feel guilty for their success and enjoyment and have tried to take it away, through governmental “redistributions” of wealth and income. The influence of such moralists is entirely destructive. Socalled redistribution impoverishes even those whom it is intended to benefit, as should by now be abundantly clear. 87
The fact that neither private charity nor governmental coercion is the solution to poverty does not mean that there is no solution and that the alternative is simply to accept a world of suffering. On the contrary, we can have a world in which a high and rising degree of human
wellbeing is the overwhelming norm everywhere. In such a world the cases requiring charity would be so reduced in frequency that they could be provided for within the limits of people’s rational self-interest.
The solution to the present problem of massive, overwhelming poverty is nothing other than the science of economics. As should be increasingly clear, economics is a science which can make possible the construction of a social and political system in which human success is a feature of normal, everyday life everywhere. It is truly the humanitarian science, and only those who have studied it well and who are prepared to implement its teachings deserve to be called friends of mankind. The most important charity which the true friends of mankind can pursue is to disseminate knowledge of this vital subject as widely and as deeply as they know how.
The solution to poverty that economics offers is, of course: the freedom of the individual—i.e., laissez-faire capitalism—a system in which each pursues his own good and, at the same time, is necessarily led to promote the good of those with whom he deals, as the condition of obtaining their voluntary cooperation. This is the engine for transforming poverty into prosperity. In its effectiveness in overcoming poverty, it surpasses the futile gestures of traditional, altruist morality, which has been handed down unchanged in all essentials since the Middle Ages, on the same scale as the rest of modern civilization surpasses that of the Middle Ages. It is the difference between a rocket ship and an oxcart. Indeed, when one considers the nature of the demands for sacrifice, pain, and suffering, it is the difference between a rocket ship and a medieval torture chamber. 88
It should be realized that the use of the law of diminishing marginal utility to support the demand for economic equality, is closely related to the doctrine of “external benefits,” in that both rest on the obliteration of the individual human being as the base and source of values, and feel free to talk of “utility” or “benefits” apart from the context of specific individuals. 89 The only difference is that the doctrine of external benefits goes a step beyond the egalitarian version of diminishing marginal utility. Thus, according to its logic, if a painting is stolen from the private collection of a millionaire who does not appreciate it very highly, and is stolen not merely by someone who appreciates it more, but by someone who exhibits it to multitudes of others, many of whom also appreciate it more, then what is present is not only the alleged gain in marginal utility that exists by virtue of the painting falling into the hands of the more-appreciative thief, but also the further alleged gain of the more-appreciative multitude’s enjoyment. This last is an alleged “external benefit” of the theft. What is overlooked by the external-benefits doctrine, of course, is that, like the enjoyment of the thief, the enjoyment of such a multitude, especially if its members are knowing accomplices to the theft, represents absolutely no value, indeed, a negative value, to the victim of the theft, and thus can claim no objective status, certainly no positive moral status.
Precisely such considerations must be raised against the use of the external-benefits doctrine to justify taxation for the sake of such programs as public education. It can be granted that education benefits not only its recipients but also all who come into contact with its recipients. This fact, however, does not justify the support of education by taxation or imply that a free market provides inadequately for education. The combined benefit of education both to its recipients and to those who come into contact with its recipients does not have any existence apart from the lives and purposes of definite, individual human beings. An individual millionaire, for example—the prospective victim of an education tax— can legitimately value his own yacht above all the effects, direct and indirect combined, of other people’s children receiving an education at the price of his not receiving his yacht.
True enough, if education lived up to its inherent potential of typically producing civilized adults, instead of, as is the case today, growing hordes of illiterate, semi-savage delinquents, it would indeed represent a major benefit to everyone. It would be the basis of a civilized, flourishing society. And in such circumstances, many people, especially many millionaires, would value the support of education above the purchase of some further personal luxuries. This in fact is why millionaires have traditionally been generous benefactors of education. In so doing, they would serve their own selfish values. They would provide to some significant extent both for the value they attached to living in a civilized society and to passing on such a society to their children, and for the value they attached to their own direct personal enjoyment in the form of such things as yachts.
The external-benefits doctrine, of course, ignores such facts. When it talks of the free market, it takes for granted that the participants are unthinking brutes incapable of understanding or appreciating the wider benefits resulting from such things as education and thus unwilling to support such activities voluntarily. Then, in a still greater affront to the humanity and the human dignity of the individual, it urges the government totally to disregard the choices, the judgment, indeed, the very existence of the mind and person of the individual, and to proceed simply to seize his wealth for use in the support of “external benefits.”
What the supporters of the external-benefits doctrine need to realize is that a free market, in the sense of the
arena of all voluntary financial transactions, provides all the funds to which education and all other activities entailing “external benefits” are properly entitled, consistent with the understanding and values of the citizens. Even more importantly, they need to realize that an essential precondition of the existence of any objective value of external benefits is that those who are to finance them not be regarded as sacrificial victims. An indispensable precondition of the pleasure or enjoyment or any other kind of value to others being a value to an individual is respect on the part of those others for his individual rights and his free judgment, including, of course, his free judgment with respect to the use of his own property. Nothing represents an external benefit to an individual if his sacrifice is required to achieve it. No gain to others is a gain to an individual insofar as those others regard him as a sacrificial animal. Thus, the external-benefits doctrine, as an attempt to wring benefits for others from sacrificial victims, by means of force, destroys the very foundation of the existence of benefits to others being a value to an individual. The doctrine is thus a self-nullification.
Further, when applied to education, the doctrine is a twofold self-nullification. For it introduces into the very foundation of education the preschool principle of uncivilized small children that the mere fact of wanting something entitles one to seize it, irrespective of the will—irrespective of the mind—of the owner. Education supported on the principles of the external-benefits doctrine is the self-contradictory monstrosity of education without respect for the human mind. It is the self-nullification of education that is visible above all in today’s system of public education.
Economic Inequality and the Normal Curve
The widely-used economics textbook by Samuelson and Nordhaus claims that economic inequality cannot be explained on the basis of inequalities of ability. It declares: “People differ enormously in their abilities . . . . However, these personal differences provide us with very little of the answer to the puzzle of income dispersion.” 90 In support of this claim, the authors observe: “Abilities are much more equally distributed than are incomes . . . . While human traits seldom differ by more than a factor of 3, high incomes today are more than 100 times greater than the lowest.” 91
The meaning of these words is that economic inequality has little or nothing to do with ability, inasmuch as the “distribution” of income does not follow the pattern of distribution of ability. Abilities, Samuelson and Nordhaus point out, such as those measured by IQ tests, follow the pattern of frequency distribution described by the normal curve. 92 The normal curve is a bell-shaped curve whose mean value, represented by the apex of the curve, is the most frequently occurring value. Additional properties of the normal curve are that the deviations above and below the mean occur both equally and with more rapidly diminishing frequency the greater is their departure from the mean. In a normal distribution, over 99 percent of all occurrences lie within the limit of plus or minus three standard deviations from the mean value. Thus, for example, in the case of IQs, the most frequently occurring IQ is 100, and approximately as many people have IQs above 100 as below 100, with more than 99 percent of the population having IQs between 50 and 150, that is, between values respectively equal to half and one-and-a-half times the mean value.
Apparently, according to the logic of Professors Samuelson and Nordhaus, what would be necessary for intelligence to be the explanation of inequalities of income would be if the earnings of those with IQs of 150 were only three times as high as those with IQs of 50, rather than one hundred or more times as high—in other words, if the earnings of geniuses were only three times those of morons, rather than a hundred or more times those of morons. In that case, inequalities of income would show the same pattern of dispersion as inequalities of intelligence. Indeed, it is logically implicit in the position of Professors Samuelson and Nordhaus that for inequalities in income to be based on inequalities in intelligence and ability—that is, to meet the requirement of similarly conforming to the normal curve—either morons must be capable of performing such activities as brain surgery one-third as frequently as brain surgeons perform it, or the work that morons can do must be one-third as valuable as the work brain surgeons do—and similarly in comparison with others whose abilities are greater and rarer even than those of brain surgeons. If neither of these conditions is met, that is, if morons cannot perform such activities as brain surgery at all and if brain surgery and the like are substantially more than three times as valuable as the work morons can do, then according to Professors Samuelson and Nordhaus, inequalities in income cannot be based on inequalities in intelligence and ability; they allegedly cannot, because if they were, they would be normally distributed, just as are the inequalities in intelligence and ability.
Of course, none of the above is a claim on my part that intelligence is the only factor which determines the relative income and wealth of individuals. (Nor is it to say that what is today considered intelligence necessarily embraces all aspects of intelligence or gives them their proper weight.) In order for greater intelligence to result in the earning of higher income and greater wealth, it must be accompanied by such factors as rationality, ambition, hard work, and forethought, and, in addition,
the valuation of more income and wealth above alternative goals. If it is accompanied by the necessary further factors, however, then its influence on the earning of income and wealth is very different from the pattern represented by the normal curve.
First of all, its effect when present in this combination is clearly exponential, not linear. That is, each additional few points of intelligence, or, better, productive ability (however that might be precisely gauged), should be expected to yield exponentially increasing results. Those of average ability, represented by IQs of 100, should be expected to earn substantially more than twice as much as morons, represented by IQs of 50. Productive geniuses who revolutionize the work of hundreds of thousands of individuals and the consumption of hundreds of millions, should be expected to earn and accumulate many thousands of times the wealth and income of the average person, which, in fact, is what they do. In connection with productive geniuses, moreover, it should be recognized how crucial is that extra measure of intelligence and ability which separates them from individuals who are merely very bright, and which gives the geniuses the ability to conceive of the new and original, not merely repeat what others have done, which is all that even the merely very bright can do.
Secondly, the very nature of productive ability in a division-of-labor society accounts for the fact that deviations from the mean value of wealth and income are not nearly so great on the negative side as they are on the positive side. This is precisely because the success of men of exceptional ability so radically increases the wealth and income of all individuals of lesser ability. Thus, while productive geniuses may earn a thousand or more times what the average individual earns, productive morons, to coin a phrase, earn many times more than one one-thousandth of what a person of average ability earns. This, as I say, is because of how much is added by the productive geniuses to the results of all individuals of lesser ability. This also helps to explain the pattern of income distribution diagrammed by Professors Samuelson and Nordhaus. 93
The kindest words one can say on behalf of the normal-curve argument propounded by Professors Samuelson and Nordhaus is that its supporters simply have no serious appreciation of the role of intelligence and ability in the creation of wealth. Indeed, so profound is their apparent ignorance on this score, that it suggests an alternative for what might otherwise stand as the obvious hypothesis for explaining the propounding of such an absurd doctrine. The obvious hypothesis, of course, is a readiness to grab at anything that to the unthinking appears capable of tarnishing capitalism and the success of its leading producers. But the enormous degree of ignorance present in the normal-curve argument suggests the possibility that the deeper-lying explanation of wanting to tarnish capitalism and its producers in the first place may be simply some form of compartmentalized imbecility. 94 But whether it is a form of imbecility that causes malice against capitalism and successful individuals, or such malice that causes the imbecility, is a question that may be left to others to decide. What is important here is merely to recognize the actual relationship between inequalities of income and wealth, on the one side, and inequalities of intelligence and ability, on the other. This relationship is that inequalities of intelligence and ability operate exponentially, not linearly, in the earning of income and wealth and that the greater intelligence and ability of some is a source of gain to all.
3. The “Equality of Opportunity” Doctrine:
A Critique
The advocates of economic equality have a fallback position, which they also frequently use as a camouflage, namely, the doctrine of “equality of opportunity.” They do not, they say, advocate anything so foolish or so extreme as the imposition of actual economic equality. All they advocate, they say, is that everyone have an equal chance—that, as they put it, all the runners begin the race from the same starting line. On this basis, they feel free to advocate the confiscation of inheritances, public education through the postgraduate level, and laws preventing private discrimination on the basis not only of such factors as race, religion or national origin, but also age, medical condition, and physical handicap.
The supporters of the equality-of-opportunity doctrine view opportunities as fundamentally external to the individual—in effect, as various dishes carried by waiters on trays, which, under capitalism, are arbitrarily served to some and withheld from others. They want the government to seize control, they say, not of the distribution of wealth and income, but merely of the distribution of these dishes, as it were—that is, of the opportunities to earn wealth and income—and so give everyone an equal chance.
To most people, this doctrine sounds eminently fair and reasonable. But, in fact, it is as much against the nature of reality as is the doctrine of the out-and-out equality of wealth and income. This becomes clear as soon as we look beyond the inheritance of wealth and begin to consider other external factors that affect the opportunities an individual has.
For example, consider such factors as the intelligence of a child’s parents, their education and vocabulary, their system of values, and their love for him and treatment of him, not to mention their level of income and the kind of
material life they lead and thereby expose him to while he is growing up. It is certainly arguable that differences in these factors confront a child with differences in opportunities that are certainly of no less significance for his future life, including his ability to earn wealth and income, than those which are based on the wealth he may or may not inherit.
To create equality of opportunity with respect to these factors, nothing less would be necessary than to abolish the institution of the family and to raise all children in government orphanages, where they could all be brought up in exactly the same way. This, of course, was the idea of Plato, and it was supported by many socialists in the nineteenth century and earlier in this century.
But even this would not be enough to achieve equality of opportunity. Because even if all of these environmental factors could be made the same, there would still remain enormous differences in the intellectual and physical endowment of the child himself, based on his genetic inheritance. A highly intelligent, strong, and beautiful child, for example, automatically has enormous advantages over a stupid, weak, and ugly child who is given the same upbringing. How can such different children, and the adults they later become, be given equality of opportunity?
One possible answer to this question is that the government should concentrate more heavily on the upbringing of the less fortunate, thus, perhaps raising their intelligence, improving their strength, and possibly even their looks. But no amount of such extra effort by the government can significantly make up for what nature has denied. Thus, another possible answer is that the government should insist that such differences simply be disregarded. The first answer manifests itself today in largescale government support for special programs for the education of the retarded and the handicapped; the second, in those antidiscrimination laws, such as California’s, which prohibit discrimination in employment based on medical condition or physical handicap.
Another possible answer is that, failing the government’s ability to create equality of opportunity by raising up the less fortunate, it should tear down the more fortunate. If it cannot make the stupid intelligent, the weak strong, and the ugly beautiful, it can find a way to hamper or destroy intelligence, strength, and beauty, and so achieve equality of opportunity by making everyone stupid, weak, and ugly. It may be difficult to find anyone who would openly advocate such a policy, but it does follow logically from the goal of equality of opportunity.
There is a fourth conceivable answer: the government should attempt to determine the genetic endowment of children. It should enact a program of eugenics, and attempt to breed children who would all possess the same characteristics at birth. Then, with the same upbringing, the demand for equality of opportunity could, apparently, at last be satisfied.
These absurd and vicious implications of the equality of opportunity doctrine should make one begin to wonder what kind of ideal “equality of opportunity” really is. In reality, it is not a legitimate ideal at all. It appears to represent justice only on the basis of a thoroughly confused view of the nature of opportunities and the causes of human success.
Let us consider what opportunities actually are, and then establish some important facts about them.
An opportunity is merely an occasion on which successful action is possible. It is a situation that an individual can take advantage of to his gain.
What needs to be realized about opportunities is, first of all, that there is no scarcity of them; they arise again and again. The second thing that needs to be understood is that what is important in connection with them and deserves to be fought for, as a matter both of justice and universal self-interest, is not that vicious absurdity “the equality of opportunity,” but the freedom of opportunity. What the freedom of opportunity means and why it is so important will be explained shortly. Finally, what needs to be understood about opportunities is that they can be and regularly are created by individuals. Indeed, opportunities are themselves products of human thought and action. Just how they are is something that will also be explained shortly.
Let us consider the abundance of opportunities. An opportunity exists every time there is the possibility of improving oneself in any way. If one is penniless and there is an unfilled job available that one has the ability to fill, one has the opportunity of ending one’s penniless-ness. If one has a job, and there is any better job available that one has the ability to fill, one has the opportunity to improve one’s position further. If there is any skill that one does not possess, but is capable of acquiring, then one has the opportunity of expanding one’s skills.
In fact, in the nature of the case, the economic opportunities potentially open to the individual far exceed his ability to exploit them, with the result that he must choose among them, selecting some and rejecting others. This follows from the fact that there is always room for improvement in the satisfaction of man’s wants, and that the basis for carrying out such improvement is the performance either of more labor or of more productive labor. In other words, built into the fact that man’s wants can always be satisfied more fully or better is the opportunity for the performance of more labor as the means of satisfying them more fully or better, and the opportunity for improving the productivity of his labor.
Indeed, on the basis of what has been established
earlier in this book, in Chapter 2, it follows that in the nature of things there are potentially limitless opportunities both for increasing employment and for raising the productivity of labor, for there are virtually limitless possibilities for improvement in the satisfaction of man’s wants. Indeed, the potential opportunities for employment always dwarf man’s ability actually to work, which is a major reason why he must be concerned with raising the productivity of his labor. 95
People may wonder, of course, how it can be true that there are virtually limitless employment opportunities and yet, at the same time, the world in which we live is characterized by chronic mass unemployment and the experience of millions is that they have no opportunity for work. There is a simple reconciliation of these facts. Namely, misguided laws and social institutions deny man the freedom of exploiting the opportunities for employment that the nature of reality offers him, and so force unemployment upon him. The problem of unemployment is the result of the violation of the freedom of opportunity—i.e., the violation of man’s freedom to exploit the opportunities that reality offers him. The freedom of opportunity means, to be precise, the ability to exploit the opportunities afforded by reality, without being stopped by the initiation of physical force.
People are unable to find work not because there is no work for them to do in reality, but because government and labor-union interference, based on the initiation of physical force, prices their labor beyond the reach of potential employers. This interference is, specifically, the inflation of the money supply (which sets the stage for a later financial contraction and depression) coupled with socalled prolabor legislation. The precise ways in which such interference serves to cause unemployment are explained later in this book. 96 For now, however, it may be helpful to realize that if, for example, employers have the financial ability to pay a trillion dollars a year in payrolls and there are 100 million workers able and willing to work, those payrolls would be capable of employing all those workers at an average annual wage of $10,000 per year. But to the extent that the government and the unions keep in force an average annual wage greater than $10,000, the payroll funds are rendered incapable of employing that many workers. The result is that corresponding unemployment is caused and can be made to continue to exist indefinitely. Thus, as this example indicates, unemployment and the lack of employment opportunity are not the result of any fundamental or “metaphysical” lack of employment opportunity, but of the government’s violation of the freedom of opportunity with respect to employment. In essence, first, the government creates the boom-bust cycle, and then, when the bust comes, it and the coercive labor unions it sanctions prohibit businessmen and wage earners from offering and accepting the lower wage rates that would enable them sufficiently to exploit the limitless employment opportunities that reality offers, to the point of establishing full employment.
As shown elsewhere in this book, the violation of freedom of opportunity is also what underlies the problems described under the head of racial discrimination. Their solution, too, would follow from the establishment of freedom of opportunity. 97
I stated that opportunities are themselves products. What I mean by this is the following. In any given instance, an opportunity is the result of a combination of external circumstances and the skills and abilities an individual possesses, such that he is able to exploit the circumstances to his advantage. An opportunity is a product in the sense that the skills and abilities an individual possesses are the result of his successful exploitation of previous, lesser opportunities.
It must be realized that opportunities are never a matter merely of external circumstances that are served up on a plate, as it were. They always depend on what the individual himself brings to the external circumstances in the way of skills and abilities. These skills and abilities in turn are never the automatic result of the individual’s genetic inheritance. They are the cumulative product of what the individual has done with his life up to that point. They reflect his initial choices to use his genetic inheritance to deal with external circumstances in ways that developed certain skills and abilities, and then further choices to use those skills and abilities to deal with further external circumstances in ways that developed still further skills and abilities, and so on up to the present moment.
For example, a child who chooses to use his mind to learn arithmetic thereby creates an indispensable precondition for the potential opportunity to learn algebra. Unless and until he learns arithmetic, there can be no possibility of any opportunity for him to learn algebra. If he does learn arithmetic and then, when he is confronted with the opportunity of learning algebra, successfully exploits it too, he creates a necessary internal basis for the further opportunity of learning calculus. And so on.
It is similar with regard to employment. The individual who exploits the opportunity to become a worker in a factory thereby creates a possible basis for his later on becoming a foreman there. If he becomes a foreman, he creates a possible basis for later promotion to a higher managerial position, and so on. Of course, he will have to expand his abilities in each of these jobs and possibly acquire other skills off the job, as well—perhaps by going to night school, for example. The principle is that opportunity presents itself as the rungs of a ladder. Each
rung is open only to those who have climbed within reach by ascending previous rungs.
Once things are viewed in this light, the notion of the advocates of “equality of opportunity,” that opportunities are a matter of environmental circumstances, or environmental circumstances combined with genetic inheritance, appears absurdly inadequate. It is actually ludicrous to think that what a person does is the outcome merely of his environment and genes. In between the environment and the genes is a lifetime of choices, each of which has a vital bearing on the individual’s ability to deal with his environment and to make further choices. In between the environment and the genes is the whole life of the person as a being who functions on a level above that of an automaton.
It is not necessary that people make the choices that develop their skills and abilities at any precise moment. There is considerable leeway. And it is never completely too late to start. For example, someone can learn to read even in old age and then begin rapidly to build on that foundation.
In a free society—with its superabundance of opportunities, with no fixed deadline on the process of developing one’s skills to better exploit them—all talk of inequality of opportunity must be judged as just so much whining and excuse-making. In such a society, everyone, whatever his starting point in life, is able to raise himself very far, if that is what he chooses to do. He can miss many, many opportunities, and still there will be more. He can begin improving his ability to exploit them at any time, and start moving up from that moment.
It is true that in such a society if two individuals were born equal in every respect, except that one had richer parents than the other, and if they both actively and constantly chose to develop their skills and abilities from birth on, the one with the richer parents would probably always be ahead of the one with the poorer parents. But far from representing any kind of embarrassment to a free society, it is perfectly just that things be this way. The advantages of the individual with the richer parents would not prevent the one with the poorer parents from rising, and rising not only very high, but without any fixed limit. It is simply the case that wealth is beneficial, and if everything else is in fact the same, it makes a difference. But what else is wealth for if not to provide benefits? (And, more fundamentally, what are parents for, if not to provide every possible benefit to their children? One of the ugliest consequences of the equality-of-opportunity doctrine is that it actually causes some parents deliberately to do less for their children than they otherwise would, on the grounds that other parents are unable to do as much, and thereby willfully to default on their responsibilities as parents.) Furthermore, as explained in the discussion of the institution of inheritance, everyone, nonheirs as well as heirs, benefits from the capital that is accumulated in order to be passed on to heirs. The nonheir is thus able to achieve more than he would have in the absence of the institution of inheritance, even if that is less than what someone else can achieve who is both equally capable in every respect and has the benefit of an inheritance.
The way this principle applies in the present instance is not only that the nonheir has the benefit of a more abundant supply of products and a greater demand for his labor by virtue of the existence of capital accumulated because of the institution of inheritance, but also that he can benefit specifically in his potential capacity as a businessman and capitalist himself. In the example of the two boys who grow up with equal ability while one has the advantage of money, that advantage can enable the one without the money to make his own fortune, even if it is a smaller fortune than the one who begins with the money. For example, suppose the two of them become partners in business. If neither of them had capital, both would be equal partners, because they are equally talented. But neither of them would be able to get very far, or at least not nearly as soon, because of their lack of capital. If one of them has the necessary capital to contribute to their business, he will have more than a 50 percent share in their partnership, but the one with the smaller share will also be better off now. He will have, say, 40 percent or 30 percent of a business that now earns two, three, or five times more profits because of the capital contributed to it, with the result that his absolute share is greater. He must have more than he otherwise would have had, or he will not enter into the partnership.
Now, of course, the real fact is that individuals are not born perfectly equal in all respects but the wealth of their parents, and they do not make the same choices in connection with developing their skills and abilities. Time and again, there are individuals born to poorer parents, to parents badly deficient not only in wealth, but in education, knowledge, and even character; individuals whose own endowment at birth or in childhood is not only not exceptional, but possibly deficient in some important respects. Yet, over the course of their lives, these individuals manage to far outstrip in their accomplishments practically everyone else, despite their having begun under such seemingly insuperable disadvantages.
What enables them to do this is making the choice and the effort to exploit as far as they can whatever opportunities present themselves for self-improvement. Once they begin to do this, they actually do begin to improve themselves. And now, when they face the world, they are better equipped than before. And because they are better equipped, there are more opportunities for self-improve—
ment open to them than there were before. They seize these further opportunities, thereby further improving themselves and their subsequent ability to act and to seize opportunities. And so on, year after year.
What happens is that these individuals engage in a personal, internal process very similar to capital formation in the economy of a country. They use the means at their disposal to build the personal attributes—intellectual, psychological, moral, and physical—required for further success. And then they use the personal attributes they have constructed thus far to further construct such attributes. It is similar in principle to the process of a poor farmer scrimping and straining to obtain an additional supply of seed; of then using the larger supply of seed to produce a bigger crop the following year, from which a much greater supply of seed can be obtained for the year after that, and so on. Or to the economy of a whole country working very hard and saving very heavily to be able to make iron and steel available for the construction of the first railroads and steel mills, and then with the aid of those first railroads and steel mills being able to produce more of practically everything, including more and better railroads and steel mills.
Concentration on building up the means of further action, whether internal and personal or external and material, produces exponentially increasing results. Each success serves to increase the capabilities for further action, which makes possible still greater success. Those who concentrate heavily on these efforts rapidly improve, while those who neglect them stagnate or decline. It is on these principles that we can understand both such things as how Japan, so poor and backward a generation or two ago, can now be within sight of economically overtaking the United States and how Demosthenes the ancient Athenian, who began as a stutterer, could become a great orator, and how, again and again, in a free society, poor boys grow up to become rich and famous.
The secret of the success of the poor boys is contained in that old but very accurate expression that is so seldom heard today: the self-made man. Those poor boys build themselves into the kind of men capable of achieving great success. (While custom and tradition apply the principle to “boys and men,” it should go without saying that the principle applies no less to girls and women. There are self-made women, as well as men.)
The following example, perhaps, can help in understanding how by building themselves into the right kind of men they outstrip even those with the greatest advantages at birth. Thus, imagine two boys—one the newborn son of a highly educated millionaire; the other, the newborn son of a poor, uneducated coal miner. To most people, it seems that the millionaire’s son has such great advantages that he can never be overtaken. But this is not so. And the reason why not can be seen in terms of a few conceptual snapshots, as it were, of the two boys at different stages of their development.
At birth, neither of them is capable of very much of anything. All of their capabilities remain to be developed. The millionaire’s son is not capable of jumping out of his crib and using his father’s millions to make more millions. If he is ever to have that ability, he will first have to develop it.
By age six or seven, say, the two boys have developed certain attitudes toward acquiring knowledge, and other important attributes, too, of course. But, for simplicity’s sake, we will focus just on this aspect and its possible ramifications. If the poorer boy recognizes the value of knowledge and the necessity of making his best effort to acquire it, while the richer boy does not, the poorer boy has gained an advantage that can become of growing significance over the years. By age fourteen or fifteen, perhaps, the poorer boy has acquired an important body of knowledge that the richer boy has not. He understands algebra, trigonometry, and something of physics and chemistry. The richer boy has no real understanding of these subjects. By age twenty or twenty-two, the poorer boy is capable of working as an engineer, say, and making a significant contribution to the profits of anyone who employs him. The richer boy, on the other hand can only be employed either in a menial capacity or at the expense of his father, who must continue to support him under the guise of giving him a salary, or who must provide for some associate to pay a fictitious salary, and compensate that associate in some form.
By age thirty, if he is really talented, the poorer boy has developed some significant ideas which have earned him some significant sums of money and have enabled him to start his own business. He now possesses a capacity for earning money which exceeds the richer boy’s. The richer boy may still have vastly more money and earn a larger absolute amount, but the poorer boy is in a position to earn it now at a much faster rate. For the poorer boy’s money is under his own, intelligent control and can earn a high rate of profit. The richer boy’s money is either in his own, incompetent hands, in which case he can rapidly lose it, or it is in the hands of others who are more competent but who pay him only a relatively modest rate of interest or dividends. As the years go by, with the poorer boy earning a 50, 75, or 100 percent annual rate of profit, and plowing back almost all of it, while the richer boy earns a 3, 4, or 5 percent rate of interest or dividends and consumes almost all of it, the poorer boy becomes the richer man.
This, in briefest essence, is how it actually happens that in a free society penniless newcomers are able, again and again, to overtake and surpass even those with the
greatest inherited wealth.
It cannot be stressed too strongly in this connection how critical is the element of freedom of opportunity. In order to succeed, the poorer boys must have the freedom to earn the highest rates of profit they can and to keep those profits. They must also be free of government controls and regulations, which can easily prevent them from ever getting started, by placing innumerable bureaucratic obstacles in their way—such as causing unnecessary delays, requiring unnecessary staffs of lawyers, accountants, and clerks that they are unable to afford, and by diverting their valuable time and efforts from serious work to contending with the arbitrary power and sheltered incompetence of government officials.
Education and the Freedom of Opportunity
Now it is also true that the success of the poorer boys depends on their being able to obtain education. But this certainly does not mean that a case is made for public education of any kind. The kind of men and boys I have described grasp very early the value of acquiring knowledge and make it their business to find opportunities for acquiring it. Public education, on the other hand, by removing all incentives of profit and loss and all possibility of genuine competition in education, and by thus sheltering inefficiency and incompetence while making improvement almost impossible, creates a system of instruction so poor that compulsion is the only means of keeping most of the students in attendance. And because people, including children, are not automatons programmed by a combination of genes and their environment, the system of forcing books and lectures on unwilling minds simply does not work.
For the kind of men and boys I have described, public education is unnecessary. What is necessary, or, more correctly, would be extremely helpful to them, and would be far more efficient and effective for everyone, is the freedom of education, combined with the availability of private, voluntarily supported merit scholarships and also the freedom of working and earning money to pay for education. People do not generally realize the extent to which the present system of public education destroys the freedom of opportunity with respect to education. By making educational innovations virtually impossible through government controls on curricula, faculty qualifications, and teaching methods, and requiring that competition take place against a subsidized competitor who does not charge, countless educational innovations that might have been made have not been made. People have been prohibited or prevented from exploiting the opportunities they perceive for improvement in education. The further opportunities that those improvements would have constituted for students have thus been prevented from coming into being. We have a situation today where the law both prevents better, more economical forms of education from being offered and prevents students from earning the means of paying for education, by making it almost impossible for anyone under the age of eighteen to obtain any kind of meaningful job. Our present system is one of systematic opposition to the freedom of opportunity with respect to education.
Everyone’s Interest in the Freedom of Opportunity
In general, on an increasing scale, people are prevented from exploiting the opportunities open to them, and thereby prevented from creating further opportunities that would be available not only to them but to those with whom they dealt. I have just shown how this is the case in education. On the basis of what we have seen earlier in this chapter, it is also obvious that in preventing the acquisition of fortunes, our present system prevents the opportunities from coming into being that those fortunes would have afforded to workers and suppliers in the form of a demand for labor and capital goods, and to customers, in the form of more and better products produced.
These observations bring out a further important principle pertaining to opportunities that is consistent with our wider, previous discussions both of economic inequality under capitalism and with the synergistic nature of a division-of-labor society in general, especially of private ownership of the means of production: namely, each person’s successful exploitation of the opportunities open to him creates further opportunities not only for himself, but also for those with whom he deals. In other words, with respect to opportunities too, one man’s gain is the gain of others. The losses caused by the violation of freedom of opportunity represent losses to everyone. This is true ranging from the consequences of aborting the earning of great fortunes and the development of major industries all the way down to the level of licensing laws aborting one man’s opportunity to be a cab driver and another’s opportunity to find a cab, or immigration laws aborting one person’s opportunity to be a gardener or a maid and other people’s opportunity of obtaining such services.
The notion of “equality of opportunity,” however innocent it may sound at first, is actually vicious and absurd. In its logically consistent form, it implies the destruction of the institution of the family, the implementation of a governmental program of eugenics, and the elimination or destruction of every personal attribute that represents an advantage of one person over others.
In a positive vein, what has been shown is that what is actually important in connection with opportunities is
the establishment of a free society and its corollary the freedom of opportunity. In such a society, the individual is free to exploit the virtually limitless opportunities offered by the combination of his nature and the nature of the world. He must pick and choose among them. And he progressively creates better and better opportunities for himself by successfully exploiting the best of the opportunities available to him at any given time.
In such a society, the notion of equality of opportunity reveals itself as absurdly irrelevant, as nothing more than an excuse for not taking advantage of the opportunities one has and for not creating better ones. In such a society, everyone can rise no matter what his starting point or present position, and again and again people of the most humble origins overtake and surpass those who began with seemingly insuperable advantages.
What is required for everyone to be able to succeed and, at the same time, represents full justice, is not equality of opportunity, but freedom of opportunity. The successful exploitation of opportunities that freedom makes possible is the basis of each individual being able to rise and create better opportunities not only for himself, but also for those with whom he deals.
PART C
ECONOMIC COMPETITION
1. The Nature of Economic Competition
In a division-of-labor society, competition is of a radically different character than it is in the animal kingdom. In the animal kingdom, competition is over a limited, nature-given supply of means of subsistence. For the lions in the jungle, for example, there are only so many zebras or gazelles in the surrounding territory. Once the population of lions grows to stand in a sufficiently high ratio to that of the surrounding species that it eats, the individual lions are placed in competition with one another for survival. For each lion that succeeds in obtaining a supply of food, the survival of some other lion is jeopardized. For there is simply not enough to go around. In these conditions, those lions that have the keenest senses, that can run fastest and furthest, and that are the strongest, catch their prey and survive, while those that are less well endowed in these respects fail in the chase and perish. This is truly “the law of the jungle” and “the survival of the fittest.”
The competition that exists in a division-of-labor, capitalist society, on the other hand, is so radically different that it is actually of a diametrically opposite character. It is not competition over any limited, nature-given supply of means of subsistence. On the contrary, it is a competition in the positive creation of new and additional wealth. Ford and General Motors, IBM and Apple, and so on, are not competing in the seizure of a fixed supply of automobiles or computers provided by nature. They are competing in the positive creation of automobiles and computers—of ever more and better automobiles and computers. While animals in the jungle chase prey, which they seize with their teeth and claws, producers under capitalism chase dollars, which they gain from willing customers only by virtue of sending after the dollars more and better goods—goods which they have created.
Man does not obtain his automobiles, computers, food, or anything else that he requires, as a gift from nature. He must produce them. His possession of reason and his organization of production into a system of division of labor enable him steadily to increase the total of the wealth he produces. Unlike the lions in the jungle, man increases the size of the animal herds that serve him (to return to that example); he domesticates them; he studies their requirements for health and nutrition and so on; he grows food for them and studies the requirements for the health and nutrition of the crops that feed them; he progressively expands and implements such knowledge, with ever increasing benefit to himself. And similarly with regard to each and every other source of his material wellbeing.
Economic competition takes place within this context—the context of unlimited potential improvement in man’s material wellbeing, based on his possession of reason and the organization of production into a system of division of labor. Because of this, what economic competition is about is not the means of subsistence, but, as pointed out in Chapter 5, the selection of products for markets, of technological methods for producing any particular product, and of persons for specific occupations. 98 That is, it is not at all about one human being’s survival causing another human being to perish for lack of subsistence. Rather it is about one product serving a given market instead of another product serving that market, about whether this or that technological method will be used to produce a given product, and to what extent, and about which individuals are to perform which jobs in the economic system. Throughout, it is a competition for the patronage of customers (including employers) and for the services of workers—a competition which can be won only to the degree that one renders labor more productive and so operates to raise the general standard of living by producing more and better products. Economic competition is the process of achieving an ever more efficient organization of the division of labor. It is not in opposition or in contrast to social
cooperation, as so many people have believed; on the contrary, it is precisely the process of steadily reorganizing the system of social cooperation—the division of labor—in terms of who is to produce what and by what methods, so as steadily to raise the productivity of labor and increase the quantity and quality of products produced and pouring onto the market. 99 Indeed, it is the mechanism whereby a veritable growing flood of goods is produced and poured onto the market, raising the standard of living of everyone further and further above “subsistence.”
In this competition there are no genuine, longrun losers—only winners. Everyone benefits from the ever-increasing wealth that economic competition creates. Even those who at first sight appear to be losers turn out to be winners, and usually fairly quickly. Consider, for example, the effect of the competition of the automobile on blacksmiths, horsebreeders, and buggymakers. These “losers” in this competition suffered only a very temporary loss—in the period in which it was necessary for them to adapt their skills to the requirements of other jobs. Once they did this, the only permanent effect on them of the competition they “lost” was that, along with everyone else, they too obtained the benefit of the automobile in their capacity as consumers, including, of course, the benefit of having all manner of products transported by means of trucks rather than horse-drawn wagons. In exactly the same way, the farmers using horses and mules, who lost out in competition to other farmers using tractors and harvesters, did not die of starvation, but merely ended up in different jobs. Only now, along with everyone else, they were able to obtain their food cheaper and had money left over for the purchase of larger quantities of other things—other things that could now be produced because the labor required for their production was no longer required in the production of food, thanks to the successful competition of tractors and harvesters. 100
It is vital to realize that there is room for all in the competition of a division-of-labor society. 101 To “lose” in such competition does not mean to be cast out of the productive system and to perish. It means only to have to relocate to some other point in the productive system—to produce some different product, to work in some different occupation; or, perhaps, to continue in the same occupation and learn to produce one’s present product differently. The effect of making such adjustments is almost always that one ends up benefitting even from the very improvement in production that caused one’s initial “loss”—in the same way as occurred in the examples just given of the blacksmiths et al. and of the backward farmers.
The socalled weak in particular gain from the process of economic competition. Consider all those millions who might have perished from hunger or malnutrition, or from disease or accident; who suffer from some impairment of vision or hearing; who lack the muscles or the agility to live in the jungle or the forest. And now consider the effect on them of competition among farmers and farm-equipment manufacturers; among pharmaceutical makers and manufacturers of diagnostic equipment; among the makers of eyeglasses and hearing aids; among the producers of every labor-saving device and life-enhancing product. Can anyone fail to see that such competition is what enables the weak to survive? 102
Economic competition is not a process by which the success of the biologically fit brings about the extermination of the biologically weak. On the contrary, it is the process by which the success of better products and more efficient methods of production promotes the survival and wellbeing of all. It is a process in which the success of the more able raises the productivity and improves the standard of living of the less able. For the competitive success of the more able is merely their achievement of positions in which they, rather than the less able, take charge of production. The less able remain in the productive system and are more productive because they work under the direction of the more able. They work in the enterprises founded and run by the more able. In those enterprises, they produce the new and improved products made possible only by virtue of the work of the more able, and they work with the aid of the progressively more productive methods of production, again, made possible only by the work of the more able. Economic competition is thus the process of improving the efficiency of social cooperation under the division of labor, and thereby of promoting the survival of every member of the human species. 103
An important aspect of the benefits of economic competition can be understood in the light of the beneficial effects that typically result from competition in such fields of human endeavor as athletics and the arts. Thus, for example, without competition, an individual can pursue such an activity merely as a pleasurable pastime, engaging in it as it suits him, with no strong dedication to improving his performance and raising it to the maximum level of which he is capable. But now let him enter into competition in his chosen activity. The immediate effect is that he is confronted with a standard that is set by the performance of his competitor or competitors. To succeed in the competition, he must exceed that standard.
It follows that for all those competitors whose performance does not presently measure up to the standard set by the leading competitor, competition creates the need to raise their level of performance—to make it exceed
the performance of the presently leading competitor. To the extent that one or more of the initially lagging competitors is inspired to surpass the initially leading competitor, the effect is to confront that individual too with a standard that he must now aspire to match and exceed. The effect of competition is thus a kind of upward ratcheting of standards accompanied by continual efforts to match and exceed the rising standards, thereby setting still higher standards, until everyone is led to exert his utmost best efforts and turn in the absolute best performance of which he is capable. In other words, competition brings out the very best in the participants.
It is the same in the economic world. Here, each company must take the quality of the goods produced by its competitors, and the prices charged by its competitors for their goods, as a standard for the quality of its own goods and for the prices it must charge. It must make its performance match and, if possible, exceed theirs. Thus, economic competition is a process by which producers are led to exert themselves to their utmost best.
Now what could be more wonderful or more beneficial than an arrangement which leads individuals to exert their very best efforts for the sake of their own and their customers’ material wellbeing and very survival? Exactly this is what economic competition accomplishes. Exactly this is why capitalism has succeeded in so radically improving the material conditions of everyone who lives under it and in so radically lengthening life expectancy. People live and prosper under capitalism in large measure for no other reason than that economic competition drives them to put their heart and soul into doing so.
In the next section, we will consider in more detail the matter of the short-run losses that various people can experience in connection with economic competition. Following that, I will explain more fully why there is room in the competition of a division-of-labor society even for people who are less efficient than others in every respect. I will show precisely why and how even such people can have a secure place in a division-of-labor society. I will also explain further why, by the very same token, such people not only need not fear the competition of those who are more able than themselves, but derive incalculable benefits from their existence. Where appropriate, I will apply the principles derived from our discussion to the questions of international competition and free international trade. One of the major themes throughout will be that the hardships usually blamed on competition are not the result of competition, but of government intervention infringing the freedom of competition.
2. The Short-Run Loss Periods
In order to understand the problem of short-run losses and why, in a free economy, it would not be a very great one, let us consider the inherent difficulties of adjusting to the effects of competition that are experienced by three different groups of people: unskilled workers, skilled workers, and businessmen or others with invested fortunes. Between them, these groups embrace everyone directly affected.
When competition makes obsolete the job of an unskilled worker, there is no intrinsic reason for his short-run loss period to be longer than a few weeks or months. For that is the period of time required to acquire a comparable level of skill, and thus to earn a comparable level of income, in some other unskilled job. From that point on, an unskilled worker should be back to where he was in his capacity as an income earner, and he should now be in a position to benefit in his capacity as a consumer—a buyer—from the very improvement in production that displaced him.
This, of course, assumes the existence of some other job for him to take. But as explained in Chapter 2, there are always far more potential jobs out there, waiting to be done, than we are capable of doing. If the government does not intervene and so prevent the exploitation of employment opportunities that the nature of reality provides in superabundance, there will indeed be other jobs available. And in modern conditions, in which even the very poorest workers can afford the cost of a bus ride that will take them practically anywhere in the country within days, alternative employment opportunities can be drawn from the entire length and breadth of the land. The intrinsic difficulties in the way of people adjusting to the temporary job losses caused by competition are now less than ever, and diminish with every further improvement in transportation and communications.
The temporary losses suffered by skilled workers are necessarily longer lasting than those of unskilled workers. If a skill is made obsolete that required two or three years to learn, then it will probably take that much time for such a worker to acquire a comparable level of skill in some other line of work and thus, once again, to earn a comparable level of income. But even so, if the worker does reestablish his level of skill and income, then, from that point on, he too benefits from the very improvement that initially cost him his job. For he has now drawn even in his capacity as an income earner and, because of the improvement, is ahead in his capacity as a consumer. For example, a typesetter displaced by automated typesetting equipment would come out a permanent net gainer from the lower-cost books, newspapers, and magazines that that improvement made possible. He would have this
permanent net gain once he acquired a comparable level of skill and thus of income in some other line of work, perhaps two or three years later.
Now I have stressed the fact that in a free society individuals end up gaining even from the improvements that initially make them lose their jobs. It should not be forgotten, of course, that they also benefit from the overwhelmingly greater number of improvements that do not make them temporarily lose their jobs, but which purely and simply benefit them in their capacity as consumers. For example, the typesetter just referred to benefits purely and simply from the effects of competition in the production of food, housing, clothing, transportation, and everything else to which he is related merely as a consumer.
For every individual, such improvements are always in the great majority, for the simple reason that he works in only one industry at any one time, while competition affects all industries. His job is potentially threatened only by the competition which goes on within his industry, or between his industry and one or more other industries. It is not threatened by any of the competition that goes on in all the rest of the economic system—by all the competition that goes on within and between all the other industries and that does not directly relate to his one industry. Such competition merely improves his position as a consumer. In essence, if the economic system can be thought of as consisting of one-hundred industries, the individual benefits purely and simply from the effects of competition in and between the ninety-nine industries to which he is related merely as a consumer. When it comes to his own industry, he may lose his job and have to change his employment, after which he benefits in his capacity as a consumer even from the improvement that initially cost him his job.
Thus, the position of the individual in a capitalist society is that over the course of his lifetime competition improves the production and lowers the cost of practically everything, and introduces many totally new and previously unheard of products, with the result that the standard of living of the average person steadily rises. But from time to time the nature of the competition is such that the individual must change his job. At that point, his standard of living may temporarily decline. The fall in his standard of living is from an upward sloping line, so to speak; and as soon as he acquires a comparable level of skill in another type of work, his standard of living is raised to a point further up the line than it ever was before—in part, precisely because of the very improvement that displaced him.
The picture that emerges of an individual’s life under capitalism, in connection with competition, is one of steady improvement punctuated by a few brief periods of setback. The impact of such periods of setback could, of course, be minimized by the possession of savings. It could also be greatly reduced in most cases by forethought, in the form of paying attention to the factors affecting the existence of one’s job and making preparations for obtaining a new job before the loss of one’s present job. This would mean learning a new skill while one still had one’s old job. For individuals willing to exercise such forethought, the main negative impact of competition, if, indeed, it can even still be called a negative impact, would be merely that it required them to do fresh thinking.
Indeed, in most cases, fresh thinking is practically all that competition need require of a person. For example, the great majority of the blacksmiths, horsebreeders, and buggymakers who were displaced by the automobile did not have to wait to lose their jobs. It took over twenty years for the automobile substantially to displace the horse even in the United States, the country where the automobile made its most rapid progress. Thus most of those workers were in a position to see well in advance what they needed to do, before they lost their existing jobs. Such conditions are typical, and for many workers the impact of competition on their employment is in fact little more than that they need to learn new skills.
In a free economy, the only case of a loss period that is necessarily long and major is that of wealthy individuals who lose an invested fortune as the result of competition. The owner of a harness factory or horsebreeding farm in the early decades of this century, who lost the equivalent perhaps of a million dollars or more when his investment became obsolete, was far less likely to be able to accumulate such a sum a second time than were his workers to adapt their skills to the requirements of other jobs. For it is incomparably more difficult to earn a fortune than to learn a new job—even a highly skilled one.
Of course, even this is not impossible. There are numerous instances of individuals who have made and lost several fortunes. But for many people, especially those whose wealth has come to them through inheritance rather than their own abilities, it is simply out of the question to earn back a fortune.
Let us concentrate now on the effects of competition on this group, precisely because it is the only group whose members must probably suffer a major and prolonged loss as the result of free competition. The question we must consider is whether even the members of this group can legitimately claim to be harmed by competition.
The first thing we must realize is that the effect of competition on this group is certainly not to cause the extermination of its members, but merely their fall from
a relatively high position in the economic system to the ranks of the average. We must also keep in mind that the position of the average member of the society is steadily rising because of competition. Thus, it is only a question of time before the standard of living of a former millionaire would rise to the point where it was higher in his position as an average worker than it used to be when he was a millionaire.
This last statement is not only a theoretical inference, but also an accurate description of the actual historical facts of capitalism. The average worker in the United States today is materially far better off than a millionaire of a century ago—than even the world’s very richest people of that time or of any other time much before the beginning of the present century. He has at his disposal all kinds of goods they simply did not have, such as automobiles, airplanes, electric light, indoor plumbing, radios, telephones, television sets, phonographs, tape-recorders, motion pictures, air-conditioners, refrigerators, freezers, antibiotics, modern anesthetics, and all the other advances of modern medicine. No one in the world had any of these things much before the beginning of the present century—not Queen Victoria, not Napoleon, not Louis XIV, not any of the Roman Emperors or Egyptian Pharaohs. The only respect in which these immensely wealthy individuals of the past can be described as better off than the average wage earner under capitalism today is that they had access to personal servants, which he, of course, does not. But servants to carry chamber pots and harness horses do not begin to compare to indoor plumbing and automobiles, which today’s wage earner does have.
Furthermore, until about twenty-five years ago, when we still had a substantially freer economy than we do now, the rate of economic progress was sufficiently rapid so that it was not unreasonable to expect that by the time an average individual reached the end of his life, he himself would actually live better than a millionaire did when he, the average person, was a boy or a young man.
Of course, even under conditions of full capitalism, many or even most people who lose a fortune cannot live long enough for further competition and progress to give them a higher standard of living as an average person than they previously had as a millionaire. If they lose their fortune when they are sixty-five or even forty-five years old, it is virtually impossible that they will live long enough for economic progress to restore the equivalent of all that they have lost. And even if they lost their fortune, say, at age twentyone and did perhaps live long enough, finally—say, some forty or fifty years later—to have a standard of living as an average person higher than they had had as a millionaire in their youth, the period of gain would be too short compared with the period of loss for us to be able to say that competition had on the whole raised their standard of living in their lifetimes. Thus, even though competition and economic progress operate to raise the standard of living of the average person above that of millionaires of previous generations, they often do not do so rapidly enough to enable those who lose fortunes to improve their standard of living on net balance in their lifetimes.
Even so, there is no legitimate argument that can be raised against economic competition. Those who lose a fortune cannot logically regard competition as their enemy. For we must consider the foundation on which their fortune rested. If it was acquired legitimately, i.e., through production and trade, it could only have been so by virtue of their or their parent’s or grandparent’s previous success in the process of competition. To have a million dollars or more almost certainly requires that someone have earned an exceptional rate of profit that he kept plowing back over a period of years. That exceptional rate of profit represented successful competition. Thus, the fortunes that are lost because of competition were first acquired because of competition. One cannot reasonably denounce the process of competition for taking away what one could not have had without it in the first place.
This point applies in a double way. Not only is competition responsible for the existence of any fortune with which one legitimately begins, but it is also responsible for the purchasing power of that fortune and of every other sum of money one will ever possess. Virtually all of the products that can be bought are the result of the process of competition. The millionaire who loses the ability to buy a Rolls Royce and caviar and champagne, and who ends up having to settle for a Chevrolet and hamburgers, could not have had any of these things without the process of competition. To denounce competition as the source of his loss ignores the foundation of virtually everything he has or ever could have. (The same point, of course, applies to a worker who might be tempted to denounce competition for a decline in his income. The purchasing power of any income he ever earned or will earn is created by the competition of producers. There would be almost nothing for him to buy without it. And the previously higher money income he earned was itself the result of his own previously more successful competition.) Thus, an accurate description of the millionaire’s loss, or anyone else’s loss in connection with competition, is not to say that the phenomenon of competition has caused him any kind of actual loss or harm, but that competition both before and after his financial loss has benefitted him incalculably. It is just that after his financial loss, competition, while still benefitting him incalculably, benefits him somewhat less
than it did before, and will require some period of time to benefit him even more than it did at its previous peak of benefit to him. Always, the effect of economic competition on the standard of living of everyone is positive—enormously positive.
The Enemies of Competition as the True
Advocates of the Law of the Jungle
It should be realized that it is those who denounce competition who are the true advocates of the law of the jungle. They want to preserve their or others’ accustomed standard of living by means of prohibiting or restricting competition. The only way they can accomplish such a goal is by means of the initiation of physical force. For competitors will not stay back or stop their competition voluntarily.
For example, if the owner of a harness factory wanted to preserve his standard of living by stopping the competition of the automobile, it would not be sufficient for him merely to send a polite letter to Henry Ford explaining the hardship he was suffering on account of Ford’s activities and requesting, therefore, that Ford stop or restrict his business. Ford would obviously disregard such a request, since it is overwhelmingly to his self-interest to go on with his business and increase it.
If our harness factory owner were seriously out to stop Ford’s activities, the only way he could do so would be by means of force. Either he would have to employ private criminals to stop Ford, by such means as wrecking his factories and threatening his workers, or he would have to have a law passed, which would stop him by the threat of seizing his property or putting him in prison. One way or another, force would have to be his only recourse, because there is no way that Ford or any other competitor would voluntarily give up the means of making his own fortune in order to preserve the fortune of someone else. Such activity on the part of the harness-factory owner—who is in the position usually regarded as that of a victim of “the law of the jungle”—is the real law of the jungle in its human setting. For it is the attempt to live by means of force, rather than production and exchange. All those who denounce economic competition implicitly support such behavior, and in this sense are advocates of the law of the jungle.
In contrast, economic competition itself has now been clearly established as the opposite of the law of the jungle. It is a uniquely human mode of survival: the achievement of success by offering progressively better goods and services to others, who have alternatives for spending their money and who must be voluntarily induced to spend it in any particular way—who are induced because they are offered something better. Economic competition is both the product and the agent of man’s ongoing use of his mind to improve his life—the product of the minds of those who have something newer and better to offer, and the agent compelling all others to do the thinking necessary to be able to follow if they are to retain the voluntary patronage of their customers. It is not the law of the jungle, but of progressing civilization—the basis not of the survival of the biologically fittest, but of everyone, at a higher and higher level.
3. Economic Competition and Economic Security
Our discussion has important implications for the relationship between economic competition and economic security, which need to be developed.
Usually, competition is perceived as one of the foremost threats to the individual’s economic security, because it can cause him to lose his present job. We are now in a position to see that in actuality the freedom of competition is an essential basis of economic security— that it is so in terms both of the individual’s ability to obtain physical goods and services in exchange for the money income he earns and to earn a money income in the first place.
It should be realized that in its most fundamental, physical sense, economic security means the ability to obtain the goods and services on which one’s life and wellbeing depend. It means that when one is hungry, one can obtain food, that when it is cold and raining, one has a warm, dry house to stay in; and so on. In its fundamental, physical sense, economic security obviously depends on the ability to produce. The ability to produce and physically have goods depends on the freedom of competition. The freedom of competition is thus a fundamental basis of physical economic security.
This point can be highlighted by a brief consideration of the medieval guild system, whose absurdity it makes manifest. The guilds existed in order to give their members economic security. The means chosen by the guilds for achieving economic security was the prohibition of all economic competition both by outsiders and among their own members. Thus, the bakers’ guild sought security by prohibiting improvements in the production of bread; the cobblers’ guild, by prohibiting improvements in the production of shoes; the tailors’ guild, by prohibiting improvements in the production of clothing, and so on, industry by industry, occupation by occupation.
The effect of all this misguided seeking of security was that everyone remained much poorer and therefore much less physically secure than he needed to be. People were deprived of bread and made insecure against hunger because of the activities of the bakers’ guild. They were deprived of shoes and clothing and made insecure against the elements because of the activities of the cobblers’ and
tailors’ guilds, and so on. And those so deprived included the members of all of the guilds. Each guild operated to perpetuate the poverty and insecurity of the whole society—that of the population standing outside the guild system, that of the members of all other guilds, and even that of its own members (for it should be recalled how people benefit even from the improvements that initially displace them). Thus, the guilds operated in a veritable self-contradiction: they professed a desire for security and yet in fact perpetuated insecurity. Much the same, of course, is true of modern-day labor unions, which are similar to the guilds in essential respects.
The focus of the guilds, to be sure, was not on the physical basis of economic security in the production and availability of goods, but on the ability of their members to have jobs and earn money income. In this respect too, their policy operated contrary to purpose, in that they themselves created the very insecurity with respect to employment and income that they feared and complained of. (Again, the same point applies to modern-day labor unions.)
The following example will demonstrate this point. Someone loses his job because competition makes it obsolete. This individual must now find a new job. This means that he must turn around and enter the labor market of some other industry or occupation as a new competitor. As such, what he requires is precisely the freedom of competition. If the whole economic system has the freedom of competition, the hardships accompanying his loss of his original job need not be very great at all. He is free to compete anywhere else in the entire economic system and will obviously pick whichever industry or occupation he feels is most advantageous for him, given his abilities, including his ability and willingness to learn. The freedom of competition also ensures the availability of an abundance of jobs. It does so because, as will be explained in detail later in this book, it makes wages, costs of production, and prices low enough so that whatever the amount of spending of money that exists in the economic system, it will be sufficient to employ everyone seeking work and to buy all that they are capable of producing. 104 Thus, under the full freedom of competition, the problems of finding alternative employment are minimal.
But now consider what must happen as restrictions on the freedom of competition are introduced. Now, alternative employment opportunities begin to be closed off. The consequences of losing one’s present job thus become more severe. At the same time, with every further restriction of the freedom of competition, pressures are created leading to still more such restrictions. Because, with every reduction in the alternative opportunities for employment, more and more workers must crowd into the industries and occupations still open to them. In these industries and occupations their products and services are in artificial oversupply, and their wages must suffer correspondingly. In addition, their productivity declines because an artificial scarcity exists of the complementary means of production that must be obtained from the restricted industries and occupations. To compensate for such decline in the productivity of labor, wage rates in the remaining free industries must fall still further.
Thus, as conditions grow worse in the remaining free areas, more and more of them are led to demand restrictions of their own—as a matter of self-defense. And then at last there is simply no place for an unemployed worker to go. By then almost everyone lives in mortal terror of losing his job, and opposes everything that might have that effect.
It is clear that it is largely the existence of the restrictions on competition that makes them seem so necessary. They are the cause of the terrifying insecurity that grips so many people at the prospect of losing their job and makes them so desperately fear competition. Competition is terrifying when one is not allowed to compete. People are terrified of losing the competition concerning their present jobs, because if they lose it, they are prohibited from competing for alternative employment. The prohibitions on their competing elsewhere are what make them cling so desperately to the jobs they have.
The belief that the freedom to compete is a threat to economic security is completely wrong. The freedom to compete is a precondition of economic security. The belief that it is a threat is an illusion based largely on the lack of the freedom to compete. Furthermore, it is this belief that is a real source of economic insecurity, precisely because it leads to the restriction of competition.
As a further illustration of these principles, let us return briefly to the matter of the short-run loss periods connected with competition. Hostility to competition leads to the imposition of seniority, rather than merit, as the criterion for promotion and pay increases. This artificially lengthens the short-run loss periods associated with competition. A level of skill and income that in fact should take only a few weeks or months, or, perhaps, in the case of skilled workers, two or three years, to achieve may be stretched out to ten or twenty years by the seniority system. As a result, a worker who may lose a relatively modest stake in terms of genuinely necessary experience, which he could reacquire with relatively little difficulty in another job, is made to lose a major stake in seniority, which he can reacquire only with tremendous difficulty. Such workers are obviously placed in a position in which the loss of their present jobs is made into a much worse threat than it would be under the freedom of competition and its concomitant absence of the seniority system.
4. The Law of Comparative Advantage
Now let us consider just why there is not only room but also actual need for everyone in the competition of a division-of-labor society, even for those who are less capable than others in every respect.
There is, first of all, the fundamental economic fact that the need and desire for goods and services are virtually unlimited, while the ability to produce goods and services is always strictly limited. 105 Thus, there is a need for all the productive ability that exists—even for productive ability on the most modest scale.
A good example of how the need for productive ability translates into a need for productive ability on a more modest scale is the case of a one-man business which begins to grow. Originally, the owner had time to do everything, from making all of the most important decisions to sweeping the floor. But now, as his business begins to grow, it is physically impossible for him to do all these things. It pays him to begin to employ others to do jobs which he might be better able to do than they, but which he simply lacks the time to do. Thus, even though he might be a better secretary than the secretary he employs, and better at sweeping floors than the janitor he hires, it pays him to employ these people in order to be able to carry on a larger scale of activity. Their presence enables him to concentrate on the performance of tasks in which his superiority is greater and more important, such as thinking about what needs to be done in his business.
This brings us to the law of comparative advantage, or, as von Mises calls it, the law of association. This law holds that human cooperation in a division of labor is mutually advantageous even when one party is productively superior to the other in every way, because it allows the superior party to concentrate on those areas of his superiority which are greater and more important—i.e., on his areas of comparative advantage. By the same token, the inferior party concentrates on those areas in which his inferiority is less or less important, which represents his comparative advantage. 106
Although originally advanced by Ricardo to show that international free trade and division of labor are mutually advantageous even if one country could produce every single good without exception with less labor than its trading partners, the principle of comparative advantage is all-pervasive, which is why von Mises calls it the law of association. It is found not only in the case of the boss and his secretary or the boss and the janitor, but also in such other everyday cases as the physician and his X-ray technician, the architect and his draftsman, the engineer and the mechanic, and so on. These are all cases in which one party could almost certainly do the work of the other in less time than the other does it, but in which it does not pay him to do it, because it would mean time away from his own work, in which his superiority is greater. In the light of this principle, it is clear that even a productive genius as great as Edison can benefit from being able to employ the humblest cleaning lady, despite the fact that he could almost certainly clean his office in the barest fraction of the time it takes her to clean it. Employing the cleaning lady enables him to devote whatever time he would otherwise have to devote to cleaning, to inventing, where his productive superiority over the cleaning lady is incalculably greater than it is in cleaning, however great it is there.
In the case of international trade, a good example of the principle of comparative advantage would be the following. Assume that with modern technology and mechanized picking, the United States can grow coffee in hothouses with less total labor, including the labor of building and maintaining the hothouses, than is required to grow it in the open air in Brazil, where it must be picked by hand. Specifically, imagine that the labor required to produce x bags of coffee in the United States is 1 million man-days, while in Brazil it is 2 million man-days. Assume further, however, that in the United States it is possible to produce y automobiles with .5 million man-days of labor and that the same quantity of automobiles requires 5 million man-days of labor in order to be produced in Brazil. These assumptions are shown in Table 9–1.
Will the United States grow its own coffee and undersell Brazil even on coffee, merely because it can produce it with less labor than Brazil? The answer is no. It will pay the United States and Brazil each to concentrate on their areas of comparative advantage and to trade. The United States will not devote 1 million man-days to producing its own coffee. Instead, it will devote perhaps an additional .5 million man-days to producing automobiles—its area of comparative advantage—and exchange them for the quantity of coffee it would have cost 1 million man-days to produce at home. The effect will be that the United States gets its coffee and saves the labor of .5 million man-days, with which it produces additional products, to be enjoyed in addition to the coffee.
The Brazilians will gladly give x bags of coffee for y of automobiles, because in doing so, they obtain for 2 million man-days of labor devoted to growing coffee a quantity of automobiles that would have cost them 5 million man-days of labor to produce. Thus, division of labor and trade are still mutually advantageous. The absolute advantage of the United States in growing coffee is irrelevant, because it gains much more by concentrating on automobile production, in which its absolute advantage is far greater.
Table 9–1
The Absolute Advantage of the United States over Brazil
Labor Required In (country)/
United to Produce (product)
States Brazil x of Coffee 1 million man-days 2 million man-days y of Cars .5 million man-days 5 million man-days
It should be realized, incidentally, that to the degree that the United States does concentrate on cars, and Brazil on coffee, the total combined production that both countries obtain from the same amount of labor increases. If there is no concentration, and each country simply produces its own coffee and its own automobiles, then the United States produces x of coffee with the labor of 1 million man-days, and y of cars with the labor of .5 million man-days. Brazil produces a further x of coffee with the labor of 2 million man-days, and a further y of cars with the labor of 5 million man-days. The combined output of the two countries, obtained from the labor of 1.5 million man-days in the United States and 7 million man-days in Brazil, is 2x of coffee plus 2y of cars.
But now, if the United States gives up growing coffee and switches the labor previously employed in producing coffee to producing cars, it can produce 3y of cars. If Brazil gives up automobile production and switches the labor previously employed in producing cars to producing coffee, it can now produce 3 1 ⁄ 2 x of coffee. The total combined production of the two countries obtained from the same total labor thus increases from 2x + 2y to 3 1 ⁄ 2 x + 3y—just by virtue of employing the labor along the lines of comparative advantage.
Production increases because the United States gives up the production of a good in which its superiority is 2:1, in order to expand the production of a good in which its superiority is 10:1; at the same time, Brazil gives up the production of a good in which its inferiority is 1:10, in order to expand the production of a good in which its inferiority is 1:2.
Not only does the total of what is produced increase, but also each of the two countries necessarily gains by following the law of comparative advantage. The ability of both countries to gain rests not only on the fact that the total of what is produced is greater and thus that more is available to be had by both countries, but also on the following consideration: Namely, because the United
States can produce 2y of cars with the same labor as it requires to produce x bags of coffee, it will be willing, if necessary, to offer as many as something just short of 2y of automobiles for x bags of coffee. So long as it can obtain its coffee for less than 2y of automobiles, it obtains it for less labor than it would have had to expend in producing the coffee. At the same time, Brazil is prepared to accept for x bags of coffee anything more than .4y of automobiles, since by devoting the labor required to produce x bags of coffee to producing automobiles, it could produce only .4y of automobiles. (This follows from the fact that it takes Brazil 2 million man-days to produce x bags of coffee and 5 million man-days to produce y of automobiles. Two million man-days is .4 times 5 million man-days, and if the product of the 5 million man-days is y of automobiles, the product of 2 million man-days is .4y.) Hence, Brazil comes out ahead so long as it can obtain anything more than .4y of automobiles for x bags of coffee. Thus, within the broad limits of anything less than 2y of automobiles for x bags of coffee and anything more than .4y of automobiles for x bags of coffee, both the United States and Brazil are able to gain from the arrangement.
International Competition and Free Labor Markets
The introduction of money into the preceding example will help to reinforce the conclusion that it is economically worthwhile for each country to concentrate on its areas of comparative advantage, and will make possible wider applications of the principle.
Assume simply that wage rates in the United States are more than double what they are in Brazil—say, triple. In this case, even though it takes only half the labor to grow coffee in the United States as in Brazil, it will be one-and-a-half times more expensive to do so—because of our higher wage rates. Thus, on a dollars-and-cents basis, the United States would be led not to grow coffee. We would concentrate on producing automobiles, where
our cost would be three-tenths of Brazil’s (after allowing for the effect of our three-times higher level of wage rates applied to our one-tenth the quantity of labor).
The question may be asked of how we know that our wages will be more than twice as high as Brazil’s and thus that it will pay us to leave coffee growing to Brazil? We know because it follows logically that if American wages are not more than twice as high as Brazil’s, economic forces will soon make them so. All we need do is assume that initially our wages are no higher than Brazil’s, and then see what happens.
In other words, what we are assuming now is the nightmare case of the Brazilian protectionists. For in this case, with wage rates the same in the United States as in Brazil, it is cheaper to produce everything in the United States, and the United States could undersell Brazil even on coffee. But what will happen under these conditions? The answer, which the protectionists claim to know all too well, is that Americans won’t buy anything from Brazil, while Brazilians will try to buy everything from the United States. That is exactly right.
But what is the consequence of this? The consequence is that money leaves Brazil and enters the United States. In Brazil, the effect will be less spending—less demand—for labor and goods. In the United States there will be somewhat more demand for labor and goods. (I say somewhat more, because being a much larger economy, the transfer of any given sum of money will represent a much smaller percentage increase here than it does a decrease there.)
If the freedom of competition exists in Brazil, wages and prices in Brazil will come down as the result of the drop in demand, while in the United States, they will rise somewhat. They will continue falling in Brazil and rising in the United States until the change in relative wages, costs, and prices between the two countries makes Brazil the cheaper country for the United States and other countries to buy from as often as the United States and other countries are cheaper for Brazil to buy from. Only then will money stop flowing out of Brazil and her wages, costs, and prices stop falling. Since our productivity-of-labor advantage in coffee is relatively modest, our cost advantage there will be among the first to disappear as Brazilian wage rates fall and ours rise.
It follows from this discussion that there is room for every country in the world market. However backward it may be in its methods of production, it can still be competitive in whatever it sells, provided only that its relative money wage rates compensate for its deficiencies in the productivity of labor.
To further bear this out, imagine, for example, that the labor of one country was uniformly half as productive as that of another—i.e., twice the labor was required to produce every good. Such a country would nevertheless have the same costs of production and be able to sell profitably at the same prices as the more productive country, provided only that its wage rates were half as great. For half the wages per hour times double the number of hours equal the same costs of production. In the same way, if its productivity of labor were a third, a fifth, or a tenth as great, it would have the same costs of production and be able to sell profitably at the same prices as any more advanced country, provided only that its wages were a third, a fifth, or a tenth as great as those of its more productive competitor. The principle that emerges is that every country can be internationally competitive provided that its relative level of money wage rates corresponds to its relative productivity of labor.
The mutual gains that accompany every country’s presence in the world market stem from the fact that the differences in the productivity of labor are not uniform: there is comparative advantage. A country with half the productivity of labor and thus half wage level almost certainly does not have half the productivity of labor in the production of each and every good, but just as a kind of weighted average. In the production of many goods, it has less than half the productivity of labor; in the production of many others, it has more than half the productivity of labor. In the cases in which it has less than half the productivity—i.e., requires more than twice the labor to produce a good—its wage level of one-half prices it out of the market and it imports; but in every case in which it has more than half the productivity—i.e., requires less than twice the labor to produce a good—its wage level of one-half puts its costs below those of its competitors and it exports. In this way, each country tends to curtail the production of some things and expand the production of others, and thus to participate in the international division of labor in accordance with the principle of comparative advantage. The very fact of each country’s expansion of its areas of comparative advantage then makes possible still further economies associated with division of labor and production on a larger scale.
In each country that enters into free trade, prices fall relative to wages, which increases the buying power and standard of living of the average wage earner in that country. Where it is necessary for wage rates to fall in order for a country to become competitive, the prices of domestically produced goods and services tend to fall in the same proportion. Some of these goods and services are now cheaper than foreign-produced goods and services and so are exported. But some foreign-produced goods and services are still below domestically produced goods and services and so are imported. The ability to get these foreign-produced goods and services represents
a fall in prices greater than the fall in wages.
As illustration, consider again the case of the two countries one of which, on average, is half as productive as the other. If wage rates in the less productive country are initially 60 percent of the wage rates of the more productive country, they must fall by one-sixth in order to become only 50 percent as great. This fall in domestic wage rates reduces domestic costs of production and prices by one sixth. Thus, as far as domestically produced goods are concerned, the wage earners in the country have not lost any buying power, because prices are lower by as much as their wages. Where they gain is from the fact that now imported goods will be available to them which continue to be lower in price than domestically produced goods. These goods are the goods that require more than twice the labor to produce at home than abroad, and which thus continue to be more expensive to produce at home despite the fall in domestic wage rates to half the level of the foreign wage rates. At the same time, of course, the fall in domestic wage rates to half the foreign level gives the country concerned a cost advantage in all those cases in which its productivity of labor is anything more than half as great as the foreign country’s— that is, in which it requires less than twice as much labor to produce a good. The proportion of its labor force which is no longer employed in producing the goods that are now imported will be employed in producing goods of this latter description instead, which are exported and which are the source of benefit to the wage earners of the foreign country.
The preceding examples bring to light a split vision on the part of protectionists. In the backward countries, the protectionists claim that free trade will be ruinous because of the higher productivity of the more advanced countries. In the more advanced countries, they claim that free trade will be ruinous because of the low wages of the backward countries—that to have free trade with the low-wage countries is to “import their standard of living.” The truth is, of course, that the higher productivity of labor of the more advanced countries tends to be counterbalanced by their higher wages, and the lower wages of the backward countries tends to be counterbalanced by their lower productivity of labor. This is what tends to occur on a weighted-average basis. In all the individual cases that deviate from the average, i.e., in which one or the other country retains a cost advantage, we have the mutual gains from comparative advantage.
The source of problems in international trade is the persistence of wage rates that are too high in relation to a country’s productivity of labor. If a country has two or five times the average productivity of labor of its trading partners, then it can be competitive with wage rates two or five times as high as theirs, but not with wage rates, say, two-and-a-half or six times as high as theirs. By the same token, the countries with the low productivities of labor can be competitive with wage rates of a half or a fifth, but not two-thirds or one-fourth those of their trading partners.
In a labor market subject to the freedom of competition, such undue differences in wage rates could not persist. The unemployment resulting from them would drive down wage rates and costs and restore the country’s international competitiveness and the full employment of its workers as well. But where labor unions, minimum-wage laws, and other government interference prevent wage rates from falling, or from falling sufficiently, the problem of unemployment remains and tends to grow worse. More and more companies that have kept their prices competitive, and paid the higher wages at the expense first of funds for capital improvements, and then at the expense of dividends and funds for capital replacement, must finally cut back or go out of business altogether. This is exactly what has occurred in the United States in the automobile industry, the steel industry, and in many other branches of industry.
Government intervention in the form of confiscatory taxation, inflation, and deficit spending has deprived American business of the capital funds required for raising the productivity of labor. Labor legislation and the resulting union wage scales and union work rules, and all manner of government regulations have also operated to prevent the rise in the productivity of labor, or actually to reduce it. Meanwhile, foreign competitors, in countries with policies less hostile to capital accumulation and with less labor union and regulatory interference, have rapidly improved their productivity of labor. This combination of circumstances is what has made vast segments of American industry unable to compete at today’s relative wage levels, which were inherited from an era of great relative superiority in America’s productivity of labor. (All this, of course, is usually ignored. The most popular explanation of the problem is such trivialities as the alleged bad judgment of the American automobile companies in continuing to produce large cars after critics of the American standard of living had made known their preference for small cars. References to alleged cycles of inevitable decline are another popular explanation.)
The actual solution to the United States’ lack of competitiveness (and to all of our other politico-economic problems, as well) would be to abolish all the government interference and establish laissez-faire capitalism. That would end the destruction of the American economic system and allow it to rebuild and resume the rise in the productivity of labor. But this almost certainly will not be done. What most likely will be done is that foreign
competition will be severely restricted. The effect of that will not only be that the American people will lose many of the benefits of international division of labor. It will also contribute to future wars.
Countries like Japan, with huge populations and small territories, vitally depend on being able to export manufactured goods in order to be able to import food and raw materials. If we close them out of major export markets, we threaten their vital interests. We give them grounds for enmity and an economic rationale for war, as a means either of forcing open markets or of seizing the food-and mineral-producing territories they are prevented from earning the foreign exchange to buy from, and making them into captive markets.
Of course, for now and for the foreseeable future, the Japanese are not capable of being a military threat to us. Interestingly, however, as if to remedy this, the same U.S. Congress which has tried to restrict Japanese exports to this country has also urged Japan to increase her military expenditures.
A major implication of this whole discussion is that one of the requirements of free international trade, and thus of world peace, is free labor markets within countries. That is what is necessary to keep a country’s wage level in a proper relationship to the wage levels of its competitors, and so enable it to have free trade without fear of mass unemployment developing because it is too widely undersold. A further implication is that since labor legislation and the coercive labor unions it spawns are incompatible with the establishment of the necessary relative wage levels, they are incompatible with free trade and thus, in the long run, with friendly international relations and world peace. It should be obvious that this consideration alone demands the abolition of such legislation.
Comparative Advantage Versus the
Infant-Industries Argument
Recognition of the gains from comparative advantage can serve as the basis for a refutation of the socalled infant-industries argument. The infant-industries argument is the claim that new industries require tariff protection until such time as they have become established and are in a position to stand on their own. Thus, according to this argument, the means for developing new industries is to concentrate on industries in which one is currently relatively inefficient and would not pursue on the basis of following the law of comparative advantage. Then, by means of the employment of coercion in one’s favor—namely, protective tariffs—one will somehow be able to grow more efficient and later on be able to operate in the industry under conditions of free competition.
The economic error of the infant-industries argument is that it fails to see that the quickest way to become efficient in new industries is to acquire the capital necessary to become efficient in them. The quickest way to do that is to concentrate on those areas in which one can earn the highest income and thus be in a position to save and invest to the greatest possible extent, which means: to follow the law of comparative advantage. As illustration, imagine that I as an individual want to go into business for myself, but at present, because of my lack of capital, the only way I can do so is at the level of buying a frankfurter pushcart, which will enable me barely to earn a living. If I am in a position to earn a substantially higher income by virtue of working for someone else, and thus to save and invest much more heavily, it should be obvious that the most effective way to establish myself in business is to work for someone else until such time as I have accumulated the capital necessary to go into business for myself on an efficient basis, with a reasonable prospect of earning a higher income than I can by working for someone else—i.e., that I wait until such time as my comparative advantage in the face of my greater capital, leads me to go into business for myself.
Exactly the same common-sense principle applies to the conduct of a whole country. Thus, the fact that in the early years of the United States, comparative advantage meant that the United States should concentrate on agriculture, while Great Britain concentrated on manufacturing, implied that concentration on agriculture was actually the fastest route to efficient industrialization in the United States. The higher incomes earned by concentration on agriculture provided the ability to save and invest far more heavily than would have been possible on the basis of premature industrialization brought about by coercion. Concentration on agriculture was the foundation for the development of industry on an efficient basis, and thus for the far greater development of industry. To the extent that the United States, or any other country, has employed the coercion of tariffs and other government intervention to promote the development of unprofitable industries, its policy has actually served to retard the industrial development of the country, because it has served to make its people earn lower incomes than they could have earned and thus to be less capable of saving and accumulating the capital necessary for the development of industry.
Any gains that may have resulted to particular industries as the result of this policy were at the expense of greater losses to other industries, whose development was thereby prevented. The truth of this proposition can be clearly seen if we imagine that the government were to encourage my purchase of the previously mentioned
frankfurter stand, by means of giving me some kind of monopoly privilege in connection with the sale of frankfurters. Anything I might gain in this way would be at the expense of an equivalent loss to my customers. At the same time, I would be producing less than I could have been producing had I worked in another line. In addition, there would be less production on the part of whoever might have been in the business of selling frankfurters and who is now forced to find some less remunerative line of work because of my monopoly privilege. In exactly the same way, diverting part of the capital and labor of the whole country from efficient employment in agriculture to inefficient employment in industry, represents an equivalent economic loss. To whatever extent the reduced production is disguised by the coercive transfer of wealth, the loss of the victims is as great as the gain of the recipients. What remains is the reduction in production and thus in the ability to save and invest, and thus in the ability to develop industry.
Consideration of the law of comparative advantage provides the answer to those who complain about the alleged dangers to a country of being “overspecialized” and about its alleged need to diversify its economy to avoid such “overspecialization.” The fact is that the gains from efficient specialization far outweigh any possible losses arising from lack of “diversity.” This is obvious in the case of any individual. Thus, for example, a man works regularly as a house painter or truck driver. He does this rather than attempt to alternate between several employments, because he earns more income this way. Such specialization represents his comparative advantage. He gains even though occasionally the circumstances of the market cause the demand for his specialty to fall sharply. Despite such periods, he is far better off concentrating on his specialization. Any possible loss of income he might be spared in such periods by “diversifying” and dividing his time between more two or more regular employments, are far outweighed by the reduction in income he would have to experience in the much lengthier periods of normal demand for his specialty.
A government policy of forced diversification for the purpose of avoiding periods of slack international demand in the areas of its citizens’ specializations, is comparable to forcing an individual who judges it best for him to be a house painter or truck driver, or whichever, to divide his time between two or more employments to avoid the occasional loss of income in his area of specialization. It represents forcing people to do that which they judge on net balance to be overwhelmingly against their interest, and which in fact is against their interest. This is the result even though the government does not force a given individual to pursue two or more lines of work at the same time, but instead, for the sake of its citizenry collectively diversifying, uses such coercive means as protective tariffs and subsidies to force various portions of its citizenry to pursue full-time lines of work or branches of industry that are less remunerative to them as individuals than the lines of work or branches of industry they would have chosen on their own.
How the Less Able Can Outcompete the More Able in a Free Labor Market
The principle that wage differences compensate for productivity differences applies within the labor market of each country, as well as internationally. It shows how less efficient individuals can be fully competitive with more efficient individuals in seeking employment. All they have to do is accept wage rates that are lower to the degree that their productivity is lower. For example, a man who can lay only twenty bricks per hour can be fully competitive with workers who can lay forty bricks per hour, provided only that he be willing to accept half the hourly pay they receive. For then the cost to an employer per brick laid is the same.
Indeed, less productive individuals can, and regularly do, outcompete more productive individuals for jobs simply by virtue of their wages being lower to a greater degree than their productivity is lower. All other things being equal, the worker who can lay twenty bricks per hour and asks five dollars an hour outcompetes the worker who can lay forty bricks an hour but asks fifteen dollars an hour. The first man’s cost per brick laid to an employer is only twenty-five cents ( $5 ⁄ 20 ), while that of the second man is thirty-seven-and-a-half cents ( $15 ⁄ 40 ).
The law of comparative advantage guarantees a job for everyone—a job in which he outcompetes all other contenders for that job, no matter how modest his abilities—provided only that the labor market is free to bring about the appropriate adjustments in relative wages.
As the wage rates of less capable people fall relative to those of people who are more capable, the less capable are able to match or exceed in more and more employments what a more capable person is able to offer an employer per dollar of cost. When the wages of a less capable person are half those of a more capable person, he is the more economical employee in every job in which his productivity is more than half as great as that of the more capable person. When his wages are only a third of the wages of a more capable person, he is the more economical employee in every job in which his productivity is merely more than a third as great as that of the more capable person, and so on.
By the same token, the relatively higher wage rates of those who are more capable operate to reserve their talents and abilities for those specific employments in
which their relative productivity is great enough to offset their higher wage rates. Our man with the three-times higher wage, for example, is the more economical employee in any occupation in which his relative productivity is more than three times as great as that of the less capable person. He is, of course, also the more economical employee in any occupation that the less capable person is simply incapable of performing at all and which at the same time is in sufficient demand to pay him the high wage he receives. The higher wage rates of more capable people, derivable from those employments whose requirements they alone can satisfy, or in which their relative productivity is otherwise sufficiently high, operate to keep such people out of the portions of the labor market served by the less capable people.
For example, an engineer or doctor capable of laying even a hundred bricks an hour would not dream of working as a bricklayer, nor could anyone dream of employing him as one, given his ability to earn, say, fifty or a hundred dollars an hour as an engineer or doctor. His relative productivity advantage as a bricklayer may be as great as five to one (that is, a hundred bricks an hour to twenty bricks an hour), but his advantage as a doctor or engineer gives him an income so high that, given the availability of workers who can lay twenty bricks an hour for only five dollars, he would need to have an unattainable relative productivity advantage of ten or twenty to one before such an occupation as bricklaying could afford him an income comparable to what he earns as an engineer or doctor. (This is putting aside the fact that he would almost certainly want a good deal more income as a bricklayer, to compensate for the greater unpleasantness and much lower social standing of the job.)
It is no exaggeration to say that at the appropriate level of relative wage rates, people with abilities no greater than those of a janitor are able to outcompete everyone else in the entire economic system—even the world’s most talented people. They not only are capable of doing so, they actually do so—for such jobs as janitor: by being willing to accept the income of a janitor.
Thus, on the basis of the law of comparative advantage, there is room even for the least talented individuals in the productive system of a division-of-labor society. Even they have a contribution to make, and one that is of benefit to others who are more talented. Namely, by taking over tasks in which their productive inferiority is relatively small, they enable those who are more talented to concentrate on areas where their productive superiority is greater and more important.
Competition for jobs is not the enemy of such people. They can compete successfully for jobs appropriate to their abilities, provided they are free to accept the necessary wage rates. Indeed, free competition is precisely what they need in order to be successful in getting the jobs they want.
The enemy of such people is the misguided attempt to give them wages they are unable to earn. That attempt— principally in the form of minimum-wage laws and prounion legislation—is tantamount to prohibiting such people from competing. It prohibits them from competing by the one means that can compensate for their low productivity, namely, sufficiently low wage rates.
In the name of a misguided humanitarianism, people are stopped from competing, and the results are blamed on competition! The poor and weak, we are told, have no jobs and no income, because they have been overrun by the competition of the strong that casts them adrift and leaves them to perish. The actual fact, of course, is that the poor and the weak have not been harmed by the competition of the more able, but by the police, who are sent in by the “humanitarians” to enforce the laws to stop them from competing where they could successfully have competed.
The “humanitarians”—today’s socalled liberals—are responsible for millions of low-skilled people, most notably, black teenagers, being prohibited from competing. Despite the “humanitarians’” alleged concern for human welfare, their ignorance of economics has led them to enact government policies that condemn millions to unemployment and a lifetime of poverty on the welfare rolls. Had these people been free to take a low-paying job, on the other hand, most of them would have gained some skills and experience that would have fitted them for better paying jobs later on. Many of them would have seen the need for further education and have gotten it.
Furthermore, it should be realized that the policy of attempting to enforce wage rates above the market level operates to reduce wage rates elsewhere. The higher wage rates imposed reduce the volume of jobs offered. The result is that workers who could have worked in such jobs cannot find employment in them and thus must seek work elsewhere. Thus, the supply of workers in other lines is increased, and wages elsewhere are put under pressure to fall. Because of this, every time labor unions succeed in artificially increasing the wages of skilled workers, they increase the supply of labor seeking employment in less-skilled jobs, and thus operate to reduce wages in the less-skilled areas artificially. It follows that in an economic system free of all government interference with wage rates, the wages of the unskilled would not have to be as low to establish full employment for them as is presently the case. The least capable members of the economic system not only could be employed under free competition, but could be so on more favorable terms than is the case under restrictions on the freedom of competition.
5. The Pyramid-of-Ability Principle
The law of comparative advantage explains the nature of the productive contribution of the less able to the more able. Now we must consider the incalculably greater productive contribution of the more able to the less able. In effect, having considered the contribution of the cleaning lady to Edison, let us consider the contribution of Edison to the cleaning lady. The principle we are now about to consider is the pyramid-of-ability principle, which is the name given to it by Ayn Rand, who was the first to identify it explicitly. 107
The principle can be stated as follows: To the degree that those who are more able occupy the higher positions in a division-of-labor society, the productivity of those in the lower positions is increased.
For example, if a better-qualified person becomes foreman in a factory, the workers under him will produce more than if a poorer-qualified person became foreman. If a better-qualified person becomes company vice president or president, all those working under him will produce more than if a poorer-qualified person got the position. If two people both want to be an automotive engineer, and the better qualified succeeds, while the less qualified ends up as an auto mechanic, the better-qualified one can raise the productivity of the poorer-qualified one by designing a better car for him to work on. If their positions were reversed, this would not be possible.
More broadly and fundamentally, if there is the freedom to invent new and better products and new and better methods of production, and to start and expand new lines of business that produce or implement them, the productivity of all who help to produce the goods or services concerned, or who use them in production, or who are simply enabled to buy them by virtue of the work they presently do, is raised. It is raised by the activities of the inventors, businessmen, and investors who made those improvements possible.
The division of labor itself, as it exists within every factory and workplace, is a marvelous example of how the activities of those who are more capable raise the productivity of those who are less capable. As explained in Chapter 4, their work of breaking the production of a product into a series of small, simple, repetitious steps, which they then concentrate and coordinate, allows people of very little ability to produce highly complex products, such as automobiles and television sets. The contribution of the more able to the productivity of the less able can be gauged by the fact that in a division-of-labor society even janitors, merely by the effort of pushing a broom, can actually obtain automobiles, television sets, and almost all the other products of modern technology—products which on their own they could never even imagine.
It follows from this discussion that in “losing” the competition for the higher positions in a division-of-labor society, those who are less qualified do not in fact lose, but win. Their productivity of labor and standard of living are raised by the greater success of those who are more able than they. Were they to somehow force their way into the higher positions, they would lose. For they would destroy the productivity of labor of all those who would be under them and thus the possibility of obtaining the goods they wanted.
For example, I would like to have the income of the president of General Motors, which is a substantial multiple of my own. If by some means, despite my total lack of knowledge and experience or even interest in the automobile industry, I could force my way into his job, I would certainly reduce the production of General Motors by an enormously greater amount than corresponds to any additional income I would receive. For I would be disrupting the work of hundreds of thousands of people and causing the misuse of billions of dollars of capital. Perhaps, if this were the only instance of its kind in the whole economic system, I might still have a substantial gain for myself—provided I didn’t have to trust my own life to GM products; the enormous loss I caused would fall almost entirely on others. But now suppose someone else similarly unqualified has become president of the airline I fly; or he’s the surgeon who will operate on me; and so on. As this sort of action becomes more widespread, it becomes impossible for anyone to gain from it. Everyone suffers losses—those who succeed in getting the positions they don’t deserve and can’t obtain under the freedom of competition, along with all whom they victimize. In this way, they would actually end up losing by virtue of trying to obtain the gains they don’t deserve.
Freedom of Competition and the General Gain from the Existence of Others
The pyramid-of-ability principle and the law of comparative advantage can be integrated into a wider principle that subsumes them both. Namely, that each person gains from the existence of other people who participate with him in the division of labor. If they are less productively capable than he, his gain from them is described by the law of comparative advantage. If they are more productively capable than he, his gain from them is described by the pyramid-of-ability principle.
In either case, looking down the scale or up, the individual gains from the existence of others who participate with him in the division of labor. The great precondition of his gain is the freedom of competition: that everyone should have the legal right to enter every occupation and every industry. That is the condition
which simultaneously guarantees him the widest possible scope for his own talents as a producer and operates to assure that everything he buys will be produced by those who are best suited to produce it, in an environment of constant progress and improvement. The freedom of competition is the true basis of his economic security and the diametric opposite of the law of the jungle. It gives a place in the system of division of labor to everyone, and tends to put everyone in the particular place for which he is best suited, with the result that the productivity and standard of living of all are increased and go on increasing. So far from being the law of the jungle, the freedom of economic competition emerges as the true principle of the universal brotherhood of man.
6. The Population Question
With the notable exceptions of Adam Smith and Frederic Bastiat, the classical economists taught, in sympathy with Malthus, that population growth represents a threat to the average standard of living. As explained in connection with the discussion of private ownership of land and “land rent” earlier in this chapter, their belief was that the larger the number of people, the larger the amount and poorer the quality of land and mineral deposits that must be worked to support them, and, at the same time, the more intensive the exploitation of each piece of land and mineral deposit worked, resulting in diminishing returns. For both reasons, they held, increases in population and in the number of workers tend to be accompanied by less than proportionate increases in the supply of food and minerals.
The clear implication of this doctrine is that there is an inherent conflict of interests among people as their numbers increase. It is tantamount to the claim that man is in the position of the lions in the jungle after all. The lions are at the point of a scarcity of food supply; man allegedly approaches it with every increase in his numbers. Indeed, Malthus was the inspiration for Darwin, whose writings were in turn the inspiration for the doctrine of conflict of interests presented under the name Social Darwinism. 108 A garbled form of Malthusianism is a root of the ecology movement’s hostility to population growth.
The fact is, however, that the classical economists’ ideas on the effects of population growth are valid only for a stagnant, non-division-oflabor society. (This was essentially the kind of society to which all but the most recent experience of the human race referred at the time that Ricardo wrote, which was in the early nineteenth century. He wrote too soon to know that he lived at the beginning of a radically new era in human history. Thus, it is understandable that neither he nor his followers were able decisively to break with this pessimistic view.) In such a society, everyone lives in the same way—namely, as a self-sufficient farmer. In such a society, the existence of more people does mean the need for more and more land of progressively inferior quality and an ever worsening problem of diminishing returns. In such a society, it does mean the need to start farms higher and higher up the sides of hills or mountains, to extend farming to rockier patches of soil, or down into marshlands, and to subdivide existing farms among more and more people—all with the result of declining yields per unit of labor expended.
But this is not at all what the existence of more people means in a division-of-labor society. In a division-of-labor society, a larger population means a greater, more intensive division of labor.
Adam Smith alluded to this fact when he wrote that “the division of labor is limited by the extent of the market.” 109 The meaning of this proposition is that the extent to which the division of labor can be carried in the production of anything depends on the volume in which it is to be produced. If, for example, automobiles are to be turned out at a rate of, say, 10 or 20 a day in a given location, then it is impossible that a step which takes 5 minutes to perform on any one car could be anyone’s full-time job. The daily volume of automobile production would have to be increased to approximately 100 in a given location before such an operation could be made into a full-time job. (One hundred times 5 minutes equals 8.33 hours, which represents a full-time job.) The daily volume of automobile production would have to be increased to approximately 1 thousand in a given location, before an operation requiring only 30 seconds could be made into a full-time job, and so on. (One thousand times 30 seconds also equals 8.33 hours.) Thus, the larger the volume to be produced—the larger the market to be served—the further can the division of labor be carried. 110
Markets, however, are not made possible by nonproducing consumers, as Adam Smith well knew, but only by producers. 111 And without a larger total number of producers participating in the division of labor overall, a more intensive division of labor in the production of any one good would require drawing labor away from the production of other goods, and thus correspondingly reducing the extent of division of labor elsewhere. The only way to have a greater division of labor overall is by virtue of a larger population of participating producers. This alone permits the division of labor to be extended in some areas without being correspondingly reduced in other areas. Thus, when we refer to the connection between the division of labor and population, or the division of labor and markets, it must be kept in mind that
what is always referred to is a larger population of producers, and of overall markets that are larger by virtue of the existence of more producers.
Keeping this in mind, let us consider some further illustrations of the connection between the division of labor and the size of the population. Consider, for example, why large cities have so many specialized shops and restaurants, which are rarely found elsewhere. The reason is that the large population of such a city constitutes so vast a market that the statistically most infrequent tastes and interests are present in a great enough absolute quantity to make their accommodation possible.
For example, on any given evening perhaps only one person in ten thousand would like to eat Indian food. If the whole surrounding territory has only fifty thousand inhabitants, such a restaurant almost certainly could not survive, for it would have only five customers on an average evening. Its survival in such conditions would require patrons willing to pay very high prices. Only then could it be worthwhile for anyone to operate such an establishment. But in a large city or metropolitan area, with a surrounding population of ten million, say, there will be a thousand people, on average, wanting such food every evening. As a result, several such restaurants can exist and prosper.
The same principle applies to specialized book stores, equipment stores, and so on. It also explains why it is in large cities that one finds such cultural institutions as museums, opera companies, symphony orchestras, and so on, which appeal to refined and, in terms of their frequency of occurrence, relatively uncommon tastes. Only large cities have a sufficiently large market to provide a sufficient level of attendance for such institutions.
The advantages of a large population can be observed by considering the size of the population necessary for the existence of an economical-sized medical school, say, and for the existence of medical specializations. The principles observed in these cases will apply throughout the economic system.
Thus, as a hypothetical illustration, let us assume that an efficient-sized medical school produces 100 new doctors per year. This number, let us assume, is a number that represents enough students to keep the cost of lectures and demonstrations within reason on a per student basis, and yet not so many students that they cannot obtain sufficient individual consultations and so forth with the faculty. Let us assume further that the average graduate of this medical school will practice medicine for 40 years after graduation. This means that ultimately there will be 4,000 graduates of this school in practice at any one time. Finally, let us assume that the average frequency of diseases and accidents, and so on, that require medical attention is such that in order to keep the average doctor more or less fully occupied, there have to be 1,000 people for every doctor. These assumptions imply that a population of 4 million is necessary to provide a market large enough to support one efficient-sized medical school.
But this is by no means the end. For suppose that only one doctor in a thousand is a brain specialist. With a total of only 4,000 thousand doctors, there would be just 4 brain specialists. That is hardly enough to support much specialized research in brain diseases, a specialized journal of brain diseases, graduate programs or seminars in brain diseases, and so forth. A population of 4,000 brain specialists, however, would make these things possible. But that implies an underlying population not of 4 million, but of 4 billion people.
This same kind of radical step-up in the size of the population necessary to make further specialization possible occurs throughout production. Consider again the case of automobile production, where it was pointed out that for a full-time job to be made out of one specific step that requires 30 seconds per car, volume would have to be approximately 1,000 cars per day in a given location. Only this time, let us assume that the worker doing this job could be helped by a machine specifically designed for that purpose. If the total market for automobiles is limited to 1,000 per day, then there is room for only one such machine. Obviously, it would be impossible to have any regular employment in producing such machines. But suppose the market for automobiles is not 1,000 thousand per day, but 50,000 thousand per day, so that 50 such machines are required. Now it may be possible to have some people regularly employed just in the production of these machines, who will produce them with greater experience and expertise. Of course, their division of labor could not go very far: only a very few such machines would need to be produced in any one year. If there is a specific operation in building such a machine which takes a whole month, say, it is doubtful that even that operation could be anyone’s full-time job, because it occurs so infrequently. A vastly larger market would be required to carry the division of labor to the point where even very large-sized steps in the production of these machines could be made into full-time jobs. It is doubtful if markets could ever be achieved that were so large that all possibilities for carrying the division of labor further in the production of specialized machines and tools would be exhausted.
Now it is necessary to realize how important are the gains a larger market provides not only in allowing the existence of further specializations and subspecializations, but also simply in allowing existing specializations and subspecializations to be carried on, on a larger
absolute scale. Our medical school example can illustrate this point very well.
Some kind of very small market, say a few hundred people, is necessary to allow one person to specialize as some sort of primitive doctor. A larger market of several million, that permits the existence of several thousand doctors, also permits them all to be trained in a medical school and creates the subspecialization of brain specialist. A still larger market increases the absolute number of brain specialists. And here we can easily see something that is vitally important. Namely, if the market is big enough to support 400, or better still, 4,000 brain specialists, rather than just 4, the likelihood of some important discovery being made about brain diseases is substantially increased. For there will be 400 or 4,000 highly intelligent and experienced people thinking about the problems involved, instead of just 4. And whatever any one of them discovers, can, of course, be quickly communicated to all the rest—through the journals, seminars, and so on that their number is large enough to support.
Again, exactly the same principle applies throughout production. The larger the size of the market, the greater is not only the number of the scientific and engineering specializations and subspecializations, but also the absolute size of all of them—and, equally important, the larger the absolute number of intelligent, innovative individuals prepared to go into the various lines of business. Thus, throughout the economic system, the chances of new discoveries and inventions being made, being quickly communicated throughout the fields concerned, and then being implemented are greatly increased. And thus the rate of economic progress accelerates.
The potential gains of this kind from a larger-sized population in a division-of-labor society can be thought of in terms of a doubled population having a doubled number of Edisons and Fords and the like. Indeed, in a division-of-labor society, a doubled population even with just one-tenth more of such innovators would probably be easily capable of overcoming any problems of diminishing returns and poorer-quality land and mineral deposits, and of doing so by an ever widening margin. It would do so through the greater technological progress that the existence of a larger number of such outstanding individuals would make possible. For the existence of each additional productive genius serves to raise the productive power of the whole human race. Because essentially what he supplies is ideas. Ideas can be used by everyone who has need of them without in any way diminishing their ability to serve others. They are an inexhaustible gift. 112
What we have here in the existence of a larger population in a division-of-labor society is a further step-up in productive power along the lines of the multiplication of knowledge used in production and the raising of the level of such knowledge to a standard set by the most intelligent. 113 For now we have a larger absolute number of the most intelligent, which is bound to mean a more rapidly rising standard of knowledge used in production. 114
Thus, the effect of population growth in a division-of-labor society is radically different than in a non-division-oflabor society. In a division-of-labor society it means a greater, more intensive division of labor, including the larger absolute size of the various specializations and subspecializations concerned with making new discoveries and implementing them in the form of new products and better methods of production—in a word, it means a greater absolute number of productive geniuses, whose work operates to raise the standard of living of everyone. These advantages enable a division-of-labor society easily to overcome any problems that would otherwise be associated with the need to produce more food and minerals for a larger population.
Worldwide Free Trade
The fact that a larger market provides important gains, in the form of a more intensive division of labor and a larger absolute size of the various specializations and subspecializations, implies the desirability of worldwide free trade. Under worldwide free trade, every producer would be able to regard the entire world as his market. Production could be carried on in each locality on the vastly greater scale commensurate with a world market. Thus, the division of labor could reach its maximum possible extent consistent with the existing size of the world’s population and the proportion of it already incorporated into the division of labor within the various national boundaries.
One may believe that already, even with substantial trade barriers, the scientific and engineering professions of all the various countries are essentially integrated, and that knowledge flows freely among them, with the exception, of course, of the Communist and other totalitarian countries. This is probably true. But what cannot flow freely, so long as there are trade barriers, is the implementation of scientific and technological progress— in the form of improvements in products and methods of production. If we want that, we need access to all the business talent to be found in the world, which means: we need to establish the right of every businessman everywhere to sell his goods everywhere. So long as that is missing, the benefit of the existence of much business talent is largely lost, because it is kept out by tariffs and other trade barriers. In other words, people are deprived of the benefit of the existence of talented foreign businessmen. And, of course, they are deprived of the benefit
of all the economies of larger-scale production that free trade would make possible.
Free Trade and the Economic Superiority of the
United States over Western Europe
The gains from free trade and the consequent access to a larger market can be illustrated by comparing the economic history of the United States with that of Western Europe. The fact that since the enactment of the Constitution there has always been free trade among the various states of the Union made the United States into a much larger free-trade area than Western Europe, in terms of population as well as land area. Because of its substantially greater population than any single West-European country, American businessmen were able to produce on a larger scale, with greater division of labor and more efficiency, than their West-European counterparts. A businessman anywhere in the United States could regard the whole territory and population of the United States as his market, and businesses were able to be built up accordingly. In Europe, on the other hand, tariffs and other trade barriers increasingly tended to restrict the markets of businessmen to the much smaller territories and populations of their respective countries.
By the same token, the American people had free access to the greater absolute volume of business talent to be found among its own greater population, while the people of most European countries were increasingly confined to the smaller absolute volume of business talent to be found among their smaller populations. These facts help to explain the more rapid rate of economic progress that prevailed in the United States than in Western Europe until fairly recently.
The fact that in recent decades West-European countries have greatly reduced their tariffs and other trade barriers against one another, under the aegis of the Common Market, has contributed to their rapid rate of economic progress in this period. Now, to a substantial degree, businessmen in any one member country can regard the populations of all the rest as part of his market. The combined population of these countries, counting that of the newer members, exceeds the population of the United States. The result has been an intensification of the division of labor within Western Europe and a much greater ability of the citizens of each member country to gain access to the talents of businessmen in the other member countries.
International Free Trade and Domestic Laissez Faire
The advantages of the United States from internal free trade and the gains from freer trade within Western Europe would be dwarfed by those derived from fully free trade on a world basis. But free foreign trade ultimately requires a policy of laissez faire domestically. We have seen how in preventing necessary adjustments in relative wage rates government interference in the labor market causes free trade to result in mass unemployment, which leads to the abandonment of free trade. Similarly, government subsidy programs are incompatible with free trade: a government cannot, for example, try to raise the price of wheat in its country above the world-market level and at the same time allow the free importation of foreign wheat.
Some economists have held that external free trade is compatible with government intervention domestically, if governments abandon much of their political sovereignty to a supernational authority, which would impose a uniform policy of intervention. For example, the problem of wheat subsidies could be solved, it is held, if all countries in the trading area had the same subsidy program. To some degree, the European Common Market represents a relinquishing of national sovereignty to the organs of the Common Market. The ultimate success of the Common Market is widely thought to rest on the prospects for the political unification of Western Europe.
However, no uniform policy of government intervention can deal with such matters as the major differences between the productivity of labor in different areas. A uniform minimum wage between the United States and Taiwan, for example, would mean the virtually total destruction of the Taiwanese economy if it were set at the present American level, or, for all practical purposes, the total absence of a minimum wage in the United States if it were set at a level that would not destroy the Taiwanese economy.
Furthermore, the longrun effect of government intervention is to break up the unity of existing political entities, not to promote the formation of still larger political entities. For the existence of government intervention is an invitation to pressure-group warfare. Groups form to use the government as an instrument serving their short-run interests at the expense of the interests of the rest of society. In such an environment, such groups often come to be formed on the basis of such factors as regional ties, ethnic origin, and common language. Each such special group feels the need to control the use of government power in order to promote its own interests at the expense of other groups, and to protect itself from the depredations of other groups. In such conditions, growing conflict and hostility develop among the various groups, culminating in violent clashes and, ultimately, in demands for political separation. Thus, at the very same time that some people are calling for a United States of Europe, others are demanding the breakup of the existing countries of Europe. In Great Britain, there are the Scottish and Welsh nationalists; in Spain, the Basque and
Catalan separatists; in Belgium, the Flemish separatists; and in other countries, similar such groups.
Thus, international free trade and the gains to be derived from the international division of labor ultimately require the existence of domestic free trade—of laissez-faire capitalism. This is necessary to avoid both the surrender of national sovereignty and the pursuit of policies promoting the development of ethnic conflicts that lead to the rupturing of nations. With domestic laissez faire, there are no obstacles of any significant kind to the establishment of international free trade. There is no unemployment problem caused by free trade, because wage rates are free to adjust as necessary; no problem of protecting the recipients of subsidies, because there are none; and no problems of uniform government regulation, because there is no government regulation.
The Birth Rate
It has been shown that in a division-of-labor society a larger-sized population, far from reducing the average standard of living, actually increases it. This demonstration by no means implies, however, that the ideal arrangement would be the highest possible birth rate, or that birth-control measures operate to hold down the standard of living. There is an important difference between a larger-sized existing population, made up of self-supporting adults, and a rapidly growing population, composed of a high proportion of dependent children. The latter represents a reduction in the standard of living of those who must support the children.
Too-rapid population growth caused by a too-high birth rate is almost impossible, however, in a society which is not dominated by religious fanaticism and in which parents are financially responsible for the costs of raising their own children, and are free to practice birth control. For then, the parents simply consider the costs they will have to bear, and act accordingly. The only way a problem of population growth can be created in these circumstances is insofar as the government taxes the general public to pay for the costs of raising children. Then, people can have children at little or no cost to themselves; the cost is borne by the taxpayers. Welfare allowances geared to family size, socalled family assistance allowances, and public education are examples of measures of this type.
7. Free Immigration
It is necessary to address the issue of free immigration, which is closely related to the subject of population growth. This section will show that free immigration is in the longrun material self-interest of the citizens of a capitalist country.
The words capitalist country must be stressed. To the extent that a country has a welfare system, tax-supported hospitals and schools, public housing, and so on, and the immigrants come to take advantage of these offerings, the effect is a corresponding loss to the present inhabitants of the country, who have to pay the costs. The above proposition applies to a country insofar as it is without these and other welfare-state-type programs—a country in which the immigrants must be self-supporting and themselves pay for whatever they receive. By the same token, the freedom of a country implies the absence of economic disabilities imposed on immigrants: there are no minimum-wage laws or prounion legislation to prevent them from gaining employment, and no legal obstacles to their starting businesses, buying land, and so on.
Under such conditions, the freedom of immigration must ultimately prove economically beneficial to everyone. Because among the immigrants and their descendants will be individuals of great talent, capable of achieving great things in a free country, but who would be stifled and be able to contribute little or nothing in the lands of their origin. In effect, the freedom of immigration into a free country from countries that are less free or unfree is a vital means of unlocking human talent and increasing the gains from the pyramid of ability.
As a simple example, one should consider what would have been the effect on Andrew Carnegie, and not just on the American but on the world steel industry, if he had been prevented from immigrating to the United States and confined to the less free environment of Scotland and Great Britain. One should consider what would have been the effect on the development of the helicopter if Sikorsky had been prevented from immigrating to the United States from Russia. Is it likely that the Russians would have seen the value of his ideas before they had been proved by actual repeated demonstration in the United States?
Indeed, we should consider the effects if the ancestors of any American industrial innovator had had to remain in their native lands, and thus that person have been born and spent his life in a country like Italy, Poland, Russia, or Germany, or even France or Great Britain, instead of the United States. Probably most of the innovators would have been stifled or at least significantly held back.
The historical advantage noted in the previous section, of the people of the United States having access to more business talent than the people of any European country, was due to America’s policy of greater economic freedom in general combined with her policy of free immigration in particular. The latter gave the United States a larger population from which to draw such talent, while the former ensured that in the larger population a greater frequency of such talent would be manifested,
because freedom is the essential condition for the development and flowering of such talent. The combination of free immigration and general economic freedom thus results both in more people and, at the same time, as an inextricable part of the same process, a rate of economic progress that is not only rapid, but also further accelerated by virtue of the immigration. Simply put, free immigration into a free country accelerates economic progress, because talent requires freedom in order to flourish. Free immigration into a free country brings talent to freedom, and so enables more of it to develop and contribute to economic progress. The acceleration of economic progress it achieves ultimately far outstrips whatever short-run problems may accompany an increase in immigration.
Refutation of the Arguments Against
Free Immigration
It is necessary to refute the arguments advanced against the freedom of immigration and the population growth it causes.
It is claimed that the larger population resulting from free immigration creates the need to resort to inferior grades of land and mineral deposits and is accompanied by diminishing returns. This argument has already been answered both in our discussions of population growth and in our discussion of private ownership of land. 115 Here it is only necessary to add a further point which applies particularly when the population growth results from immigration. Namely, that the immigration can be accompanied by the importation of additional raw materials along with the additional people.
Imagine, for example, that workers of the British steel industry immigrated to the United States and became steel workers here. This would not mean that the iron ore they required must be taken from the Mesabi range in Minnesota. Very probably, it would simply mean that iron ore that used to go from Labrador to Britain will now go from Labrador to the United States.
This example points up the fact that those who fear population growth are thinking in terms of a non-division-oflabor society, in which people work the land and in which more people in a territory means more working of the land in that territory. Actually, immigration into towns and cities has no necessary connection with the extent to which the land and mineral deposits of the surrounding territory must be worked, because the towns and cities can draw their raw materials from anywhere in the world. The notion that more people in a country must mean a higher ratio of labor to land in that country, and thus diminishing returns, simply does not apply in a division-of-labor society.
It is also claimed that a larger population must reduce the productivity of labor because it means a higher ratio of labor to capital goods, or, what is the same thing, less capital goods per worker. Those who advance this argument believe that population growth and increases in the supply of capital goods are independent processes. Capital accumulation, they believe, is determined simply by saving, which allegedly has no connection with the growth of population.
The fact is that a larger number of people working and producing is itself the cause of a larger supply of capital goods. A larger number of people working and producing in conjunction even with an unchanged supply of capital goods results in an increase in total production. This no one can deny. It is only necessary to realize that what is produced in an economy is not only consumers’ goods, but also capital goods. Labor and existing capital goods are used to produce both consumers’ goods and capital goods, and, as we shall see in later chapters, they do so in accordance with the relative demands for the two types of goods. 116
The implication of this is that if there is any single, one-time increase in the number of people working and producing, it automatically tends to be followed by a growth in the supply of capital goods per worker and thus in output per worker at least back to their original levels. This is because the larger number of workers produces more capital goods with which that same larger number of workers then works in the next period, and with the aid of which it enjoys a higher productivity. The further effect is another increase in production in the following period—both of consumers’ goods and of capital goods, until the original levels of capital goods per worker and the productivity of labor are equalled and, indeed, surpassed.
Thus, it should be clear that no reasonable case exists against any single dose of immigration or population increase based on the argument that it reduces the amount of capital goods per worker. For the additional labor itself results in progressively more capital goods.
In the case of a continuous increase in the supply of labor, it could be argued that just as the first group of additional workers brings about an increase in the supply of capital goods, a second group arrives on the scene, so that the ratio of capital goods to labor does not increase and may even fall further. Yet even this, more sophisticated version of the reduced-capital-perworker argument against immigration and population growth cannot stand. This is because if the productivity of labor were threatened by a relative excess of labor and a relative deficiency of capital goods, the effect would be a drop in the demand for labor, and thus in the wage earners’ demand for consumers’ goods, and a rise in the demand for capital goods. The effect of this, in turn, would be a
higher relative production of capital goods and a lower relative production of consumers’ goods. The larger number of workers of each year would find sufficient additional capital goods available because they would be produced by a larger proportion of the labor and capital goods of each year, as well as by a growing volume of labor and capital goods from year to year.
And, as time went on, the positive effects of the unlocking of more human talent would occur. The effect of this would be an increase in the output of capital goods (and consumers’ goods) that can be obtained from any given quantity of labor working in conjunction with any given quantity of capital goods. Even if it occurred on a strictly delimited, once-and-for-all basis, the effect of this in turn would be a more rapid rate of increase in the production both of capital goods and consumers’ goods, with each year’s larger output of capital goods serving as the base for the following year’s further increase in the production both of capital goods and of consumers’ goods. 117
Thus, a capitalist economy with the freedom of immigration turns out in the long run to have a more rapid rate of capital accumulation than one without it. For it has both a larger relative production of capital goods and uses capital goods more efficiently in the further production of capital goods than one without the freedom of immigration. The effect of this more rapid rate of capital accumulation is a correspondingly faster rate of economic progress, which soon makes up for the reduction in the proportion of output going to the consumption of wage earners.
If one wants to form a more precise, quantitative estimate of the relationships involved, let us assume that free immigration, together with any increase in population coming from those already present, results in an overall rate of population growth of 3 percent per year. This is a rate last seen in the United States in colonial times. It would be sufficient to double the population every twenty-five years.
In order for a 3 percent larger number of workers each year to be as well equipped as the workers would be without population increase, something on the order perhaps of an additional 9 to 12 percent of national income—more accurately, current net output—would need to be devoted to saving and capital accumulation. This figure is generous. I arrive at it on the basis of the fact that in the nineteenth century and the first few decades of the twentieth century, the period in which the American economy was relatively free, the longterm historical ratio of reproducible capital to national income was about three or four to one. 118 Thus, a 3 percent increase in capital to accompany the 3 percent increase in the number of workers and so maintain a three or four to one ratio of capital to output per worker, would represent no more than something on the order of 9 to 12 percent of national income in conditions in which the degree of capital intensiveness was substantially higher than it is today.
Having to obtain this 9 to 12 percent of national income from the share of national income previously going to wage earners, would represent something on the order of a one-time reduction in wages of about 13 to 17 percent, if, as is typical, wages initially constitute about 70 percent of national income. This magnitude of reduction in wages, however, greatly overstates the magnitude that would actually follow the establishment of free immigration. This is because it is predicated on going from zero population increase to an annual rate of 3 percent increase. In reality, the effect would be more likely to be to go from a 1 1 ⁄ 2 percent annual increase without freedom of immigration to perhaps a 3 percent annual increase with it. The additional capital required would thus actually equal only 4 1 ⁄ 2 to 6 percent of national income, rather than 9 to 12 percent; and the one-time wage reduction would be on the order of 6 1 ⁄ 2 to 8 1 ⁄ 2 percent rather than 13 to 17 percent.
If the freedom of immigration were introduced following the establishment of greater economic freedom in other respects, this short-run negative effect would probably go largely unperceived, since it would be more than offset by other, positive developments. But, in any case, if the effect of the freedom of immigration and the pool of talent it unlocks is to enable the productivity of labor to increase by just an additional 1 percent a year, then, as soon as this happens, within seven to nine years the initial loss is made good and thereafter the process results only in gains.
A third argument raised against the freedom of immigration is that its effect would be to reduce the wages of unskilled workers relative to those of skilled workers. This result would occur to the extent that such factors as their lack of knowledge of the language, and the possibly lower educational standards of the poorer countries from which they came, led the immigrants to enter the economic system more heavily at the unskilled end of the labor market than at the skilled end.
Now this argument would have weight only if it could be shown that the influx of unskilled workers substantially increased the short-run reduction in the standard of living of the present unskilled workers, over and above the reduction just discussed. This cannot be shown, because by the time the influx of immigrants is able to have a significant depressing effect on the relative wages of unskilled workers, it also exerts a significant positive effect on the absolute standard of living of everyone.
Consider. If the freedom of immigration means an
additional increase in the number of workers of about 1 1 ⁄ 2 percent a year, then whatever the proportions of skilled and unskilled labor among the immigrants, in any one year it can change the proportion among workers as a whole only very slightly. As a hypothetical illustration, if initially half the workers are skilled and half are unskilled, while among the immigrants only one-third are skilled and two-thirds are unskilled, the effect in one year is to change the overall composition of the labor force to a little more than 49 3 ⁄ 4 percent skilled, and a little less than 50 1 ⁄ 4 percent unskilled. (This conclusion follows by applying a rate of increase of 2 percent to the unskilled half of the population and a rate of increase of 1 percent to the skilled half of the population, and then expressing the results as percentages of the combined total. 119 )
Furthermore, this change in the relative composition of the labor force does not go on indefinitely, because as time passes more and more of the earlier immigrants move up the ladder into skilled jobs. And among their children, the proportion of skilled and unskilled workers will be about the same as among the original population.
But what is most important is that with each passing year in which the proportion of unskilled workers becomes more pronounced, until it finally levels off at its new equilibrium, more and more of the earlier immigrants have had time to achieve positions from which they can begin making contributions that raise the general standard of living. Thus, after ten years, say, while the overall proportion of unskilled labor has risen in our hypothetical example from 50 percent to about 52 1 ⁄ 2 percent, there will be immigrants who have established their own businesses and introduced important innovations having a growing impact on the rest of the economic system and operating to raise the standard of living of everyone. And with each passing year, this effect will become more pronounced. (The figure of 52 1 ⁄ 2 percent results from applying to the half of the population that is initially unskilled a compound rate of increase of 2 percent for ten years, and to the half of the population that is initially skilled a compound rate of increase of 1 percent for ten years, and then taking the former result as a percentage of the combined result.)
Thus, the effect of the change in the proportions of skilled and unskilled labor operates perhaps to postpone somewhat the restoration and increase in the standard of living of the unskilled workers. At the same time, it accelerates the restoration and increase in the standard of living of the skilled workers. For what happens is that while the unskilled workers, with their relatively lower wages, are unable to buy as many of the goods and services of the skilled workers, the skilled workers are able to buy correspondingly more of the goods and services of the unskilled workers.
Thus, overall, the effect of free immigration is that the immigrants enjoy a substantial gain immediately, while the original population gains after a period of time, which is shorter for skilled workers and longer for unskilled workers. Within the span of a single generation it is likely that almost everybody will have gained and from that point on will gain more and more. For by then, the immigrants and their children will have been making important contributions for some time, and will continue to do so, while further changes in the proportion between skilled and unskilled labor will probably have come to a halt.
The fourth and final objection to the freedom of immigration is a noneconomic argument to the effect that it means turning the country over to foreigners and thus destroying its language and culture.
The fact is that for a capitalist country the opposite is true. The freedom of immigration is the principal means of extending the language and culture of such a country. For the immigrants come voluntarily, in order to take advantage of freedom and to benefit themselves. They come with the knowledge that they are now in a better country than the one they left behind, and so are well-disposed to learning its language and absorbing its culture. And because they come from many different lands, each with its own language, the language of the new country is the logical common ground for them to choose in dealing with one another. Learning it is also virtually indispensable for practical success, since almost all of the existing wealth of the country is in the hands either of its native inhabitants or of earlier immigrants who have learned the language to be able to deal with the native inhabitants. It was in just this way that English came to be the language of tens of millions of people who originally did not speak English; people who, along with learning English, made the most important parts of Anglo-Saxon culture their own, such as the idea of the rule of law and the sanctity of private property.
The immigrants, of course, do not merely absorb their new country’s culture. They help to make it better. They contribute to it not only all their business, scientific, and artistic achievements, and what is valuable in their own heritage, but, perhaps most important of all, a constantly renewed sense of personal ambition and personal achievement. They are a fresh inspiration in every generation.
The fact that while two hundred years ago English was the native language of perhaps 12 million people out of a world population of 1 billion, and is today the native language of over 350 million people out of a world population of about 4 billion, is due principally to the existence of the freedom of immigration into the United
States. The ability of the United States to become the leading economic and military power in the world would not have been possible without its freedom of immigration, which both attracted the numbers and powerfully contributed to their per capita productivity. Had the United States adhered to its policy of free immigration— along with the rest of its freedom—it is probable that today it would have a population approximately twice as large and a standard of living at least twice as high as the population and standard of living it presently has. As such, it would so far surpass any combination of external powers as to be absolutely unassailable.
Free Immigration and International Wage Rates
The discussion of free immigration that has just been presented implies the necessity of modifying an important proposition of economics—namely, the proposition that the movement of workers from lower-paying to higher-paying jobs brings about an equalization of wage rates. This proposition must be limited to a context in which the jobs are performed under the same degree of economic freedom and cultural rationality. The movement of workers from lower-paying jobs in less free, less rational countries to higher-paying jobs in a freer, more rational country does not equalize wage rates, but increases the differences still further, because the productivity of labor in the freer, more rational country will tend to grow all the more rapidly relative to the productivity of labor in the other countries, thanks to the unlocking of human talent and the capital formation that is brought about in the freer, more rational country. Thus, free immigration contributes to the emergence of virtually two different worlds, as population moves from politically created wastelands into countries in which freedom and rationality make possible continuous economic progress.
It should now be clear that the freedom of immigration into a capitalist country is to the longrun economic self-interest of all of its inhabitants. It enables more talent to flourish and thus increases the rate of economic progress in that country, through the greater operation of the pyramid-of-ability principle.
Capital Export
Closely related to the subject of freedom of immigration is the subject of capital export. Just as the immigration of labor is feared, on the grounds that it will reduce the ratio of capital to labor in the country experiencing the immigration, so the export of capital to foreign countries is also feared, on exactly the same grounds. The ratio of capital to labor, and thus the productivity of labor and real wages, will allegedly be reduced either by the immigration of labor or by the exportation of capital. Thus, for example, at the time of writing, objection is widely voiced to the prospective export of capital from the United States to Mexico, as the result of the impending establishment of greater freedom in the economic relations between the two countries. (It is rather ironic that most of those who fear the export of capital from the United States also fear the import of capital into the United States—from Japan, for example. It seems that the enemies of economic freedom have two fears in connection with the movement of capital: its movement out of a country and its movement into a country.)
The answer to the fears concerning the export of capital is essentially the same as the answer to the fears concerning the immigration of labor. Namely, that it too is the source of more rapid capital accumulation, including, ultimately, more rapid capital accumulation in the countries that export capital. Capital is exported only because it can be employed more productively abroad than at home. That is why it is more profitable to export the capital than to keep it at home. But the fact that capital can be employed more productively abroad than at home— that the same capital has a larger product abroad than at home—implies that the production of capital goods, no less than the production of consumers’ goods, will be larger than before. For capital goods no less than consumers’ goods are the product of capital goods and labor. Anything which serves to increase production in general serves to increase the production of capital goods. 120 Thus, the freedom of the Japanese to export capital to the United States, and the freedom of the United States to export capital to Mexico, makes possible the production of more goods—more capital goods as well as consumers’ goods—with the same total labor and capital goods than would otherwise be possible. Thus such freedom increases the overall rate of capital accumulation.
Insofar as capital is exported to develop the exploitation of foreign natural resources and to take advantage of special climate and growing conditions found abroad, its beneficial effect on the capital-exporting country is obvious. For now raw materials and other products become available to the domestic market of the capital-exporting country that would not otherwise be available or available as economically. The effect is an immediate rise in the standard of living of the capital-exporting country. The effect is also a rise in the standard of living of all other countries that obtain the benefit of the expanded and improved production of minerals and agricultural commodities, through their import of such commodities.
The export of capital for the purpose of developing foreign manufacturing is similarly advantageous. Once again, an expanded and improved supply of products becomes available wherever these products are sold. If
the major market for these products is the capital-exporting country, then its citizens have the most benefit from the larger supply of products.
As far as the expanded production that results from the export of capital—whether to develop foreign natural resources, foreign agriculture, or foreign manufacturing—is an expanded production of capital goods, the effect is, as I say, a further increase in the ability to produce, everywhere that the additional capital goods become available. For now these capital goods are added to the supply of capital goods otherwise existing and thereby raise the productivity of labor. The result of this higher productivity of labor is a greater ability to produce, including a greater ability to produce capital goods. Thus still more capital goods become available, followed by a still greater ability to produce, followed by an even greater supply of capital goods, and so on. This process is capable of continuing indefinitely, causing the supply of capital goods, the ability to produce, and the standard of living to go on rising further and further, and thus to be higher everywhere throughout the world than they would otherwise have been. 121
An essential foundation of the permanently higher rate of capital accumulation attendant on the freedom of capital export is the intensification of the international division of labor that freedom of capital export brings about. Freedom of capital export is the means of bringing previously undeveloped or backward territories into the international division of labor and thereby enabling any given quantity of labor and capital goods to produce more, including, of course, more capital goods, by virtue of the intensification of the division of labor that is achieved.
Economic history, precisely the economic history of the United States and Mexico, provides a clear demonstration of the consequences of capital export. A major portion of the present-day United States—Texas and the whole of the Southwest and California—once was a part of Mexico. The economic development of this vast area was made possible by substantial capital export from the Eastern United States. However, although its original foundation was capital exported from the Eastern United States, most of the capital that is today invested in this region did not actually come from the Eastern United States. Rather it was accumulated out of the increasing production of the region itself (or out of goods obtained in exchange for that increasing production). Thus, the capital exported from the Eastern United States provided the foundation of the capital accumulation of the former Mexican territories but not the substance of it. A major by-product of the increasing production of the region, of course, was a growing supply of products in the Eastern United States, which, as far as they were capital goods, made an important contribution to all aspects of economic progress in the Eastern United States. In other words, the fact that Texas and California and the other states that once were part of Mexico have developed as they have, has greatly contributed to capital accumulation, production, and the standard of living in the rest of the United States. Had the United States of the nineteenth century attempted to retain all of its capital east of the state of Texas, in order to avoid the allegedly harmful consequences of exporting capital to “Mexican territory,” the effect would have been a United States that in succeeding decades was far poorer than it turned out to be.
Today, there may be the opportunity to export capital to the remaining territory of Mexico. To the extent that the United States is free, the process of the economic development of the remainder of Mexico could only be accompanied by further improvement in the economy of the United States. The development of this remaining part of Mexico, it if can actually take place, would have the same impact on the economy of the United States as the development of Texas and California.
It should be evident that in the nature of the case there is no inherent reason for the export of capital to be accompanied by unemployment. Many people, of course, must change their jobs as the result of such a process, but in a free economy the overall effect is no reduction of employment, but merely a rise in the productivity of labor and standard of living. 122
8. The Harmony of Interests in the Face of Competition for Limited Money Revenues
Going beyond the various aspects of international economic competition, the case for the freedom of economic competition in general becomes stronger still when one considers its benevolent effects in the context which might be thought most hostile to it, namely, the context of a fixed, invariable quantity of money and volume of spending in the economic system. In such a context, each person’s gain of sales revenues and money income would imply a corresponding loss of sales revenues and money income by someone else. I will show that in such a context the effect of economic competition is necessarily to reduce prices by an amount sufficient to compensate, indeed, more than compensate, for the loss of money revenue or income in the rest of the economic system. This demonstration will constitute a further validation of the principle that in a division-of-labor, capitalist society, one man’s gain is not another man’s loss, but other men’s gain.
Thus, for the sake of further reinforcing the case for freedom of competition by confirming it even in these
rather extreme circumstances, let us imagine an economic system in which gold is money and all the gold has been mined, so that no further increase in the quantity of money is possible. 123 If the quantity of money were to be become fixed in this way, then, as Chapter 12 will show, there would be no basis for a rising volume of spending in the economic system, nor, therefore, for a rising volume of sales revenues and money incomes earned. This is because the increase in all of these depends on the increase in the quantity of money. 124
For the sake of convenience, let us assume that the fixed quantity of money generates a volume of total spending and therefore of total sales revenues in the economic system equal to 1,000 units of money per year, year in and year out. Let us further assume, for the sake of simplicity, that the 1,000 of sales revenues earned each year constitute 1,000 of net incomes to the sellers. If one likes, each of the 1,000 units of money spent and received can be conceived of as equal to $5 billion or more of our present money, so that the economic system we are imagining could be physically as large as our own is now.
Let us also assume that this hypothetical economic system is initially composed of two groups of producers which are equal both in the number of their members and in the productive ability of their members. Thus, initially, each of these two groups produces half of the total output of the economic system. Because equal outputs command equal prices and exchange for equal revenues, we are justified in inferring that the sales revenues and incomes of the two groups are initially equal at 500 units of money each.
Now, to show the benevolent effects of competition, let us imagine that over a period of years, while both groups remain the same in terms of the number of their members, the members of one of the groups succeed on average in doubling the productivity of their labor, while the members of the other group merely maintain the productivity of their labor. The effect of this will be that one of the groups doubles its production while the production of the other group remains unchanged. This, in turn, means that one of the groups will now account for two-thirds of the output of the economic system while the other group now accounts for only one-third of the output of the economic system.
On the principle that equal outputs command equal prices and sell for equal revenues, we can infer that the members of the group that has doubled its production will now earn two-thirds of the total sales revenue and income of the economic system while the members of the other group will now earn only one-third of the total sales revenue and income of the economic system. Because total sales revenue and income are fixed at 1,000, the consequence is that the revenue and income of the group that has doubled its output increases from 500 to 667, while the revenue and income of the group whose output remains unchanged decreases from 500 to 333. These changes are in accordance with the changed relative contributions of the two groups to the total product of the economic system in the face of a fixed 1,000-monetary-unit value of that product.
Thus, the picture may appear to be one of a conflict of interest between the members of the two groups. The totality of sales revenue and income is strictly limited and the members of the one group gain sales revenue and income only by equivalently depriving the members of the other group of sales revenue and income.
Here one must keep in mind the fact that the nature of the competition is not a grabbing off of a limited supply of something from nature by means of the exercise of greater physical strength and agility, but the earning from willing consumers of a greater share of money revenue and income by means of the enlargement of the supply of goods produced in exchange for that revenue and income. A number of benevolent consequences follow from this fact that are crucial, and they can be seen at their clearest precisely in the present case.
The first such consequence is that totally unlike the conditions in the animal kingdom, where the success of the strong deprives the weak of means of subsistence, the success of the more productive never deprives the less productive of the ability to earn at least some revenue and income. In the present case, the relatively less productive group still earns a full one-third of the sales revenue and income of the economic system, corresponding to its one-third contribution to total production. It would not matter by how much it fell behind in its relative contribution to total production, it would still earn revenue and income in proportion to whatever it did produce.
For example, if the members of the more productive group increased their productivity ninefold instead of twofold, the consequence would be that their relative production would rise from 1:1 to 9:1, instead of to only 2:1. Under these conditions, the members of the group that did not increase its productivity, instead of accounting for a third of the output of the economic system and earning a third of the revenue and income of the economic system, would account for only a tenth of the output of the economic system and earn only a tenth of its revenue and income. In other words, its members would earn 100 of revenue and income. This 100 is still something, and so long as the members of this group produce anything at all, they will still account for some positive proportion of the output of the economic system and earn a corresponding proportion of the revenue and income of the economic system.
THE INFLUENCE OF THE DIVISION OF LABOR ON CAPITALISM 369
And here is where we find the second benevolent consequence of the nature of economic competition that is brought out in the present analysis—a consequence that may appear astonishing. This is the fact that precisely to the same extent that the money income of the group that does not increase its productivity declines, so too do the prices it must pay in order to obtain goods. And thus its real income—its ability to obtain goods for the money it earns—does not fall at all!
Consider. The doubling of production by the members of the one group—let us call it Group A from now on—represents two things simultaneously: First of all, of course, a rise in its production relative to that of the other group—which from now on we call Group B—from 1:1 to 2:1. This is what is responsible for its proportion of total production rising from a half to two-thirds and for the proportion of Group B falling from a half to one-third. In virtue of the fact that total sales revenues and income are fixed at 1,000 units of money, it is responsible specifically for the revenue and income of Group A rising from 500 to 667 and for that of Group B falling from 500 to 333. But the second thing that the doubling of production by Group A is responsible for is an increase in the total production of the economic system in the ratio of 3:2. For a doubling of one-half of the output of the economic system plus the remaining initial one-half of the output of the economic system totals to three-halves of the initial output of the economic system.
Now, given the fact that the total expenditure to buy the output of the economic system is frozen at 1,000 units of money—which is why the total sales revenues and incomes of the economic system are frozen at 1,000 units of money—it follows that the purchase of three-halves the output entails a fall in prices to two-thirds of their initial level. This fall in prices to two-thirds of their initial level is precisely equal to the fall in the revenue and income of the members of Group B, inasmuch as the ratio of the 333 of revenue and income that the members of Group B now earn to the 500 of revenue and income that they initially earned is also equal to two-thirds. (At the same time, of course, the proportion of the total physical output of the economic system that is produced by the members of Group B, in falling to a third from a half, also falls precisely to two-thirds of its initial level. For when one divides a third by a half, the result is two-thirds.) Thus, while the members of Group B suffer a one-third decline in their money revenues and incomes as the result of the greater production on the part of the members of Group A, they simultaneously experience a one-third reduction in the prices they pay, and thus no reduction whatever in their actual buying power or socalled real incomes.
Could this amazing result be some kind of strange coincidence?
To find out, let us consider the results if the members of Group A were in fact to succeed in increasing their production ninefold instead of only twofold. In this case, the members of Group A would account for nine-tenths of the output of the economic system and earn 900 of the fixed 1,000 of total sales revenue and income. At the same time, the members of Group B would now account for only one-tenth of the output of the economic system and would accordingly earn only 100 of the fixed 1,000 of total sales revenue and income. In falling to one-tenth of the output of the economic system from one-half of the output of the economic system, the proportion of Group B’s production to that of the economic system as a whole falls to one-fifth of its initial level, for that is the ratio of a tenth to a half. And, of course, the revenue and income of Group B, in falling to 100 from 500, falls to a fifth of its initial level.
To find out if our previous finding was a coincidence, we need only determine the extent to which prices fall in the present instance. If they too fall to one-fifth of their initial level, then we can be sure that more than a coincidence is involved.
It turns out that prices do fall precisely to a fifth of their initial level. This results from the fact that in increasing its production by a multiple of nine, Group A now produces an output equal to nine-halves of the initial output of the economic system. When added to the output of Group B, which is equal to one-half of the initial output of the economic system, the result is a total production that is equal to ten-halves of the initial output of the economic system. The fact that in the conditions of the case the ten-halves of the initial total output must be sold for the same fixed 1,000 of sales revenues requires that prices be two-tenths as great, which, of course, means that they are one-fifth as great. Thus, once again, the percentage fall in the revenues and incomes of the members of Group B is precisely matched by the percentage fall in the prices of the goods they buy, and thus, once again, the members of Group B suffer no decline in their real incomes.
The mathematical necessity of prices and the revenue and income of the members of Group B falling by the same percentage, and thus the real incomes of the members of Group B remaining the same, can be established as a universal principle. To do this, it is only necessary to state matters algebraically. Thus, let the initial output of Group A be expressed as O A and that of Group B, as O B . The total initial output of the economic system as a whole will then be represented simply as the sum of O A + O B . The initial proportion of total output produced
O B by Group B will then be . The initial relative
O A + O B production of the two groups in this case need no longer
370 CAPITALISM be equal. It could be anything.
Now let us imagine that the members of Group A find a way to increase their production by any amount. Call it X. As a result of this increase in output by Group A, the proportion of total output produced by Group B falls to
O B O B from . When the former expres-O A + X + O B O A + O B sion is divided by the latter, the two O B terms constituting the numerators cancel out and the result is
O A + O B
. This is the measure of the fall in the sales O A + X + O B revenues and incomes earned by the members of Group B. It is the ratio of their new, lower proportion of total production to their previous, larger proportion of total production.
It turns out that the fall in prices that results from Group A’s increase in its production by amount X is also precisely equal to O A + O B . For the numerator of this
O A + X + O B expression is the initial volume of total production and the denominator is the larger volume of total production that results from Group A’s increase in its output by amount X. When production is O A + O B , the price level is the fixed 1,000 of spending divided by this volume of production. When production is increased to O A + X + O B , the price level falls to the fixed 1,000 of spending divided by this larger volume of production. The ratio of this new, lower price level to the initial price
1,000 level is thus found by dividing O A + X + O B by
1,000
O A + O B . When this division is performed, the two 1,000 terms constituting the numerators cancel out, and the result stands as the ratio of the second denominator to the first, which is exactly the same as the ratio of Group B’s new, lower sales revenue and income to its initial sales revenue and income.
The principle that has now been established is that under the conditions of a fixed quantity of money and volume of spending, the increase in production by any group acts equally to reduce the price level as well as the sales revenues and incomes of the members of the rest of the economic system.
We are not yet through with amazing results, however. The result of free competition and the inequality of revenue and income that results from it is that prices end up falling by more than the revenue and income of the members of Group B. This is because of the fact that in the process of competition the members of Group B will almost certainly succeed in increasing their production to some extent. They will be strongly aided in doing so by the operation of the pyramid-of-ability principle.
Thus, for example, imagine that Group A represents
10 percent of the producers and Group B, 90 percent. Assume that initially Group A produces 10 percent of the total product of the economic system and Group B, 90 percent of the total product of the economic system. Now imagine that under the freedom of competition, the members of Group A, who represent the most intelligent, ambitious, and hardworking individuals in the economic system, succeed in increasing their production by a multiple of nine. At the same time, imagine that the members of Group B succeed in doubling their production. (This doubling occurs as the result of the members of Group B having to compete with the members of Group A and thus improve their own performance, of being able to learn from the success of the members of Group A, and of being able both to work under the direction and with the aid of products and methods of production devised by members of Group A.)
As the result of these respective increases in production, the members of Group A now produce an amount equal to nine-tenths of the initial output of the economic system, for they have increased their output, initially equal to one-tenth the output of the economic system, by a multiple of nine. At the same time, the members of Group B now produce an amount equal to 1.8 times the initial output of the economic system, for they have doubled their nine-tenths of the initial output. Thus total production in the economic system as a whole is now 2.7 times its initial amount. The proportion of the total output produced by the members of Group B is now two-thirds— 1.8 ⁄ 2.7 . It was initially nine-tenths. The fall in the proportion of output produced, and therefore of revenue and income dividing earned, two-thirds by the by members nine-tenths. of Group The result B is found is 20 ⁄ 27 by . Given 1,000 monetary units of total revenue and income in the economic system, the earnings of the members of Group B fall from 900 to 667.
Despite this fall in their money sales revenues and incomes, the members of Group B come out far ahead in this case in real terms. In fact, their real incomes precisely double, in full proportion to their increase in production. This is evident in the fact that total production in the economic system increases by a multiple of 2.7 and thus that prices fall to 10 ⁄ 27 of their initial level. When the 10 ⁄ 27 price level is divided into the 20 ⁄ 27 money-revenue-and-income level of the members of Group B, the result is that the buying power—that is, the real revenues and incomes—of the members of Group B exactly doubles, just as their production.
Indeed, it should be obvious that it can be shown algebraically, as a general principle, that if Y is the amount of increase in the production of Group B, while X is the amount of increase in the production of Group A, then the real income of Group B increases in the ratio
THE INFLUENCE OF THE DIVISION OF LABOR ON CAPITALISM 371 of O B + Y , at the same time that the real income of Group
O B
O A + X
A increases in the ratio of . This result follows
O A from the fact that the change in a group’s real income is equal to the change in its money income divided by the change in the price level. In an economy with an invariable money, the change in a group’s money income is equal to the change in its relative contribution to production. Thus the change in the money income of Group B is equal to the ratio of its current relative contribution to production to its initial relative contribution to production. Its current relative contribution to production is
O B + Y
. Its initial relative contribution to pro-O A + O B + X + Y
O B duction, of course, was . When the first fraction
O A + O B is divided by the second, the result is O B + Y ×
O B
O A + O B
O A + O B + X + Y . When this expression is divided by the change in the price level, which also equals
O A + O B O B + Y
, the result simplifies to . Ex-O A + O B + X + Y O B actly the same procedure establishes the fact that the real income of Group A changes in the ratio of O A + X .
O A
Thus, the entirely benevolent nature of economic competition and the economic inequality that results from it has now been demonstrated in the context of an invariable money. It should scarcely be necessary to say that the only difference that is made by an increase in the quantity of money more or less in pace with the increase in the volume of production is that in those conditions the money revenue and income of the members of any Group B would not decline and would actually tend to increase to the extent that the members increased their production. Under these conditions, of course, prices would no longer tend to decline.
It should also scarcely be necessary to say that in the course of economic progress, the members of any Group B would have to be prepared to change their occupations. They could not, for example, rationally expect to go on producing horses and buggies once members of Group A have introduced the automobile. Their same or greater production would have to be in the context of their making the necessary adjustments in what they produced.
Notes
1. Cf. Ludwig von Mises, Socialism (New Haven: Yale University Press, 1951), pp. 40–42; reprint (Indianapolis: Liberty Classics, 1981). Page references are to the Yale University Press edition; pagination from this edition is retained in the reprint edition.
2. For a discussion of its influence on the mentality of destruction-ism, see above, pp. 230–231.
3. Cf. von Mises, Socialism, pp. 500–504.
4. See above, p. 174. This, of course, is a leading theme of von Mises.
5. See above, pp. 201–212.
6. See above, pp. 275–278 and 288–290.
7. For elaboration of the significance of this fact, see below, pp. 477–480. See also below, pp. 632–634.
8. See below, pp. 622–642, especially pp. 622–629. So intimately connected is the present discussion with that just referenced, that it would almost certainly be worthwhile to reread it after having read that material.
9. See below, pp. 631–632 and 824.
10. Even if a rise in costs comes out of above-average profits earned by the producers, and thus does not raise the price of the product they are selling, it still operates to make that price higher than it would have been in the long run, because now competition will not be able to reduce the price to the extent that it otherwise would have. In addition, whatever portion of that profit would have been used for reinvestment, either in this particular branch of production or anywhere else in the economic system, is now no longer available. Thus production will be held back in the lines which are deprived of this additional capital and prices will be made higher than they otherwise would have been in this respect too.
11. On this point, see below, pp. 634–636. See also above, pp. 98–99.
12. See below, pp. 622–642. See also below, pp. 462–473 and 480–482, which explain the productive functions of businessmen and capitalists. The meaning of productive expenditure, incidentally, is expenditure for the purpose of making subsequent sales; it is the expenditure of business enterprises for business purposes. See below, pp. 444–445, for elaboration. 13. This is apart from instances in which business or investment losses are incurred, which the capitalists certainly strive to avoid but which are capable of wiping out one’s entire capital, and more.
14. Matters are different when an individual acquires a possibly substantial sum of wealth that he does not regard as essential to his livelihood or to the provision for his future needs and wants. In such cases, he probably goes through that wealth fairly quickly. Even though the wealth in question may be thought of as capital to the extent that it is temporarily invested and earns a rate of return, the behavior of such individuals should not be thought of as at all typical of that of capitalists. Insofar as individuals behave in such a way, they certainly are not capitalists for very long.
15. The figure of the significant-sized capitalists’ consumption being not much more than 10 percent of total consumption is consistent even with the sum of all profit and interest incomes
being 30 percent of national income, while the sum of all wage and salary incomes is 70 percent of national income (national income being the sum of both such categories of incomes). It is consistent if the significant-sized capitalists own approximately 75 percent of the capital of the economic system and earn approximately 75 percent of the profit and interest incomes, and then save half of their incomes and consume half of their incomes. On these assumptions, the incomes of the significant-sized capitalists represent 75 percent of 30 percent of national income, that is, 22.5 percent of national income; their consumption of half of their incomes thus represents a consumption of 50 percent of 22.5 percent of national income, that is, 11.25 percent of national income. When that 11.25 percent is divided by the approximately 85 percent of national income that can be assumed to be expended for consumption as distinct from net investment, the result is a consumption expenditure on the part of the significant-sized capitalists of about 13 percent of total consumption expenditure.
16. For a discussion of the same subject from the perspective of the very limited extent to which wage rates in particular might conceivably be raised, see below, pp. 650–653.
17. And, indeed, if it could be gained, a significant portion of the 10 percent would come at the expense of such things as support of education, the arts, and other charitable activities. 18. Ludwig von Mises, Human Action, 3d ed. rev. (Chicago: Henry Regnery Co., 1966), p. 531.
19. See Simon Kuznets, “LongTerm Changes in the National Income of the United States of America Since 1870” in Simon Kuznets, ed., Income and Wealth of the United States (Baltimore: The Johns Hopkins Press, 1952), pp. 82, 86. See also Paul Samuelson and William Nordhaus, Economics, 13th ed. (New York: McGraw-Hill Book Company, 1989), p. 860. 20. The degree of capital intensiveness is indicated by the ratio of accumulated capital to national income as well as by the ratio of accumulated capital to current consumption expenditure mentioned earlier in this chapter. This is because national income and consumption expenditure are necessarily always very closely related—indeed, are almost equivalent concepts. (Concerning the relationship between national income and consumption, see below, pp. 699–706.) For additional measures of the degree of capital intensiveness, see below, p. 631. 21. See below, pp. 631–632 and 824.
22. For elaboration, see below, pp. 622–629.
23. For elaboration of this point, see below, pp. 737–739. 24. For a discussion of the destructive consequences of inheritance and income taxes, see below, pp. 306–310. See also pp. 636–639, 653–655, and 826–829. For a critique of land reform, see below, pp. 317–322. For further critiques of redistributionism, namely, of its role in the interpretation of the economic history of capitalism and as a leading aspect of welfare statism, see below, pp. 642–663.
25. On the significance of profit-and-loss incentives, see above, pp. 172–183, especially 176–180. Concerning the lack of individual initiative and the freedom of competition under government ownership, see above, pp. 275–278.
26. The destruction of the special gains of ownership is actually a consequence of redistributionism in general, and one that is especially noteworthy in the context of a non-division-oflabor society. For as soon as it is realized that redistributionism is to be a system, not only do people stop accumulating or maintaining wealth, thus leaving very little for the recipients of “redistributions” to receive, but also what the recipients do receive can give them no pleasure, in that they know that they themselves will in turn suffer expropriation.
27. Even if the taxpayers have the power, in their capacity as voters, to remove the elected officials, they are unlikely to be able to use that power. Obviously, there is no question of such power insofar as relatively small numbers of high-income taxpayers are plundered by majorities. Insofar as tens of millions of taxpayers are made to foot the bill for the losses of nationalized enterprises, the losses of any given such enterprise are rendered too small to impel the individual taxpayer to action. A hundred million taxpayers who must pay $10 or $20 more in taxes to cover the losses of this or that government enterprise are no match in terms of motivation and organization for the pressure-group members, who as individuals gain very substantially from the government enterprise’s losses.
28. Amazingly, none other than Adam Smith appears to hold this view. See below, pp. 476–477, where I quote him precisely to this effect.
29. This discussion is closely related to the critique of the doctrine that money is the root of all evil, which I presented earlier. See above, pp. 143–144.
30. Cf. Ludwig von Mises, Bureaucracy (1944; reprint, New Rochelle, N. Y.: Arlington House, 1969), pp. 20–39.
31. Ibid., pp. 40–63.
32. Ibid.
33. Ibid., pp. 64–73.
34. As further illustration of the bureaucratization of business, see above, pp. 196–199, where government-made obstacles to the operation of profit management are described as standing in the way of the achievement of fair treatment of blacks. 35. See above, pp. 234–237 and 254–256.
36. For the proof of these points, see below, pp. 618–642, especially 622–629 and 631–632. See also p. 824.
37. The reason such expenditures, when undertaken by the government, do not represent capital formation is explained below, on pp. 454–455.
38. Again, see below, pp. 631–632 and 824.
39. See below, pp. 618–642, for a comprehensive explanation of how capital accumulation is achieved and how it raises real wage rates.
40. See below, pp. 622–629 and 632–634.
41. Once more, see below, pp. 622–629 and 824.
42. See above, p. 147. See also, below, pp. 741–743.
43. For an explanation of how innovation, and anything else that increases efficiency, is a source of capital accumulation, see above, the example of the more efficient farmer, on pp. 132–133, and below, pp. 629–631 and 634–636.
44. Yet once again, see below, pp. 631–632 and 824.
45. Even if the effect is not to raise wage rates, but, in raising the demand for labor, to reduce or eliminate unemployment, that too operates to increase the funds available to the average wage earner—by virtue of reducing what he must pay to support the unemployed.
46. See below, pp. 618–642.
47. Cf. Touche Ross & Co. AB, Tax & Investment Profile Sweden (New York: Touche Ross International, 1985), pp. 5–6, 34.
48. David Ricardo, Principles of Political Economy and Taxa—
THE INFLUENCE OF THE DIVISION OF LABOR ON CAPITALISM 373 tion, 3d ed. (London, 1821), chap. 2; reprinted as vol. 1 of The Works and Correspondence of David Ricardo, ed. Piero Sraffa (Cambridge: Cambridge University Press, 1962), pp. 67–69. (Where appropriate, from now on, specific page references to the Sraffa edition will be supplied in brackets.)
49. Ibid., pp. 70–71.
50. See above, pp. 67–69.
51. Cf. Ricardo, Principles of Political Economy and Taxation, chap. 5, [p. 93].
52. Ibid. [pp. 94–95.]
53. See ibid., chap. 24, [pp. 203–204].
54. Hopefully, it is not necessary to say that these numbers are to be understood merely as representative, not as describing the actual total agricultural output or total produce rent of the country. To do that, they would need to be multiplied perhaps by a factor of several hundred thousand or several million, depending on the number of units of land involved.
55. Interestingly, Ricardo was very much aware of these possibilities. See Principles of Political Economy and Taxation, chap. 2 [pp. 78–83].
56. See below, pp. 358–367.
57. See above, p. 69.
58. Justification for the use of quotation marks around the word “owners,” if not already understood, will become clear in the next part of this chapter. See below, pp. 331–332.
59. See above, pp. 63–71.
60. See above, pp. 66–67, 98. and 234–237.
61. For a discussion of how the rise in land rents caused by environmentalism comes at the expense of the demand for labor, see below, pp. 667–668.
62. See above, Chapter 1, n. 38.
63. The problems in the way of assimilation are a matter that needs historical investigation. They evidently continue even down to the present time, with the continued existence of Indian “reservations.” The logically necessary intertribal warfare of the Indians, and all other primitive peoples, is also a matter worthy of historical investigation and dissemination to the public, which is increasingly under the sway of doctrines extolling the life of primitive peoples and attacking the life of modern, Western man.
64. Cf. von Mises, Socialism, pp. 55, 375.
65. What is present here, of course, is the operation of time preference, which renders a given sum in the present more valuable than a larger sum in the future. See above, pp. 55–58. 66. See below, pp. 931–933.
67. On these points, cf. von Mises, Human Action, pp. 684– 688, 823–824; Socialism, pp. 225–226.
68. See above, pp. 19–21.
69. See above, pp. 176–180.
70. See above, ibid.
71. For an explanation of the significance of different rates of consumption by businessmen and capitalists relative to their capitals in connection with the determination of the average rate of profit and interest in the economic system, see below, pp. 737–739. 72. See above, pp. 176–180.
73. For an explanation of the connection between capital intensiveness and receptiveness to technological progress, see below, pp. 631–632. See also p. 824.
74. See below, pp. 622–629.
75. See below, pp. 632–634.
76. See below, pp. 618–642.
77. Cf. The Communist Manifesto, translated by Samuel Moore, chap. 1 (1844; reprint ed. (Chicago: Henry Regnery Company, Gateway, 1954), pp. 37–38. Henceforth, page references to the Gateway Edition will appear in brackets.
78. Cf. ibid., chap. 2 [pp. 56–57].
79. John Kenneth Galbraith, The New Industrial State, 2d ed. rev. (New York: New American Library, 1971), p. 141. 80. For elaboration, see below, pp. 580–594.
81. See above, pp. 275–278 and 288–290.
82. See above, pp. 267–282 passim.
83. Cf. Oskar Lange and Fred M. Taylor, On the Economic Theory of Socialism (Minneapolis: University of Minnesota Press, 1938), pp. 102–103.
84. I am indebted for this identification to my wife, Dr. Edith Packer.
85. Cf. Ludwig von Mises, Human Action, pp. 41–44; Ayn Rand, Atlas Shrugged (New York: Random House, 1957), pp. 1012–1013; idem, Capitalism: The Unknown Ideal (New York: New American Library, 1965) pp. 7, 12–13.
86. Cf. Ayn Rand, “The Ethics of Emergencies” in The Virtue of Selfishness (New York: New American Library, 1964), pp. 46–56.
87. See above, pp. 300–303.
88. The specific works that need to be disseminated are, above all, those of Ludwig von Mises and, though a philosopher rather than an economist, Ayn Rand. These, of course, should be reinforced by the writings of the classical economists and of Austrian economists other than von Mises.
89. On the doctrine of external benefits and external costs, see above, pp. 96–98.
90. Samuelson and Nordhaus, p. 649.
91. Ibid.
92. Ibid.
93. Ibid.
94. This latter hypothesis is supported by the profound mental weakness displayed above all by the supporters of environmentalism. See above, pp. 107–112. See also above, pp. 332–336. 95. See above, pp. 42–45 and 59–61.
96. See below, pp. 580–594 passim and 938–942. 97. See, above, pp. 196–199 and, below, pp. 382–384. See also George Reisman, Capitalism: The Cure for Racism, pamphlet (New York: The Intellectual Activist, 1982); reprinted (Laguna Hills, Calif.: The Jefferson School of Philosophy, Economics, and Psychology, 1992).
98. See above, p. 144.
99. Cf. von Mises, Human Action, pp. 273–276; Socialism, pp. 319–321.
100. For a confirmation of the above analysis in terms of the operation of Say’s Law, see below, 561–569.
101. Cf. von Mises, Human Action, pp. 159–164; Socialism, pp. 294–295.
102. Cf. Ayn Rand, Atlas Shrugged, pp. 1063–1065. 103. See again the last two notes to von Mises and the preceding reference to Ayn Rand.
104. See below, pp. 559–594.
105. Again, see above, pp. 42–45 and 59–61.
106. Cf. von Mises, Human Action, pp. 159–161. 107. Cf. Ayn Rand, Atlas Shrugged, pp. 1064–1065. 108. Cf. von Mises, Socialism, pp. 315–319.
109. Cf. Adam Smith, The Wealth of Nations (London, 1776), bk. 1, chap. 3; reprint of Cannan ed. (Chicago: University of Chicago Press, 2 vols. in 1, 1976), 1:17–25. See also Frederic Bastiat, Economic Harmonies, trans. W. Hayden Boyers (New York: D. Van Nostrand & Co., 1964), pp. 561–567.
110. It is important to recall that the extension of the division of labor in this way requires the availability of more capital. There must be the appropriate additional supplies of plant and equipment and materials, as well as the larger number of workers. See above, p. 141.
111. Cf. below, pp. 542–580 passim.
112. Cf. von Mises, Human Action, p. 128; Ayn Rand, Atlas Shrugged, pp. 1064–1065.
113. See above, pp. 123–125.
114. For an account of how more rapid technological progress contributes to capital accumulation, see below, pp. 629–631. 115. See above, pp. 358–362 and 313–316.
116. On these points, see below, pp. 622–629 and 709.
117. For a discussion of the causes of capital accumulation and how it is promoted by anything which increases the efficiency of production, see below, pp. 634–636.
118. Cf. Income and Wealth of the United States, p. 82. (Raymond Goldsmith indicates a significantly lower range. See ibid., p. 297.) In contrast with the previous estimates cited of the ratio of capital to national income in that period, which estimates included the value of land in capital, capital is here presented simply as the value of structures and producers’ equipment, exclusive even of the value of business inventories. However, it is doubtful that the inclusion of business inventories would make the capital-output ratio significantly larger. 119. The use of these percentages is based on the fact that two-thirds of an increase of 1 1 ⁄ 2 percent of the population as a whole is 1 percent of the population as a whole and 2 percent of half the population. Likewise, one-third of the 1 1 ⁄ 2 percent increase in the population as a whole is 1 ⁄ 2 percent of the population as a whole and 1 percent of half the population. 120. On this essential point, see below, pp. 634–636.
121. See below, ibid.
122. I deal with the vital subjects of unemployment and the determinants of the average worker’s standard of living—his real wages—throughout Chapters 13 and 14, below. See also pp. 938–942.
123. Actually, of course, the quantity of gold that has been mined is probably as small compared with the quantity that remains to be mined as is the quantity of most other minerals that has been mined compared with the quantity of them that remains to be mined. As I have shown, in reality, the useable, accessible supply of everything, even including gold, can be indefinitely increased by virtue of man enlarging his knowledge of and physical power over the world and the universe. See above, pp. 63–66.
124. See below, pp. 503–506 and 517–526.
Capitalism: A Treatise on Economics
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