Mises on Mexico; E. Turrent

One particularly important aspect is that it is relevant to more than just the economic situa tion he found when he visited in 1942. Mises was concerned with the long-run historical context; or as one says nowadays, he focused on fundamental structural change. He was interested in uncovering the fallacies on which the principal positions and policies of Mexico's former socialist regime, as well as all socialist regimes, were based. Eduardo Turrent is the historian ofthe Bank ofMex ico. This is excerpted from a paper delivered at a conference of the Ludwig von Mises Cultural Insti tute of Mexico City, September 23-24, 1998, cele brating publication in Spanish ofLudwig von Mises's Mexico's Economic Problems: Yesterday and Today, which was written in 1943 but unpublished until last year. Translated by Bettina Bien Greaves. 18 One of the principal points in Mises's essay was his vote of confidence for Mexico because of the capabilities of its people and the progress of the country. As he put it: "It is beyond doubt that the Mexicans are endowed with the spirit of workmanship. The achieve ments of the autochthonous [indigenous] craftsmen and artisans meet with the admira tion of all experts. The workers in the already existing industrial plants and in the mines are not less efficient than those of other coun tries." And the same may be said with respect to their entrepreneurial and other skills.

Thus the problem of Mexico's develop ment was not capital scarcity, geography (which Mises judged favorably), climate, or geology, even though the soil "in the greater part of the country is dry and barren." Devel opment depends on the application of "an appropriate economic policy"; that is, a "wise" economic policy aimed at the "estab lishment of a durable system resulting in a continuous improvement of the nation's well being." Unfortunately, this was not the case in Mexico when Mises wrote this paper. Nor has it been the case since, especially not from 1970 to 1982, even if one considers the sever al forms such a "wise" policy may take. Attack on Easy Money Only five or six years after the publication of Keynes's General Theory, Mises took a well-aimed shot at the economic policies that stemmed from the noted English author's ideas. According to Mises, the "easy money" policies of the interwar years, policies that tended to generate inflation, had been based on the doctrines of Lord Keynes, doctrines that Mises called "fallacious." To Mises, the Keynesian dictum that "in the long run we are all dead" was no more than a new version of the cruel-hearted motto attributed to Madame de Pompadour, "After us, the deluge." Thus, every strategy that "is indifferent about the tomorrow strives after ephemeral success and carelessly sacrifices the future." Such strate gies must not be considered "progressive, but parasitic." Growth may be sustained only by having fundamental policies favorable to the stability of money and exchange.

Mises said in this study, not without cause, that the monetary history of Mexico, like that of many other countries, has been "a record of failures and disasters." He hit the bull's-eye when he said that "Monetary troubles are never the inextricable outcome of conditions beyond the control of a country's government. They are always the result of a deliberate pol icy," which, only too often, has been "the result of erroneous monetary doctrines." Thus, with a nod to the then-current financial authorities in Mexico, Mises pointed to the need to return to a firm path toward stability. But stability is not a goal in and of itself. "Monetary stability" must be recognized as a means, "an indispensable requirement for the formation of capital." Moreover, the conse quences of applying an "easy money" infla tionary policy are, and have been, economic depressions with millions unemployed and social unrest. "Easy money" policies "result for a short time in the creation of an artificial boom, but must later end in a slump and in depression."

Few of the wise observations, prescriptions, clairvoyant remarks, and even prophetic visions in Mises's text appear obsolete, not even his proposals concerning exchange. Nevertheless, one must remember that this manuscript was written years before Bretton Woods and more than a decade before the cel ebrated article by Milton Friedman, "Fixed vs. Flexible Exchange Rates" (1953). It should not be surprising that Mises showed 19 Ludwig von Mises himself in 1942 to be an advocate of the gold standard. However, one should look at the matter from the perspective of history. Basi cally, what Mises wanted was not something radically different from what Domingo Caval lo introduced in Argentina, fixed exchange with a monetary policy subject to discipline.2 At a time when public deficits have come to be considered virtuous, Mises insisted on the advantages of fiscal health. He explained clearly that excessive public spending con tributes neither to disposable income for the masses nor to the supply of social capital. If the public budget is in disequilibrium, this must be financed either by issuing central bank credit or by using internal debt. If cen tral bank credit is used to finance the public debt, it is doubly pernicious because, in addi tion to leading to inflation with all its harmful consequences, it affects the balance of pay ments and hinders the maintenance of exchange stability. If internal debt is used to finance the public debt, wealth is simply with drawn from the private sector and transferred to the public sector. Public spending propos als assume, also, that the government will spend resources better than individuals will.

But is this by any means certain? Withdraw ing purchasing power from the private sector not only reduces the total resources entrepre20 THE FREEMAN/IDEASON LIBERTY • MARCH 1999 neurs will have available to invest, but it may also reduce the income and consumption of the needy. It is possible, even likely, that in his Mexi can travels under the guidance of Montes de Dca, Mises became acquainted with the Mex ican historian Daniel Cosio Villegas. Mises's opinions concerning the apparent and abun dant "natural wealth of Mexico and the chances of its future prosperity" were con trary to the views then commonly held. But they were remarkably similar, particularly in emphasis and approach, to those expressed by Cosio Villegas in his essay "The Legendary Wealth of Mexico." Mises's sharp observa tions were, and still are, particularly applica ble to the agricultural capabilities of Mexico.

To Mises the natural supply and quality of the land were not insuperable obstacles. Rather, he looked on agricultural policy, which was rooted in the heart of the revolutionary ideol ogy, as the obstacle to the country's progress. Mises cited figures to illustrate what he called the harmful effects "of the agrarian reform of the revolution." The crops of com and wheat had been much less in 1937 than in 1907 and those of beans less than in 1897. Mises saw clearly, as did Manuel Gomez Morin and a few other illustrious intellects, that in Mexico, as in any other country, the agricultural sector could not make progress without a clear definition and absolute respect for the rights of property. The plain fact was that those rights were not well defined in the arrangement made for common land. There fore, land was not only not cultivated with the devotion required, but investments necessary for the development of the land were not made either.

The right to property is the necessary con dition for all modern productive activity. Therefore, Mises argued strenuously in 1942 against the desire of many to look to the Sovi et system of agricultural collectives as the example for Mexico to follow. Granting that, however, Mises did not object to, and he even looked with favor on, other forms of collec tive activity even with the active participation of the state. For instance, he mentioned coop eratives that could be formed to acquire farm equipment, seed, and fertilizers, and to cover other expenses. Such cooperatives could also arrange for leasing machinery, selling farm produce, and obtaining credits for members. The government could also help with institu tions to promote technological education and agricultural research. Nevertheless, every individual farmer should be "the master on his own farm."3 The Demographic Problem Surely Mises was one of the first visionar ies to recognize the demographic problem from which Mexico has long suffered. Mexi co, he noted, is "a comparatively overpopulat ed country," with the surplus population liv ing in rural areas. The potential productivity of the country was insufficient to assure a decent standard of living for these excess peo ple. Therefore, the only viable solution was for industries to be developed to absorb that excess population. But truly productive indus tries could develop only in response to defi nite commercial opportunities.

In 1942, Mises called for something that was then strictly taboo, something that could not be undertaken in Mexico until more than four decades later: an "open door" trade pol icy. If the dismantling of our ancient protec tionist structure in recent times provoked no few laments and rending of garments, imag ine the reaction to the Austrian economist's proposal in the 1940s, in the midst of the great World War. Contrary to archaic mer cantilist doctrines, Mises looked on imports as something desirable; he considered the opening of trade as the indispensable means for obtaining the best possible allocation of resources. "The advantage derived from for eign trade lies entirely in importing, not in exporting," he said. According to Mises, only by competitive industry emerging in an open environment can manufactured products be produced at prices that permit living stan dards in the country to rise while at the same time generating exports to pay for the nation's indispensable imports. The problem, he lamented, is that many Mexican patriots were "entangled in the neo-mercantilist fal lacies" then in vogue-and I would say still in vogue among many groups.

The whole process of industrialization based on protectionism is damaging in three ways. First, protection inhibits the agricultur al sector from exporting. Second, it raises the prices of manufactured consumers goods, which could otherwise be acquired by the rural inhabitants. And third, because of its high costs, industrialization based on protec tionism prevents the manufactured products from penetrating international markets. It is true that, given such industrialization, many people would find employment in the protect ed industries. But what they would gain as employees others in other sectors of the econ omy would lose through the high cost of the manufactured articles. In this way any possi bility of raising "the standard of living of the average Mexican" would be lost. Therefore, Mises concluded, industrialization by means of protection would lead the nation down a "blind alley" since it would perpetuate the low living standards of the people.

Although Mises argued for opening up trade gradually, he predicted that there was no need to fear that, by removing tariff barriers, "any plant will be forced to discontinue pro duction. Some plants, it is true, will have to rearrange their lines of production in order to obtain a higher degree of specialization." But, to the great surprise of many, the visiting Austrian recommended opening up trade uni laterally-removing commercial barriers even though other countries maintained pro tective policies without offering commercial reciprocity. Mises's expectations about opening the country up to trade were absolutely correct, as they were in other instances. Although the Mexican opening was not gradual and the policy adopted was unilateral in the begin ning, practically no failures that could be attributed to that fact were reported. Mises explained how the opening up of trade, with all its benefits, cannot yield its full benefits without a coherent and a compatible wage policy. Today those who think real wages can be determined by decree or by employer-employeenegotiations still organize in battalions. But those who are serious know the painful consequences of such a wage pol icy; it directly diminishes the competitiveness MISES ON MEXICO 21 of enterprises and employment, and indirectly affects inflation and economic growth. As Mises expressed it: There is but one means to raise Mexican wage rates: industrial expansion. Every new plant improves the standard of living of the Mexican masses by creating an addi tional demand for labor. But industry can not allow higher wages than such as safe guard the conduct of business. If trade unions are anxious to enforce higher wages, they prevent the establishment of new plants and the expansion of existing plants. They succeed, it is true, in raising wage rates for a comparatively small group of workers; but they force, on the other hand, hundreds of thousands to remain in agricultural occupations, in which their income is extremely low, i.e., much lower than it would be if they could find industri al jobs.

Mises was absolutely clairvoyant in sug gesting in 1942 that private initiative should participate in the production of petroleum, the management of the railroads, and the genera tion of electricity. He was also right in insist ing that unless investment and production have confidence, they cannot thrive and thus cannot contribute to economic progress. Railroads, Electricity, and Petroleum More than half a century after Mises's visit, his recommendation with respect to the rail roads is becoming a reality. In the case of investment in the field of electricity, there are now indications that private capital will be permitted greater participation in the future. As for the production of petroleum, we are still far from a decision; some isolated voices suggest only occasionally, rather timidly, that the matter be reconsidered. Further, Mises was several decades ahead in predicting what would happen in Mexico between 1970 and 1976 with respect to coop erativism. In that six-year period the manage ment of cooperatives in some sectors, like that 22 THE FREEMAN/IDEAS ON LIBERTY • MARCH 1999 of fishing, was entirely given up. The results had been very disappointing; they fulfilled to the letter what Mises had written years before.

"N0 serious economist believes that a cooper ative society could successfully compete with private enterprises. The experiments have resulted in complete failure." This, he said, applied especially in the field of industrial production. One of the themes emphasized in Mises's essay is the importance of maintaining the confidence of investors in order to improve the country's material welfare. In Mexico s Eco nomic Problems there are more than ten refer ences to this. On this point Mises was absolutely positive: "What Mexico needs most is capital, either foreign or domestic. The repudiation of the national debt and the expro priation of foreign investments deter the for eign capitalist. The methods of taxation pre vent the accumulation of domestic capital." The investor, domestic or foreign, fears every attack on property rights, lack of pub lic safety, and arbitrariness. Strictly speaking, when we consider the situation, confiscatory taxation is aggression against the right of property. According to Mises, very high taxes "paralyze the spirit of entrepreneurship."

Therefore, he recommended that Mexico dis tance itself from a "suicidal" tax policy of this kind. Taxes should never discourage sav ing or the accumulation of capital. In this same vein, personal and entrepreneurial income that is invested should be taxed at a lower rate. Mises's essay is enlightening and clear; it refutes fallacies, destroys myths, is analytical, and advisory. When it was first written and made available in Mexico, it had practically no effect; in fact it was forgotten. Why? I ven ture a few theories. First, his views were in opposition in many regards to the most widely accepted ideas of the time and the years to follow. Moreover, there was resistance from the powerful groups that were surely disturbed, or would have been disturbed, by this text. International experience reveals that one of the great obstacles to under taking reforms is special-interest groups. And Mises's paper touched directly on many of them, especially syndicalism, the agrarian reform bureaucracy, the administrators of pub lic enterprises that would be dismantled, the industrial beneficiaries of protectionist mea sures, the clientele of subsidized organizations, and even the teachers who were preaching in the schools and universities "the religion of etatism." In this connection, Chapter XI of Mises's essay, "Education," is recommended.

However, as Keynes said, the ideas of econ omists and social philosophers are more pow erful than generally believed. There is a ten dency to exaggerate the power of special interests as compared with the gradual pene tration of ideas. And something that Keynes did not say, but which I firmly believe, is that in the long run, correct ideas will succeed in asserting themselves over the fallacies and the economic deceits. 0 1. Translated into Spanish as Problemas Economicos de Mexico, Ayer y Hoy by Daniel Sotelo Kucharik and Ana Maria de Sotelo (Mexico: Instituto Cultural Ludwig von Mises, 1998). Publication of the original English-language version is scheduled by Liberty Fund ofIndianapolis in Volume 4 of Mises's Lost Papers. 2. Domingo Cavallo, formerly associated with Argentina's cen tral bank, became foreign minister and then minister of economic affairs under President Carlos Saul Menem. He was instrumental in stopping the inflation, establishing a currency board and stabilizing the exchange rate of the Argentine peso at one U.S. dollar.

3. Editor's Note: Mises wrote in his 1943 manuscript that "The economic backwardness of a part of Mexico's agricultural popula tion justifies intervention on the part of the government. It is all right for the government to advise the peons how to establish and to run cooperatives. Even small subsidies for newly formed cooperatives may be advocated. But it would be a mistake to subsidize them per manently or to grant them tax privileges. It does no good to mask the failure of any institution by such measures. Mexico is not rich enough to indulge in the luxury of waste."