5th Lecture: Capitalism and Human Progress

I want to start tonight with the relation between economics and human practical life, and the consequences of the development of the theory of economics.

Kipling said, “East is East, and West is West, and never the twain shall meet.” Differences between the East and the West have certainly existed for thousands of years. The East never developed the idea of scientific research—the search for knowledge and truth for its own sake—which the Greeks gave to civilization. A second achievement of the Greeks, which has always been foreign to the East, is the idea of political liberty of government—of political responsibility of the individual citizen. These ideas, widely accepted in the West, never found counterparts in the East. Even today, only a small group of Eastern intellectuals follow these ideas. Nevertheless, the world was more or less one world, in spite of these ideas, until about 250 years ago.

Social relations and living conditions were more or less the same all over the world until 250 years ago. The average standard of living varied little between East and West. Modern methods of production and standards of consumption, technological knowledge, and equality under the law were unknown. Today we would consider most unsatisfactory the conditions that prevailed then. Aside from its political meaning, Wendell Willkie’s word, “One World” was more applicable then than now.

The general improvement in political tranquility, which had reached a certain degree about 250 years ago, contributed to an increase in population. This additional population was too much for the social system of those ages. The countries where political conditions were most favorable became infested with robbers, thieves, and murderers—people for whom there was no place under the existing economic situation.

Then something occurred in Europe—first in western Europe, Great Britain, and the Netherlands—which spread over the rest of the Western world. It was this movement that led to considerable differences between the East and the West. This movement is called by historians the Industrial Revolution. Radical changes were brought about by preceding radical intellectual changes, that is, by the intellectual movement that produced economics as an autonomous branch of human knowledge. These radical changes multiplied population figures and changed the face of the world.

Some of these ideas had been developing during earlier generations. For instance, Gresham’s law, the “law” of Sir Thomas Gresham [1519?—1579] which points out that a legally overvalued (bad) money ends up driving a legally undervalued (good) money out of circulation. This regularity in the field of money had been noted earlier by the Greek comic dramatist Aristophanes [448?–?380 B.C.] in The Frogs and by the French bishop Nicolas Oresme [1320?–1382]. However, there had been no realization that similar regularity existed also in relation to the concatenation and sequence of phenomena in the marketplace. The recognition of regularity in the broader field of market activities was an achievement of the human mind, a mental accomplishment. As a result of this new knowledge of regularity in the marketplace, people began to look on all productive activities from a different viewpoint.

The question has been raised as to why the ancient Greeks, for example, whose knowledge of science was so far advanced, did not make practical use of their discoveries. It has been said that they had the scientific knowledge to develop railroads, but they didn’t. Why not? Their progress was handicapped by certain ideas. One idea that held them back, an idea which still prevails today, is that of “technological unemployment,” the idea that improved methods of production lead to unemployment. Because of this, it was considered a crime to deviate from traditional methods of production, no matter how unsatisfactory the old methods were. The idea did not occur to them that reducing the amount of labor required for the production of a certain amount of goods or items would make possible the freeing up of materials and labor for the production of other items.

The second idea that handicapped the Greeks’ development was that they looked on a business deal as one-sided—the seller profits, the buyer loses. This attitude was especially important in its effect on international trade. This old superstition that foreign trade will create unemployment still prevails today. Many people still believe that the advantage to be derived from foreign trade comes from exporting, not from importing. If this were the case, it would mean that the advantage to be derived from buying a loaf of bread would come from “exporting” the money, from spending the money to obtain the bread, and not from getting the bread itself.

Because it was considered a crime to depart from traditional methods of production and trade—and any changes are necessarily always innovations—we are apt to ignore another development, a new idea heretofore unknown. We are blind to the great changes that took place, not only in production, but also in consumption. We see the mass production, but fail to see that this mass production was produced for the satisfaction of the needs of the masses. The guilds and handicraftsmen of the Middle Ages had produced for the well-to-do. Before the Industrial Revolution, and in the early days of the Industrial Revolution, there was a great trade in secondhand clothing. Clothes that were made to order for the well-to-do were bought secondhand by the poor. This trade in secondhand clothing, a really important part of the economy, disappeared as a result of the development of modern methods of production.

The Industrial Revolution started by producing for the needs of the poor, of the masses. Mass production started by producing the cheapest and the poorest things. The cotton industry was one of the early developments of the Industrial Revolution. Cotton was a poor man’s material—no member of the upper or middle classes wanted cotton. The quality of mass production improved only when the conditions of the masses improved to the extent that they also became biased against cheap products. Not so long ago no lady or gentlemen would have bought factory-made shoes, or ready-made clothes. Not until 100 or 120 years ago could one even buy a ready-made shirt in Germany All these industries have developed during the last 100 to 150 years.

As a consequence of the Industrial Revolution in the West, an enormous gulf developed, a gulf which today separates the West from the East. The East still clings to the idea that once hindered the development of capital in the Western world, the idea that one man’s wealth is the cause of the poverty of others. The concept of the “underdeveloped nations” has arisen and the idea that it is necessary to give them technological advice, i.e., “know-how.” This is really ridiculous! There are lots of Indians, Chinese, and students from other countries in our universities who are very capable persons and who are acquiring know-how. And even if they weren’t, many Americans would be willing to go to those countries to work and to give advice. What they really need is the capital. What is lacking is capitalism.

What is the use of economics, of theoretical economic discussions? All the achievements of the physical and chemical sciences would have remained a “dead letter,” without any significance for real life if the ideas spread by the economists of the eighteenth century about the division of labor, freedom of exchange, and so on, had not paved the way for the practical application of those scientific discoveries. And yet some people today still look askance at innovations. For instance, a German professor, who was considered an eminent economic historian and was an honorary member of many societies, said in one of his last books that it was a very serious drawback that our social institutions permitted everyone the opportunity of producing an invention to put it into practical use. He believed that no harm could come from putting inventions in museums, but unless they were military inventions, that is where they should remain. (This was the basis of the Führerprinzip—the idea that the all-knowing Führer should give the orders and that the Führer receives his orders directly from God, who is the Führer of the Universe.) Scientific advance may be hindered to a certain extent but, by and large, it is impossible to stop it completely.

Some people consider scientific progress “material.” To aim at nothing but improvement of the material or external conditions of life—better food, clothing, homes, and so forth—they called “materialism.” They said people who have such goals care only for the “mean” necessities of daily life. On the other hand, they think they are ethical and that they display idealism by disparaging such material improvements. But let us see.

One of the consequences of the Industrial Revolution was that the world is now populated by many more people than could have been supported before. Each individual in the capitalist countries also lives at a much higher standard of living than before. This means that the average length of life is much longer. The growth in population was not achieved by an increase in the birth rate, but by a decrease in the mortality rate, especially of infants. Queen Anne of England, the last reigning member of the Stuarts, had seventeen children, but not a single one lived to reach adulthood. This situation had serious significance for England; it created the historical and religious problem of the Protestant succession. As further evidence of the extent of infant mortality, most of the charming children in the Habsburg families that Velasquez painted died in childhood. You may call the improvement of living standards brought about by the Industrial Revolution “materialism.” But from the point of view of the parents, the improved life expectancy of their children may not have seemed merely materialistic.

Engels said people must eat before they can develop philosophical ideas. With this I can agree. The Europeans are now claiming that they are fighting the “Coca-Cola civilization,” but it would be a mistake to say that capitalism has developed nothing but Coca-Cola. Capitalism has certainly led to philosophical and theological improvements also. In the light of the great scientific discoveries of the nineteenth and twentieth centuries, to say that the capitalist economy is the “Coca-Cola civilization” would not seem to be an “unbiased” statement.

Several rights and liberties developed with the Industrial Revolution—policies of economic freedom both in domestic and foreign trade, of sound money and of abstention from government interference. These are policies, not scientific truths; they are policies based on value judgments that arose because of knowledge that had been developed. We must realize the relation between knowledge and values.

It is easier to grasp this distinction in the field of medicine or chemistry. Scientists may establish the fact, for instance, that drug A is a poison, but they do not issue a value judgment on the drug. Pathology and chemistry do not say how a chemical should be used. Their task is accomplished when they determine whether it will, or will not, prolong human life. The decision whether or not to use the poison, and how, must come from somewhere else, not from the chemist or pathologist; that decision must come from a value judgment. If a doctor cannot save the life of both mother and child, a dilemma results: Whose life should be saved? The answer does not come from medical science; it must come from a judgment of value.

In the field of social relations and human conduct, science provides us with existential propositions, statements as to the consequences of certain causes. There is a fundamental difference between such statements of fact and the judgment of value which tells us what alternative is more desirable, more preferable. A value judgment tells us what ought to be from the point of view of those who share the same values.

It would appear that the importance of economics for daily life is small. But that is not true. Actually economic theory is very important. In order to take the proper steps to attain a specific goal, we must first be familiar with the actual state of affairs—the existential situation. But then we need economic knowledge, economic understanding, to make decisions, to act, to make value judgments. To judge the importance of economic knowledge, consider the case of Iran. When she confiscated the property of the Anglo-Iranian Oil Company recently and nationalized the oil industry, she wanted to improve the situation of her people.[1] The question is whether or not the policy she is following will have that effect.

The classical economists introduced the term “the rightly understood interests.” There are various “runs” of different lengths of time. To determine “the rightly understood interests,” one must consider all possibilities because the short-run end is often different from the long-run end. One of the most popular attacks on economics is that economists take only the long run, not the short run, into consideration. But that is not true. Economists simply point out that there is a distinction between the two.

One is apt to prefer short-run interests to interests in the long run, but this doesn’t mean one must consider only the long run. Governments seeking to remedy economic ills by various interventions may not destroy the capitalistic countries in the short run. Some poisons act quickly, others more slowly. Like a slow poison, government interventions may bring about consequences in the long run which are disastrous, even from the point of view of precisely those persons who wanted to resort to these measures.

John Maynard Keynes [1883–1946] said, “In the long run, we are all dead.” This is my only point of agreement with Keynes. Even though this idea is correct, it means no more than does the remark of Madame de Pompadour, mistress to King Louis XV, whose role it was to console the king when his armies were threatened—“There is no reason to worry. ‘Après nous le déluge,’” Fortunately for her, Madame de Pompadour died early. But her successor as Louis XV’s mistress, Madame du Barry, was not so fortunate—she survived the short run but lived to be executed in the long run.

But Keynes’s ideas are unsatisfactory even from his point of view. His credit expansion theories bring about an artificial boom which eventually must turn into a depression and crisis. The unwanted consequences may appear several times during one’s lifetime, not only after one’s death. A man living today may have seen the depressions of 1907, 1921, 1929, 1937, and he may live to see yet another.

Economics merely states that there are both short-run and long-run consequences. One must consider both. Decisions should be made in the light of all knowledge available. Economics doesn’t say, for instance, that free trade is better than protection. Economics merely points out the differences between the consequences of the two. Economics merely states that protection is not a way to improve the general standard of living. But this does not apply to cases in which a protective tariff is advocated for other reasons. For example, when the United States realized the threat to her supply lines on the eve of World War II, she could have introduced an import duty on natural rubber and subsidized synthetic rubber manufacturers. But this would then have been considered a “defense” expenditure, not a choice based on economics, and it would have been judged from the point of view of defense.

What the economist provides is not judgments of value, which no science may issue, but the information one needs to make value judgments and decisions. The valuation, the judgment, rests with the individual, with the people, and with the voters.

The idea of the neutrality of science has been criticized, especially by those who wish to elevate certain judgments of value to a higher degree, to the dignity of a rule which everybody must obey. In Germany, especially after the War of 1870, the German professors who taught the economic aspects of political science considered it regrettable that there should be tolerance, understanding, peace, and good will among the nations.

The idea of the neutrality of science (Wertfreiheit—freedom from value) is the most characteristic development of science. Because economic science is neutral, this does not mean that it doesn’t deal with practical problems; it only means that it doesn’t explain the meaning of human action. But it is precisely because of its neutrality that people with different evaluations are able to live peaceably together. This is one of the most important ideas that came out of the Industrial Revolution and the development of modern science. It was an idea that was absolutely foreign to the most eminent minds of the sixteenth century. Very few persons then could have understood that people with different religions, values, and ideas, could live together in the same city, the same country, or the same world.

The peaceful exchange of ideas and the peaceful coexistence of people with various ideas were in triumphal progress at the beginning of the nineteenth century. There was then a development toward freedom and peace, especially toward intellectual freedom for ideas, toward the elimination of government cruelty in punishment and of government torture in criminal procedure, and also toward an improvement in the standard of living. People came to believe that this development toward freedom and peace was inevitable. In the nineteenth century they were fully convinced that nothing could stop this trend toward more freedom. The Manchester Chamber of Commerce in Great Britain even declared in the 1820s that the age of war was gone forever. That was the bloodless economic theory. There need be no war if there was free trade and representative government. But these same people failed to realize that a reaction had already started. A movement was developing in the opposite direction.

Among the opponents of the idea of freedom was Auguste Comte. It is this reaction against freedom that splits the world into two camps today. Paradoxically, those who support the groups that favor imprisonment, persecution for deviations, and so on, are called “progressives.”

The “ethical economists” who opposed the “materialism” of the bloodless economic theory of the British, became the predecessors of what was later called Nazism. The Nazis, imitating the Marxists, would tolerate no opposition. A good German could have only German ideas; everybody should be forced by the laws of nature to think according to the “natural” interests of his race or nation. The Nazis had difficulty explaining such persons as Beethoven, Goethe, Kant, and so on, all Germans, but Germans who had un-German ideas. Now, in view of later events, we can ask whether or not these Nazi ideas, imposed on the German people ostensibly for their own good, were really so useful to them in the long run.

Some modern communists allege that they anticipated the success of Nazism. But they did not! On the contrary, not a single one foresaw it. In Germany at the end of the 1920s and the beginning of the 1930s, the Nazi party first made its appearance. Neutral observers said, “It is true; they are getting some votes, but it is impossible for Germany to go Nazi. Look at the statistics. A majority of the Germans are workers and Marxists. They will never give their votes to the Nazis.” This shows that one cannot anticipate history. One can make prognostications, but whether or not these prognostications will be correct is questionable.

A group with special interests is likely to be in the minority. Cattlemen, dairy farmers, cotton growers, wheat farmers, and so on, are all minorities with special interests. But if government intervenes, alliances may be formed among such groups, even though their interests are not identical, even though they may be in opposition to one another. The same situation exists with respect to labor—garment workers, railroad men, coal miners, and so on. In political life, the thing we have to face is not pressure groups formed because of natural common interests but pressure groups made up of government-promoted alliances of several minorities.

Privileges are of benefit only when they are granted to a minority. Under certain circumstances minorities may secure certain privileges for a time but eventually the advantages will deteriorate, especially for farmers when people begin to realize the various consequences. It is not difficult to convince the various minority groups that they are losing more on the one side than they are receiving on the other, so such alliances can be only temporary. In a representative government a minority can never secure for itself a privilege except in alliance with other groups. Only when people have true knowledge, will they reap the benefits.

Before the Nazis, Germany was called the nation of the poets and thinkers. The Nazis developed a theory of all-round protection, protection for every kind of national organization and for all national production. They did not realize that if you protect everybody to the same degree everybody wins exactly as much as a consumer as he loses on the other end as a producer. If this happened in Germany, the land of poets and thinkers, what can you expect of other countries? The consequences lead to the desire for another system, so the people vote for a government that will protect them from their own ignorance.

In the long run, every country must be ruled in agreement with the ideas of the majority. If the country’s government is against the people’s ideas, then sooner or later the majority will cause a revolutionary upheaval and eliminate the leaders. In “First Principles of Government,” an essay by David Hume, he states that in the long run it is opinion that makes government powerful. For this reason, representative government is good; it reflects opinion. And the next election removes the disagreement.

If the majority is dominated by bad ideas, nothing can be done about it except to try to change the bad ideas. This is the business of writers, authors, economists, and so on. Unfortunately there are many bad writers, bad authors, and bad economists. Still, there is no substitute for trying to substitute good ideas for bad ideas. In the field of state, government, and economic organizations, the consequences of a policy appear only after a very long time and when they appear they are only historical facts. Since it is difficult to ascribe them to one definite cause, changing ideas may be very difficult. Still the only way to deal with bad ideas is to try to substitute good ones.

The social philosophers and the economists of the eighteenth and early nineteenth centuries especially were imbued with the idea that progress toward better conditions and toward more freedom would go on forever. They did not anticipate the events of our age.

All we can know about the future is through the methods of historical understanding and this does not give us certainty. However, the fact that the future is uncertain and that we are free acting individuals are one and the same fact. If the future were known, then we wouldn’t be men, we wouldn’t be free and we wouldn’t be able to make decisions and to act. We would only be ants in an anthill. There are pressures in the present world which are trying to convert men into ants, but I don’t think these tendencies will succeed!

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[1] [On April 30, 1951, the Iranian Parliament under Premier Mohammed Mossadegh enacted legislation, retroactive to March 20, 1951, expropriating the property of the Anglo-Iranian Oil Company and nationalizing the industry “[f]or the happiness and prosperity of the Iranian nation and for the purpose of securing world peace.”—Ed.]