Can We Keep Free Enterprise; H. Hazlitt

What, then, is wrong? I venture to suggest that no defense of capHenry Hazlitt is well known to Freeman readers as economist, author, columnist, editor, lecturer, and practitioner of freedom. 339 340 THE FREEMAN June italism, no matter how brilliant or thorough, will ever be generally accepted as definitive. The attacks on capitalism stem from at least five main impulses or propensities, all of which will probably be with us permanently, because they seem to be inherent in our nature. They are: (1) genuine compassion at the sight of individual misfortune; (2) impatience for a cure; (3) envy; (4) the propensity to think only of the intended or immediate results of any proposed govern ment intervention and to overlook the secondary or long-term re sults; and (5) the propensity to compare any actual state of af fairs, and its inevitable defects, with some hypothetical ideal. These five drives or tendencies blend and overlap. Let us look at them .in order, beginning with compassion. Most of us, at the sight of extreme poverty, are moved to want to do something to relieve it - or to get others to re lieve it. And we are so impatient to see the poverty relieved as soon as possible that, no matter how forbidding the dimensions of the problem, we are tempted to think it will yield to some simple, di rect, and easy solution.

The Role of Envy Let us look now at the role of envy. Few of us are completely free from it. It seems to be part of man's nature never to be satisfied as long as he sees other people better off than himself. Few of us, moreover, are willing to accept the better fortune of others as the re sult of greater effort or gifts on their part. Weare more likely to attribute it at best to "luck" if not to "the system." In any case, the pressure to pull down the rich seems stronger and more persis tent in most democracies than the prompting to raise the poor. Envy reveals itself daily in po litical speeches and in our laws. It plays a definite role in the popu larity of the graduated income tax, which is firmly established in nearly every country today, though it violates every canon of equity. As J. R. McCulloch put it in the 1830's: "The moment you abandon the cardinal principle of exacting from all individuals the same pro portion of their inc'ome or of their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may not commit."

McCulloch's prediction has been borne out by events. Historically, almost every time there has been a revision of income-tax rates the progression has become steeper. When the graduated income tax was first adopted in the United States in 1913, the top rate was 7 per cent. Some thirty years later it had risen to 91 per cent. In 1973 CAN WE KEEP FREE ENTERPRISE? 341 Great Britain the top rate went from 8:tA, to 971j2 per cent in a similar period. It has been re peatedly demonstrated li that these confiscatory rates yield negligible revenues. The reduction of real in come that they cause is certainly greater than the revenue they yield. In brief, they have hurt even the taxpayers in the lower brackets. Yet envy has played a crucial role in keeping the progressive income tax. The. bulk of the tax payers accept far higher rates of taxation than they would if the rates were uniform; for the tax payers in each tax bracket console themselves with the thought that their wealthier neighbors must be paying a far higher rate. Thus though about two-thirds (65.5 per cent) of the income tax is paid (1969) by those with. adjusted gross incomes of $20,000 or less, there is an almost universal illu 'sion that the real burden of the tax is falling on the very rich.

But perhaps the greatest reason why governments. again and again abandon the principles of free en terprise is mere shortsightedness. They attempt to cure some sup posed economic evil directly by some simple measure, and com pletely fail to foresee or even to ask what the secondary or long term consequences of that mea sure will be. Tampering with Money From time immemorial, when ever governments have felt that their country was insufficiently wealthy, or when trade was stag nant or unemployment rife, the' 'theory has arisen that the funda mental trouble was a "shortage of money." After the invention of the printing press, when a govern ment could stamp a slip of paper with any denomination or issue notes without limit, any imagin able increase in the money supply became possible. What was not understood was that any stimulative effect was temporary, and purchased at ex cessi ve cost. If the boom was ob tained by an overexpansion of bank credit, it was bound to be followed by a recession or crisis when the new credit was paid off.

If the boom was obtained by print ing more government fiat money, it temporarily made some people richer only at the cost of making other people (in real terms) poorer. When the supply of money is in creased the purchasing power of each unit must correspondingly fall. In the long run, nothing whatever is gained by increasing the issuance of paper money. Prices of goods tend, other things equal, to rise proportionately with the increase in money supply. If the stock of money is doubled, it can in the long run purchase no 342 THE FREEMAN June more goods and services than the smaller stock of money would have done. And yet the government of nearly every country in the world today is busily increasing the is suance of paper money, partly if not entirely because of its belief that it is "relieving the shortage of money" and "promoting faster economic growth." This illusion is intensified by the habit of count ing the currency unit as if its purchasing power were constant.

In 1971 there was a great out burst of hurrahs because the GNP (gross national product) had at last surpassed the magic figure of a trillion dollars. (It reached $1,046 billion.) It was forgotten that if the putative GNP of 1971 had been stated in terms of dol lars at their purchasing power in 1958 this 1971 GNP would have come to only $740 billion, and if stated in terms of the dollar's pur chasing power in 1939 would have come to only $320 billion. Yet monetary expansion is ev erywhere today - in every coun try and in the International Mon etary Fund with its SDR's - the official policy. Its inevitable effect is rising prices. But rising prices are not popular. Therefore gov ernments forbid prices to rise. And this price control has the enormous political advantage of deflecting attention away from the government's own responsibility for creating inflation, and by im plication puts the blame for rising prices on lhe greed of producers and sellers.

Price Control The record of price controls goes as far back as human his tory. They were imposed by the Pharaohs of ancient Egypt. They were decreed by Hammurabi, king of Babylon, in the eighteenth century B. C. They were tried in ancient Athens. In 301 A. D., the Roman Em peror Diocletian issued his fa mous edict fixing prices for near ly eight hundred different items, and punishing violation with death. Out of fear, nothing was offered for sale and the scarcity grew far worse. After a dozen years and many executions, the law was repealed. In Britain, Henry III tried to regulate the price of wheat and bread in 1202. Antwerp enacted price-fixing in 1585, a measure which some historians believe brought about its downfall. Price fixing laws enforced by the guillo tine were also imposed during the French Revolution, though the soaring prices were caused by the revolutionary government's own policy in issuing enormous amounts of paper currency.

Yet from all this dismal his1973 CAN WE KEEP FREE ENTERPRISE? 343 tory the governments of today have learned absolutely nothing. They continue to overissue paper money to stimulate employment and "economic growth"; and then they vainly try to prevent the in evitable soaring prices with ukas es ordering everybody to hold prices down. Harmful Intervention But though price-fixing laws are always futile, this does not mean that they are harmless. They can do immensely more economic damage than the inflation itself. They are harmful in proportion as the legal price-ceilings are be low what unhampered market prices would be, in proportion to the length of time the price con troIs remain in effect, and in pro portion to the strictness with which they are enforced. For if the legal price for any commodity, whether it is bread or shoes, is held by edict substan tially below what the free market price would be, the low fixed price must overencourage the demand for it, discourage its production, and bring about a shortage. The profit margin in making or sell ing it will be too small as com pared with the profit margin in prod ucing or selling something else.

In addition to causing scarci ties of some commodities, and bottlenecks in output, price-control must eventually distort and unbal ance the whole structure of pro duction. For not only the absolute quantities, but the proportions in which the tens of thousands of different goods and services are produced, are determined in a free market by the relative supply and demand, the relative money prices, and the relative costs of produc tion of commodities A, B, C, and N. Market prices have work to do. They are signals to both producers and consumers. They tell where the shortages and surpluses are. They tell which commodities are going to be more profitable to pro duce and which less. To remove or destroy or forbid these signals must discoordinate and discourage production. Selective Controls - No Stopping Place General price controls are com paratively rare. Governments more often prefer to put a ceiling on one particular price. A favorite scapegoat since World War I has been the rent of apartments and houses.

Rent controls, once imposed, are sometimes continued for a generation or more. When they are imposed, as they nearly always are, in a period of inflation, the frozen rents year by year become less and less realistic. The long344 THE FREEMAN June term effect is that the landlords have neither the incentive nor the funds to keep the rental apart ments .or houses in decent repair, let alone to improve them. Losses often force owners to abandon their properties entirely. Private builders, fearing the same fate, hesitate to erect new rental hous ing. Slums proliferate, a short age of housing develops, and the majority of tenants, in whose sup posed interest the rent control was imposed in the first place, become worse off than ever. Perhaps the oldest and most widespread form of price control in the world is control of interest rates. In ancient China, India, and Rome, and nearly everywhere throughout the Middle Ages, all interest was called "usury", and prohibited altogether. This made economic progress all but impos sible. Later, the taking of interest was permitted, but fixed legal ceilings were imposed. These held back economic progress but did not, like total prohibition, prevent it entirely.

Yet political hostility to higher than-customary interest rates nev er ceases. Today, bureaucrats com bat such "exorbitant" rates more often by denunciation than by edict. The favorite government method today for keeping interest rates down is to have the mone tary managers flood the market with new loanable funds. This may succeed for a time, but the long-run effect of overissuance of money and credit is to arouse fears among businessmen that in flation and rising prices will con tinue.So lenders, to protect them selves against an expected fall in the future purchasing power of their dollars, add a "price premi um". This makes the gross market rate of interest higher than ever. The propensity of politicians to learn nothing about economics is illustrated once again in the laws governing foreign trade. The classical economists of the eigh teenth century utterly demolished the arguments for protectionism.

They showed that the long-run effect of protecti ve tariff sand other barriers could only be to make production more inefficient, to make consumers pay more and to slow down economic progress. Yet protectionism is nearly as rampant as it was before 1776, when The Wealth of Nationswas published. The Conquest of Poverty In the same way, all the popular political measures to reduce or relieve poverty are more distin guished for their age than for their effectiveness. The major effect of minimum wage laws is to create unemploy ment, chiefly among the unskilled 1973 CAN WE KEEP FREE ENTERPRISE? 345 workers that the law is designed to help. We cannot make a. work er's services worth a given amount by making it illegal for anyone to offer him less. We merely deprive him of the right to earn the amount that his abilities and op portunities would permit him to earn, while we deprive the com munity of the moderate services he is capable of rendering. We drive him on relief.

And by driving more people on relief by minimum-wage laws on the one hand, while on the other hand enticing more and more peo ple to get on relief by constantly increasing the amounts we offer them, we encourage the runaway growth of relief rolls. Now, as a way to "cure" this growth, re formers come forward to propose a guaranteed annual income or a "negative income tax." The dis tinguishing feature of these hand outs is that they are to be given automatically, without a. means test, and regardless of whether or not the recipient chooses to work. The result could only beenor mously to increase the number of idle, and correspondingly to in crease the tax burden on those who work. We can always have as much unemployment as we are willing to pay for. At bottom, almost every govern ment "anti-poverty" measure in history has consisted of seizing part of the earnings or savings of Peter to support Paul. Its inevit able long-run result is to under mine the' incentives of both Peter and Paul to work or to save.

What is overlooked in aU these government interventions is the miracle of the market - the amaz ing way in which free enterprise maximizes the incentives to pro duction, to work, innovation, ef ficiency, saving, and investment, and graduates both its penalties and rewards with such accuracy as to tend to bring about the pro duction of the tens of thousands of wanted goods and services in the proportions in which they 'are most demanded by consumers. Only free private enterprise, in fact, can solve what economists call this problem of economic cal culation. The Problem of Calculation Socialism is incapable of solv ing the problem. The bureaucratic managers of nationalized indus tries may be conscientious, God fearing men; but as they have no fear of suffering personal losses through error or inefficiency, and no hope of gaining personal prof its through cost-cutting or daring innovation, they are bound, at best, to become safe routineers, and to tolerate a torpid inef ficiency.

But this is the smallest part of 346 THE FREEMAN June the problem. For a complete so cialism would be without the guide of the market, without the guide of money prices or of costs in terms of money. The bureau cratic managers of the socialist economy would not know which iterns they were producing at a social profit and which at a social loss. Nor would they know how much to try to produce of each item or service, or how to mak.e sure that the production of tens of thousands of different commod ities was synchronized or coordi nated. They could, of course (as the"y sometimes have), assign ar bitrary prices to raw materials and to the various finished items. But they would still not know how much or whether the book keeping profits or losses shown re flected real profits or losses. In short, they would be unable to solve the problem of economic calculation.· They would be work ing in the dark.

The directors of a socialist econ omy would have to fix wages arbi trarily, and if these did not draw the right number of competent workers into making the various things the directors wanted pro duced, and in the quantities they wanted them to be produced, they would have to use coercion, forc ibly assign workers to particular jobs, and direct the economy from the center, in a military kind of organization. This militarization and regimentation of work is what, in fact, Cuba, Russia, and Red China have resorted to. Rising Expectations We come finally to the fifth reason that I offered at the begin ning for the chronic hostility to free enterprise. This is the tend ency to compare any actual state of affairs, and its inevitable de fects, with some hypothetical ideal; to compare whatever is with some imagined paradise that might be. In spite of the prodig ious and accelerative advances that a dominantly private enterprise economy has made in the last two "centuries, and even in the last two decades, these advances can always be shown to have fallen short of some imaginable state of affairs that might be even better."

It may be true, for example, tha t money wages in the United States have increased fivefold, and even after all allowance has been made for rising living costs, that real wages have more than doubled in the last generation. But why haven't they tripled? It may be true that the number of the "poor", by the Federal bureau crats' yardstick, fell from 20 per cent of the population in 1962 (when the estimate was first made) to 13 per .cent in 1970. But why should there be any poor peo1973 CAN WE KEEP FREE ENTERPRISE? 347 pIe left at all? It may be true that the employees of the corporations already get seven-eighths of the entire sum available for distribu tion between them and the stock holders. But why don't the work ers get the whole of it? And so on and so on. The very success of the system has encouraged constantly rising expectations and demands - ex pectations and demands that keep racing ahead of what even the best imaginable system could achieve.

The struggle to secure what we now know as capitalism - Le., un hampered markets and private ownership of the means of pro duction - was long and arduous. It has proved an inestimable boon to mankind. Yet if this system is to be saved from willful destruc tion, the task of the incredibly few who seem to understand how and why it works is endless. They cannot afford to rest their case on any defense of free enterprise, or any exposure of socialism or other false remedies, that they or their predecessors may have made in the past. There have been some magnificent defenses over the past two centuries, from Adam Smith to Bastiat, and from Boehm Bawerk to Mises and Hayek. But they are not enough. Every day capitalism faces some new accu sation, or one that parades as new. Eternal Vigilance Truth Needs Repeating In brief, ignorance, shortsight edness, envy, impatience, good in tentions, and a utopian idealism combine to engender an endless barrage of charges against "the system" - which means against free enterprise. And so the return fire, if free enterprise is to be preserved, must also be endless.

I find I have only been apply ing to one particular field an ex hortation that Goethe once applied to all fields of knowledge. In 1828 he wrote in a letter to Eckermann: "The truth must be repeated again and again, because error is constantly being preached round about us. And not only by isolated individuals, but by the majority. In the newspapers and encyclo pedias, in the schools and uni versities' everywhere error is dominant, securely and comfort ably ensconced in public opinion which is on its side." Yet above all in political and economic thought today, the need to keep repeating the truth has assumed an unprecedented ur gency. What is under constant and mounting attack is capitalism - which means free enterprise which means economic freedom which means, in fact, the whole of human freedom. For as Alex ander Hamilton warned: "Power 348 THE FREEMAN June ~over a man's subsistence is power over his will."

What is threatened, in fact, is no less than our present civiliza tion itself; for it is capitalism that has made possible the enorm ous advances not only in provid ing the necessities and amenities of life, but in science, technology, and knowledge of all kinds, upon which that civilization rests. All those who understand this have the duty to explain and de fend the system. And to do so, if necessary, over and over again. This duty does not fall exclu sively on professional economists. It falls on each of us who real izes the untold benefits of free en terpriseand the present threat of its destruction to expound his con victions within the sphere of his own influence, as well as to sup port others who are expounding like convictions. Each of us is as free to practice what he preaches as to preach what he practices. The opportunity is as great as the challenge. ~ IDEAS ON LIBERTY Reprints available in attractive pamphlet: 4 copies $1.00; 25 copies or more, 15 cents each.

The Elite Under Capitalism THERE IS, in a free society, no other means to avoid the evils re sulting from one's fellows' bad judgment than to induce them to alter their ways of life voluntarily. Where there is freedom, this is the task incumhent upon the elite. Men are unequal and the inherent inferiority of the many mani fests itself also in the manner in which they enjoy the affluence capitalism hestows upon them. It would he a hoon for mankind, say many authors, if the common man would spend less time and money for the satisfaction of vulgar appetites and more for higher and nobler gratifications. But should not the distinguished critics rather blame themselves than the masses? Why did they, whom fate and nature have blessed with moral and intellectual eminence, not better succeed in persuading the masses of· inferior people to drop their vulgar tastes and habits? If something is wrong with the behavior of the many, the fault rests no more with the inferi ority of the masses than with the inability or unwillingness of the elite to induce all other people to accept their own higher stand ards of value. The serious crisis of our civilization is caused not only hy the shortcomings of the masses. It is no less the effect of a failure of the elite.

LUDWIG VON MISES r "Permissiveness"orLiberty? ROBERT C. WILSON TRADITIONALLY, there has been one principle with which men have been able to judge lawmaking since the advent of liberalism (in the original sense of that word). It was -the principle enshrined in the American constitution and emu lated, in part or in whole, by all nations seeking to follow Amer ica's revolutionary lead. It was the principle that guided men like Wil liam Graham Sumner, Stephen J. Field and Herbert Spencer in their respecti ve intellectual arenas. It was a principle simultaneously le gal, political and philosophic - the principle of liberty. Although still the best and only real guide to such subsidiary con cepts as justice and legality, lib erty is no longer the yardstick against which law is measured. Other concepts have replaced it: Mr. Wilson is a student of the freedom phi losophy and a freelance writer in Etobicoke, Ontario.