The Market Economy vs. the Welfare State; P. L. Greaves, Jr.

Percy L. Greaves, Jr. The Market Economy VS. The Welfare State THE HISTORYof the 20th century has been the story of the growth of statism-the ever-increasing con trol of governments over the lives, actions, earnings, inheritances and other accumulations of their in habitants. The underlying principle, seldom questioned, has been that those elected or appointed to official government positions are ((experts." They are thought to know what is best for their trusting incompetent charges, even though, in some cases, the same incompetents are consid ered intelligent enough to choose their supposedly wiser rulers. The moti vating precept of this century has been the basic Marxian fallacy that in a free market society the rich grow richer and fewer in number while the poor grow ever poorer and larger in number. This in 32 turn is based on the fallacy that employers set wage rates and pro ducers set prices. It is thus almo~t universally believed that in a free society workers and consumers are totally at the mercy of rapacious business interests.

This ill-founded, but popular, con cept of an unhampered economy has stimulated a demand for laws that limit the freedom of business or ganizations and confiscate the major part of their earnings. Such laws are expected to correct what are consid ered the undesired trends of a mar ket system. By the use of democratic means, laws are passed in attempts to thwart the ultimate disaster of a plutocratic oligarchy. These laws seize more and more of the wealth of the successful minority, while al locating much of the appropriated THE MARKET ECONOMY VS. THE WELFARE STATE 33 funds to the envious and less pro ductive majority, with the political brokers retaining an ever-in creasing share for themselves and their friends. The principles of a limited government have been superseded by the almost universal acceptance of the idea that every thing must now be decided by a majority vote, even as to who should pay for the birth or non-birth of each baby and how each person's earn ings must be shared among the elec torate.

This process of socialistic leveling has become so widely accepted that when a co-chairman of a Tenants for Poli tical Action group was recently charged with using political influ ence to force landlords to subsidize tenants, she replied, ~~I see nothing wrong with having political pres sure. That's the name of the game and that's what this country is all about." Stealing, i.e., taking the property of others by force, is now considered legitimate if it is done by the politi cal process of majority vote. Such shortsighted avarice and economic ignorance are widespread. Morality and sound economics are no longer considered reasonable guides for public actions. The result has been that politicians promise voters more than they can deliver. Further sei zures of the earnings of the high producers of wealth no longer satisfy the demands of those who believe Professor Greaves is a free lance economist, lecturer, and author of numerous arti cles as well as the books, Un derstanding the Dollar Crisis and Mises Made Easier (A Glossary for Mises' Human Action.) This article is reprinted by permission from his Editor's Introduction to the volume, On the Manipulation of Money and Credit by Ludwig von Mises, translated by Bet tina Bien Greaves, 352 pages, $14.00. This book, published by Free Market Books, P. O.

Box 298, Dobbs Ferry, N.Y. 10522, is also available from The Foundation for Economic Education, Irvington-on-Hudson, N.Y. 10533. they are legally and morally enti tled to more than consumers will voluntarily pay for their contribu tions to society. So, for years now, politicians have sponsored inflation, creating by law or regulation, more and more additional monetary units with which to pay the bills. One of the effects of this inflation has been ever higher prices, a fact that alarms the public. Defining Inflation In order to relieve themselves of the blame, the politicians and pres sure groups who promote our in flationary processes have succeeded 34 THE FREEMAN January in changing the popular definition of inflation. Historically, periods of in flation have always been considered periods of rapid increases in the quantity of money. This was so in all reports of both the American and French Revolutions. It was also so during the post World War I infla tions which reached their apex in Germany in 1923. However, those who favor the deceptive processes of inflation, as a means for transfer ring wealth from those who earn it to those they consider more worthy of it, have changed this definition of inflation. Inflation now means to almost everyone a rise in prices.

Unfortunately, such higher prices are only one of the inevitable conse quences of an increased quantity of money bidding for available goods and services. This shift in the popular defini tion of inflation tends to hide from most people the obvious way to end infla tion. When inflation is defined as ~~higher prices," most people con clude that it is businessmen who raise prices. Therefore, businessmen must be responsible for inflation. The way to end inflation is then thought to be the control or legal limitation of price rises. It is true that businessmen raise prices. They would like to raise their prices with every sale. However, it would do business organizations no good to raise their prices, if there were not some customers who could and would pay the higher prices they ask. If no one bought their wares at the higher prices, those prices would soon come tumbling down. The higher prices that we have been seeing .in recent decades have been made possible solely be cause governments have made available increasing quantities of money to politically favored custom ers who then can and do pay the higher prices. This means that those who do not share in the political allocation of the newly created money find their purchasing power grea tly diminished. If they believe what they read in the papers or see on television they blame busi nessmen rather than politicians for the higher prices which reduce the buying power of their earnings.

When inflation is defined as an increase in the quantity of money, the remedy becomes obvious. Busi nessmen cannot create money. Under present-day laws, only gov ernments and their agencies can. To stop inflation, all that needs be done is for governments to stop authoriz ing any further increases in the quantity of money. Misdirection of the Economy Unfortunately, higher prices are not the most important conse quence of the political creation of new monetary units. These mone tary units are endowed with full legal tender power. This means that, 1979 THE MARKET ECONOMY VS. THE WELFARE STATE 35 by law, they have the same purchas ing power as all previously issued monetary units of the same name. New monetary units cannot be created by governments or anyone else without someone getting them and spending them first. Those who first receive these newly created monetary units are able to go out on the market and buy things they could not otherwise buy. They can and do buy things which other peo ple would have bought with the money they had earned or saved.

Thus every political creation of new money transfers wealth from work ers and savers to those who are spending in the market place newly created monetary units which no one has earned. As a result, the production facilities of the nation are gradually redirected with an ever larger per centage devoted to the satisfaction of those spending the newly created money. Those catering to the spend ers of the newly created money find their sales going up and the politi cians proudly point to the activity they have stimulated. On the other hand, those who can only spend what they have earned or saved find that they must reduce their pur chases and their living standards. Why Inflation Accelerates As prices rise with the increased quantity of money, more and more new monetary units must be created to maintain the business activity dependent upon the creation of the new monetary units. As time passes, more and more production facilities are directed toward satisfying this demand which can only be main tained by increasing the quantity of money at an ever-increasing rate.

This, of course, tends to lower the purchasing power of the monetary unit. Sooner or later, such increases in the quantity of money must come to an end, either by a deliberate action stopping the creation of more monetary units, or by continuing until the purchasing power of that monetary unit approaches zero. When inflations come to an end, as they must, those who have been producing and catering to those spending the newly created mone tary units lose their customers. They must redirect their activities toward satisfying the only consumers left, those who have acceptable funds as a result of their contributions to the market. This redirection of the economy, popularly known as a re cession or a depression, is actually a correction of the prior misdirection resulting from the inflation. It is a very painful period, particularly for two groups: (1) those who have been producing for the spenders of the newly created money, and (2) those who have become accustomed to spending money they have not earned. The suffering cannot be completely avoided, but it can be 36 THE FREEMAN January reduced to a minimum by permit ting free market prices, wage rates and interest rates to direct the econ omy to the most efficient satisfac tion of those who contribute to the economy. All political attempts to control prices, hold wage rates up and/or hold interest rates down interfere with the indicators that direct business enterprises toward the most efficient use of available capital and labor.

Consumers Are Sovereign The simple facts stated above are seldom understood, because so few people have ever read or heard them. Rare are the schools, colleges, politicians or mass media who pro mulgate the simple economic. fact that, in a truly free market society, it is the consumers who are sovereign. It is the consumers who determine the limits on the wage rates that may be paid and the interest rates that are profitable for both borrowers and lenders, as well as the ultimate prices of consumers goods. Consequently, there are very few people today who realize that when government serves only as a keeper of the peace, that is, as a protector of lives and property and a punisher of those who resort to force or fraud, it is the consumers who, by their voluntary purchases and re fusals to purchase, determine the in -comes of all those who contribute to the market place. It is consumers who make some actresses, football stars ·and businessmen rich and it is consumers who retire to the sidelines those who do not satisfy them.

Whenever government interferes with the sovereignty of the consum ers, it always helps some at the expense of others. It discourages the production of wealth, not only by reducing the incentives of producers but also by subsidizing the human tendency to indolence and para sitism. The unhampered market, where everyone, protected by gov ernment, is acting voluntarily, op erates according to the Golden Rule. The more one contributes to the so ciety, the more he or she receives in return. This is an incentive for every one to contribute more of what con sumers are buying as this is the most efficient means for increasing their own incomes. A Society Divided When society forsakes the free market and the Golden Rule for the welfare state principles of transfer payments and special privileges for the politically powerful, it divides society into factions, each of which is struggling to get what that group considers its fair share of the wealth of others. No legislative body made up of human beings can ever divide available wealth in such a way as to satisfy every element of the popula tion. So as long as funds are taken from some to give to others, there 1979 THE MARKET ECONOMY VS. THE WELFARE STATE 37 will be perpetual political struggles among the various pressure groups, each striving to get more for their members. Such political efforts must inevitably reduce the productivity of that society. As a consequence, the living standards of all will fall.

While everyone suffers, those who are hurt most are the lowest income producers. More and more people will devote their efforts to preserv ing their wealth or obtaining more by political means, while fewer and fewer will save, invest and produce for the market place. There will be a growing number who will resort to violence in order to survive under the existing conditions. Only a trend toward a free and unhampered mar ket can prevent this disastrous con sequence. As man and the world exist, every human being has unlimited wants, while the goods and services avail able for satisfying those wants are always limited. The economic prob lem is one of determining how we can best satisfy more and more human wants by ever increasing the quan ti ties of goods and services available. No political intervention can improve upon the unhampered market processes which allocate available limited quantities to those consumers able and willing to pay the highest prices. The ability of people to pay such market prices arises from the prior valuation con sumers have placed upon their indi vidual contributions. Thus consum ers, by their bidding in the market place, set all prices. This competi tion of consumers also sets the height of the income of each worker and investor. Consumers thus estab lish each worker's wage rates and the amounts that can be paid for raw materials and borrowed capital.

In such an unhampered market, businessmen are merely middlemen competing for the favors of consum ers, whose purchases determine those who can expand and those who must contract their activities, in cluding their work forces. No busi ness can long pay higher wage rates or raw material prices than those that can be paid with what they receive from their customers. Nor can any employer long make high profits by paying lower wage rates than those that customers will vol untarily repay. Those who attempt to do so soon find other employers will bid their workers away in their attempt to attract more customers with lower prices which squeeze profits. So, in the long run, it is always the consumers who deter mine the shares of total production allocated to each participant, be he investor, employer or employee. ® Yale Brazen THE ATTACK ON CONCENTRATION~ ~ ONCE we gave high regard to those who created great enterprises by de signing desirable products, produc ing them at low cost, and offering them at such attractive prices that they won a large body of customers.