All Commentary
Thursday, August 1, 1963

A Reviewer’s Notebook – 1963/8

Adolf A. Berle’s The American Economic Republic (Harcourt, Brace and World, 247 pp., $4.50) has been praised by the believers in the “mixed economy,” and damned out of hand by libertar­ians. From the standpoint of pure economics, this reviewer should be lining up with the libertarians in condemning or dismissing Mr. Berle’s work. Yet, among all its defects, The American Economic Republic has one great virtue that libertarians should welcome. The virtue is to be found in Berle’s discussion of the role of imagina­tion, mind, and will in finding new uses for capital.

As Mr. Berle puts it, capital is not simply a matter of money or machinery. Expressed in terms of dollars, the United States gener­ates a new capital of some $100 billion annually. But this, says Mr. Berle, is “mere abstraction.” The $100 billion remains inert un­til “developed talent” has gone to work on the problem of employing it. “Audit,” says Mr. Berle, “to be real, becomes a matter of philos­ophy… Who can measure the gains drawn from near elimina­tion of tuberculosis or polio or the results, plus or minus, derived from release from drudgery brought about by automation?… The greater the body of developed talent in the United States, and the greater the opportunity for all possessing talent to bring it to bear on the use of annually formed capital, the greater will be the range and quantity of pro­ductivity.”

Having correctly put his finger on the shortcomings of economists who continue to think of capital as “dead” dollars and not as some­thing that demands imaginative “going concerns” to make it hu­manly fruitful, Mr. Berle then proceeds to back-pedal for long and confusing stretches.

What vitiates most of The American Economic Republic is Mr. Berle’s passion for making dis­tinctions that have only a surface plausibility. His biggest error is the attempt to distinguish between “active” and “passive” property. According to Berle, “active” prop­erty is a tractor, a farm, a house, a proprietor-operated industry. “Passive” property, on the other hand, is any stock ownership that does not play its direct part in the workings of management. Mr. Berle considers most stockholders to be completely isolated from business.

Stockholder Activity

The distinction is tenable only on the assumption that most stock ownership has no effect on man­agement decisions in such things as allocating new capital. If this reviewer had not gone through an apprenticeship writing corpora­tion stories for Fortune Magazine, he might have been impressed by Mr. Berle’s reasoning. But in many a mill town, from Latrobe, Pennsylvania, to Toledo, Ohio, I have sat idly by from 9 to 9:15 of a morning while the local factory manager skimmed through the pages of the Wall Street Journal looking to see how his company has been performing in the eyes of its owners. Managers, all of them, are stock market conscious—which means that stockowners, by exercising decisions to buy or sell, are putting their fingers on management every day of the week. The veto power of the stock­holder is certainly not a “passive” thing.

To sustain his distinction, Berle would no doubt argue that the re­cent decision of the Kennecott Copper Company to cut down on the dividend rate in order to build new facilities in Utah instead of in Chile, where the investment per ton of ore might have been less, is something that management un­dertook without reference to the stockholders. But such a view is the sheerest sophistry. The truth is that the rise of Marxist parties in Latin America has made it un­safe for American corporations to put stockholders’ money into places where the threat of con­fiscation or unconscionably high taxation menaces stock equities. If the Kennecott management had only consulted its own managerial class interests, it might have gone on plowing profits back into its Chile mines with the sure knowl­edge that the Chilean government would continue to employ Kenne­cott engineering talent even in the event of a formal take-over of the property. But the stockholder, that silent but effective critic, caused the Kennecott management to consider the owners’ interests first. If this is “passivity,” we are in for a rewriting of the diction­ary.

Nineteenth Century Capitalism

When it comes to looking back on the history of U.S. industrial development, Mr. Berle is quite unfair to the nineteenth century. He indulges in nonsense when he says the “ethics of the time did not extend to assuring that the processes of production were hu­manly decent, or even humanly tolerable,” and he slanders many a good U.S. enterpriser when he goes on to say that “in the inter­pretation of half a century ago, it (American capitalism) achieved results surprisingly like those ob­servable in the Soviet Union, and peculiarly in Communist China, at present.”

Well, just a half a century ago, in 1913, Henry Ford was coming to the decision that the minimum automobile wage should be $5 a day (or more than $10 a day in terms of the 1963 dollar). A $50­a-week minimum wage would be little enough in modern America. But how many workers in Soviet Russia or in Red China get any­thing like that at present?

Again, what was “intolerable” about working for a good man like Captain Bill Jones in a Carnegie mill in nineteenth century Pitts­burgh? Or for John Fritz at a Bethlehem Steel Company mill?

Jones and Fritz were humane bosses who established great esprit de corps. Steel mill work in the nineteenth century was dan­gerous, but there were those who loved it. And the capitalist “gov­erning classes” of the nineteenth century in America, though they might have ended the twelve-hour day before they did, certainly failed to coerce their employees politically. Democrats were elected to office continuously in spite of Republican mill owners, and when McKinley, a Republican, beat Bryan in 1896, it was with the slogan of the “full dinner pail.” In Soviet Russia and in Red China, by contrast, millions of workers have been starved, killed, or sent to political labor camps.

When it comes to the “transcen­dental margin,” meaning the sur­plus of production that goes to “achieve ends transcending the calculation of individual material advantage,” does Berle think for a minute that there was no such margin back in 1820, or 1870, or 1900? On Mr. Berle’s own show­ing, America had a well-defined system of education long before modern times. There are many New England and Middle State colleges and academies that even pre-date the American Revolution. The public school was an early “public sector” investment in most towns and villages of the United States well over a hundred years ago.

In trying to establish distinc­tions that are not distinctions. Berle has to assume in spite of his own evidence that the nature of man has somehow changed in the twentieth century. Today, he says, the “scientific institute of scholars” is the primary decision-maker in capital allocations. Well, wasn’t it always thus? Eli Whit­ney was a scholar, just out of Yale, when he invented the cotton gin. He had no capital, yet he was the “decision-maker” that fast­ened the slave plantation system on the South for fifty years. And he had only a War Department contract when he started to apply mass production principles to the manufacture of guns. How does this differ in any basic sense from what goes on today? Whitney had ideas and he attracted capital for their exploitation. Similarly, that twentieth century Harvard scholar and chemist, Dr. Carothers, had ideas about synthetic fibers. The Du Ponts backed Carothers’ brains with money in the age-old capital­istic way.

Adolf Berle is far more sympa­thetic to free enterprise than he was in his New Deal days. But he still can’t see that the principles of freedom do not change, for they are grounded in the eternal na­ture of man.

The Free and Prosperous Commonwealth by Ludwig von Mises, translated by Ralph Raico (D. Van Nostrand Company, 207 pp., $5.50).

Reviewed by Percy L. Greaves, Jr.

THERE are right answers to our social problems, and Ludwig von Mises, truly an economiste extra­ordinaire, packs his books with them.

Back in 1927 he pictured the pitfalls ahead for nations whose governments grant privileges to the political groups that keep them in power. More than a gen­eration ago, he foresaw that the existence of such privileges would disrupt world trade and lead to political persecutions, wars be­tween the western powers, and bloodshed in Asia and Africa, while Russia continued to act “like a robber who lies in wait for the moment he can pounce on his vic­tim and plunder him of his pos­sessions.”

Mises, then an Austrian citizen, wrote this book in German as a warning to all Europeans, and es­pecially the Germans. If his book had been read, digested, and heed­ed by the thought leaders of that day, the world would have been spared a multitude of miseries and millions of needless deaths. The horrors of the past cannot be undone. However, it is never too late to learn the elementary prin­ciples that whole populations must practice if men are ever to live in harmony with a continuing multi­plication of human comforts. So we can be happy that Ralph Raico, a bright and promising graduate student, has made this book avail­able in English as The Free and Prosperous Commonwealth.

The contents are actually better described by the English subtitle, An Exposition of the Ideas of Classical Liberalism. Mises writes of liberalism in its true and origi­nal meaning, the limitation of po­litical power to the restraint, pro­scription, and prevention of anti­social actions which disrupt man’s peaceful pursuit of happiness.

Liberalism in this sense pre­scribes the private ownership and control of all productive property. It holds that the private owners of such property can advance their own welfare only by offering con­sumers higher values than can be duplicated elsewhere for the same expenditure of funds or effort. The security of such property from theft encourages all sorts of investments in socially productive facilities. These increased invest­ments, along with increased spe­cialization of labor, account for the higher living standards of market societies.

Progressive societies of this type can exist only in areas where peace is preserved at the factory gates and market place. Under real liberalism, the function of government is to maintain that peace by protecting the lives and property of all who come to rely on the market for their supplies of necessities, as well as the luxu­ries that become the necessities of the next generation.

Unfortunately, as Mises writes in the new Preface, “the tenets of this nineteenth-century philosophy of liberalism are almost forgotten…. In the United States ‘liberal’ means today a set of ideas and po­litical postulates that in every re­gard are the opposite of all that liberalism meant to the preceding generations. The American self-styled liberal aims at government omnipotence, is a resolute foe of free enterprise, and advocates all-round planning by the authorities, i.e., socialism.”

Today, most modern “liberals” think they have found a shortcut to economic prosperity—massive political action. They hold that the injustices of our world can all be corrected by the political direction of a “more equal” distribution of wealth. The first step they advo­cated was to levy confiscatory taxes on corporations and higher than-average personal incomes for “redistribution” among those groups whose votes they sought.

When it was found that such taxes slow down production, the next step of the self-styled “liberals” has been to even up wealth by the injection of newly created sums of money into the bank accounts and pocketbooks of those whose politi­cal support is considered neces­sary. These recipients are ex­pected to spend the artificially created “legal tender” promptly and thus bring about “full employ­ment” and a business boom.

As Mises tells us, “those who advocate equality of income dis­tribution overlook the most im­portant point, namely, that the to­tal available for distribution, the annual product of social labor, is not independent of the manner in which it is divided. The fact that that product is today as great as it is… is entirely the result of our social institutions. Only be­cause inequality of wealth is pos­sible in our social order, only be­cause it stimulates everyone to produce as much as he can and at the lowest cost, does mankind to­day have at its disposal the… wealth now available for consump­tion. Were this incentive to be de­stroyed, productivity would be so greatly reduced that the portion that an equal distribution would allot to each individual would befar less than what even the poor­est receives today.”

How can we stem the present tide of pseudo liberalism? How can we start a surge toward real liberalism? Here is the answer in the words of Mises:

“There is nothing in the world more powerful than ideologies and ideologists and only with ideas can one fight against ideas…. Against what is stupid, nonsensi­cal, erroneous, and evil, liberalism fights with the weapons of the mind, and not with brute force and repression…. In a battle between force and an idea, the latter always prevails…. The minority that desires to see its ideas triumph must strive by in­tellectual means to become the ma­jority.”

This little book is full of the right ideas. Unlike some of the other fundamental books of Mises, this volume is exceedingly easy to read. Those who shudder at heavy tomes will find it written in sim­ple style and delightfully clear. If we are to avoid the complete col­lapse of our market society, on which each of us has become so dependent for our very means of survival, the contents of this great book should be widely read and spread.

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.