A popular legend calls Adam Smith the Father of Political Economy and his two great books—The Theory of Moral Sentiments, first published in 1759, and An Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776—epoch-making in economic history as well as in the evolution of economic thought. However, this is not quite correct. Smith did not inaugurate a new chapter in social philosophy and did not sow on land hitherto left uncultivated. His books were rather the consummation, summarization, and perfection of lines of thought developed by eminent authors—mostly British—over a period of more than a hundred years. Smith’s books did not lay the foundation stone, but the keystone, of a marvelous system of ideas. Their eminence is to be seen precisely in the fact that they integrated the main body of these ideas into a systematic whole. They presented the essence of the ideology of freedom, individualism, and prosperity, with admirable logical clarity and in an impeccable literary form.

It was this ideology that blew up the institutional barriers to the display of the individual citizen’s initiative and thereby to economic improvement. It paved the way for the unprecedented achievements of laissez-faire capitalism. The practical application of liberal principles multiplied population figures and, in the countries committed to the policies of economic freedom, secured even to less capable and less industrious people a standard of living higher than that of the well-to-do of the “good old” days. The average American wage-earner would not like to dwell in the dirty, badly lighted, and poorly heated palatial houses, in which the members of the privileged English and French aristocracy lived 200 years ago, or to do without those products of capitalist big business that render his life comfortable.

The ideas that found their classical expression in the two books of Adam Smith demolished the traditional philosophy of Mercantilism and opened the way for capitalist mass production for the needs of the masses. Under capitalism the common man is the much-talked-about customer who “is always right.” His buying makes efficient entrepreneurs rich, and his abstention from buying forces inefficient entrepreneurs to go out of business. Consumers’ sovereignty, which is the characteristic mark of business in a free world, is the signature of production activities in the countries of Western Civilization.

The civilization is today furiously attacked by Eastern barbarians from without and by domestic self-styled Progressives from within. Their aim is, as one of their intellectual leaders, the Frenchman Georges Sorel,*  put it, to destroy what exists. They want to substitute central planning by the government for the autonomy of the individual citizens, and totalitarianism for democracy. As their muddy and unwarranted schemes cannot stand the criticism leveled by sound economics, they exult in smearing and calumniating all their opponents.

Adam Smith too is a target of these smear campaigns. One of the most passionate advocates of destructionism had the nerve to call him, in the Introduction to an inexpensive edition of the Wealth of Nations, “an unconscious mercenary in the service of a rising capitalist class” and to add that “he gave a new dignity to greed and a new sanctification to the predatory impulses.”1  Other leftists resort to even still ruder insults.

As against such shallow opinions it may be appropriate to quote the verdict of wiser judges. The British historian Henry Thomas Buckle (1821-1862), declared “that this solitary Scotchman has, by the publication of one single work, contributed more toward the happiness of man than has been effected by the united abilities of all the statesmen and legislators of whom history has presented an authentic record.” The English economist Walter Bagehot (1826-1877) said about the Wealth of Nations: “The life of almost everyone in England—perhaps of everyone—is different and better in consequence of it.”

A work that has been praised in such a way by eminent authors must not be left on the shelves of libraries for the perusal of specialists and historians only. At least its most important chapters should be read by all those who are eager to learn something about the past. There can hardly be found another book that could initiate a man better into the study of the history of modern ideas and the prosperity created by industrialization. Its publication date—1776, the year of the American Declaration of Independence—marks the dawn of freedom both political and economic. There is no Western nation that was not benefited by policies inspired by the ideas that received their classical formulation in this unique treatise.

However, a warning must be given. Nobody should believe that he will find in Smith’s Wealth of Nations information about present-day economics or about present-day problems of economic policy. Reading Smith is no more a substitute for studying economics than reading Euclid is a substitute for the study of mathematics. It is at best an historical introduction into the study of modern ideas and policies. Neither will the reader find in the Wealth of Nations a refutation of the teachings of Marx, Veblen, Keynes, and their followers. It is one of the tricks of the socialists to make people believe that there are no other writings recommending economic freedom than those of 18th-century authors and that in their, of course unsuccessful, attempts to refute Smith they have done all that is needed to prove the correctness of their own point of view. Socialist professors—not only in the countries behind the Iron Curtain—withheld from their students any knowledge about the existence of contemporary economists who deal with the problems concerned in an unbiased scientific way and who have devastatingly exploded the spurious schemes of all brands of socialism and interventionism. If they are blamed for their partiality, they protest their innocence. “Did we not read in class some chapters of Adam Smith?” they retort. In their pedagogy the reading of Smith serves as a blind for ignoring all sound contemporary economics.

Read the great book of Smith. But don’t think that this may save you the trouble of seriously studying modern economics books. Smith sapped the prestige of 18th-century government controls. He does not say anything about the controls of 1952 or the Communist challenge.

Introduction to the Henry Regnery Co. edition (1953) of Adam Smith, An Inquiry into the Nature and Causes of The Wealth of Nations: Selections.

• *Georges Sorel (1847-1922), a French political thinker, advocated at various times in his life violence, Marxism, revolutionary syndicalism, and Bolshevism.
• 1Max Lerner in the Modern Library edition of the Wealth of Nations (New York: Random House), 1937, p. ix.

The most popular of the Marxian teachings is the doctrine of the irreconcilable conflict of social classes.

Status or Caste in Precapitalistic Society

In the precapitalistic ages the characteristic mark of society’s organization was status. In the status or caste society there prevail legal differences among individuals. The individual’s station in life was fixed by his status. He inherited from his parents at birth his caste membership and his position in life was rigidly determined by the laws and customs that assigned to each member of his rank definite privileges, duties, and disabilities. Exceptional good or bad luck might in some rare cases elevate an individual into a higher rank or debase him into a lower rank. But as a rule, the conditions of the individual members of a definite order or rank could improve or deteriorate only with a change in the conditions of the whole membership. The individual was primarily not a citizen of a nation; he was a member of an estate (Stand in German, ?tat in French).

This system, that in England had already been substantially tempered and humanized in the Middle Ages, is incompatible with the capitalistic methods of the market economy. It was finally abolished in the countries of the European continent by the French Revolution and by the revolutions and reforms which the French Revolution called forth. Its last vestiges in the capitalistic part of the world disappeared when slavery was abolished step by step in the Americas and in the overseas colonies of the European powers.

In the status society there prevails, on the one hand, a solidarity of interests of all members of the same caste and, on the other hand, an irreconcilable conflict of interests between the members of different castes. All slaves, for instance, are united in having a stake in the abolition of slavery while their masters are opposed. All members of the European nobility were opposed to the abolition of their tax exemption, from which the Third Estate people expected a relaxation of their own burden. But no such conflicts are present in a society in which all citizens are equal before the law. No logical objection can be advanced against distinguishing various classes among the members of such a society; any classification is logically permissible, however arbitrarily the mark of distinction may be chosen. But it is nonsensical to classify the members of a capitalistic society according to their position in the framework of the social division of labor and then to identify these “classes” with the castes of a status society. It is precisely this that the Marxian doctrine of the irreconcilable struggle of classes does.

Marxian “Classes”

The “classes” that Marx distinguishes within a capitalistic society have a continually fluctuating membership. Class affiliation under capitalism is not a hereditary quality. It is assigned to each individual by a daily repeated plebiscite, as it were, of all the people. The buying public, the consumers, by their buying and abstention from buying, determine who should own and run the plants, who should work in the factories and mines, who should play the parts in the theater performances, and who should write the newspaper articles. They do it in a similar way in which they determine in their capacity as voters who should act as president, governor, or judge. In order to get rich in a capitalistic society and to preserve one’s once acquired wealth one must satisfy the wishes of the public. Those who have acquired wealth as well as their heirs must try to keep it by defending their assets against the competition of already established firms and of ambitious newcomers. In the unhampered market economy, not sabotaged by concessions and exemptions accorded to powerful pressure groups, there are no privileges, no protection of vested interests, no barriers preventing anybody from striving after any prize. Access to the Marxian-designated classes is free to everybody. The members of each class compete with one another. They are not united by a common class interest and not opposed to the members of other classes by being allied either in the defense of a common privilege, which those wronged by it want to see abolished, or in the attempt to abolish a legal disability which those deriving advantage from it want to preserve.

The champions of modern political freedom and laissez faire asserted: If the old laws establishing status privileges and disabilities are abolished and no new practices of the same character?such as subsidies, discriminatory taxation, indulgence granted to non-governmental agencies like unions to use coercion and intimidation?are introduced, there is equality of all citizens under the law. Nobody is hampered in his aspirations and ambitions by any legal obstacles. Everybody is free to compete for any social position or function for which his personal abilities qualify him.

But Marx saw things in a different light. He maintained that capitalism did not abolish bondage and did not do away with the servitude of the working and toiling masses. It did not emancipate the common man. The people merely changed their masters. Formerly they were forced to drudge for the princes and aristocrats; now they are exploited by the bourgeoisie. The division of society into “social classes” is, in the eyes of Marx, sociologically and economically not different from its division into the castes of the status society. The bourgeois of the modern age is no less a predatory extortioner than were the noblemen and slaveholders of ages gone by.

But what characterizes the “social class” as such, and what entitles us to equate it with the castes of the status society? To this question Marx never gave an answer. All his books, pamphlets and writings turn around the concept of the social class and the essence of his political and economic program is the abolition of “social classes” and the establishment of what he styles a classless society. But he never told us what be had in mind when employing the term “social class” and what justifies ascribing to the division of society into “social classes” the same effects as its division into castes had.

The main treatise of Karl Marx is Das Kapital. It was designed to provide a scientific justification of the ideas Marx had expressed in his numerous pamphlets and manifestos. Only the first volume of this book was published by Marx himself in 1867. Two years after the death of Marx his friend Engels published the second volume and finally, in 1894, eleven years after the death of Marx, the third volume, which consists of two parts, 870 pages altogether. Yet, the book remained unfinished. The third volume contains 51 chapters; then follows a 52nd one-page chapter that is headed “The Classes.” There Marx declares that the first question to be answered is what constitutes a class. But he does not provide an answer. Instead we read a note by the editor, Engels, saying: Here the manuscript breaks off.

One could be tempted to say: It is really tragic. Here is an author to whom fate denied the opportunity to define and to explain the fundamental concept of his philosophy, the concept on which all he said, argued and planned depended. At the hour in which he was to write down the most important thing he had to tell mankind, death took him off. How lamentable!

But a closer inspection reveals a different aspect of the case. The abundant biographical material about Marx collected and published by his followers and the Marx-Engels-Lenin Institute in Moscow evinces the fact that Marx had ceased to work on his book many years before his death. There cannot be any doubt about the reason. When faced with the task of telling in precise words what he had in mind when perorating about “social classes” and giving reasons for his doctrine of the irreconcilable conflict of interests between the “social classes,” Marx failed thoroughly. He had to acknowledge to himself that he was perplexed and was at his wit’s end. He did not know what to say in the planned 52nd chapter of the third volume and this embarrassment induced him to desist from finishing his great treatise. The essential dogma of the Marxian philosophy, the class conflict doctrine which he and his friend Engels had propagated for many decades, was unmasked as a flop.

Marxian Ideology Doctrine

The only retort that Marx, Engels and all their followers down to the Russian Bolshevists and the European and American professorial admirers of Marx knew to advance against their critics was the notorious ideology doctrine. According to this makeshift a man’s intellectual horizon is fully determined by his class affiliation. The individual is constitutionally unfit to reach out and to grasp any other doctrine than one that furthers the interests of his own “class” at the expense of other “classes.” It is, therefore, unnecessary for a proletarian to pay any attention to whatever bourgeois authors may say and to waste time refuting their statements. All that is needed is to unmask their bourgeois background. That settles the matter.

This is the method to which Marx and Engels and later Marxians resorted in dealing with all dissenters. They never embarked upon the hopeless task of defending their self-contradictory system against devastating criticism. All they did was to call their opponents stupid bourgeois and to ascribe their opposition to their bourgeois class affiliation.

But Marx and Engels also contradicted their own doctrine in this regard. They both were scions of bourgeois families, brought up and living in a typical middle class milieu. Marx was the son of a well-to-do member of the bar and married the daughter of a Prussian nobleman. His brother-in-law was Cabinet Minister of the Interior and as such the Chief of the Royal Prussian Police. Engels was the son of a wealthy manufacturer and a rich businessman himself; he indulged in the amusements of the British gentry such as riding to hounds in a red coat, and snobbishly refused to marry his mistress because she was of low origin. From the very Marxian point of view one would have to qualify Marxism as a doctrine of bourgeois origin.

The Destruction of Marxian Ideas Demands Vigorous Criticism

The enormous power that the Marxian ideas and the political parties guided by them enjoy in the present is not due to any inherent merits of the doctrine. It is an outgrowth of the moral and intellectual indifference and apathy of those whose duty it ought to be to offer unswerving resistance to false doctrines and to disclose their untruth. Some eminent philosophers and economists have provided irrefutable arguments to show the perversion, the misrepresentation of facts and the self-contradictions of the Marxian creed. But their books are not read by those whose responsibility it is to enlighten the public. Thus the masses today indolently endorse all the socialist slogans and look upon every step forward on the way toward totalitarianism as progress toward the establishment of an earthly paradise. It is the inertness and sloth on the part of many of our most eminent fellow citizens that make the impetuous advance of the communist power possible.

The task of fighting Marxian dialectical materialism and all the various epistemological, philosophical, economic, and political doctrines emanating from it can only be accomplished by well-informed people. Those who want to contribute seriously to the defense of Western civilization against the onslaught of the dictators must acquaint themselves with the doctrines they plan to fight and must with full vigor study the writings of those authors who have long since entirely demolished all the Marxian fables and distortions. One has to admit that this is not an easy matter. Yet, there are in this world no great things that can be accomplished but by moral resolution and strenuous exertion.

Reprinted from Christian Economics, October 3, 1961.

The most powerful force in the policies of our age is Karl Marx. The rulers of the many hundreds of millions of comrades in the Communist countries behind the Iron Curtain pretend to put into effect the teachings of Marx; they consider themselves as the executors of the testament of Marx. In the noncommunist countries there is more restraint in the appreciation of Marx’s achievements, but still he is praised at all universities as one of the greatest intellectual leaders of mankind, as the giant who has demolished inveterate prejudices and errors and has radically reformed philosophy and the sciences of man. Little attention is paid to the few dissenters who do not join in the chorus of commendation of Marx. They are boycotted as reactionaries.

The most remarkable fact about this unprecedented prestige of an author is that even his most enthusiastic admirers do not read his main writings and are not familiar with their content. A few passages and sentences from his books, always the same, are quoted again and again in political speeches and pamphlets. But the voluminous books and the scores of articles and pamphlets turned out by Marx are, as can be easily shown, not perused even by politicians and authors who proudly call themselves Marxians. Many people buy or borrow from a library reprints of Marx’s writings and start reading them. But, bored to death, they usually stop after a few pages, if they had not already stopped on the first page.

Doctrines of Marx

If people were familiar with the doctrines of Marx, they would never talk, as they often do, about socialism “according to the designs and precepts of Marx.” For Marx neither devised the concept of socialism nor did he ever say anything about the organization and operation of a socialist commonwealth except that it would be a blissful realm of unlimited abundance in which everybody would get all he needed. The idea of socialism?the abolition of private control of the material means of production and of free enterprise and the exclusive management of all economic affairs by the government?had been fully elaborated by French and British authors before Marx embarked upon his career as an author and propagandist. There was nothing left to be added to it and Marx did not add anything. Nor did he ever attempt to refute what economists had already brought forward in his time to show the illusiveness and absurdity of the socialist schemes. He derided as vain utopianism any occupation with the problems of a socialist economic system. As he himself viewed his own contribution, it consisted in the discovery of the alleged fact that the coming of socialism was inevitable and that socialism, precisely because it is bound to come “with the inexorability of a law of nature” and was the final goal to which mankind’s history must necessarily lead, would be the fulfillment of all human wishes and desires, a state of everlasting joy and happiness.

The writings of Marx, first of all the ponderous volumes of his main treatise, Das Kapital, do not deal with socialism. Rather they deal with the market economy, with capitalism. They depict capitalism as a system of unspeakable horrors and utmost detestableness in which the immense majority of people, the proletarians, are ruthlessly oppressed and exploited by a class of felonious capitalists. Everything in this nefarious system is hopelessly bad, and no reform, however well intentioned, can alleviate, still less remove, the abominable suffering of the proletarians. Nothing else can be said in favor of capitalism than that precisely on account of its monstrosity and atrocity it will one day, when the evils it produces become intolerable, result in the great social revolution that will generate the socialist millennium.

The “Iron Law” of Wages

The pith of Marx’s economic teachings is his “law” of wages. This alleged law that is at the bottom of his entire criticism of the capitalistic system is, of course, not of Marxian make. It was devised by earlier authors, had long since been known under the label of the “iron law of wages” and had already been thoroughly refuted before Marx employed it as the foundation of his doctrine. Marx chose to ignore all that had been said to show the viciousness of the reasoning implied in this alleged law. He made some sarcastic remarks about the German translation of the English term “iron law,” as suggested by his main rival for the leadership of the German socialist party, Ferdinand Lassalle (1825-1864). But he built his entire economic reasoning, all his prognostication of the future course of economic affairs and his whole political program upon the illusory basis of this fallacious theorem.

This so-called “iron law” declares that wage rates are determined by the cost of the means of subsistence required for the bare maintenance of the labor force. The wage earner cannot get more than is physiologically needed to preserve his capacity to work and to enable him to raise the number of children required to replace him when he dies. If wages rise above this level, the wage earners will rear more progeny and the competition of these additional seekers for employment will reduce wage rates again to what this doctrine considers the natural level. If, on the other hand, wages drop below this alleged natural level, the workers will not be able to feed the number of offspring needed to fill the ranks of the labor force. There will then develop a shortage of laborers and competition among the employers will bring wage rates back to the natural level.

From the point of view of this alleged “iron law” the fate of the wage earners under capitalism appears hopeless. They can never lift themselves above the level of bare subsistence. No reforms, no governmental minimum wage enactment’s, no activities of labor unions can prove effectual against this iron law. Under capitalism, the proletarians are doomed to remain forever on the verge of starvation. All the advantages derived from the improvement of technological methods of production are pocketed exclusively by the capitalists. This is what the Marxian category of exploitation means. By right, Marx implies, all the products ought to benefit those who are producing them, the manual workers. The mere existence of the bourgeoisie is parasitic. While the proletarians suffer, the bourgeois exploit, feast and revel.

Capitalist Production

Now one has only to look around in order to detect that something must be entirely wrong with this description of capitalism’s economic functioning. The great innovation brought about by the transformation of the precapitalistic mode of production into the capitalistic system, the historical event that is called the Industrial Revolution, was precisely the inauguration of a new principle of marketing. The processing industries of the good old days catered almost exclusively to the wants of the well-to-do. But what characterizes capitalism as such is that it is mass production for the satisfaction of the needs of the masses. The much greater part of all the products turned out by the factories is consumed, directly or indirectly, by the same people who are working in the factories. Big business is big precisely because it produces the goods asked for, and bought by, the masses. If you go into the household of the average common man of a capitalistic country, you will find products manufactured in the plants of big business. It is fantastic nonsense to assert that all the wage earner gets are the bare necessities to sustain himself and to rear enough children to fill the jobs in the factories. While businesses that produce for the masses grow big, those that are turning out luxury goods for the few never grow above the size of medium, or even small, businesses.

The essential shortcoming of the “iron law of wages” was that it denied to the wage earner his human character and dealt with him as if he were a non-human creature. In all non-human living beings the urge is inwrought to proliferate up to the limits drawn by the available supply of the means of subsistence. Nothing but the quantity of attainable nourishment checks the boundless multiplication of elephants and rodents, of bugs and germs. Their number keeps pace with the available aliments. But this biological law does not apply to man. Man aims also at other ends than those involving the physiological needs of his body. The “iron law” assumed that the wage earner, the common man, is no better than a rabbit, that he craves no other satisfactions than feeding and proliferation and does not know of any other employment for his earnings than the procurement of those animal satisfactions. It is obvious that this is the most absurd assumption ever made. What characterizes man as man and elevates him above the level of the animals is that he aims also at specifically human ends which we may call “higher ends.” Man is not like other living beings that are driven exclusively by the appetites of their bellies and their sex glands. The wage earner is also a man, that is a moral and intellectual person. If he earns more than the absolutely required minimum, he spends it upon the satisfaction of his specifically human wants; he tries to render his life and that of his dependents more civilized.

At the time Marx and Engels adopted this spurious “iron law” and asserted in the Communist Manifesto (1848) that the average wage is “that quantum of the means of nourishment (Lebensmittel) which is absolutely requisite (notwendig) to keep the laborer in bare existence as a laborer,” judicious economists had already exposed the fallaciousness of this syllogism. But Marx did not heed their criticism. His whole economic doctrine set forth in his main treatise, Das Kapital, is based upon the “iron law.” The falseness of this presumed law, the falseness of which has not been questioned by anybody for about a hundred years, cuts the ground from under all his economic reasoning. And it demolishes entirely the main demagogy of the Marxian system, the doctrine, that contends that the recipients of wages and salaries are exploited by the employers.

The Inevitability of Socialism

In the elaboration of his system of philosophy and economics Marx was blinded to such an extent by his passionate hatred of Western civilization that he did not become aware of the blatant contradictions in his own reasoning. One of the most essential dogmas of the Marxian message, perhaps its very core and substance, is the doctrine of the inevitability of the coming of socialism. In Das Kapital (1867), Marx proclaims that capitalism “begets, with the inexorability of a law of nature, its own negation,” that is, it produces socialism. It is this prophecy that accounts for the obstinate fanaticism of the various communist and socialist factions of our age.

Marx tried to prove this cardinal dogma of his creed by the famous prognostication that capitalism generates necessarily and unavoidably, a progressive impoverishment of the masses of the wage earners. The more capitalism develops, he says, the more “grows the mass of misery, oppressions, slavery, degradation and exploitation.” With “the progress of industry” the worker “sinks deeper and deeper,” until finally, when his sufferings have become unbearable, the exploited masses revolt and establish the everlasting bliss of socialism.

It is well known that this prognostication of Marx was no less disproved by the facts of social evolution than all other Marxian prophecies. Since Marx wrote the lines quoted in 1848 and 1867, the standard of living of the wage earners has in all capitalistic countries improved in a way unprecedented and undreamt of.

But there is still something more to say about this piece of Marx’s argumentation. It contradicts the whole Marxian theory of the determination of wage rates. As has been pointed out, this theory asserts that wage rates under capitalism are always and necessarily so low that for physiological reasons they cannot drop any further without wiping out the whole class of wage earners. How is it then possible that capitalism brings forth a progressing impoverishment of the wage earners? Marx in his prediction of the progressive impoverishment of the masses contradicted not only all the facts of historical experience. He also contradicted the essential teachings of his own theory based on the “iron law of wages,” namely that capitalist wage rates are so low that they cannot drop any further without wiping out the workers.

The Marxian economic system, so much praised by hosts of self-styled intellectuals, is a hodgepodge of arbitrary statements conflicting with one another.

Reprinted from Christian Economics, May 30, 1961.

It seems that in the heated polemics of the cold war people have lost sight of the issue in dispute between socialism and capitalism. The objective of socialism and communism is neither to “bury” us, nor to occupy the whole of the city of Berlin, nor the conquest of any of the remaining free countries.

Socialism, as all its harbingers announced in the past and as its professorial, journalistic, and political advocates repeat again and again in their books, speeches, and platforms, aims at a spectacular improvement in the average man’s standard of living.

The Marxians and all other friends of socialism declare that capitalism inevitably results in progressing impoverishment of the masses. While the rich are getting richer, they say, the poor are getting poorer. This is especially true of “mature” capitalism, the present-day American system of what they call “imperialistic monopoly and finance capitalism.” They claim that all schemes, such as labor unionism or social security designed to ward off or to assuage the sinister effects of the free enterprise system, are in vain.

There is only one way, they say, open to prevent the eclipse of civilization. That is to substitute socialism for capitalism. Socialism will pour a horn of plenty on the masses whom the capitalistic “exploiters” have reduced to utmost penury.

This is what the socialist message promised the world and what the U.S.S.R., the Union of Soviet Socialist Republics, was resolved to achieve. “Have a little patience and wait until our Five-Year Plan takes effect; then you will see what socialism can do. Don’t trust the theorists who claim that they have demonstrated the inferiority and absurdity of the socialist methods. We will show you what miracles government all-round planning can accomplish. Do not cry over spilt milk. One cannot make an omelet without breaking eggs. But our omelet will be a marvel.”

Now, where are these much-glorified blessings of the socialist methods of production? We have today, 42 years after the “ten days that shook the world” and after a succession of half a dozen five- and seven-year plans and bloody purges, the opportunity to compare the operation of the two systems, capitalism and socialism. Nobody would have the courage to deny that the average man’s standard of living is incomparably higher in capitalistic Western Europe?not to speak of the United States, the paragon of capitalism?than it is in communist Russia. Leaving aside everything else that may be said about the dictatorship of the proletariat, there is need to emphasize that socialism failed lamentably in the very point that, according to its own doctrine, is the only one that counts.

The Communists try to divert attention from this essential fact by a barrage of doctored statistics and by telling us that at some later date?in 1965, 1984, or 2050?Russia’s production will equal or even outstrip present-day American production. Up to now all such predictions have been disproved by reality. Experience has belied all this empty boasting. And whenever another free country has been incorporated into the socialist orbit, its industrial and agricultural output has immediately declined.

The socialists have entirely misrepresented the working of the market economy, the system popularly called capitalism. Capitalism is essentially mass production for the satisfaction of the needs of the masses. While the processing industries in the pre-capitalistic ages catered almost exclusively to the wants of a minority of well-to-do, modern business serves the much talked about common man.

All that big business turns out serves, directly or indirectly, but inevitably, the average citizen. There is no other means for business to prosper and to grow into bigness than to render its products and services accessible to the many.

The shops that produce luxury goods for the few remain small or at least medium sized. Thus capitalism resulted in an unprecedented improvement of the masses’ standard of living and in a no less unprecedented increase in population figures. Capitalism deproletarianizes the proletarians and raises them to the “bourgeois” level. The average American wage-earner enjoys amenities of which the richest princes and lords of the pre-capitalistic ages did not even dream.

The rulers of Russia know very well why they prevent their people, by means of a rigid system of censorship, from learning about true conditions in the capitalistic West. The communist power is based upon keeping the masses behind the Iron Curtain in crass ignorance. The Soviet system would collapse if its victims were to get reliable information about the normal life of the common man in Western Europe and in this country.

Reprinted from the New York World Telegram & Sun, October 5, 1959.

The social and economic meaning of institutions may change in the course of history while their legal definition and character remain unaltered. Whenever this is the case, serious misunderstandings originate that lead astray the reasoning not only of the masses but also that of economists and politicians.

Let us deal with two outstanding examples.

Land Reform

The reformers and revolutionaries of the precapitalistic ages aimed at a radical transformation of land ownership. As they saw it, God had given the land as an endowment to all men. As far as any man’s estate exceeds the size needed for the support of his family, he deprives others of what by rights is their due. Nobody has from the point of view of natural law the right to keep as his own more than his legitimate share. In order to establish a fair social order, all land has to be confiscated and redistributed in equal portions to all heads of families. Then the most blatant inequalities of social and economic conditions will disappear. There will no longer be any poverty. All men will be equal.

Such was, still in the 20th century, the program of the Social Revolutionaries, the most popular party of Imperial Russia and the early years of Lenin’s dictatorship. Many politicians of Latin America and of some nations of the Old World still today warmly recommend the same policies and their endeavors meet with sympathetic approval in the United States and in other Western countries.

It can easily be understood how such a program originated in a milieu of feudal conditions. Under feudalism and kindred systems the inequality in the size of the individual inhabitants’ land holdings was an outcome of the political and military order of governmental affairs. A rigid caste system assigned to everybody a definite place in the social hierarchy and a definite position in the economic organization. The individual was born and died in the rank and circumstances inherited from his ancestors. The villein, the peasant, bemoaning his poverty and servile peasant status, could not think of any other way of betterment than that of confiscation of all land holdings and a fair redistribution.

But under the conditions of the capitalistic market society this program of land reform no longer makes any sense. In the market economy the consumers daily decide anew who should own the material factors of production and how much anybody should own. By their buying or abstention from buying the consumers allot control of the material factors of production to those who know how to use them in the best and cheapest way for the satisfaction of the most urgent wants of the consumers. Ownership of land means in the market economy the sovereignty of the consumers. The owners are mandataries of the consumers as it were, bound to employ their property as if it were entrusted to them by the people. When they fail in this regard, they suffer losses. Then they are forced to improve their management or, finally, they go bankrupt. Others who know better how to serve the consumer replace them.

Ownership of land as of all other material factors of production is an asset in the market economy only for those who use it in the best possible way for the satisfaction of the consumers. The idea that inspired the plans for so-called agrarian reform is nonsensical in the market economy. Under the conditions of modern methods of agricultural management, a more or less equal distribution of the soil among the farming population is merely a scheme for granting privileges to a group of less efficient producers at the expense of the immense majority of consumers. The operation of the market tends to eliminate all those farmers whose cost of production is higher than the marginal costs needed for the production of that amount of farm products the consumers are ready to buy. It determines not only the size of the farms as well as the methods of production applied; it determines no less what fields should be tilled and what fields should be left fallow.

Favoritism for Debtors

Another example of the survival of atavistic reform ideas is provided by the popularity of government interference to favor debtors at the expense of creditors.

When more than 2500 years ago Solon in Athens resorted to such a policy and when more than 400 years later in Rome the Gracchi brothers adopted a similar course, they could consider their policies as a method of favoring poor people at the expense of richer ones. Before the 19th century only the well-to-do could lend money and reap interest on funds lent. But capitalism has radically changed these conditions too. Under the modern credit organization the more opulent strata are more often debtors than creditors. They own mortgaged real estate, business firms that are indebted to the banks and insurance companies, common stock of corporations that have issued corporate bonds. On the other hand the common man is a creditor insofar as he has taken out insurance policies, has savings deposits with commercial banks and savings banks, owns bonds whether government issued or corporate, and is entitled to receive retirement and old age pensions.

The most spectacular manifestation of the misinterpretation of the economic meaning of the present-day creditor-debtor nexus was provided by the program of the National-Socialist-German-Labor-Party, the Nazis. Their economic expert, Gottfried Feder, coined the slogan “Brechung der Zinsknechtschaft“ that can by and large be translated as “Destruction of Interest Slavery.” It was adopted as Point II of the “unalterable” Party Program that aimed at the “Abolition of any Income acquired without Labor and Pain.” The popularity of this slogan was irresistible in Germany in the 1920s and early 1930s. In vain did some economists criticize it. One of the few newspapers that tried to block the Nazis’ way to power once published a headline, “Do you, average reader, know that you are a creditor?” The German voters who practically unanimously voted for Hitler certainly did not know it.

Neither do the average men in other countries. The governments can embark upon the inflationary policies they style “deficit spending” and “an easy money policy” because there is no opposition on the part of the masses of people whose endeavors to provide for their old age and for the future of their children are frustrated. In spite of all the unfavorable experiences they had with the monetary policies of the past, the voters look with indifference upon the effort to preserve sound money.

The most momentous virtue of the gold standard is precisely the fact that it makes the determination of money’s purchasing power independent of the ambitions and machinations of political parties and pressure groups. It thus prevents inflationary policies and thereby protects the savings of the common man. But unfortunately this fact is ignored by the millions of Americans who are the owners of many billions of savings accounts, bonds, and insurance policies. Thus the deficit spending and easy money policy of the American government does not find any opposition on the part of the parties that dominate the political life of the nation.

Mises wrote this short essay on primitive economic ideas for inclusion in the 1966 Festschrift for Jacques Rueff published on the occasion of his 70th birthday. It has previously appeared only in French.

The publication of a new English-language translation of Böhm-Bawerk’s monumental work on Capital and Interest1  raises an important question.

There is no doubt that Böhm-Bawerk’s book is the most eminent contribution to modern economic theory. For every economist it is a must to study it most carefully and to scrutinize its content with the utmost care. A man not perfectly familiar with all the ideas advanced in these three volumes has no claim whatever to the appellation of an economist. But what about the general reader, the man who does not plan to specialize in economics because his strenuous involvement in his business or in his profession does not leave him the leisure to plunge into detailed economic analysis? What does this book mean to him?

To answer this question we have to take into account the role that economic problems play in present-day politics. All the political antagonisms and conflicts of our age turn on economic issues.

It has not always been so. In the 16th and 17th centuries the controversies that split the peoples of Western civilization into feuding parties were religious. Protestantism stood against Catholicism, and within the Protestant camp various interpretations of the Gospels begot discord. In the 18th century and in a great part of the 19th century constitutional conflicts prevailed in politics. The principles of royal absolutism and oligarchic government were resisted by liberalism (in the classical European meaning of the term) that advocated representative government. In those days a man who wanted to take an active part in the great issues of his age had to study seriously the matter of these controversies. The sermons and the books of the theologians of the age of the Reformation were not reserved to esoteric circles of specialists. They were eagerly absorbed by the whole educated public. Later the writings of the foremost advocates of freedom were read by all those who were not fully engrossed in the petty affairs of their daily routine. Only boors neglected to inform themselves about the great problems that agitated the minds of their contemporaries.

In our age the conflict between economic freedom, as represented in the market economy, and totalitarian government omnipotence, as realized by socialism, is the paramount matter. All political controversies refer to these economic problems. Only the study of economics can tell a man what all these conflicts mean. Nothing can be known about such matters as inflation, economic crises, unemployment, unionism, protectionism, taxation, economic controls, and all similar issues, that does not involve and presuppose economic analysis. All the arguments advanced in favor of or against the market economy and its opposites, interventionism or socialism (communism), are of an economic character. A man who talks about these problems without having acquainted himself with the fundamental ideas of economic theory is simply a babbler who repeats parrot-like what he has picked up incidentally from other fellows who are not better informed than he himself. A citizen who casts his ballot without having studied to the best of his abilities as much economics as he can fails in his civic duties. He neglects using in the appropriate way the power that his citizenship has conferred upon him in giving him the right to vote.

Now there is no better method to introduce a man to economic problems than that provided by the books of the great economists. And certainly Böhm-Bawerk is one of the greatest of them. His voluminous treatise is the royal road to an understanding of the fundamental political issues of our age.

The general reader should start with the second volume in which B?hm analyzes the essence of saving and capital accumulation and the role capital goods play in the process of production. Especially important is the third book of this second volume; it deals with the determination of value and prices. Only then should the reader turn to the first volume that gives a critical history of all the doctrines advanced on the source of interest and profit by earlier authors. In this historical review the most important part is the chapter that analyzes the so-called exploitation doctrines, first of all the doctrine that Karl Marx developed in his Das Kapital, the Koran of all Marxians. The refutation of Marx’s labor theory of value is perhaps the most interesting, at any rate the politically most momentous chapter of B?hm’s contribution.

The third volume consists of 14 brilliant essays in which Böhm-Bawerk deals with various objections raised against the validity of his theory.

The new translation was made by Professor Hans Sennholz, the chairman of the Department of Economics at Grove City College, and by Mr. George D. Huncke. Mr. Frederick Nymeyer is to be credited with the initiative of making the whole work of Böhm-Bawerk accessible to the English-reading public. The hitherto only available translation is obsolete as it was made from the first edition of the treatise which consisted only of two volumes. The new translation gives the full text of the revised and considerably enlarged third edition which B?hm Bawerk completed a few weeks before his premature death in 1914.

A book of the size and profundity of Capital and Interest is not easy reading. But the effort expended pays very well. It will stimulate the reader to look upon political problems, not from the point of view of the superficial slogans resorted to in electoral campaigns, but with full awareness of their meaning and their consequences for the survival of our civilization.

Although Böhm-Bawerk’s great opus is “mere theory” and abstains from any practical application, theory is the most powerful intellectual weapon in the great struggle of the Western way of life against the destructionism of Soviet barbarism.

Reprinted from The Freeman, August 1959.

• 1Capital and Interest (3 vols.) I. History and Critique of Interest Theories, 512 pp.; II. Positive Theory of Capital, 480 pp.; III. Further Essays on Capital and Interest, 256 pp.: South Holland, Illinois; Libertarian Press, 1959.

As is customary with biographies, Professor R. F. Harrod’s The Life of John Maynard Keynes (Harcourt, Brace, 195 1) provides an abundance of information about insignificant happenings and uninteresting people who crossed the path of his subject. The whole of page 171, for instance, is devoted to the description of a lady who happened to be the niece of an authentic duke. We are told how she dressed, how and where she lived, what her eccentricities were and many other things. Perhaps the lady was really a very eminent woman, perhaps no less remarkable than the author Mathilde Wesendonck, who had an affair with the composer Richard Wagner. But the duke’s niece missed her Richard Wagner, and her only claim to fame is that on July 2, 1914, she entertained the Prime Minister and John Maynard Keynes at a small dinner party.

Not only is the social side of eating and drinking amply dealt with in this book by Harrod, but also the business side. Keynes founded a theater in Cambridge and paid attention to the detail of its management. “Nothing was too trivial for him,” says Professor Harrod.

By a happy and successful idea, a restaurant was attached to the theater, and I recall receiving a letter from him asking me to write a testimonial for a chef . . . . He was anxious to encourage expenditure upon wine in the restaurant rather than upon cocktails and spirits.... He gave an instruction that, instead of the usual addition of 50 per cent to the cost price, only 2s. 6d. should be added in the case of champagne, with the consequence that profits on that item actually rose!

Such small talk would do for the many things Lord Keynes was and did besides being Keynes. He belonged to many groups and circles, to the University of Cambridge, to the Bloomsbury Bohemia of the last years preceding World War I, to the active friends of the theater and the ballet. He was a “society” man and a collector. He wrote a noteworthy book, A Treatise on Probability. He played a role in the Liberal Party. He spent a good many of his years as a government economist. As such he cooperated in the drafting of many ordinances and international conventions, the vast paper work that accompanies the decline of Western civilization, freedom and prosperity. None of these activities elevated him above the rank of the hosts registered in Who’s Who and daily mentioned in the newspapers. But other questions remain: Was Keynes not perhaps more? Was he not a man who shaped the ideas and policies of his age? Was he not an historical character? Such are the problems a biography of Lord Keynes ought to deal with.

There are people who believe that the two books of Keynes that became best sellers?The Economic Consequences of the Peace (1920), and The General Theory of Employment, Interest and Money (1936)?decisively influenced the course of British policies and of world affairs. It is said that the first of these books inaugurated the anti-French and pro-German tendencies of Great Britain’s “appeasement” policy which virtually encouraged the rise of Nazism, permitted Hitler to defy the essential clauses of the Treaty of Versailles and finally resulted in the outbreak of the Second World War. It is furthermore asserted that the second book generated the “Keynesian revolution” of economic policies. The abandonment of the gold standard and the adoption of outright inflationary or “expansionist” fiscal methods, the New Deal and the Fair Deal, the full-employment policy, the intensification of anti-importation measures and many other kindred ventures are ascribed to the “unorthodox” ideas propagated by Keynes. If these assertions are correct, Keynes appears as the most influential personality of our age, whether the effects of these policies are to be considered as beneficial or disastrous.

Keynes’ Appeal to “Progressives”

Because of limitations of space we must set aside the first of these two questions and concentrate upon the second. Keynes was definitely not the inaugurator of a new economic policy. The governments did not have to wait for his advice in order to learn that inflation is a handy means to fill the empty vaults of the treasury. The Keynesian policies were practiced by governments and powerful political parties long before they were advocated by Keynes. Keynes’ writings were enthusiastically received by people who found in them an apparently scientific justification for what they had already done for a long time in defying the teachings of economics.

Nothing was more contemptible in the eyes of the post-Victorian English than the ideas of laissez faire that had multiplied England’s population and secured to the average Englishman the highest standard of living in Europe. Lords and commoners, divines and atheists, manufacturers and union members, Fabians and Colonel Blimps?all agreed in rejecting the “dismal science.” They hated the theory according to which there was but one means toward the general improvement of people’s material well-being, viz., to increase the per head quota of capital invested. They longed for short cuts to an earthly paradise; a protective tariff, a cheap money policy, the closed shop, doles, and social security. They did not want to be told by the economists that it is the policy of the unions that creates unemployment as a lasting mass phenomenon and that the periodical recurrence of crises is the inevitable outcome of the easy money policy. They knew better; all evils were caused by capitalism.

To such people the Keynesian slogans appealed strongly. Here they found what they were looking for. If demand lags, create “effective” demand by expanding credit! If there is unemployment, print more money! If you want to increase “the real national dividend of useful goods and service,” then “dig holes in the ground paid for out of savings!” And, first of all, do not save, spend!

The triumph of Lord Keynes’ last book, the General Theory, was instantaneous. Although reasonable economists refuted his doctrines, it has become the gospel of the self-styled Progressives all over the world. Today many universities simply teach Keynesianism. It is really paradoxical. Nobody can any longer fail to realize that what is needed most is more saving and capital accumulation and that the inflationary and expansionist policies are on the verge of complete breakdown. But the students are still taught the dangers of saving and the blessings of expansionism.

Lord Keynes had, as his biographer points out, “a very rare combination of gifts; his endowment in any one of them would by itself have made him a notable person.” But politics and history are not concerned with the virtues Professor Harrod registers in his detailed catalogue. They ask: Did he enrich mankind’s treasure of ideas and did he influence the course of events? The answer to both questions is in the negative. The ideas he professed were untenable and, even so, not original. The books he wrote supported firmly established policies which would have gone on without this support. He was highly renowned, famous and popular in an age of decay and disintegration, but his writings were not the cause of these disasters; they were only symptoms.

Reprinted from The Freeman, June 18, 1951.

The Keynesian doctrine as developed by 1936 in The General Theory of Unemployment, Interest, and Money, tries to prove the soundness of the two most popular but least tenable components of contemporary economic policies: inflationism and labor unionism. At the time of its publication the spectacular failure of these two methods of interfering with the market phenomena could no longer be concealed. Yet the governments and the political parties were firmly resolved not to abandon “deficit spending” and the support of labor union violence and intimidation. Their official wisdom explained the progressive rise in prices?which they misnamed inflation?as caused by machinations on the part of bad people, the profiteers, and they considered that unemployment was one of the unavoidable shortcomings of a “free,” i.e., not regimented, economy.

But from day to day it became more obvious that it was not enough to find a lame excuse for the current policies. What the noncommunist West seemed to need was a comprehensive doctrine that could be adopted as the economic philosophy of these governments that, while ostensibly proclaiming their anticommunism, step by step approached a system of all-round government control of business. The General Theory’s success was due to the fact that it tried to provide such a justification of the American New Deal and the devaluation practices of the various European nations.

The enthusiastic praise that Keynes’ doctrine received on the part of professors and authors propagating government omnipotence could for a while divert attention from the fact that from the beginning all discriminating economists rejected it and unmasked its inherent fallacies. Some of the most important of these critical essays were collected and republished by Henry Hazlitt under the title The Critics of Keynesian Economics (Van Nostrand, 1960). Hazlitt himself has in a voluminous brilliantly written study, The Failure of the “New Economics” (Van Nostrand, 1959), clearly demonstrated the shortcomings, contradictions, and other failings of Keynesianism.

To Clear the Air

As an economic doctrine, Keynesianism is now dead. But the serious errors and misunderstandings of fundamental issues of economics that made its emergence and its fleeting success possible still prevail. There remain with us many empty slogans and illusory concepts that easily mislead those seeking a satisfactory interpretation of phenomena. It is necessary to clear away the debris of the Keynesian structure in order to open the way for a correct grasp of the principles of the market and the functioning of price flexibility.

This is the task that the new book of Professor W. H. Hutt, Keynesianism?Retrospect and Prospect (Chicago: Regnery, 1963, 447 pp.), wants to accomplish. Hutt calls his work A Critical Restatement of Basic Economic Principles. Such a restatement was badly needed indeed. The main failure of Keynes and all his disciples and admirers is to be seen in the fact that they simply do not know what prices are, how they originate, and what they bring about.

Prices come into existence by the eagerness of people to exchange one commodity or service against another commodity or service. They are the outcome of various individuals’ readiness to buy or to sell. Every price is the outgrowth of a definite constellation of demand and supply. No price could ever be different from what it really was, because people failed to appear on the market at that time who were ready to bid a higher price, or who were ready to ask a lower price. The structure of prices reflects the state of the material conditions determining people’s existence and the success of the endeavors made to satisfy the most urgent needs, as far as these material conditions make it feasible.

Prices cannot be manipulated ad libitum [at will] by the social apparatus of coercion and compulsion, the police power. All the government?or a labor union to which the government has virtually delegated its power of enforcing orders by violent action?can achieve is to substitute coercion for voluntary action. Where there is coercion, the market economy no longer functions; disorder results in the production and the marketing of the articles subject to the governmental decree. Then the spokesmen of the authorities point to the inefficiency of the market system and ask for more government meddling with the price system.

The Market Economy

Professor Hutt analyzes point by point all the alleged shortcomings of the free market about which people complain. He presents a comprehensive analysis of all aspects of the Keynesian interpretation of the market economy. Most of the rising generation of economists were taught Keynesianism and therefore ignore all that economic theory has brought forward for an elucidation of what is going on in production and in the marketing of the products. A careful study of Professor Hutt’s new volume will lead them back to a correct grasp of the problems of the market economy.

Professor Hutt’s contributions to economic science were long since highly appreciated by all serious students of social problems. His rank among the outstanding economists of our age is not contested by any competent critic. Yet, what he has written up to now has appealed only to those specializing in the study of economics. This new volume on Keynesianism is addressed not only to specialists, but to all those who want to form a well-grounded opinion concerning the most burning problems of social policies. It is not only a refutation of erroneous doctrines. It is also an exposition of the fundamental principles and ideas of up-to-date economic theory. It is not merely a treatise for the specialist. It is also a book for all those eager to learn what sound economic doctrine has to say about the great problems of our age.

Reprinted from The Freeman, January 1964.

The interpretation of the trade cycle—the recurrence of periods of feverishly booming business invariably followed by periods of depressions—first developed by the British Currency School and later perfected by modem economics runs this way:

There prevails on the part of public opinion a reluctance to look upon interest as a phenomenon uniquely dependent upon the general state of economic conditions. People are loath to comprehend that the discount of future goods as against present goods is not a specific characteristic of the market economy, but an inexorable category of human valuation which would direct the decisions of the planning board of a socialist system no less than it determines the conduct of every individual in a capitalistic system. People believe that artificially lowering the rate of interest by expansion of bank credit is a blessing for everybody except idle capitalists. They fail to realize that it is impossible to substitute additional bank credit for non-existing capital goods and that therefore an artificially created boom must collapse and turn into a slump. They hail the illusory prosperity which such credit expansion brings about in its initial stages, and are bigoted enough not to recognize that the following depression is the inevitable consequence of the preceding orgy of speculation.

Against this theory, which is commonly called the monetary or circulation credit theory of the business cycle, there have never been raised any tenable objections. Even the report of the League of Nations, Prosperity and Depression, prepared by Professor Gottfried Haberler, admits that an author who wants to explain the business cycle in a different way “often tacitly assumes?or ought logically to assume?the willingness and ability of the banking system to expand credit on existing terms” (p. 7 of the new edition, 1939). Nonetheless, governments stubbornly cling to the policy of artificially lowering interest rates by credit expansion. Scores of authors try to defend this policy by producing spurious explanations of the trade cycle and by passing over in silence the monetary theory. As they see it, the recurrence of economic crises is inherent in the very nature of the unhampered market economy.

The originator of this fallacy was Karl Marx. It is one of the main dogmas of his teachings that the periodical return of commercial crises is an inherent feature of the “anarchy of production” under capitalism. Marx made various lame and contradictory attempts to prove his dogma; even Marxian authors admit that these ventures were utterly futile. Yet Marx and Engels and all their disciples down to Stalin and his henchmen have built their hopes upon the expectation that the crises will return again and again, each time more threateningly, and will finally induce people to abolish economic freedom and establish socialism. Hosts of pseudo-economists, while emphatically protesting their anti-communism, have unreservedly adopted this fundamental thesis of the Marxian creed. They are intent upon demonstrating its correctness, and design programs for what they call a “positive countercyclical policy.” In effect all these programs aim at the substitution for private initiative of all-round planning by the government. In order to remedy the disastrous consequences of the government’s policies of credit expansion and inflation, they suggest more and more government interference until any trace of the individual’s freedom will have disappeared.

Professor Alvin H. Hansen’s book, Business Cycles and National Income (Norton, 1951), is the latest product of this daily swelling literature. It does not add any new idea to those advanced by its predecessors. It merely repeats what has been said again and again and has been irrefutably exploded a hundred times. It tries to revive all the specters of confused economic thinking such as general overproduction, general overinvestment, acceleration principle, and so on. It presents an inadequate account of the opinions of previous authors, omitting the most important contributions. It includes ample historical and statistical material, badly assembled and poorly interpreted.

Professor Hansen’s endeavors to discredit those who contend that the only efficient means for preventing the reappearance of crises is to abstain from any kind of credit expansion and inflation would not deserve any special attention if they were not symptomatic of the prevailing tendency in academic and official circles. The views held and propagated by these circles are even more fateful than the policies they try to vindicate.

The methods of reckless inflation and credit expansion engineered by the present Administration will inevitably, sooner or later, result in an economic debacle. Then people, indoctrinated by the official tenets, will argue: “The last desperate attempts to salvage capitalism, the New Deal and the Fair Deal, have entirely failed. It is obvious that capitalism must lead to a depression. No other remedy is left than to adopt full socialism.” The teachings handed down in most of our schools as well as the passionate utterances of the Communists on each side of the Iron Curtain will not allow any other interpretation.

As against all this talk it is imperative to instruct people in time that the trade cycle is not a phenomenon inherent in the unhampered operation of the market economy but, on the contrary, the inevitable effect of manipulation of the money market. People must learn that the only means to avoid the recurrence of economic catastrophes is to let the market?and not the government?determine interest rates. There is but one pattern of positive counter-cyclical policies, viz., not to increase the quantity of money in circulation and bank deposits subject to check. Deficit spending by borrowing from the commercial banks is the surest way toward economic disaster.

Reprinted from The Freeman, September 24, 1951.

In his book, How Can Europe Survive? (Van Nostrand, 1955), Dr. Hans F. Sennholz explodes one of the main fallacies underlying present-day economic policies.

The spurious doctrine, advanced by the majority of contemporary pseudo-economists and endorsed by almost all contemporary statesmen and politicians, runs this way: The operation of the market economy (capitalism, laissez faire) results in progressing poverty of the masses, in unemployment of an ever-increasing part of the potential labor force, in the regular recurrence of periods of economic depression. It disintegrates the international exchange of commodities and services and thereby hurts vital interests of all nations that cannot produce within the boundaries of their own countries all the food and raw material they need. In order to prevent a complete collapse of Western civilization, the governments must interfere. They must, in domestic policies, substitute government planning for the “anarchy of production” (a term employed by Karl Marx) and, in the international field, they must try to establish some sort of supernational government.

Main Points of Argument

Dr. Sennholz examines the issue in analyzing a special case, viz., the endeavors to “unify” Europe. The main points of his argument are:

1. The economic disintegration of Europe is not an outcome of the unhampered operation of the capitalist system. It is, on the contrary, the result of the various governments’ interference with the business of their own countries. If a government “regulates” business conditions of its own country, it must prevent foreign business from nullifying this regimentation by imports. It must adopt a policy of national isolation and thereby contribute to the economic disintegration of Europe.
2. Mere talking and drafting of international conventions will never re-establish European economic unity. As long as there is domestic interventionism, the present unsatisfactory state will last. The funds spent by the U.S. taxpayer for the economic unification of Europe were wasted.

Dr. Sennholz thus attacks and explodes a doctrine supported by all government economists, a doctrine that guides the official policy of the Administration. His book will certainly be unfavorably reviewed by the “Progressive” newspapers and magazines. But its ideas will, sooner or later, bring about a change both in ideologies and policies. The book is certainly the most important case study in the field of economic policies written in the last few years. Some minor points of it may be open to objections. But the general line of its reasoning cannot be questioned.

Reprinted from Christian Economics, November 15, 1955.

The inauguration of a systematic science of economics, an achievement of the social philosophy of the Enlightenment that also begot the doctrine of popular sovereignty, was a challenge to the powers that be. Economics shows that there prevails in the succession and interdependence of the market phenomena an inescapable regularity that man must take into full account if he wants to attain ends aimed at. Even the most mighty government, operating with the utmost severity, cannot succeed in endeavors that are contrary to what has been called “economic law.” It is obvious why despotic rulers as well as leaders of revolutionary masses disliked such doctrines. For them economics was the “dismal science” and they fought it indefatigably.

However, it was not the hostility of governments and powerful political parties that fomented the protracted discussions about the epistemological character and the logical method of economics in which the very existence and significance of this branch of knowledge were again and again questioned. What generated these debates was the vagueness that the early economists evinced in defining the field of their studies. It would be absurd to blame them for this want of clearness. They had sufficient reasons for concentrating upon those problems which they were trying to deal with and for neglecting others. What had stimulated their inquiry was definite issues of contemporary political controversies. Their great accomplishment was the discovery of the uniform order prevailing in the emergence of events previously considered chaotic. Only the later generations of economists were puzzled with the epistemological problems involved.

Dr. Kirzner’s book provides an historical account of all the solutions suggested in this debate. It is a very valuable contribution to the history of ideas, describing the march of economics from a science of wealth to a science of human action. The author does not, in the fashion adopted by some recent histories of economic doctrines, indulge in value judgments and paradoxical observations. He prefers to follow the sober methods of the best historians of economic theories, Böhm-Bawerk and Edwin Cannan. Every economist?and for that matter everybody interested in problems of general epistemology?will read with great profit Dr. Kirzner’s analyses, especially his treatment of the famous discussion between Benedetto Croce and Vilfredo Pareto or the critical examination of the ideas of Max Weber and Lionel Robbins.

Essays on the history of economic thought are to be appreciated not only purely as history. No less important is the fact that they enable us to re-examine the present state of economic theory in the light of all attempts earlier generations made for their solution. In comparing our point of view with past achievements and errors we may either detect flaws in our own theories or find new and better reasons for their confirmation. Dr. Kirzner’s thoughtful essay is a real aid in such a re-examination and in this consists its great value.

Reprinted from the foreword to The Economic Point of View by Israel M. Kirzner (Van Nostrand, 1960).

As the harbingers of socialism tell us again and again, socialism will not only make all people rich but it will also bring perfect freedom to everybody. The transition to socialism, declares Frederick Engels, the friend and collaborator of Marx, is the leap of mankind from the realm of necessity into the realm of freedom. Under capitalism, say the Communists, there is bondage for the immense majority; in the Soviet Union alone is there genuine liberty for all.

The treatment of this problem of freedom and bondage has been muddled by confounding it with the issues of the nature-given conditions of man’s existence. In nature there is nothing that could be called freedom. Nature is inexorable necessity. It is the state of affairs into which all created beings are placed and with which they have to cope. Man has to adjust his conduct to the world as it is. He lacks the power to rise in rebellion against the “laws of nature.” If he wants to substitute more satisfactory conditions for less satisfactory, he has to comply with them.

Freedom and Western Civilization

The concept of freedom and its antithesis make sense only in referring to the conditions of social cooperation among men. Social cooperation, the basis of any really human and civilized existence, can be achieved by two different methods. It can be cooperation by virtue of contract and voluntary coordination on the part of all individuals, or it can be cooperation by virtue of command on the part of a F?hrer and compulsory subordination of the many. The latter system is authoritarian. In the libertarian system every individual is a moral person, that is, he is free to choose and to act and is responsible for his conduct. In the authoritarian system the supreme chief alone is a free agent while all the others are bondsmen subject to his discretion. Where the authoritarian system is fully established, as was for instance the case in the Incan empire of pre-Columbian America, the subjects are human merely in a zoological sense; they are virtually deprived of their specifically human faculty of choosing and acting, and are not accountable for their conduct. It was in accordance with this degradation of man’s moral dignity that the Nazi criminal declined any responsibility for their deeds by pointing out that all they did was to obey the orders of their superiors.

Western civilization is based upon the libertarian principle and all its achievements are the result of the actions of free men. Only in the frame of a free society is it meaningful to distinguish between what is good and ought to be done and what is bad and ought to be avoided. Only in such a free society has the individual the power to choose between morally commendable and morally reprehensible conduct.

Man is not a perfect being and there is no perfection in human affairs. Conditions in the free society are certainly in many regards unsatisfactory. There is still ample room for the endeavors of those who are intent upon fighting evil and raising the moral, intellectual and material level of mankind.

Authoritarianism

The designs of the Communists, socialists, and all their allies aim at something else. They want to establish the authoritarian system. What they mean in extolling the benefits to be derived from what they call planning is a society in which all of the people should be prevented from planning their own conduct and from arranging their lives according to their own moral convictions. One plan alone should prevail, the plan of the great idol State (with a capital S), the plan of the supreme chief of the government, enforced by the police. Every individual should be forced to renounce his autonomy and to obey, without asking questions, the orders issued from the Politburo, the Führer’s secretariat. This is the kind of freedom that Engels had in mind. It is precisely the opposite of what the term freedom used to signify up to our age.

It was the great merit of Professor Friedrich von Hayek to have directed attention to the authoritarian character of the socialist schemes whether they are advocated by international or by nationalist socialists, by atheists or by misguided believers, by white-skinned or by dark-skinned fanatics. Although there have always been authors who exposed the authoritarianism of the socialist designs, the main criticism of socialism centered around its economic inadequacy and did not sufficiently deal with its effects upon the lives of the citizens. Because of this neglect of the human angle of the issue, the great majority of those supporting socialist policies vaguely assumed that the restriction of individual freedom by a socialist regime will apply “only” to economic affairs. But as Hayek clearly pointed out in 1944 in his book The Road To Serfdom, economic control is not merely control of a sector of human life that can be separated from the rest; it is the control of the means for all our ends. As the socialist state has sole control of the means, it has the power to determine which ends are to be served and which ends men are to strive for. It is not an accident that Marxian socialism in Russia and nationalist socialism in Germany resulted in the complete abolition of all civil liberties and the establishment of the most rigid despotism. Tyranny is the political corollary of socialism, as representative government is the political corollary of the market economy.

Now Professor Hayek has enlarged and substantiated his ideas in a comprehensive treatise, The Constitution of Liberty (University of Chicago Press, 1960). In the first two parts of this book the author provides a brilliant exposition of the meaning of liberty and the creative powers of a free civilization. Endorsing the famous definition that describes liberty as the rule of laws and not of men, he analyzes the constitutional and legal foundations of a commonwealth of free citizens. He contrasts the two schemes of society’s social and political organization, government by the people (representative government), based upon legality, and government by the discretionary power of an authoritarian ruler or ruling clique, an Obrigkeit as the Germans used to call it. Fully appreciating the moral, practical, and material superiority of the former, he shows in detail what the legal requirements of such a state of affairs are, and what has to be done in order to make it work and to defend it against the machinations of its foes.

The Welfare State

Unfortunately, the third part of Professor Hayek’s book is rather disappointing. Here the author tries to distinguish between socialism and the Welfare State. Socialism, he alleges, is on the decline; the Welfare State is supplanting it. And he thinks the Welfare State is, under certain conditions, compatible with liberty.

In fact, the Welfare State is merely a method for transforming the market economy step by step into socialism. The original plan of socialist action, as developed by Karl Marx in 1848 in the Communist Manifesto, aimed at a gradual realization of socialism by a series of governmental measures. The ten most powerful of such measures were enumerated in the Manifesto. They are well known to everybody because they are the very measures that form the essence of the activities of the Welfare State, of Bismarck’s and the Kaiser Wilheim’s German Sozialpolitik as well as of the American New Deal and British Fabian Socialism. The Communist Manifesto calls the measures it suggests “economically insufficient and untenable,” but it stresses the fact that “in the course of the movement” they outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionizing the mode of production.”

Later, Marx adopted a different method for the policies of his party. He abandoned the tactics of a gradual approach to the total state of socialism and advocated instead a violent revolutionary overthrow of the “bourgeois” system that at one stroke should “liquidate” the “exploiters” and establish “the dictatorship of the proletariat.” This is what Lenin did in 1917 in Russia and this is what the Communist International plans to achieve everywhere. What separates the Communists from the advocates of the Welfare State is not the ultimate goal of their endeavors, but the methods by means of which they want to attain a goal that is common to both of them. The difference of opinions that divides them is the same as that which distinguished the Marx of 1848 from the Marx of 1867, the year of the first publication of the first volume of Das Kapital.

However, the fact that Professor Hayek has misjudged the character of the Welfare State does not seriously detract from the value of his great book. His searching analysis of the policies and concerns of the Welfare State shows to every thoughtful reader why and how these much praised welfare policies inevitably always fail. These policies never attain those, allegedly beneficial, ends which the government and the self-styled Progressives who advocated them wanted to attain, but, on the contrary, bring about a state of affairs which—from the very point of view of the government and its supporters—is even more unsatisfactory than the previous state of affairs they wanted to “improve.” If the government does not repeal its first intervention, it is induced to supplement it by further acts of intervention. As these fail again, still more meddling with business is resorted to until all economic freedom has been virtually abolished. What emerges is the system of all-round planning, i.e., socialism of the type which the German Hindenburg plan was aiming at in the first World War and which was later put into effect by Hitler after his seizure of power and by the British Coalition Cabinet in the second World War.

The main error that prevents many of our contemporaries from adequately comprehending the significance of various party programs and the trend of the welfare policies is their failure to recognize that there is, apart from outright nationalization of all plants and farms as effected in Russia and China, a second method for the full realization of socialism. Under this system, that is commonly called “planning” or, in war time, “war socialism,” the various plants and farms remain outwardly and seemingly separate units, but they become entirely and unconditionally subject to the orders of the supreme planning authority. Every citizen, whatever his nominal position in the economic system may be, is bound to toil in strict compliance with the orders of the planning board, and his income, the amount he is permitted to spend for his consumption, is exclusively determined by these orders. Some labels and terms of the capitalistic system may be preserved, but under the altered conditions they signify something entirely different from what they used to signify in the market economy. Other terms may be changed. Thus in Hitler’s Germany the head of an outfit who supplanted the entrepreneur or the corporation president of the market economy was styled the “shop manager” (Betriebsführer) and the labor force the “retinue” (Gefolgschaft). As the theoretical pacemakers of this system, for instance, the late Professor Othmar Spann (1878-1950), a collectivist, has pointed out again and again, it retains only the name of private ownership, while in fact there is exclusively public—state—ownership.

Only by paying full attention to these fundamental issues can one form a correct appreciation of the political controversies in the nations of Western civilization. If socialism and communism should succeed in these countries, it will be the socialism of the planning scheme and not the socialism of the nationalization scheme. The latter is a method applicable to predominantly agricultural countries like those of Eastern Europe and Asia. In the industrial countries of the West the planning scheme is more popular because even the most fanatical statolatrists shrink from directly nationalizing the intricate apparatus of modern manufacturing. Yet, the “planning scheme” is just as destructive of freedom as the “nationalization scheme” and both lead on to the authoritarian state.

Reprinted from Christian Economics, August 1, 1960.

Most of what goes today under the label of the social sciences is poorly disguised apologetics for the policies of governments. What the philosopher George Santayana (1863-1952) once said about a teacher of philosophy of the, then Royal Prussian, University of Berlin, that it seemed to this man “that a professor’s business was to trudge along a governmental towpath with a legal cargo,” is today everywhere true for the majority of those appointed to teach economics. As these doctors see it, all the evils that plague mankind are caused by the acquisitiveness of greedy exploiters, speculators and monopolists, who are supreme in the conduct of affairs in the market economy. The foremost task of good government is to curb these scoundrels by suppressing their “economic freedom” and subjecting all affairs to the decisions of the central authority. Full government control of everybody’s activities?whether called planning, socialism, communism, or any other name?is praised as the panacea.

To make these ideas plausible one had to proscribe as orthodox, classical, neoclassical, and reactionary all that economics had brought forward before the emergence of the New Deal, the Fair Deal, and the New Frontier. Any acquaintance with pre-Keynesian economics is considered as rather unsuitable and unseemly for an up-to-date economist. It could easily raise in his mind some critical thoughts. It could encourage him to reflect, instead of meekly endorsing the empty slogans of governments and powerful pressure groups. There is, in fact, in the writings and teaching of those who nowadays call themselves “economists,” no longer any comprehension of the operation of the economic system as such. Their books and articles do not describe, analyze, or explain the econonomic phenomena. They do not pay attention to the interdependence and mutuality of the various individuals’ and groups’ activities. In their view, there exist different economic spheres that have to be treated by and large as isolated domains. They dissolve economics into a number of special fields, such as economics of labor, agriculture, insurance, foreign trade, domestic trade, and so on. These books and articles deal with the height of wage rates, for example, as if it were possible to treat this subject independently of the problems of commodity prices, interest, profit and loss, and all the other issues of economics. They assemble, without any idea for what purpose they are doing it, a vast array of statistical and other historical data about the recent past, which they choose to style the “present.” They entirely fail to comprehend the interconnectedness and mutual determination of the actions of the various individuals whose behavior results in the emergence of the market economy.

The economic writings of the last decades provide a pitiful story of progressing deterioration and degradation. Even a comparison of the recent publications of many older authors with their previous writings, shows an advancing decline. The few, very few, good contributions that came out in our age were smeared as old-fashioned and reactionary by the government economists, boycotted by the universities, the academic magazines and the newspapers, and ignored by the public.

Let us hope that the fate of Murray N. Rothbard’s book Man, Economy and State (Princeton: D. Van Nostrand, 1962) will be different. Dr. Rothbard is already well known as the author of several excellent monographs. Now, as the result of many years of sagacious and discerning meditation, he joins the ranks of eminent economists by publishing a voluminous work, a systematic treatise on economics.

The main virtue of this book is that it is a comprehensive and methodical analysis of all activities commonly called economic. It looks upon these activities as human action, i.e., as conscious striving after chosen ends by resorting to appropriate means. This cognition exposes the fateful efforts of the mathematical treatment of economic problems. The mathematical economist attempts to ignore the difference between physical phenomena, on the one hand, the emergence and consummation of which man is unable to see the operation of any final causes and which can be studied scientifically only because there prevails a perceptible regularity in their concatenation and succession, and praxeological phenomena, on the other hand, that lack such a regularity but are conceivable to the human mind as the outcomes of purposeful aiming at definite ends chosen. Mathematical equations, says Rothbard, are appropriate and useful where there are constant quantitative relations among unmotivated variables; they are inappropriate in the field of conscious behavior. In a few brilliant lines he demolishes the main device of mathematical economists, viz., the fallacious idea of substituting the concepts of mutual determination and equilibrium for the allegedly outdated concept of cause and effect. And he shows that the concepts of equilibrium and the evenly rotating economy do not refer to reality; although indispensable for any economic inquiry, they are merely auxiliary mental tools to aid us in the analysis of real action.

The equations of physics describe a process through time, while those of economics do not describe a process at all, but merely the final equilibrium point, a hypothetical situation that is outside of time and will never be reached in reality. Furthermore, they cannot say anything about the path by which the economy moves in the direction of the final equilibrium position. As there are no constant relations between any of the elements which the science of action studies, there is no measurement possible and all numerical data available have merely an historical character; they belong to economic history and not to economics as such. The positivist slogan, “science is measurement,” in no way refers to the sciences of human action; the claims of “econometrics” are vain.

In every chapter of his treatise, Dr. Rothbard, adopting the best of the teachings of his predecessors, and adding to them highly important observations, not only develops the correct theory but is no less anxious to refute all objections ever raised against these doctrines. He exposes the fallacies and contradictions of the popular interpretation of economic affairs. Thus, for instance, in dealing with the problem of unemployment he points out: in the whole modern and Keynesian discussion of this subject the missing link is precisely the wage rate. It is meaningless to talk of unemployment or employment without reference to a wage rate. Whatever supply of labor service is brought to market can be sold, but only if wages are set at whatever rate will clear the market. If a man wishes to be employed, he will be, provided the wage rate is adjusted according to what Rothbard calls his discounted marginal value product, i.e., the present height of the value which the consumers?at the time of the final sale of the product?will ascribe to his contribution to its production. Whenever the job-seeker insists on a higher wage, he will remain unemployed. If people refuse to be employed except at places, in occupations, or at wage rates they would like, then they are likely to be choosing unemployment for substantial periods. The full import of this state of affairs becomes manifest if one gives attention to the fact that, under present conditions, those offering their services on the labor market themselves represent the immense majority of the consumers whose buying or abstention from buying ultimately determines the height of wage rates.

Less successful than his investigations in the fields of general praxeology and economics are the author’s occasional observations concerning the philosophy of law and some problems of the penal code. But disagreement with his opinions concerning these matters cannot prevent me from qualifying Rothbard’s work as an epochal contribution to the general science of human action, praxeology, and its practically most important and up-to-now best elaborated part, economics. Henceforth all essential studies in these branches of knowledge will have to take full account of the theories and criticisms expounded by Dr. Rothbard.

The publication of a standard book on economics raises again an important question, viz., for whom are essays of this consequence written: only for specialists, the students of economics, or for all of the people?

To answer this question we have to keep in mind that the citizens in their capacity as voters are called upon to determine ultimately all issues of economic policies. The fact that the masses are ignorant of physics and do not know anything substantial about electricity does not obstruct the endeavors of experts who utilize the teachings of science for the satisfaction of the wants of the consumers. From various points of view one may deplore the intellectual insufficiency and indolence of the multitude. But their ignorance regarding the achievements of the natural sciences does not endanger our spiritual and material welfare.

It is quite different in the field of economics. The fact that the majority of our contemporaries, the masses of semi-barbarians led by self-styled intellectuals, entirely ignore everything that economics has brought forward, is the main political problem of our age. There is no use in deceiving ourselves. American public opinion rejects the market economy, the capitalistic free enterprise system that provided the nation with the highest standard of living ever attained. Full government control of all activities of the individual is virtually the goal of both national parties. The individual is to be deprived of his moral, political and economic responsibility and autonomy and to be converted into a pawn in the schemes of a supreme authority aiming at a “national” purpose. His “affluence” is to be cut down for the benefit of what is called the “public sector,” i.e., the machine operated by the party in power. Hosts of authors, writers, and professors are busy denouncing alleged shortcomings of capitalism and exalting the virtues of “planning.” Full of a quasi-religious ardor, the immense majority is advocating measures that step by step lead to the methods of administration practiced in Moscow and in Peking.

If we want to avoid the destruction of Western civilization and the relapse into primitive wretchedness, we must change the mentality of our fellow citizens. We must make them realize what they owe to the much vilified “economic freedom,” the system of free enterprise and capitalism. The intellectuals and those who call themselves educated must use their superior cognitive faculties and power of reasoning for the refutation of erroneous ideas about social, political and economic problems and for the dissemination of a correct grasp of the operation of the market economy. They must start by familiarizing themselves with all the issues involved in order to teach those who are blinded by ignorance and emotions. They must learn in order to acquire the ability to enlighten the misguided many.

It is a fateful error on the part of our most valuable contemporaries to believe that economics can be left to specialists in the same way in which various fields of technology can be safely left to those who have chosen to make any one of them their vocation. The issues of society’s economic organization are every citizen’s business. To master them to the best of one’s ability is the duty of everyone.

Now such a book as Man, Economy, and State offers to every intelligent man an opportunity to obtain reliable information concerning the great controversies and conflicts of our age. It is certainly not easy reading and asks for the utmost exertion of one’s attention. But there are no shortcuts to wisdom.

Reprinted from New Individualist Review, Autumn 1962.

The seven lectures that Professor Percy L. Greaves, Jr., delivered in June 1969 before the Centro de Estudios sobre la Libertad in Buenos Aires deal with the fundamental economic problems; they are about “human life,” about “the ideas that motivate human beings,” about “the most important and interesting drama of all—human action.”

To us, mortal human beings as we are, the universe appears as consisting of two different fields or regions: the field of events human action is able to influence to some extent and the field of events that are beyond the reach of any human action. The line that separates these two regions from one another is not rigidly fixed forever. We know that in the course of history man has acquired the knowledge and the power to achieve things that to earlier generations had appeared as simply impossible. But we know also that certain things can never and will never be achieved by any human action, that man can and will never become omnipotent.

The history of mankind appears to us as the history of the progressive expansion of man’s knowledge of what we call the laws that determine the course of all changes going on in the universe. But we do not affirm or assume or believe that this expansion of our knowledge will give to man one day something that could be called omniscience.

Man tries to learn as much as he can learn about the operation of the powers and factors that determine the mutual relations between the various elements that constitute the world, and he tries to employ this knowledge in attempts to influence the course of affairs. Man acts; that means, he tries to bring about definite effects. He aims at ends chosen. He is not, like the inanimate things and like the non-human animals, merely a puppet of the forces that have produced him and determine his environment. His endeavors to attain definite ends chosen are a factor cooperating in the emergence of the future state of world affairs.

The Gold Standard

The historical evolution of mankind’s economic cooperation, which culminated in attempts?by and large successful?at establishing a world-embracing system of the division of labor and the international exchange of commodities and services, gave to the metal gold the function of a generally employed medium of exchange. It is idle to raise the question of what would have happened if such a thing as gold had not been available for use as a generally employed medium of exchange.

The gold standard made the marvelous evolution of modern capitalism technically possible. It led to the establishment of the modern methods of banking. But the businessmen who had developed them lacked the intellectual power to resist successfully the attacks upon the operation of the monetary and banking principles, the strict observance of which is absolutely necessary to make the system work and to prevent its catastrophic breakdown. If the determination of the quantity of money—the generally employed medium of exchange in transactions—were subject to actions on the part of any individuals or groups of individuals whose material interests would be affected by changes in the purchasing power of the monetary unit, the system would not have been able to avoid a complete collapse. Neither inflation nor deflation is a policy that can last.

The eminence of the gold standard consists in the fact that geological conditions strictly limit the amount of gold available. This has up to now made the operation of a gold currency system possible.

These seven lectures are not merely a substitute for a textbook on economics. They are much more. They are an attempt to analyze and to explain the meaning and the effects of the various systems, methods, and measures of economic policies.

Reprinted from the foreword to Understanding the Dollar Crisis by Percy L. Greaves, Jr. (Western Islands, 1973).

The United States is today the world’s most prosperous nation. There is no need to dwell upon this fact. Nobody contests it.

But, in the present-day political and ideological climate, riches are held in evil repute. By and large, people look upon the more prosperous with unconcealed envy and hatred. The New Deal philosophy assures that an individual’s fortune which exceeds that of the much talked-about common man is ill-gotten and that it is the task of government to equalize wealth and incomes by confiscatory taxation.

Foreigners View American Prosperity

Most Americans fail to realize that the same ideas that shape the anti-capitalistic bias of American domestic policies also determine foreign nations’ attitudes toward the United States. The average European?not to speak of the Asiatics and Africans?looks upon the United States with the same envy and hatred which the American “progressive” displays toward American business. He finds fault with the United States because it is more prosperous than his own country. In his opinion all Americans are bad for the simple reason that they enjoy a higher standard of living than he does. And just as the American “progressive” disparages as bribed “sycophants” of the exploiting bourgeoisie those few economists who have the courage to raise their voices against the New Deal, so the European “progressive” condemns as traitors all statesmen and writers supporting his government’s pro-American policy in the Cold War.

The many billions of dollars that the United States government has distributed all over the world have not tempered these anti-American sentiments. This aid, say the Socialists, is a mere pittance, a quite insufficient payment on the immense debt that America owes to the rest of mankind. By rights, all the wealth of the United States ought to be equally distributed among all nations. In the opinion of foreign radicals it is an infringement of divine and natural law that the average American lives in a nice gadget-equipped home and drives a car, while millions abroad lack the necessities of a decent existence. It is a shame, they say, that the scions of the peoples who have created Western civilization are living in straitened conditions, while the Americans, mere money makers, lead a luxurious life.

In the opinion of the typical foreign “intellectuals” mankind is divided into two classes: the exploiting Americans on the one side and the exploited have-nots on the other side. The communist “intellectuals” put all their hopes on “liberation” by the Soviets. The moderates expect that the United Nations will one day evolve into an effective world government that by means of a progressive world income tax will try to bring about more equality in the distribution of incomes all over the world, just as national income tax laws try to do within their respective countries. Both groups agree in rejecting what they call a pro-American policy on the part of their nation and favor neutralism as the first step toward the worldwide establishment of a fair social order.

This blend of anti-capitalistic and anti-American sentiments plays an ominous role in present-day world affairs. It excites sympathies for the cause of the Soviets and jeopardizes the best designed attempts to block the further advance of Russian power. It threatens to overthrow Europe’s civilization from within.

Rappard Views American Prosperity

Sober-minded European patriots are worried. They are aware of the dangers that the neutralist ideology generates. They would like to unmask its fallacies. But they are checked by the fact that the essential content of the anti-American doctrine fully agrees with the economic?or rather, pseudo-economic?theories that are taught at universities in their own countries and are accepted by all political parties. From the point of view of the ideas that determine the domestic policies of most European nations?and, for that matter, also those of the United States?a man’s penury is due to the fact that some people have appropriated too much to themselves. Hence the only efficacious remedy is to bring about by government interference a more equal distribution of what is called the national income. No argument whatever can be discovered to show that this doctrine and the practical conclusions derived from it ought to be limited to conditions within a nation and should not also be applied in international relations in order to equalize the distribution of world income.

The ideological obstacles that stand in the way of a European who wants to attack the prevailing anti-American mentality seem therefore almost insurmountable. The more remarkable is the fact that an eminent author, braving all these difficulties, has published an essay that goes to the heart of the matter.

Professor William E. Rappard [1883-1958] is not unknown to the American public. An outstanding historian and economist, this Genevese was born in New York, graduated from an American university and taught at Harvard. He is the world’s foremost expert in the field of international political and economic relations. His contributions to political philosophy, first of all those expounded in 1938 in his book The Crisis of Democracy, will be remembered in the history of ideas as the most powerful refutation of the doctrines of Communism and Nazism. There are but few authors whose judgment, competence, and impartiality enjoy a prestige equal to that of Rappard.

In his new book1  Professor Rappard is neither pro-American nor anti-American. With cool detachment he tries to bring out in full relief the factors that account for the economic superiority of the United States. He starts by marshaling the statistical data and proceeds with a critical examination of the explanations provided by some older and newer authors. Then comes his own analysis of the causes of American prosperity. As Professor Rappard sees it, these causes can be put together under four broad headings: mass production, the application of science to production, the passion for productivity, and the spirit of competition.

The political importance of Professor Rappard’s conclusions is to be seen in the fact that they ascribe American prosperity fully to factors operating within the United States. America’s present-day economic superiority is a purely American phenomenon. It is an achievement of Americans. It is in no way caused or furthered by anything that would harm foreign nations. There is no question of exploitation of the “have-nots.” No non-American is needy because there is well-being in America. Professor Rappard carefully avoids any allusion to the heated controversy concerning the European nations’ attitudes toward the United States. He does not even mention the exploitation doctrine and the complaints of the self-styled have-nots. But his book demolishes these counterfeit doctrines and, by implication, the political programs derived from them.

It can hardly be disputed, says Professor Rappard, “that the wealth of a country very largely depends on the will of the nation. Other things being equal, then, a country will be richer and its economy will be more productive in proportion as its inhabitants want it to be.” America is prosperous because its people wanted prosperity and resorted to policies fitted to the purpose.

Prosperity and Capital

The operation of the four factors to which Professor Rappard attributes the superior productivity of labor in the United States is certainly not confined to the United States. They are characteristic features of the capitalist mode of production that originated in Western Europe and only later came to the United States. Mass production was the essential innovation of the Industrial Revolution. In earlier ages craftsmen produced with primitive tools in small workshops almost exclusively for the needs of a limited number of well-to-do. The factory system inaugurated new methods of production as well as of marketing. Cheap goods for the many were and are its objective. It is this principle that, combined with the principle of competition, accounts for the expansion of the most efficient enterprises and the disappearance of inefficient ones.

It is true that these tendencies are today more powerful in the United States than in European countries this side of the Iron Curtain. But this is principally due to the fact that political antagonism to big business and its superior competitive power set in earlier and is more drastic in Europe than in the United States, and has therefore more vigorously curbed the “rugged individualism” of business. The difference which in this regard exists between Europe and the United States is a difference of degree, not of kind.

With regard to the application of science to production and the passion for productivity, there is little, if any, difference between America and Europe. There is no need to stress the fact that the passion to make his outfit as productive as possible is strong in every businessman. Concerning the application of science to production, Professor Rappard observes that the most knowledgeable and sincere American writers recognize “that the most fruitful investigations of recent years have nearly all been carried out by Europeans working either in their own countries or in American laboratories.” The industrial lead of the United States is explained, Monsieur Rappard goes on to say, not by the discovery of new theoretical truth but by the rapid and constantly improved application of discoveries of any origin whatsoever.

In enunciating this fact, Professor Rappard gives us the decisive answer to the problem he has investigated. America’s industrial superiority is due to the circumstance that its plants, workshops, farms, and mines are equipped with better and more efficient tools and machines. Therefore, the marginal productivity of labor and, consequently, wage rates are higher there than anywhere else. As the average quantity and quality of goods produced in the same period of time by the same number of hands is greater and better, more and better goods are available for consumption. Here we have the “secret” of American prosperity.

With some insignificant exceptions, there is no secrecy whatever about the best modern methods of production. They are taught at numerous technological universities and described in textbooks and technological magazines. Thousands of highly gifted youths from economically backward countries have acquired full knowledge of them at the educational institutions and in the workshops of the United States, Great Britain, France, Germany, and other Western countries. Besides, a great many American engineers, chemists, and agriculturists are prepared to offer their expert services to the businesses of the so-called underdeveloped nations.

Every intelligent businessman?not only in Western Europe, but no less in all other countries?is obsessed by the urge to furnish his enterprise with the most efficient modern equipment. How is it then that, in spite of all these facts, the American (and Canadian) firms alone make full use of modern technological achievements and by far outstrip the industries of all other countries?

It is the insufficient supply of capital that prevents the rest of the world from adjusting its industries to the most efficient ways of production. Technological “know how” and the “passion for productivity” are useless if the capital required for the acquisition of new equipment and the inauguration of new methods is lacking.

What made modern capitalism possible and enabled the nations, first of Western Europe and later of central Europe and North America, to eclipse the rest of mankind in productivity was the fact that they created the political, legal, and institutional conditions that made capital accumulation safe. What prevents India, for example, from replacing its host of inefficient cobblers with shoe factories is only the lack of capital. As the Indian government virtually expropriates foreign capitalists and obstructs capital formation by natives, there is no way to remedy this situation. The result is that millions are barefoot in India while the average American buys several pairs of shoes every year.

America’s present economic supremacy is due to the plentiful supply of capital. The allegedly “progressive” policies that slow down saving and capital accumulation, or even bring about dissaving and capital decumulation, came later to the United States than to most European countries. While Europe was being impoverished by excessive armaments, colonial adventures, anticapitalistic policies, and finally by wars and revolutions, the United States was committed to a free enterprise policy. At that time Europeans used to stigmatize American economic policies as socially backward. But it was precisely this alleged social backwardness that accounted for an amount of capital accumulation that surpassed by far the amount of capital available in other countries. When later the New Deal began to imitate the anticapitalistic policies of Europe, America had already acquired an advantage that it still retains today.

Wealth does not consist, as Marx said, in a collection of commodities, but in a collection of capital goods. Such a collection is the result of previous saving. The anti-saving doctrines of what is, paradoxically enough, called New Economics, first developed by Messrs. Foster and Catchings1  and then reshaped by Lord Keynes, are untenable.

If one wants to improve economic conditions, to raise the productivity of labor, wage rates and the peoples’ standard of living, one must accumulate more capital goods in order to invest more and more. There is no other way to increase the amount of capital available than to expand saving by doing away with all ideological and institutional factors that hinder saving or even directly make for dissaving and capital decumulation. This is what the “underdeveloped nations” need to learn.

Reprinted from The Freeman, November 1955.

• 1William E. Rappard, The Secret of American Prosperity, translated from the original French by Kenneth A. J. Dickson, with a Foreword by Henry Hazlitt (New York: Greenberg—A Corwin Book, 1955), 124 pp.
• 1College Professor William T. Foster (1879-1950) and businessman Waddill Catchings (1879-1967) joined forces to establish the Pollak Foundation for Economic Research and to co-author several books in the 1920s that considered saving harmful, advocated contra-cyclical public works, and “a constant flow of new money” to encourage consumer spending.

It is admitted by everybody that the understanding of the American economy developed in most high schools today is not adequate for effective citizenship. In cognizance of this fact, the Committee for Economic Development, and the American Economic Association, a body that includes in its ranks almost all American teachers of economics, cooperated in entrusting a task force of professors and educational administrators with the study of the problems involved.

Task Force Report

The report of this task force, published in September 1961, is one of the most interesting and characteristic documents of our age. It shows what is taught under the label of economics at most of the American colleges and universities. And it shows, as the distinguished authors of the report believe, what ought to be handed down also to the high school students. It provides virtually a r?sum? of the ideas held by “progressives”?men who have been most influential in this country’s movement away from the free market economy.

As the report sees it, there are various economic systems?”capitalist, communist, or any other”?and the task of economics is to describe and to compare the good and the bad aspects of each of them. In drafting a scheme for this pursuit, the authors are in some respects anxious to belittle the differences between capitalism and Communism and in other respects to find some reason to praise the Communist treatment of various problems as against that effected in the market economy.

Thus the report correctly contends that American production is “guided by the demands of millions of individual consumers,” although it tries to qualify this statement by adding to the verb “guided” the adverb “largely.” It would have been accurate to continue that in Russia “the decisions on what shall be produced are made by the Communist leaders.” But such a frank expression would have appeared too “reactionary” for a “progressive” document. So the report only says that the “major” decisions are made by the leaders. Could any of the authors tell us what the “minor” decisions are, as distinguished from the “major” ones, and who the people are to whom these minor decisions are entrusted?

It would have been logical to go on pointing out?in full agreement with fact?that for the money he has earned a Russian can get only what the Communist leaders deign to give him. But such a plain declaration, too, was repugnant to the authors of the report. Instead they chose to say that the Russians “are generally free to buy what they wish,” modifying this manifestly false statement only by the stilted proviso “subject to the over-all availability of goods set by the central planners.”

While in this matter of the direction of production activities and in many other regards the report sees but little difference between the market economy and the Communist method of central planning, in other respects it lays stress on the divergence of the two and finds that the Communist methods work better than the capitalistic. Thus it proclaims in italics, “Communist societies have not suffered from economic instability (booms and depressions) to the same extent that private enterprise economies have.“ And it goes on in Roman type: “This is partly because of the extent to which all communist activities are controlled by central planning, but especially because decisions on capital investment are made directly by the state, thus avoiding the instability of profit-motivated investment which characterizes private enterprise economies.” We may pass over the fact that the return of periods of economic depression is not a phenomenon originating from the operation of a free market economy, an economy not sabotaged by the interference of the state. The returning periods of economic depression are precisely the effect of the reiterated attempts of governments to create artificial booms by “cheap money” policy, that is, by lowering the market rate of interest through an increase in the quantity of money and fiduciary media.

But let us ask the authors of the report: How do you learn whether business in a country is good or bad? In the free countries people publicly complain as soon as they think that they do not earn as much as they would like. You cannot open an American newspaper without getting information about the state of business. But in Russia a man who would dare to say that something is unsatisfactory with the course of Russian economic affairs would pronounce his own death sentence. Years ago many millions died from starvation in the Ukraine, and no Russian newspaper or book ever mentioned this “minor” incident. It is well known that agricultural output has dropped considerably wherever socialist management has replaced private farming. What kind of stability does China, the most populous of all Communist countries, enjoy? It seems that the task force credulously based its judgments about Russia’s conditions upon the statistics published by the Russian offices without paying attention to the fact that statistics, if not controlled by a free press and by writers who are not on the government’s payroll, can prove anything in favor of the government whose agencies compiled it.

Communist Bias

If the report had not been biased in favor of Communism, it would have had to say this about the controversy of capitalism and Communism: The Communist doctrine as expounded by Marx and endorsed by Lenin emphatically declared that capitalism must and will inevitably result in progressing impoverishment and enslavement of all workingmen, while Communism will bring to all people unprecedented affluence and perfect freedom. Events have entirely belied this prognostication. In the capitalistic countries of western Europe and North America, the standard of living of the average common man is continually improving and is much more satisfactory today than in any previous epoch of history, while in the Communist countries the masses are extremely poor and utterly deprived of any civil liberties.

In order to demonstrate the inferiority of the market economy as against government action, the report takes pleasure in affirming repeatedly that there are things that private enterprise cannot achieve, e.g., police protection and provision of national defense. This observation is entirely irrelevant. No reasonable man ever suggested that the essential function of state and government, protection of the smooth operation of the social system against domestic gangsters and foreign aggressors, should be entrusted to private business. The anarchists who wanted to abolish any governmental institution, as well as Marx and Engels who muttered about the “withering away” of the state, were not champions of free enterprise. Resorting to violent suppression of anti-social activities, and producing things that can be used and consumed and thus satisfy human wants, are two entirely different matters.

In defending the report against criticism leveled in The Wall Street Journal, the Chairman of the task force, Dean G. L. Bach, asserted that “careful definition of terms is essential to economic understanding.” Everybody will agree. But did the report comply with this rule?

Without attempting any definition it ascribes to big business “extensive power” over its customers. What in this instance it calls power is the fact that an enterprise has succeeded in serving its customers better, or cheaper, or better and cheaper than its competitors do. Then again it speaks of the power of labor unions and mentions “strikes supported by union picketing” as “the most powerful union weapon,” modifying this statement by appending the rather questionable proposition “but strikes occur infrequently.” Nothing is said about what Harvard Law School Dean Roscoe Pound [1870-1964] called “the substantially general privileges and immunities of labor unions and their members and officials to commit wrongs to person and property” and to commit many other acts that are considered and punished as criminal offenses when committed by other people. The authors did not find it worthwhile to react to these words of the nation’s most eminent legal expert. Nor to the books of law by Professor Sylvester Petro. All they did was to declare that such issues as the “closed shop” and “right-to-work laws” are worth “brief”(!) student attention.

Implementing the Task Force Report

One thing must be acknowledged concerning this report: It unblushingly provides a faithful exposition of the ambivalent economic philosophy of the present-day system of American government. All the evils that are plaguing the people of this country are the inevitable effect of policies that, under the misleading name of a “middle-of-the-road” program, are, step by step, substituting government compulsion and coercion for the initiative of individual citizens. These ideologies and policies make the “public sector” of the economy grow more and more within the nation at the expense of “the private sector.” And they make the totalitarian “Communist sector” expand within the sphere of world politics and the free “capitalistic sector” shrink. Hitherto in this country the propagation of these policies and ideas was the concern of leftist parties and their press. Now it is suggested to indoctrinate the high school students with them. This will certainly provide jobs for thousands and thousands of staunch supporters of the allegedly “progressive” doctrines that in present-day America are expounded under the misleading labels “liberal” and “democratic.” However, the ambitious expectations entertained by the sponsors and the authors of the report and by their political friends will hardly be realized.

The greater part of the pupils, preoccupied with other things, will not take any interest in the subject. And the judicious students will not meekly acquiesce in the official dogmas of the textbooks and will be shrewd enough to ask questions that will embarrass their teachers. They may ask for instance: Why does the government spend billions of the taxpayers’ money in order to make the most important foodstuffs more expensive for the consumer? Or: Did any government ever improve the methods of production or embark upon supplying the consumers with new articles never produced before? Or: Why do the Communist governments prohibit their citizens from visiting foreign countries and from reading books and newspapers published abroad?

A sensible boy or girl will certainly not put up with the confused and contradictory observations that a teacher, imbued with the philosophy of the report, may bring forward.

The modern American high school, reformed according to the principles of John Dewey, has failed lamentably, as all competent experts agree, in the teaching of mathematics, physics, languages, and history. If the plans of the authors of this report materialize, it will add the teaching of economics to its other failings, and will also add to the curriculum indoctrination in very bad economics.

Reprinted from Christian Economics, April 3, 1962.

The great catastrophes that befell Germany in the first part of our century were the inevitable effect of its political and economic policies. They would not have happened at all or they would have been much less pernicious if there had been in the country any noticeable resistance to the fatal drift in official policies. But the characteristic mark of Germany in the age of Bismarck as well as later in that of World War I General Erich Ludendorff and of Hitler was strict conformity. There was practically no criticism of the interventionist economic policies and still less of inflationism. The great British economist Edwin Cannan (1861-1935) wrote that if anyone had the impertinence to ask him what he did in the Great War, he would answer, “I protested.” Germany’s plight consisted in the fact that it did not have, either before the armistice of 1918 or later, anybody to protest against the follies of its monetary and financial management. Before 1923 no German newspaper or magazine, in dealing with the rapidly progressing fall in the mark’s purchasing power, ever mentioned the boundless increase in the quantity of banknotes printed. It was viewed as un-German not to accept one of the “loyal” interpretations of this phenomenon that put all the blame upon the policies of the Allies and the Treaty of Versailles.

In this regard conditions in Germany have certainly changed. There is in Germany today at least one monthly magazine that has both the courage and the insight to form an independent judgment on the economic and social policies of the government and the aims of the various parties and pressure groups. It is the Monatsblätter für freiheitliche Wirtschaftspolitik, edited now already for six years by Doctor Volkmar Muthesius. It is published by the Fritz Knapp Veriag in Frankfurt. Excellent articles written by the editor and a carefully selected group of external contributors analyze every aspect of contemporary economic and social conditions.

Doctor Muthesius and his friends are unswerving supporters of free trade both in domestic and in foreign affairs. They reject the lavish bounties doled out to agriculture at the expense of the immense majority, the urban population. They are keen critics of the cheap demagogy of the government’s alleged antimonopoly campaign. They unmask the dangers inherent in the privileges granted to the labor unions. In matters of taxation, a balanced budget, sound money, and “social” policies, they follow a line of thought similar to that of the American Goldwater-Republicans. They prefer the Adenauer1  regime to the only possible alternative, a cabinet of Social-Democrats, but they do not close their eyes to the shortcomings of the Chancellor’s policies. And they are not afraid of repeating again and again that it is only thanks to the United States that West Berlin is still free from Soviet rule.

A periodical that openly and without any reservations endorses the free enterprise system and the market economy is certainly a remarkable achievement in the classical land of socialism whether imperial or social-democrat or nationalist.

Reprinted from The Freeman, March 1961.

• 1 Konrad Adenauer (1876-1967) was Chancellor of West Germany from 1949 until 1963.

One of the characteristic marks of the age that witnessed more bloodshed, war, and destruction than any preceding era of history was the credulous appreciation of quasi-prophetic prognostications about the course of future history and about the final goals of mankind’s evolution. In the wake of Hegel’s philosophy, Marx had proclaimed that a mysterious, never-defined or clearly described agency called the “material productive forces” was inevitably leading the peoples toward the bliss of everlasting earthly paradise, socialism. Socialism, he contended, would radically transform all human and earthly affairs. In its frame there would no longer be any want or suffering. To work would not cause pain but pleasure and everybody would get all he needed. What a comfort to know that the coming of this perfect state of things was inevitable!

Seen from the point of view of these fables, which paradoxically were called scientific socialism, the foremost duty of every decent fellow was to fight unto death the dissenters who did not believe in the Marxian message and to prepare himself for life in utopia. The task of progressive education, heralded the pundits, is to adjust the rising generation to the conditions of their future socialist environment.

Only a few years ago the harbingers of these dogma could assume that they had succeeded in this educational effort. Their semantic innovations were accepted by almost everybody. Progress meant progress on the road toward socialism, reaction any attempt to preserve freedom. “No enemies on the left” was a battle cry which very soon was followed by the still more shameful slogan: “Better Red than dead.”

But then a miracle happened, the awakening of the common sense of sound, decent people. Out of the ranks of the young boys and girls arose an opposition. There were on the campuses once again friends of freedom and they had the courage to speak their minds. Collectivism was challenged by individualism. No longer was liberty condemned as a bourgeois prejudice; no longer were constitutional, representative government and the rule of law smeared as clever makeshifts invented by the privileged few for the oppression of the many. The idea of freedom made a comeback.

There are overcautious skeptics who admonish us not to attach too much importance to these academic affairs. I think these critics are wrong. The fact that, out of the midst of the college youth, a new movement in favor of the great old ideals of individualism and freedom originated, is certainly of paramount importance. The spell of the dreadful conformity that threatened to convert our country into a spiritual desert is broken. There are again young men and women eager to think over the fundamental problems of life and action. This is a genuine moral and intellectual resurrection, a movement that will prevent us from falling prey to the arbitrary tyranny of dictators. As an old man I am greeting the young generation of liberators.

Statement at Young Americans for Freedom rally, Madison Square Garden, March 7, 1962. Reprinted from The New Guard, March 1962.