The Economic Foundations of Freedom; L. von Mises

THEFREEMAN IDEASON UBERlY The Economic Foundations of Freedom by Ludwig von Mises A nimals are driven by instinctive urges. They yield to the impulse which pre vails at the moment and peremptorily asks for satisfaction. They are the puppets of their appetites. Man's eminence is to be seen in the fact that he chooses between alternatives. He regulates his behavior de liberatively. He can master his impulses and desires; he has the power to suppress wishes the satisfaction of which would force him to renounce the attainment of more important goals. In short: man acts; he purposively aims at ends chosen. This is what we have in mind in stating that man is a moral person, responsible for his conduct. Freedom as a Postulate of Morality All the teachings and precepts of ethics, whether based upon a religious creed or whether based upon a secular doctrine like that of the Stoic philosophers, presuppose this moral autonomy of the individual and therefore appeal to the individual's con science. They presuppose that the individ ual is free to choose among various modes of conduct and require him to behave in Professor Mises (1881-1973), one of the centu ry's preeminent economic thinkers, was aca demic adviser to the Foundation for Economic Education from 1946 until his death.This article first appeared in "the April 1960 issue of The Freeman.

compliance with definite rules, the rules of morality. Do the right things, shun the bad things. It is obvious that the exhortations and admonishments of morality make sense only when addressing individuals who are free agents. They are vain when directed to slaves. It is useless to tell a bondsman what is morally good and what is morally bad. He is not free to determine his comportment; he is forced to obey the orders of his master. It is difficult to blame him if he prefers yielding to the commands of his master to the most cruel punishment threatening not only him but also the members of his family. This is why freedom is not only a political postulate, but no less a postulate of every religious or secular morality. The Struggle for Freedom Yet for thousands of years a considerable part of mankind was either entirely or at least in many regards deprived of the faculty to choose between what is right and what is wrong. In the status society of days gone by, the freedom to act according to their own choice was, for the lower strata of society, the great majority of the population, seriously restricted by a .rigid system of controls. An outspoken formulation of this principle was the statute of the Holy Roman Empire -that conferred upon the princes and counts of the Reich (Empire) the power 315 316 THE FREEMAN • MAY 1996 and the right to determine the religious allegiance of their subjects.

The Orient~ls meekly acquiesced in this state of affairs. But the Christian peoples of Europe and their scions that settled in over seas territories never tired in their struggle for liberty. Step by step they abolished all status and caste privileges and disabilities until they finally succeeded in establishing the system that the harbingers of totalitari anism try to smear by callingit the bourgeois system. The Supremacy of the Consumers The economic foundation of this bour geois system is the market economy in which the consumer is sovereign. The con sumer, Le., everybody, determines by his buying or abstention from buying what should be produced, in what quantity, and of what quality. The businessmen are forced by the instrumentality of profit and loss to obey the orders of the consumers. Only those enterprises can flourish that supply in the best possible and cheapest way those commodities and services which the buyers are most anxious to acquire. Those who fail to satisfy the public suffer losses and are finally forced to go out of business.

In the precapitalistic ages the rich were the owners of large landed estates. They or their ancestors had acquired their property as gifts-feuds or fiefs-from the sovereign who, with their aid, had conquered the country and subjugated its inhabitants. These aristocratic landowners were real lords as they did not depend on the patron age of buyers. But the rich of a capitalistic industrial society are subject to the suprem acy of the market. They acquire their wealth by serving the consumers better than other people do and they forfeit their wealth when other people satisfy the wishes of the con sumers better or cheaper than they do. In the free market economy the owners of capital are forced to invest it in those lines in which it best serves the public. Thus ownership of capital goods is continually shifted into the hands ofthose who have best Ludwig von Mises succeeded in serving the consumers. In the market economy private property is in this sense a public service imposing upon the owners the responsibility of employing it in the best interests of the sovereign consum ers. This is what economists mean when they call the market economy a democracy in which every penny gives a right to vote.

The Political Aspects of Freedom Representative government is the politi cal corollary of the market economy. The same spiritual movement that created mod ern capitalism substituted elected office holders for the authoritarian rule of absolute kings and hereditary aristocracies. It was this much-decried bourgeois liberalism that brought freedom of conscience, of thought, of speech, and of the press and put an end to the intolerant persecution of dissenters. A free country, is one in which every citizen is free to fashion his life according to his own plans. He is free to compete on the THE ECONOMIC FOUNDATIONS OF FREEDOM 317 market for the most desirable jobs and on the political scene for the highest offices. He does not depend more on other people's favor than these others depend on his favor. If he wants to succeed on the market, he has to satisfy the consumers; if he wants to succeed in public affairs he has to satisfy the voters. This system has brought to the capitalistic countries of Western Europe, America, and Australia an unprecedented increase in population figures and the high est standard of living ever known in history.

The much talked-about common man has at his disposal amenities of which the richest men in precapitalistic ages did not even dream. He is in a position to enjoy the spiritual and intellectual achievements of science, poetry, and art that in earlier days were accessible only to a small elite of well-to-do people. And he is free to worship as his conscience tells him. The SocialistMisrepresentation of the MarketEconomy All the facts about the operation of the capitalistic system are misrepresented and distorted by the politicians and writers who arrogated to themselves the label of liberal ism, the school of thought that in the nine teenth century crushed the arbitrary rule of monarchs and aristocrats and paved the way for free trade and enterprise. As these ad vocates of a return to despotism see it, all the evils that plague mankind are due to sinister machinations on the part of big business. What is needed to bring about wealth and happiness for all decent people is to put the corporations under strict govern ment control. They admit, although only obliquely, that this means the adoption of socialism, the system of the Union of Soviet Socialist Republics. But they protest that socialism will be something entirely differ ent in the countries of Western civilization from what it is in Russia. And anyway, they say, there is no other method to deprive the mammoth corporations of the enormous power they have acquired and to prevent them from further damaging the interests of the people.

Against all this fanatical propaganda there is need to emphasize again and again the truth that it is big business that brought about the unprecedented improvement of the masses' standard of living. Luxury goods for a comparatively small number of well-to-do can be produced by small-size enterprises. But the fundamental principle of capitalism is to produce for the satisfac tion of the wants of the many. The same people who are employed by the big corpo rations are the main consumers of the goods turned out. If you look around in the house hold of an average American wageearner, you will see for whom the wheels of the machines are turning. It is big business that makes all the achievements of modem tech nology accessible to the common man. Ev erybody is benefited by the high productiv ity of big-scale production. It is silly to speak of the "power" of big business. The very mark of capitalism is that supreme power in all economic matters is vested in the consumers. All big enterprises grew from modest beginnings into bigness because the patronage of the consumers made them grow. It would be impossible for small or medium-size firms to turn out those products which no present-day Amer ican would like to do without. The bigger a corporation is, the more does it depend on the consumers' readiness to buy its wares.

It was the wishes-or, as some say, the folly-of the consumers that drove the au tomobile industry into the production of ever bigger cars and force it today to man ufacture smaller cars. Chain stores and department stores are under the necessity to adjust their operations daily anew to the satisfaction of the changing wants of their customers. The fundamental law of the market is: the customer is always right. A man who criticizes the conduct of business affairs and pretends to know better methods for the provision of the consumers is just an idle babbler. If he thinks that his own designs are better, why does he not try them himself? There are in this country always capitalists in search of a profitable investment of their funds who are ready to provide the capital required for any reason318 THE FREEMAN • MAY 1996 able innovations. The public is always eager to buy what is better or cheaper, or better and cheaper. What counts in the market is not fantastic reveries, but doing. It was not talking that made the "tycoons" rich, but service to the customers.

Capital Accumulation Benefits All of the People It is fashionable nowadays to pass over in silence the fact that all economic better ment depends on saving and the accumu lation of capital. None of the marvelous achievements of science and technology could have been practically utilized if the capital required had not previously been made available. What prevents the econom ically backward nations from taking full advantage of all the Western methods of produ~tion, and thereby keeps their masses poor; is not unfamiliarity with the teachings of technology but the insufficiency of their capital. One badly misjudges the prob lems facing the underdeveloped countries if one asserts that what they lack is techni cal knowledge, the "know-how." Their businessmen and their engineers, most of them graduates of the best schools of Europe and America, are well acquainted with the state of contemporary applied sci ence. What ties their hands is a shortage of capital.

A hundred years ago America was even poorer than these backward nations. What made the United States become the most affluent country of the world was the fact that the' 'rugged individualism" of the years before the New Deal did not place too serious obstacles in the way of enterprising men. Businessmen became rich because they consumed only a small part of their profits and plowed the much greater part back into their businesses. Thus they en riched themselves and all of the people. For it was this accumulation of capital that raised the marginal productivity of labor and thereby wage rates. Under capitalism the acquisitiveness of the individual businessman benefits not only himself but also all·other people. There is a reciprocal relation between his acquiring wealth by serving the consumers and accu mulating capital and the improvement of the standard of living of the wageearners who form the majority of the consumers. The masses are in their capacity both as wage earners and as consumers interested in the flowering of business. This is what the old liberals had in mind when they declared that in the market economy there prevails a harmony of the true interests of all groups of the population.

It is in the moral and mental atmosphere of this capitalistic system that the American citizen lives and works. There are still in some parts of the United States conditions left which appear highly unsatisfactory to the prosperous inhabitants of the advanced districts which form the greater part of the country. But the rapid progress of industri alization would have long since wiped out these pockets of backwardness if the unfor tunate policies of the New Deal had not slowed down the accumulation of capital, the irreplaceable tool of economic better ment. Used to the conditions of a capitalistic environment, the average American takes it for granted that every year business makes something new and better accessible to him. Looking backward upon the years of his own life, he realizes that many implements that were totally unknown in the days of his youth and many others which at that time could be enjoyed only by a small minority are now standard equipment of almost every household. He is fully confident that this trend will prevail also in the future. He simply calls it the "American way of life"

and does not give serious thought to the question of what made this continuous im provement in the supply of material goods possible. He is not earnestly disturbed by the operation of factors that are bound not only to stop further accumulation of capital but may very soon bring about capital de cumulation. He does not oppose. the forces that-by frivolously increasing public ex penditure, by cutting down capital accumu- . lation, and even making for consumption of parts of the capital invested in business, and, finally, by inflation-are sapping the' THE ECONOMIC FOUNDATIONS OF FREEDOM 319 very foundations of his material wellbeing. He is not concerned about the growth of statism that wherever it has been tried resulted in producing and preserving condi tions which in his eyes are shockingly wretched. No PersonalFreedomWithout EconomicFreedom Unfortunately many of our contemporar ies fail to realize what a radical change in the moral conditions of man, the rise of statism, the substitution ofgovernment omnipotence for the market economy, is bound to bring about. They are deluded by the idea that there prevails a clear-cut dualism in the affairs of man, that there is on the one side a sphere of economic activities and on the other side a field of activities that are con sidered as noneconomic. Between these two fields there is, they think, no close connec tion. The freedom that socialism abolishes is "only" the economic freedom, while free dom in all other matters remains unim paired.

However, these two spheres are not in dependent of each other as this doctrine assumes. Human beings do not float in ethereal regions. Everything that a man does must necessarily in some way or other affect the economic or material sphere and requires his power to interfere with this sphere. In order to subsist, he must toil and have the opportunity to deal with some material tangible goods. The confusion manifests itself in the pop ular idea that what is going on in the market refers merely to the economic side of human life and action. But in fact the prices of the market reflect not only "material con cerns" -like getting food, shelter, and other amenities-but no less those concerns which are commonly called spiritual or higher or nobler. The observance or nonob servance of religious commandments-to abstain from certain activities altogether or on specific days, to assist those in need, to build and to maintain houses of worship, and many others-is one of the factors that determines the supply of, and the demand for, various consumers' goods and thereby prices and the conduct of business. The freedom that the market economy grants to the individual is not merely "economic"

as distinguished from some other kind of freedom. It implies the freedom to deter mine also all those issues which are consid ered as moral, spiritual, and intellectual. The simple truth is that individuals can be free to choose between what they con sider as right or wrong only where they are economically independent of the govern ment. What makes many people blind to the essential features of any totalitarian system is the illusion that this system will be oper ated precisely in the way which they them selves consider as desirable. In supporting socialism, they take it for granted that the "state" will always do what they them selves want it to do. D Economics on Trial One Graph Says It All by Mark Skousen "But the free market is not primarily a device to procure growth. It is a device to secure the most efficient use of resources. " -Henry C. Wallich1 I n celebrating fifty years of service by the Foundation for Economic Education, we observe one overriding lesson of history: Freedom is, on balance, a great blessing to all mankind.