Freeman

ARTICLE

The Economic Foundations of Freedom

APRIL 01, 1960 by LUDWIG VON MISES

Dr. Mises is Visiting Professor of Economics at New York University and part-time advisor, consultant, and staff member of the Foundation for Economic Education. This article first ap­peared in the January 26, 1960 issue of Chris­tian Economics and is here reprinted with their permission.

 

Animals are driven by instinctive urges. They yield to the impulse which prevails 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 deliberatively. 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 conscience. They presuppose that the individual is free to choose among various modes of conduct and require him to behave in 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 the power and the right to determine the religious allegiance of their subjects.

The Orientals meekly acquiesced in this state of affairs. But the Christian peoples of Europe and their scions that settled in over­seas 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 totalitarianism try to smear by calling it the bourgeois system.

The Supremacy of the Consumers

The economic foundation of this bourgeois system is the market economy in which the consumer is sovereign. The consumer, i.e., 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 patronage of buyers. But the rich of a capitalistic in­dustrial society are subject to the supremacy 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 consumers 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 of those who have best 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 consumers. 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 political corollary of the mar­ket economy. The same spiritual movement that created modern capitalism substituted elected of­ficeholders 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 hislife according to his own plans. He is free to compete on the market for the most desirable jobs and on the political scene for the highest offices. He does not depend more on other peoples’ favor than these others depend on his favor. If he wants to succeed, he has on the market to satisfy the consumers and in public affairs 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 highest 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 Socialist Misrepresentation of the Market Economy

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 liberalism, of the school of thought that in the nineteenth century has crushed the arbitrary rule of monarchs and aristocrats and paved the way for free trade and enter­prise. As these advocates 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 government 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 different 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 satisfaction of the wants of the many. The same people who are employed by the big corporations are the main consumers of the goods turned out. If you look around in the household of an average American wage-earner, you will see for whom the wheels of the machines are turning. It is big business that makes all the achievements of modern technol­ogy accessible to the common man. Everybody is benefited by the high productivity 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 Ameri­can 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 automobile industry into the production of ever bigger cars and force it today to manufacture 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 reasonable innova­tion. 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 betterment depends on saving and the accumulation 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 econom­ically backward nations from tak­ing full advantage of all the West­ern methods of production and thereby keeps their masses poor, is not unfamiliarity with the teachings of technology but the insuf­ficiency of their capital. One badly misjudges the problems facing the underdeveloped countries if one as­serts that what they lack is tech­nical 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 science. 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 ploughed the much greater part back into their businesses. Thus they enriched 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 accumulating capital and the improvement of the stand­ard of living of the wage-earners 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.

Welfare Threatened by Statism

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 his country 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 industrialization would have long since wiped out these pockets of backwardness if the unfortunate policies of the New Deal had not slowed down the accumulation of capital, the irreplaceable tool of economic betterment. 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 im­provement in the supply of ma­terial goods possible. He is not earnestly disturbed by the opera­tion of factors that are bound not only co stop further accumulation of capital but may very soon bring about capital decumulation. He does not oppose the forces that—by frivolously increasing public expenditure, by cutting down capi­tal accumulation, and even making for consumption of parts of the capital invested in business and finally by inflation—are sapping the very foundations of his ma­terial well-being. He is not con­cerned about the growth of stat­ism that wherever it has been tried resulted in producing and preserving conditions which in his eyes are shockingly wretched.

No Personal Freedom Without Economic Freedom

Unfortunately many of our con­temporaries fail to realize what a radical change in the moral con­ditions of man, the rise of statism, the substitution of government 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 considered as noneconomic. Be­tween these two fields there is, they think, no close connection. The freedom that socialism abolishes is "only" the economic freedom, while freedom in all other matters remains unimpaired.

However, these two spheres are not independent 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 popular 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 concerns"—like getting food, shelter, and other amenities—but no less those con­cerns which are commonly called spiritual or higher or nobler. The observance or nonobservance 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 deter­mine also all those issues which are considered as moral, spiritual, and intellectual.

In exclusively controlling all the factors of production the socialist regime controls also every individ­ual’s whole life. The government assigns to everybody a definite job. It determines what books and papers ought to be printed and read, who should enjoy the oppor­tunity to embark on writing, who should be entitled to use public assembly halls, to broadcast and to use all other communication facili­ties. This means that those in charge of the supreme conduct of government affairs ultimately de­termine which ideas, teachings, and doctrines can be propagated and which not. Whatever a written and promulgated constitution may say about the freedom of conscience, thought, speech, and the press and about neutrality in reli­gious matters must in a socialist country remain a dead letter if the government does not provide the material means for the exercise of these rights. He who monopolizes all media of communication has full power to keep a tight hand on the individuals’ minds and souls.

The Illusions of the Reformers

What makes many people blind to the essential features of any so­cialist or totalitarian system is the illusion that this system will be op­erated precisely in the way which they themselves consider as desir­able. In supporting socialism, they take it for granted that the "state" will always do what they them­selves want it to do. They call only that brand of totalitarianism "true," "real," or "good" socialism the rulers of which comply with their own ideas. All other brands they decry as counterfeit. What they first of all expect from the dictator is that he will suppress all those ideas of which they them­selves disapprove. In fact, all these supporters of socialism are, unbe­known to themselves, obsessed by the dictatorial or authoritarian complex. They want all opinions and plans with which they dis­agree to be crushed by violent ac­tion on the part of the govern­ment.

The Meaning of the Effective Right to Dissent

The various groups that are ad­vocating socialism, no matter whether they call themselves com­munists, socialists, or merely so­cial reformers, agree in their es­sential economic program. They all want to substitute state control—or, as some of them prefer to call it, social control—of produc­tion activities for the market econ­omy with its supremacy of the in­dividual consumers. What sepa­rates them from one another is not issues of economic management, but religious and ideological con­victions. There are Christian so­cialists—Catholic and Protestant of different denominations—and there are atheist socialists. Each of these varieties of socialism takes it for granted that the so­cialist commonwealth will be guided by the precepts of their own faith or of their rejection of any religious creed. They never give a thought to the possibility that the socialist regime may be directed by men hostile to their own faith and moral principles who may consider it as their duty to use all the tremendous power of the socialist apparatus for the suppression of what in their eyes is error, superstition, and idolatry.

The simple truth is that indi­viduals can be free to choose be­tween what they consider as right or wrong only where they are eco­nomically independent of the gov­ernment. A socialist government has the power to make dissent im­possible by discriminating against unwelcome religious and ideologi­cal groups and denying them all the material implements that are required for the propagation and the practice of their convictions. The one-party system, she politi­cal principle of socialist rule, im­plies also the one-religion and one-morality system. A socialist gov­ernment has at its disposal means that can be used for the attain­ment of rigorous conformity in every regard, "Gleichschaltung" as the Nazis called it. Historians have pointed out what an important role in the Reformation was played by the printing press. But what chances would the reformers have had, if all the printing presses had been operated by the governments headed by Charles V of Germany and the Valois kings of France? And, for that matter, what chances would Marx have had under a system in which all the means of communication had been in the hands of the govern­ments?

Whoever wants freedom of conscience must abhor socialism. Of course, freedom enables a man not only to do the good things but also to do the wrong things. But no moral value can be ascribed to an action, however good, that has been performed under the pressure of an omnipotent government.

 

***

Ideas on Liberty

 

Hidden Taxes

The average person knows how much he shells out directly to the tax collector on his income every year.

But hidden taxes are another thing, the Tax Foundation notes.

Here are a couple of examples of how government silently reaches into the taxpayer’s pocket.

Bread prices—reflecting taxes on the land the grain is grown on, the seed that’s sown, the machinery that plows and harvests and mills the wheat, the fuel, the transporta­tion, the baker, the wrapper, and so on—contain 151 hidden taxes. Add some vitamins and you add more taxes.

A man’s suit of clothes bears a price tag representing 116 hidden taxes. A house has at least 600 hidden taxes. There are at least 100 hidden taxes on eggs.

This silent siphoning of taxpayer’s money by federal, state, and local governments boosts the tax bill of the average family with $7,500 annual income from $1,770 direct taxes to $2,600 total.

A January 11, 1960 news release of the Merchants and Manufacturers Association, Los Angeles.

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