All Commentary
Thursday, August 1, 1963

The Economic Role of Saving and Capital Goods

Dr. Mises is Visiting Professor of Economics at New York University and part-time adviser, consultant, and staff member of the Founda­tion for Economic Education.

As the popular philosophy of the common man sees it, human wealth and welfare are the prod­ucts of the cooperation of two primordial factors: nature and hu­man labor. All the things that en­able man to live and to enjoy life are supplied either by nature or by work or by a combination of nature-given opportunities with human labor. As nature dispenses its gifts gratuitously, it follows that all the final fruits of produc­tion, the consumers’ goods, ought to be allotted exclusively to the workers whose toil has created them. But unfortunately in this sinful world conditions are dif­ferent. There the “predatory” classes of the “exploiters” want to reap although they have not sown. The landowners, the capitalists, and the entrepreneurs appropriate to themselves what by rights be­longs to the workers who have produced it. All the evils of the world are the necessary effect of this originary wrong.

Such are the ideas that domi­nate the thinking of most of our contemporaries. The socialists and the syndicalists conclude that in order to render human affairs more satisfactory it is necessary to eliminate those whom their jar­gon calls the “robber barons,” i.e., the entrepreneurs, the capitalists, and the landowners, entirely; the conduct of all production affairs ought to be entrusted either to the social apparatus of compulsion and coercion, the state (in the Marxian terminology called Society), or to the men employed in the individual plants or branches of production.

Other people are more consider­ate in their reformist zeal. They do not intend to expropriate those whom they call the “leisure class” entirely. They want only to take away from them as much as is needed to bring about “more equality” in the “distribution” of wealth and income.

But both groups, the party of the thoroughgoing socialists and that of the more cautious reform­ers, agree in the basic doctrine according to which profit and in­terest are “unearned” income, are therefore morally objectionable, are the cause of the misery of the great majority of all honest work­ingmen and their families, and ought to be sharply curbed, if not entirely abolished, in a decent and satisfactory organization of so­ciety.

Yet this whole interpretation of human conditions is fallacious. The policies engendered by it are pernicious from whatever point of view we may judge them. Western civilization is doomed if we do not succeed very soon in substituting reasonable methods of dealing with economic problems for the present disastrous methods.

Three Factors of Production

Mere work—that is, effort not guided by a rational plan and not aided by the employment of tools and intermediary products—brings about very little for the improvement of the worker’s con­dition. Such work is not a specifi­cally human device. It is what man has in common with all other ani­mals. It is bestirring oneself in­stinctively and using one’s bare hands to gather whatever is eat­able and drinkable that can be found and appropriated.

Physical exertion turns into a factor of human production when it is directed by reason toward a definite end and employs tools and previously produced inter­mediary products. Mind—reason—is the most important equip­ment of man. In the human sphere, labor counts only as one item in a combination of natural resour­ces, capital goods, and labor; all these three factors are employed, according to a definite plan de­vised by reason, for the attain­ment of an end chosen. Labor, in the sense in which this term is used in dealing with human af­fairs, is only one of several fac­tors of production.

The establishment of this fact demolishes entirely all the theses and claims of the popular doctrine of exploitation. Those saving and thereby accumulating capital goods, and those abstaining from the consumption of previously accumulated capital goods, con­tribute their share to the outcome of the processes of production. Equally indispensable in the con­duct of affairs is the role played by the human mind. Entrepre­neurial judgment directs the toil of the workers and the employ­ment of the capital goods toward the ultimate end of production, the best possible removal of what causes people to feel discontented and unhappy.

What distinguishes contem­porary life in the countries of Western civilization from condi­tions as they prevailed in earlier ages—and still exist for the greater number of those living today—is not the changes in the supply of labor and the skill of the workers and not the famili­arity with the exploits of pure science and their utilization by the applied sciences, by technol­ogy. It is the amount of capital accumulated. The issue has been intentionally obscured by the ver­biage employed by the interna­tional and national government agencies dealing with what is called foreign aid for the under­developed countries. What these poor countries need in order to adopt the Western methods of mass production for the satisfac­tion of the wants of the masses is not information about a “know how.” There is no secrecy about technological methods. They are taught at the technological schools and they are accurately described in textbooks, manuals, and periodical magazines. There are many experienced specialists available for the execution of every project that one may find practicable for these backward countries. What prevents a coun­try like India from adopting the American methods of industry is the paucity of its supply of capital goods. As the Indian government’s confiscatory policies are deterring foreign capitalists from invest­ing in India and as its prosocial­ist bigotry sabotages domestic accumulation of capital, their country depends on the alms that Western nations are giving to it.

Consumers Direct the Use of Capital

Capital goods come into exist­ence by saving. A part of the goods produced is withheld from immediate consumption and em­ployed for processes the fruits of which will only mature at a later date. All material civilization is based upon this “capitalistic” approach to the problems of pro­duction.

“Roundabout methods of pro­duction,” as Böhm-Bawerk called them, are chosen because they generate a higher output per unit of input. Early man lived from hand to mouth. Civilized man pro­duces tools and intermediary pro­ducts in the pursuit of long-range designs that finally bring forth results which direct, less time-consuming methods could never have attained or only with an in­comparably higher expenditure of labor and material factors.

Those saving—that is con­suming less than their share of the goods produced—inaugurate progress toward general prosper­ity. For the seed they have sown enriches not only themselves but also all other strata of society.

It benefits the consumers. The capital goods are for the owner a dead fund, a liability rather than an asset, if not used in production for the best possible and cheap­est provision of the people with the goods and services they are asking for most urgently. In the market economy the owners of capital goods are forced to em­ploy their property as if it were entrusted to them by the consum­ers under the stipulation to in­vest it in those lines in which it best serves those consumers. Virtually, the capitalists are man­dataries of the consumers, bound to comply with their wishes.

In order to attend to the orders received from the consumers, their real bosses, the capitalists must either themselves proceed to investment and the conduct of business or, if they are not pre­pared for such entrepreneurial activity or distrust their own abilities, hand over their funds to men whom they consider as better fitted for such a function.

Whatever alternative they may choose, the supremacy of the con­sumers remains intact. No matter what the financial structure of the firm or company may be, the entrepreneur who operates with other peoples’ money depends no less on the market, that is, the consumers, than the entrepreneur who fully owns his outfit.

There is no other method to make wage rates rise than by in­vesting more capital per worker. More investment of capital means: to give to the laborer more effi­cient tools. With the aid of better tools and machines, the quantity of the products increases and their quality improves. As the employer consequently will be in a position to obtain from the consumers more for what the em­ployee has produced in one hour of work, he is able—and, by the competition of other employers, forced—to pay a higher price for the man’s work.

Intervention and Unemployment

As the labor union doctrine sees it, the wage increases that they are obtaining by what is euphe­mistically called “collective bar­gaining” are not to burden the buyers of the products but should be absorbed by the employers. The latter should cut down what in the eyes of the communists is called “unearned income,” that is, interest on the capital invested and the profits derived from success in filling wants of the consumers that until then had remained un­satisfied. Thus the unions hope to transfer step by step all this al­legedly unearned income from the pockets of the capitalists and en­trepreneurs into those of the em­ployees.

What really happens on the market is, however, very different. At the market price m of the prod­uct p, all those who were prepared to spend m for a unit of p could buy as much as they wanted. The total quantity of p produced and offered for sale was s. It was not larger than s because with such a larger quantity the price, in order to clear the market, would have to drop below m to m1. But at this price of m1 the producers with the highest costs would suffer losses and would thereby be forced to stop producing p. These marginal producers likewise incur losses and are forced to discontinue producing p if the wage increase enforced by the union (or by a governmental minimum wage de­cree) causes an increase of pro­duction costs not compensated by a rise in the price of m to m,. The resulting restriction of production necessitates a reduction of the labor force. The outcome of the union’s “victory” is the unemploy­ment of a number of workers.

The result is the same if the employers are in a position to shift the increase in production costs fully to the consumers, with­out a drop in the quantity of p produced and sold. If the consum­ers are spending more for the purchase of p, they must cut down their buying of some other com­modity q. Then the demand for q drops and brings about unemploy­ment of a part of the men who were previously engaged in turn­ing out q.

The union doctrine qualifies in­terest received by the owners of the capital invested in the enter­prise as “unearned” and concludes that it could be abolished entirely or considerably shortened with­out any harm to the employees and the consumers. The rise in production costs caused by wage increases could therefore be borne by shortening the company’s net earnings and a corresponding re­duction of the dividends paid to the shareholders. The same idea is at the bottom of the unions’ claim that every increase in what they call productivity of labor, (that is, in the sum of the prices received for the total output di­vided by the number of man hours spent in its production) should be added to the wage bill. Both meth­ods mean confiscating for the ben­efit of the employees the whole or at least a considerable part of the returns on the capital pro­vided by the saving of the capi­talists. But what induces the capitalists to abstain from con­suming their capital and to in­crease it by new saving is the fact that their forbearance is counterbalanced by the proceeds of their investments. If one de­prives them of these proceeds, the only use they can make of the capital they own is to con­sume it and thus to inaugurate general progressive impoverish­ment.

The Only Sound Policy

What elevates the wage rates paid to the American workers a­bove the rates paid in foreign countries is the fact that the in­vestment of capital per worker is in this country higher than abroad. Saving, the accumulation of capital, has created and pre­served up to now the high stand­ard of living of the average Amer­ican employee.

All the methods by which the federal government and the gov­ernments of the states, the polit­ical parties, and the unions are trying to improve the conditions of people anxious to earn wages and salaries are not only vain but directly pernicious. There is only one kind of policy that can effec­tively benefit the employees, namely, a policy that refrains from putting any obstacles in the way of further saving and accumu­lation of capital.




Ideas on Liberty

Wrong Problem

A story is told of a motorcycle driver who, on a wintry night, reversed his jacket so that the bitter winds would not come through the gaps between the buttons. The jacket was somewhat uncomfortable back-to-front, but it served the purpose. As he sped along the road, he skidded on an icy spot and the poor fellow crashed into a tree.

When the ambulance arrived, the first-aid men pushed through the crowd and asked a man who was standing over the victim what happened. He replied that the motorcycle rider seemed to be in pretty good shape after the crash, but by the time they got his head straightened out he was dead.

So it goes when people get excited and take quick action to provide a remedy for a problem without clearly understanding what the problem is.

JOHN A. HOWARD, Federal Aid: Stampede to Disaster

  • Ludwig von Mises (1881-1973) taught in Vienna and New York and served as a close adviser to the Foundation for Economic Education. He is considered the leading theorist of the Austrian School of the 20th century.