Defender of Capitalism; L. v. Mises

Mises is important because his teachings are necessary to the pre servation of material civilization. As he showed, the base of material civ ilization is the division of labor. Dr. Reisman is Associate Professor of Economics at Pepperdine University in Los Angeles and the author of The Government Against the Economy (Caroline House Publishers, ottawa, Illinois, 1979). This article, to mark the one-hundredth anniver sary of the birth of LudWig von Mises on September 29, 1981, first appeared In The Intellectual Activist, August 15, 1981,and is reprinted here by permission. Without the higher productivity of labor made possible by the division of labor, the great majority of man· kind would simply die of starvation. The existence and successful func tioning of the division of labor, how.. ever, vitally depends on the institu .. tions of a capitalist society-that is, on limited government and eco~ nomic freedom, private ownership of land and all other property, ex change and money, saving and in..

vestment, economic inequality and economic competition, and the profit motive-institutions everywhere under attack for several genera tions. When Mises appeared on the scene, Marxism and the other socialist sects enjoyed a virtual intellectual mo nopoly. Major flaws and inconsisten cies in the writings of Smith and Ri cardo and their followers enabled the socialists to claim classical econom ics as their actual ally. The writings of Jevons and the earlier "Austrian"

LUDWIG VON MISES: DEFENDER OF CAPITALISM 433 economists-Menger and B6hm Bawerk-were insufficiently com prehensive to provide an effective counter to the socialists. Bastiat had tried to provide one, but died too soon, and probably lacked the necessary theoretical depth in any case. Thus, when Mises appeared, there was virtually no systematic opposi tion to socialism or defense of capi talism. Quite literally, the intellec tual ramparts of civilization were undefended. What Mises undertook, which summarizes the essence of his great ness, was to build an intellectual de fense of capitalism and thus of civi lization. The leading argument of the so cialists was that the institutions of capitalism served the interests merely of a handful of rugged "ex ploiters" and "monopolists" and op erated against the interests of the great majority of mankind, which socialism would serve. While the only answer others could give was to de vise plans to take away somewhat less of the capitalists' wealth than the socialists were demanding, or to urge that property rights neverthe less be respected despite their in·· compatibility with most people's well·· being, Mises challenged everyone's basic assumption. He showed that capitalism operates to the material self-interests ofall, including the non·· capitalists-the so-called proletari ans. In a capitalist society, Mises showed, privately owned means of production serve the market. The physical benef).ciaries of the facto ries and mills ~re all who buy their products. And, Itogether with the in centive of profit and loss and the freedom of competition that it im plies, the existence of private own ership ensures ian ever-growing sup ply of products for all.

Thus, Mises showed to be absolute nonsense such. cliches as "poverty causes commu.nism." Not poverty, but poverty plus the mistaken belief that communism is the cure for pov erty, causes communism. If the mis guided revol u~ionaries of the back ward countries and of impoverished slums understood economics, any desire they might have to fight pov erty would m~ke them advocates of capitalism. No Basis for Economic Calculation Socialism, Mises showed, in his greatest original contribution to economic thought, not only abol ishes the incentive of profit and loss and the freedom of competition along with private ownership of the means of production, ,but makes economic calculation, economic coordination, and economic planning impossible, and therefore Iresults in chaos. For socialism means the abolition of the price system and the intellectual di vision of labor; it means the concen tration and centralization of all de cision -making in the hands of one 434 THE FREEMAN July agency: the Central Planning Board or the Supreme Dictator.

Yet the planning of an economic system is beyond the power of any one consciousness: the number, va riety and locations of the different factors of production, the various technological possibilities that are open to them, and the different pos sible permutations and combina tions of what might be produced from them, are far beyond the power even of the greatest genius to keep in mind. Economic planning, Mises showed, requires the cooperation of all who participate in the economic system. It can exist only under cap italism, where, every day, business men plan on the basis of calcula tions of profit and loss; workers, on the basis of wages; and consumers, on the basis of the prices of con sumers' goods. Capitalist Planning Mises' contributions to the debate between capitalism and socialism the leading issue of modern times are overwhelming. Before he wrote, people did not realize that capital ism has economic planning. They uncri tic ally accepted the Marxian dogma that capitalism is an anarchy of production and that socialism represents rational economic plan ning. People were (and most still are) in the position of Moliere's M. Jour dan, who never realized that what he was speaking all his life was prose.

For, living in a capitalist society, people are literally surrounded by economic planning, and yet do not realize that it exists. Every day, there are countless businessmen who are planning to expand or contract their firms, who are planning to introduce new products or discontinue old ones, planning to open new branches or close down existing ones, planning to change their methods of produc tion or continue with their present methods, planning to build up their inventories or run them down, plan ning to hire additional workers or let some of their present ones go. And every day, there are countless work ers planning to improve their skills, change their occupations or places of work, or to continue with things as they are; and consumers, planning to buy homes, cars, stereos, steak or hamburger, and how to use the goods they already have-for example, to drive to work or to take the train, instead.

Yet people deny. the name plan ning to all this acti vity and reserve it for the feeble efforts of a handful of government officials, who, having prohibited the planning of everyone else, presume to substitute their knowledge and intelligence for the knowledge and intelligence of tens of millions. Mises identified the existence of planning under capitalism, the fact that it is based on prices ("economic calculations"), and the fact that the 1982 LUDWIG VON MISES: DEFENDER OF CAPITALISM 435 prices serve to coordinate and har monize the activities of all the mil lions of separate, independent plan ners. He showed that each individual, in being concerned with earning a revenue or income and with limiting his expenses, is led to adjust his par ticular plans to the plans of all oth ers. For example, the worker who decides to become an accountant rather than an artist, because he values the higher income to be made as an accountant, changes his career plan in response to the plans of oth ers to purchase accounting services rather than paintings. The individ ual who decides that a house in a particular neighborhood is too ex pensive and who therefore gives up his plan to live in that neighbor hood, is similarly engaged in a pro cess of adjusting his plans to the plans of others; because what makes the house too expensive is the plans of others to buy it who are able and willing to pay more. And, above all, Mises showed, every business, in seeking to make profits and avoid losses, is led to plan its activities in a way that not only serves the plans of its own customers, but takes into account the plans of all other users of the same factors of production throughout the economic system.

Thus, Mises demonstrated that capitalism is an economic system rationally planned by the combined, self-interested efforts of all who participate in it. The failure of social ism, he showed, results from the fact that it represents not economic planning, but the destruction of eco nomic planning, j which exists only under capitalism: and the price sys tem. A Harmony of Interests Mises was not primarily anti-so cialist. He was pro-capitalist. His opposition to socialism, and to all forms of governJjnent intervention, stemmed from his support for capi talism and from his underlying love of individual freedom and conviction that the self-interests of free men are harmonious-indeed, that one man's gain under capitalism is not only not another's loss, but is actually others' gain. Mises was a consistent cham pion of the self-made man, of the in tellectual and business pioneer, 'whose activities are the source of progress for all mankind and who, he showed, can ftourish only under capitalism.

Mises demonstrated that compet ition under capitalism is of an en tirely different character than com petition in the animal kingdom. It is not a competition for scarce, nature given means of isubsistence, but a competition in the positive creation of new and addi~ional wealth, from which all gain. Fbr example, the ef fect of the c0In1petition between farmers using horses and those us ing tractors was not that the former 436 THE FREEMAN July group died of starvation, but that everyone had more food and the in come available to purchase addi tional quantities of other goods as well. This was true even of the farm ers who "lost" the competition, as soon as they relocated in other areas of the economic system, who were enabled to expand precisely by vir tue of the improvements in agricul ture. Similarly, the effect of the au tomobile's supplanting the horse and buggy was to benefit even the former horsebreeders and blacksmiths, once they made the necessary reloca tions.

Comparative Advantage In a major elaboration of Ricardo's Law of Comparative Advantage, Mises showed that there is room for all in the competition of capitalism, even those of the most modest abili ties. Such people need only concen trate on the areas in which their rel ative productive inferiority is least. For example, an individual capable of being no more than a janitor does not have to fear the competition of the rest of society, almost all of whose members could be better janitors than he, if that is what they chose to be. Because however much better janitors other people might make, their advantage in other lines is even greater. And so long as the person of limited ability is willing to work for less as a janitor than other people can earn in other lines, he has nothing to worry about from their com petition. He, in fact, outcompetes them for a job of janitor by being willing to accept a lower income than they. Mises showed that a harmony of interests prevails in this case, too.

For the existence of the janitor en ables more talented people to devote their time to more demanding tasks, while their existence enables him to obtain goods and services that would otherwise be altogether impossible for him to obtain. On the basis of such facts, Mises argued against the possibility of in herent conflicts of interest among races and nations, as well as among individuals. For even if some races or nations were superior (or inferior) to others in every aspect of produc tive ability, mutual cooperation in the division of labor would still be advantageous to all. Thus, he showed that all doctrines alleging inherent conflicts rest on an ignorance of eco nomics. He argued with unanswerable logic that the economic causes of war are the result of government interfer ence, in the form of trade and migra tion barriers, and that such interfer ence restricting foreign economic relations is the product of other gov ernment interference, restricting domestic economic activity. For ex ample, tariffs become necessary as a means of preventing unemploy ment, only because of the existence of minimum wage laws and pro1982 LUDWIG VON MISES: DEFENDER OF CAPITALISM 437 union legislation, which prevent the domestic labor force from meeting foreign competition by means of the acceptance of lower wages when necessary. He showed that the foun·· dation of world peace is a policy of laissez faire both domestically and internationally.

In answer to the vicious and widely believed accusation of the Marxists that Nazism was an expression of capitalism, he showed, in addition to all of the above, that Nazism was actually a form of socialism. Any system characterized by price and wage controls, and thus by short-· ages and government controls over production and distribution, as was Nazism, is a system in which the government is the de facto owner of the means of production. Because, in such circumstances, the government decides not only the prices and wages charged and paid, but also what is to be produced, in what quantities, by what methods, and where it is to be sent. These are all the fundamen tal prerogatives of ownership. This identification of "socialism on the German pattern," as he called it, is of immense value in understanding the nature of present demands for price controls. The Hazardsof Intervention Mises showed that all of the accu·· sations made against capitalism were ei ther altogether unfounded or should be directed against govern·· ment intervention, which destroys the workings pf capitalism. He was among the fin~t to point out that the poverty of the ,early years of the In dustrial Revolution was the heri tage of all previous history-that it existed becau$e the productivity of labor was stiU pitifully low; because scientists, in~entors, businessmen, savers and investors could only step by step create I the advances and ac cumulate the, capital necessary to raise it. He snowed that all the pol icies of so-called labor and social legislation were actually contrary to the interests of the masses of work ers they were designed to help-that their effect w~s to cause unemploy ment, retard capital accumulation, and thus hold down the productivity of labor and tHe standard of Iiving of all.

In a major original contribution to economic thought, he showed that depressions were the result of gov ernment-sponsored policies of credit expansion designed to lower the market rate of interest. Such poli cies, he showed, created large-scale malinvestments, which deprived the economic syst~m of liquid capital and brought on credit contractions and thus depressions. Mises was a lead ing supporter j of the gold standard and of laissez f¢tire in banking, which, he believed, would virtually achieve a 100% reserte gold standard and thus make impossible both inflation and deflation.

438 THE FREEMAN July What I have written of Mises pro vides only the barest indication of the intellectual content that is to be found in his writings. He authored over a dozen volumes. And I cannot recall reading a single paragraph in any of them that did not contain one or more profound thoughts or obser vations. Even on the occasions when I found it necessary to disagree with him (for example, on his view that monopoly can exist under capital ism, his advocacy of the military draft, and certain aspects of his views on epistemology, the nature of value judgments, and the proper starting point for economics), I always found what he had to say to be extremely valuable and a powerful stimulus to my own thinking. I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works. Mises' two most important books are Human Action and Socialism, which best represent the breadth and depth of his thought. These are not for beginners, however. They should be preceded by some of Mises' popu lar writings, such as Bureaucracy and Planning For Freedom.

The Theory of Money and Credit, Theory and History, Epistemological Problems ofEconomics, and The Ul timate Foundation of Economic Sci ence are more specialized works that should probably be read only after Human Action. Mises' other popular writings in English include Omnipotent Gov ernment, The Anti-Capitalistic Men tal#y, Liberalism, Critique of Inter ventionism, Economic Policy, and The Historical Setting of the Austrian School ofEconomics. For anyone se riously interested in economics, so cial philosophy, or modern history, the entire list should be considered required reading. The Courage of His Convictions Mises must be judged not only as a remarkably brilliant thinker, but also as a remarkably courageous human being. He held the truth of his convictions above all else and was prepared to stand alone in their de fense. He cared nothing for personal fame, position, or financial gain, ifit meant having to purchase them at the sacrifice of principle. In his life time, he was shunned and ignored by the intellectual establishment, because the truth of his views and the sincerity and power with which he advanced them shattered the tis sues of fallacies and lies on which most intellectuals then built, and even now continue to build, their professional careers.

It was my great privilege to have known Mises personally over a pe riod of twenty years. I met him for the first time when I was sixteen years old. Because he recognized the seriousness of my interest in eco nomics, he invited me to attend his 1982 LUDWIG VON MISES: DEFENDER OF CAPITALISM 439 graduate seminar at New York Uni versity, which I did almost every week thereafter for the next seven years, stopping only when the start of my own teaching career made it no longer possible for me to continue in regular attendance. His seminar, like his writings, was characterized by the highest level of scholarship and erudition, and al ways by the most profound respect for ideas. Mises was never con cerned with the personal motivation or character of an author, but only with the question of whether the man'S ideas were true or false. In the same way, his personal manner was at all times highly respectful, reserved, and a source of friendly encouragement.

He constantly strove to bring out the best in his students. This, com bined with his stress on the impor tance of knowing foreign languages, led in. my own case to using· some of my time in college to learn German and then to undertaking the trans lation of his Epistemological Prob lems ofEconomics-something that has always been one of my proudest accomplishments. The Growth of Ideas Today, Mises' ideas at long last appear to be gaining in influence. His teachings about the nature of social ism have been confirmed in the first hand observations of honest news reporters with extensive experience in Soviet Russia, such as Robert Kaiser, Hedrick)Smith, John Dorn berg, and Henry Kamm. They are being confirmed by the actions of millions of angry workers in Poland. Some of Mises' ideas are being propounded by the Nobel prizewin ners F.A. Hayek (himself a former student of Mises') and Milton Fried man.They exert a major influence on the writings of Henry Hazli tt and the staff of the Foundation for Eco nomic. Education, as well as such prominent form~r students as Hans Sennholz. Mises~ monetary theori~s permeate the p(}ges of recent be;t selling books on personal invest ments, such as those by Harry Browne and Jero.me Smith. And last, but certainly not least, they appear to be exerting ciLn important influ ence on President Reagan, who has acknowledged r~ading Human Ac tion and has expressed his admira tion for it.

Mises' books deserve to be in ev ery college and ,university curricu lum - not justin departments of economics, but ~lso in departments of philosophy,. h~story, government, sociology, law, business, journalism, education, and the humanities. He deserves to rec~ive every token of recognition and: memorial that our society can best~w. For as much as anyone in historF, he labored to pre serve it. If he is widely enough read, his labors may succeed in helping to save it. @ Glenn L. Pearson How Socialism Affects Charity THE economic consequences of so cialism pale into insignificance alongside the moral consequences. It is infinitely more tragic that our government has presided over the moral decay of America than over its growing poverty. Of course, mo rality has not completely disap peared and total, abject poverty has not arrived. (We owe that to the remnants of a past that enjoyed a greater freedom.) But every govern ment program based on redistribu tion of the wealth for social or eco nomic improvement carries the seeds of moral and economic death.