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Ludwig von Mises

Ludwig von Mises, 1881-1973, was one of the great defenders of a rational economic science, and perhaps the sin­gle most creative mind at work in this field in our century.

Found among the papers of Dr. Mises were transcripts of lectures he delivered in Argentina in 1959. These have now been edited by his widow and are avail­able as a Regnery/Gateway paper-backed book. This article, one of the lectures, is here reprinted by permission of the publishers. All rights reserved.

The book, Economic Policy: Thoughts for Today and Tomorrow, also may be purchased from The Founda­tion for Economic Education, Inc., Irvington-on-Hudson, N.Y. 10533.

Descriptive terms which people use are often quite misleading. In talk­ing about modern captains of indus­try and leaders of big business, for instance, they call a man a "choco­late king" or a "cotton king" or an "automobile king." Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all, he serves. He does not reign over conquered ter­ritory, independent of the market, independent of his customers. The chocolate king—or the steel king or the automobile king or any other king of modern industry—depends on the industry he operates and on the customers he serves. This "king" must stay in the good graces of his subjects, the consumers; he loses his "kingdom" as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.

Two hundred years ago, before the advent of capitalism, a man’s social status was fixed from the beginning to the end of his life: he inherited it from his ancestors, and it never changed. If he was born poor, he always remained poor, and if he was born rich—a lord or a duke—he kept his dukedom and the property that went with it for the rest of his life.

As for manufacturing, the primi­tive processing industries of those days existed almost exclusively for the benefit of the wealthy. Most of the people (ninety per cent or more of the European population) worked the land and did not come in contact with the city-oriented processing in­dustries. This rigid system of feudal society prevailed in the most de­veloped areas of Europe for many hundreds of years.

However, as the rural population expanded, there developed a surplus of people on the land. For this surplus of population without inher­ited land or estates, there was not enough to do, nor was it possible for them to work in the processing in­dustries; the kings of the cities de­nied them access. The numbers of these "outcasts" continued to grow, and still no one knew what to do with them. They were, in the full sense of the word, "proletarians," outcasts whom the government could only put into the workhouse or the poorhouse. In some sections of Europe, especially in the Nether­lands and in England, they became so numerous that, by the eighteenth century, they were a real menace to the preservation of the prevailing social system.

Today, in discussing similar con­ditions in places like India or other developing countries, we must not forget that, in eighteenth-century England, conditions were much worse. At that time, England had a population of six or seven million people, but of those six or seven million people, more than one mil­lion, probably two million, were simply poor outcasts for whom the existing social system made no pro­vision. What to do with these out­casts was one of the great problems of eighteenth-century England.

Another great problem was the lack of raw materials. The British, very seriously, had to ask them­selves this question: what are we going to do in the future, when our forests will no longer give us the wood we need for our industries and for heating our houses? For the rul­ing classes it was a desperate situa­tion. The statesmen did not know what to do, and the ruling gentry were absolutely without any ideas on how to improve conditions.

The Start of Mass Production

Out of this serious social situation emerged the beginnings of modern capitalism. There were some per­sons among those outcasts, among those poor people, who tried to or­ganize others to set up small shops which could produce something. This was an innovation. These in­novators did not produce expensive goods suitable only for the upper classes; they produced cheaper products for everyone’s needs. And this was the origin of capitalism as it operates today; It was the begin­ning of mass production, the funda­mental principle of capitalistic in­dustry. Whereas the old processing industries serving the rich people in the cities had existed almost exclusively for the demands of the upper classes, the new capitalist industries began to produce things that could be purchased by the general popula­tion. It was mass production to satisfy the needs of the masses.

This is the fundamental principle of capitalism as it exists today in all of those countries in which there is a highly developed system of mass production: Big business, the target of the most fanatic attacks by the so-called leftists, produces almost exclusively to satisfy the wants of the masses. Enterprises producing luxury goods solely for the well-to-do can never attain the magnitude of big businesses. And today, it is the people who work in large factories who are the main consumers of the products made in those factories.

This is the fundamental difference between the capitalistic principles of production and the feudalistic prin­ciples of the preceding ages.

Consumer Sovereignty

When people assume, or claim, that there is a difference between the producers and the consumers of the products of big businesses, they are badly mistaken. In American department stores you hear the slo­gan "the customer is always right." And this customer is the same man who produces in the factory those things which are sold in the depart­ment stores. The people who think that the power of big business is enormous are mistaken also, since big business depends entirely on the patronage of those who buy its products; the biggest enterprise loses its power and its influence when it loses its customers.

Fifty or sixty years ago it was said in almost all capitalist countries that the railroad companies were too big and too powerful; they had a monopoly; it was impossible to com­pete with them. It was alleged that, in the field of transportation, capi­talism had already reached a stage at which it had destroyed itself, for it had eliminated competition. What people overlooked was the fact that the power of the railroads depended on their ability to serve people bet­ter than any other method of trans­portation. Of course it would have been ridiculous to compete with one of these big railroad companies by building another railroad parallel to the old line, since the old line was sufficient to serve existing needs. But very soon there came other competitors. Freedom of competition does not mean that you can succeed simply by imitating or copying pre­cisely what someone else has done. Freedom of the press does not mean that you have the right to copy what another man has written and thus to acquire the success which this other man has duly merited on account of his achievements. It means that you have the right to write something different. Freedom of competition concerning railroads, for example, means that you are free to invent something, to do something, which will challenge the railroads and place them in a very precarious competitive situation.

In the United States the competi­tion to the railroads—in the form of buses, automobiles, trucks, and airplanes—has caused the railroads to suffer and to be almost completely defeated, as far as passenger trans­portation is concerned.

Capitalism Transformed the World

The development of capitalism consists in everyone’s having the right to serve the customer better and/or more cheaply. And this method, this principle, has, within a comparatively short time, trans­formed the whole world. It has made possible an unprecedented increase in world population.

In eighteenth-century England, the land could support only six mil­lion people at a very low standard of living. Today more than fifty million people enjoy a much higher stan­dard of living than even the rich enjoyed during the eighteenth-century. And today’s standard of liv­ing in England would probably be still higher, had not a great deal of the energy of the British been wasted in what were, from various points of view, avoidable political and military "adventures."

These are the facts about capital­ism. Thus, if an Englishman—or, for that matter, any other man in any country of the world—says today to his friends that he is opposed to capitalism, there is a wonderful way to answer him: "You know that the population of this planet is now ten times greater than it was in the ages preceding capitalism; you know that all men today enjoy a higher stan­dard of living than your ancestors did before the age of capitalism. But how do you know that you are the one out of ten who would have lived in the absence of capitalism? The mere fact that you are living today is proof that capitalism has suc­ceeded, whether or not you consider your own life very valuable."

Development of Factory System

In spite of all its benefits, capital­ism has been furiously attacked and criticized. It is necessary that we understand the origin of this an­tipathy. It is a fact that the hatred of capitalism originated not with the masses, not among the workers themselves, but among the landed aristocracy—the gentry of England and the European continent. They blamed capitalism for something that was not very pleasant for them: at the beginning of the nineteenth century, the higher wages paid by industry to its workers forced the landed gentry to pay equally higher wages to their agricultural workers. The aristocracy attacked the indus­tries by criticizing the standard of living of the masses of the workers. Of course—from our viewpoint, the workers’ standard of living was extremely low; conditions under early capitalism were absolutely shocking, but not because the newly developed capitalistic industries had harmed the workers. The people hired to work in factories had al­ready been existing at a virtually subhuman level.

The famous old story, repeated hundreds of times, that the factories employed women and children and that these women and children, be­fore they were working in factories, had lived under satisfactory condi­tions, is one of the greatest false­hoods of history. The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into fac­tories because they had no kitchens, and if they had a kitchen they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying. And all the talk about the so-called unspeakable horror of early capitalism can be refuted by a single statistic: pre­cisely in these years in which British capitalism developed, pre­cisely in the age called the Indus­trial Revolution in England, in the years from 1760 to 1830, precisely in those years the population of Eng­land doubled, which means that hundreds of thousands of children—who would have died in preceding times—survived and grew to become men and women.

Trade Brings Improvement

There is no doubt that the condi­tions of the preceding times were very unsatisfactory. It was capitalist business that improved them. It was precisely those early factories that provided for the needs of their work­ers, either directly or indirectly by exporting products and importing food and raw materials from other countries. Again and again, the early historians of capitalism have—one can hardly use a milder word—falsified history.

One anecdote they used to tell, quite possibly invented, involved Benjamin Franklin. According to the story, Ben Franklin visited a cotton mill in England, and the owner of the mill told him, full of pride: "Look, here are cotton goods for Hungary." Benjamin Franklin, looking around, seeing that the workers were shabbily dressed said: "Why don’t you produce also for your own workers?"

But those exports of which the owner of the mill spoke really meant that he did produce for his own workers, because England had to import all its raw materials. There was no cotton either in England or in continental Europe. There was a shortage of food in England, and it had to be imported from Poland, from Russia, from Hungary. These exports were the payment for the imports of the food which made the survival of the British population possible. Many examples from the history of those ages will show the attitude of the gentry and aristoc­racy toward the workers. I want to cite only two examples. One is the famous British Speenhamland sys­tem. By this system, the British government paid all workers who did not get the minimum wage (deter­mined by the government) the dif­ference between the wages they re­ceived and this minimum wage. This saved the landed aristocracy the trouble of paying higher wages. The gentry would pay the tradi­tionally low agricultural wage, and the government would supplement it, thus keeping workers from leav­ing rural occupations to seek urban factory employment.

Eighty years later, after capital­ism’s expansion from England to continental Europe, the landed aris­tocracy again reacted against the new production system. In Germany the Prussian Junkers, having lost many workers to the higher-paying capitalistic industries, invented a special term for the problem: "flight from the countryside"—Landflucht. And in the German Parliament, they discussed what might be done against this evil, as it was seen from the point of view of the landed aris­tocracy. Prince Bismarck, the fa­mous chancellor of the German Reich, in a speech one day said, "I met a man in Berlin who once had worked on my estate, and I asked this man, ‘Why did you leave the estate; why did you go away from the country; why are you now living in Berlin?’ "

And, according to Bismarck, this man answered, "You don’t have such a nice Biergarten in the village as we have here in Berlin, where you can sit, drink beer, and listen to music." This is, of course, a story told from the point of view of Prince Bismarck, the employer. It was not the point of view of all his employ­ees. They went into industry be­cause industry paid them higher wages and raised their standard of living to an unprecedented degree.

Living Standards under Capitalism

Today, in the capitalist countries, there is relatively little difference between the basic life of the so-called higher and lower classes; both have food, clothing, and shelter. But in the eighteenth century and ear­lier, the difference between the man of the middle class and the man of the lower class was that the man of the middle class had shoes and the man of the lower class did not have shoes. In the United States today the difference between a rich man and a poor man means very often only the difference between a Cadil­lac and a Chevrolet. The Chevrolet may be bought secondhand, but bas­ically it renders the same services to its owner: he, too, can drive from one point to another. More than fifty percent of the people in the United States are living in houses and apartments they own themselves.

The attacks against capitalism—especially with respect to the higher wage rates—start from the false as­sumption that wages are ultimately paid by people who are different from those who are employed in the factories. Now it is all right for economists and for students of economic theories to distinguish be­tween the worker and the consumer and to make a distinction between them. But the fact is that every consumer must, in some way or the other, earn the money he spends, and the immense majority of the consumers are precisely the same people who work as employees in the enterprises that produce the things which they consume.

Wage rates under capitalism are not set by a class of people different from the class of people who earn the wages: they are the same people. It is not the Hollywood film corpora­tion that pays the wages of a movie star; it is the people who pay admis­sion to the movies. And it is not the entrepreneur of a boxing match who pays the enormous demands of the prize fighters; it is the people who pay admission to the fight. Through the distinction between the em­ployer and the employee, a distinction is drawn in economic theory, but it is not a distinction in real life; here, the employer and the em­ployee ultimately are one and the same person.

There are people in many coun­tries who consider it very unjust that a man who has to support a family with several children will re­ceive the same salary as a man who has only himself to take care of. But the question is not whether the em­ployer should bear greater responsi­bility for the size of a worker’s fam­ily.

The question we must ask in this case is: Are you, as an individual, prepared to pay more for something, let us say, a loaf of bread, if you are told that the man who produced this loaf of bread has six children? The honest man will certainly answer in the negative and say, "In principle I would, but in fact I would rather buy the bread produced by a man with­out any children." The fact is that, if the buyers do not pay the employer enough to enable him to pay his workers, it becomes impossible for the employer to remain in business.

The Meaning of Capitalism

The capitalist system was termed "capitalism" not by a friend of the system, but by an individual who considered it to be the worst of all historical systems, the greatest evil that had ever befallen mankind. That man was Karl Marx.

Nevertheless, there is no reason to reject Marx’s term, because it de­scribes clearly the source of the great social improvements brought about by capitalism. Those im­provements are the result of capital accumulation; they are based on the fact that people, as a rule, do not consume everything they have produced, that they save—and invest—a part of it.

There is a great deal of misun­derstanding about this problem and—in the course of these six lectures—I will have the opportu­nity to deal with the most funda­mental misapprehensions which people have concerning the accumu­lation of capital, the use of capital, and the universal advantages to be gained from such use. I will deal with capitalism particularly in my lectures about foreign investment and about that most critical problem of present-day politics, inflation. You know, of course, that inflation exists not only in this country. It is a problem all over the world today.

An often unrealized fact about capitalism is this: savings mean benefits for all those who are anx­ious to produce or earn wages. When a man has accrued a certain amount of money—let us say, one thousand dollars—and, instead of spending it, entrusts these dollars to a savings bank or an insurance company, the money goes into the hands of an entrepreneur, a businessman, enabling him to go out and embark on a project which could not have been embarked on yesterday, be­cause the required capital was un­available.

The owner of producer’s goods in the frame of a market economy is forced to employ them for the best possible satisfaction of the wants of the consumers. He for­feits his property if other people eclipse him by better serving the consumers. In the market econ­omy property is acquired and preserved by serving the public and is lost when the public be­comes dissatisfied with the way in which it is served. . . . By the instrumentality of the profit-and­-loss system, the owners are forced to deal with "their" prop­erty as if it were other peoples’ property entrusted to them under the obligation to utilize it for the best possible satisfaction of the virtual beneficiaries, the consum­ers.

How Capital Creates Jobs

What will the businessman do now with the additional capital? The first thing he must do, the first use he will make of this additional capi­tal, is to go out and hire workers and buy raw materials—in turn causing a further demand for workers and raw materials to develop, as well as a tendency toward higher wages and higher prices for raw materials. Long before the saver or the entre­preneur obtains any profit from all of this, the unemployed worker, the producer of raw materials, the farmer, and the wage-earner are all sharing in the benefits of the addi­tional savings.

Whether the entrepreneur will get something out of the project de­pends on the future state of the market and on his ability to antici­pate correctly the future state of the market. But the workers as well as the producers of raw materials get the benefits immediately. Much was said, thirty or forty years ago, about the "wage policy," as they called it, of Henry Ford. One of Mr. Ford’s great accomplishments was that he paid higher wages than did other industrialists or factories. His wage policy was described as an "inven­tion," yet it is not enough to say that this new "invented" policy was the result of the liberality of Mr. Ford. A new branch of business, or a new factory in an already existing branch of business, has to attract workers from other employments, from other parts of the country, even from other countries. And the only way to do this is to offer the workers higher wages for their work. This is what took place in the early days of capitalism, and it is still taking place today.

When the manufacturers in Great Britain first began to produce cotton goods, they paid their workers more than they had earned before. Of course, a great percentage of these new workers had earned nothing at all before that and were prepared to take anything they were offered. But after a short time—when more and more capital was accumulated and more and more new enterprises were developed—wage rates went up, and the result was the unpre­cedented increase in British popula­tion which I spoke of earlier.

Theory of "Impoverishment"

The scornful depiction of capital­ism by some people as a system designed to make the rich become richer and the poor become poorer is wrong from beginning to end. Marx’s thesis regarding the coming of socialism was based on the as­sumption that workers were getting poorer, that the masses were becom­ing more destitute, and that finally all the wealth of a country would be concentrated in a few hands or in the hands of one man only. And then the masses of impoverished workers would finally rebel and expropriate the riches of the wealthy propri­etors. According to this doctrine of Karl Marx, there can be no opportu­nity, no possibility within the capi­talistic system for any improvement of the conditions of the workers.

In 1865, speaking before the International Workingmen’s As­sociation in England, Marx said the belief that labor unions could im­prove conditions for the working population was "absolutely in er­ror." The union policy of asking for higher wage rates and shorter work hours he called conservative—con­servatism being, of course, the most condemnatory term which Karl Marx could use. He suggested that the unions set themselves a new, revolutionary goal: that they "do away with the wage system al­together," that they substitute "socialism"—government ownership of the means of production—for the system of private ownership.

If we look upon the history of the world, and especially upon the his­tory of England since 1865, we realize that Marx was wrong in every respect. There is no western, capitalistic country in which the conditions of the masses have not improved in an unprecedented way. All these improvements of the last eighty or ninety years were made in spite of the prognostications of Karl Marx. For the Marxian socialists believed that the conditions of the workers could never be ameliorated. They followed a false theory, the famous "iron law of wages"—the law which stated that a worker’s wages, under capitalism, would not exceed the amount he needed to sustain his life for service to the enterprise.

The Marxians formulated their theory in this way: if the workers’ wage rates go up, raising wages above the subsistence level, they will have more children; and these children, when they enter the labor force, will increase the number of workers to the point where the wage rates will drop, bringing the workers once more down to the subsistence level—to that minimal sustenance level which will just barely prevent the working population from dying out.

But this idea of Marx, and of many other socialists, is a concept of the working man precisely like that which biologists use—and rightly so—in studying the life of animals. Of mice, for instance.

Improved Conditions Depend on Sound Economic Policies

If you increase the quantity of food available for animal organisms or for microbes, then more of them will survive. And if you restrict their food, then you will restrict their numbers. But man is different. Even the worker—in spite of the fact that Marxists do not acknowledge it—has human wants other than food and reproduction of his species. An increase in real wages results not only in an increase in popula­tion, it results also, and first of all, in an improvement in the average standard of living. That is why today we have a higher standard of living in Western Europe and in the United States than in the developing nations of, say, Africa.

We must realize, however, that this higher standard of living de­pends on the supply of capital. This explains the difference between conditions in the United States and conditions in India; modern methods of fighting contagious diseases have been introduced in India—at least, to some extent—and the effect has been an unprecedented increase in population but, since this increase in population has not been accom­panied by a corresponding increase in the amount of capital invested, the result has been an increase in poverty. A country becomes more prosperous in proportion to the rise in the invested capital per unit of its population.

But you have to remember that, in economic policies, there are no miracles. You have read in many newspapers and speeches, about the so-called German economic miracle—the recovery of Germany after its defeat and destruction in the Second World War. But this was no miracle. It was the application of the principles of the free market economy, of the methods of capital­ism, even though they were not applied completely in all respects. Every country can experience the same "miracle" of economic recov­ery, although I must insist that economic recovery does not come from a miracle; it comes from the adoption of—and is the result of—sound economic policies. 

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