The struggle between the two systems of social organization, freedom and totalitarianism, will be decided in the democratic nations at the polls. As things are today, the outcome in the United States will determine the outcome for all other peoples too. As long as this country does not go socialist, socialist victories in other parts of the world are of minor relevance.

Some people?among them very keen minds?expect either a revolutionary upheaval of the communists, a war with Russia and its satellites, or a combination of both events.

However this may be, it is obvious that the final result depends on ideological factors. The champions of freedom can win only if they are supported by a citizenry fully and unconditionally committed to the ideals of freedom. They will be defeated if those molding public opinion in their own camp are infected with sympathies for the totalitarian program. Men fight unto death for their convictions. But nobody is ready to dedicate himself seriously to a cause which in his eyes is only 50% right. Those who say: “I am not a Communist, but . . . “ cannot be counted upon to fight rigorously for freedom and against Communism.

In Russia, in 1917, the Bolsheviks numbered only a few thousand men. From the arithmetical point of view their forces were negligible. Yet, they were able to seize power and beat into submission the whole nation because they did not encounter any ideological opposition. In the vast empire of the Tsars there was no group or party advocating economic freedom. There was no author or teacher, no book, magazine or newspaper that would have declared that freedom from bureaucratic regimentation is the only method to make the Russian people as prosperous as possible.

All people agree that in France and in Italy [1948] the Communist danger is very great. Yet, it is a fact that the majorities in both countries are hostile to Communism. However, the resistance of these majorities is weak, as they have espoused essential parts of socialism and of the Marxian criticism of capitalism. Thanks to this ideological penetration of Communist adversaries in France and Italy, the chances of the Communists are much better than the numbers of Communist Party members warrant.

The Philosophical Problem Implied

Those engaged in the conduct of business, the professions, politics, and the editing and writing of newspapers and magazines are so fully absorbed by the sundry problems they have to face that they neglect to pay attention to the great ideological conflicts of our age. The urgent tasks of the daily routine impose on them an enormous quantity of pressing work, and no time is left for a thoroughgoing examination of the principles and doctrines implied. Perplexed by the vast amount of detail and trivia, the practical man looks only at the short-run consequences of the alternatives between which he has to choose at the moment, and does not bother about long-run consequences. He falls prey to the illusion that this attitude alone is worthy of an active citizen successfully contributing to progress and welfare; preoccupation with fundamental questions is just a pastime for authors and readers of useless highbrow books and magazines. In democratic America the men most distinguished in business, the professions, and politics have today the same attitude toward “theories” and “abstractions” that Napoleon Bonaparte displayed in ridiculing and abusing the “ideologues.”

The disdain of theories and philosophies is mainly caused by the mistaken belief that the facts of experience speak for themselves, that facts by themselves can explode erroneous interpretations. The idea prevails that no serious harm can be done by a fallacious philosophy, an “ism,” however vitriolic and insidious; reality is stronger than fables and myths; truth automatically dispels lies; there is no reason to worry about the propaganda of the apostles of untruth.

There is no need to enter into an investigation of the epistemological issues implied in this widely held opinion. It may be enough to quote a few lines of John Stuart Mill. “Man,” says Mill, “. . is capable of rectifying his mistakes, by discussion and experience. Not by experience alone. There must be discussion, to show how experience is to be interpreted. Wrong opinions and practices gradually yield to fact and argument; but facts and arguments, to produce any effect on the mind, must be brought before it. Very few facts are able to tell their own story, without comments to bring out their meaning.”1

Those people who believe that the mere record of the American achievements of economic individualism makes the youth of the United States safe from indoctrination with the ideas of Karl Marx, Thorstein Veblen, John Dewey, Bertrand Russell, and Harold Laski are badly mistaken. They fail to discern the role that Marxian polylogism plays in the living philosophy of our age.

According to the doctrine of Marxian polylogism, a man’s ideas necessarily reflect his class position; they are nothing but a disguise for the selfish interest of his class and are irreconcilably opposed to the interests of all other social classes. The “material productive forces” that determine the course of human history have chosen the working “class,” the proletariat, to abolish all class antagonisms and to bring lasting salvation to the whole of mankind. The interests of the proletarians, who are already the immense majority today, will finally coincide with the interests of all. Thus from the point of view of the inevitable destiny of man, the Marxians say, the proletarians are right and the bourgeois are wrong. There is no need, therefore, to refute an author who disagrees with the “progressive” teachings of Marx, Engels, and Lenin; all that is needed is to unmask his bourgeois background and show that he is wrong because he is either a bourgeois or a “sycophant” of the bourgeoisie.

In its consistent and radical form polylogism is accepted only by the Russian Bolsheviks. They distinguish between “bourgeois” and “proletarian” doctrines even in mathematics, physics, biology, and medicine. But the more moderate brand of polylogism, which applies the “bourgeois” or “proletarian” yardstick only to the social and historical branches of knowledge, is endorsed by and large even by many of those schools and authors who emphatically call themselves anti-Marxian. Even at universities, which radical Marxians vilify as strongholds of bourgeois mentality, general history as well as the history of philosophy, literature and art are often taught from the point of Marxian materialistic philosophy.

The tenets of people committed to Marxian polylogism cannot be shaken by any argument advanced by an author, politician or other citizen suspected of bourgeois affiliation. As long as a considerable part of the nation is imbued?many of them unwittingly?with the polylogistic doctrine, it is useless to argue with them about special theories of various branches of science or about the interpretation of concrete facts. These men are immune to thought, ideas and factual information that stem from the sordid source of the bourgeois mind. Hence it is obvious that the attempts to free the people, especially the intellectual youth, from the fetters of “unorthodox” indoctrination must begin on the philosophical and epistemological level.

The disinclination to deal with “theory” is tantamount to yielding submissively to Marx’s dialectical materialism. The intellectual conflict between freedom and totalitarianism will not be decided in discussions about the meaning of concrete statistical figures and historical events, but in a thorough examination of the fundamental issues of epistemology and the theory of knowledge.

It is true that the masses have only a very crude and simplified cognition of dialectical materialism and its offshoot, the so-called sociology of knowledge. But all knowledge of the many is crude and simplified. What matters is not to change the ideology of the masses, but to change first the ideology of the intellectual strata, the “highbrows,” whose mentality determines the content of the simplifications which are held by the “lowbrows.”

Marxism and “Progressivism”

The social and economic teachings of the self-styled “unorthodox Progressives” are a garbled mixture of divers particles of heterogeneous doctrines incompatible with one another. The main components of this body of opinion were taken from Marxism, British Fabianism and the Prussian Historical School. Essential elements were also borrowed from the teachings of those monetary reformers, inflationists who were long known only as “monetary cranks.” And the legacy of Mercantilism is important too.

All Progressives loathe the 19th century, its ideas and its policies. However, the principal ingredients of Progressivism, except for Mercantilism which stems from the 17th century, were formed in that much-defamed 19th century. But, of course, Progressivism is different from every one of these doctrines, parts of each of which were synthesized to make Progressivism what it is. . . . Among those who call themselves Progressives there are certainly a number of consistent Marxians .... The great majority of the Progressives, however, are moderate and eclectic in their appraisal of Marx. Although sympathizing by and large with the material objectives of the Bolsheviks, they criticize certain attending phenomena of the revolutionary movement, for instance, the Soviet regime’s dictatorial methods, its anti-Christianism and its “Iron Curtain.”. . .

Many outstanding champions of Progressivism openly declare that they aim ultimately at a substitution of socialism for free enterprise. But other Progressives announce again and again that by the suggested reforms they want to save capitalism, which would be doomed if not reformed and improved. They advocate interventionism as a permanent system of society’s economic organization, not as do the moderate Marxian groups, as a method for the gradual realization of socialism.

There is no need to enter here into an analysis of interventionism. It has been shown in an irrefutable way that all measures of interventionism bring about consequences which?from the point of view of the governments and parties resorting to them?are less satisfactory than the previous state of affairs which they were devised to alter. If the government and the politicians do not learn the lesson which these failures teach and do not want to abstain from all meddling with commodity prices, wages and interest rates, they must add more and more regimentation to their first measures until the whole system of market economy has been replaced by all-round planning and socialism.

However, my purpose here is not to deal with the policies recommended by the champions of interventionism. These practical policies differ from group to group. It is merely a slight exaggeration to say that not only does each pressure group have its own brand of interventionism, but so does every professor. Each is keenly intent upon exploding the shortcomings of all rival brands. But the doctrine which is at the bottom of interventionist ventures, the assumption that contradictions and evils are allegedly inherent in capitalism, is by and large uniform with all varieties of Progressivism and generally accepted with hardly any opposition. Theories which are at variance are virtually outlawed. Anti-progressive ideas are represented in caricature in university lectures, books, pamphlets, articles and newspapers. The rising generation does not hear anything about them except that they are the doctrines of the economic Bourbons, the ruthless exploiters and “robber barons” whose supremacy is gone forever.

The Main Thesis of Progressivism

The doctrines which are taught today under the appellation “Progressive economics” can be condensed in the following ten points.

1. The fundamental economic thesis common to all socialist groups is that there is a potential plenty, thanks to the technological achievements of the last two hundred years. The insufficient supply of useful things is due merely, as Marx and Engels repeated again and again, to the inherent contradictions and shortcomings of the capitalist mode of production. Once socialism is adopted, once socialism has reached its “higher stage,” and after the last vestiges of capitalism have been eradicated, there will be abundance. To work then will no longer cause pain, but pleasure. Society will be in a position to give “to each according to his needs.” Marx and Engels never noticed that there is an inexorable scarcity of the material factors of production.

The academic Progressives are more cautious in the choice of terms, but virtually all of them adopt the socialist thesis.

2. The inflationist wing of Progressivism agrees with the most bigoted Marxians in ignoring the fact of the scarcity of the material factors of production. It draws from this error the conclusion that the rate of interest and entrepreneurial profit can be eliminated by credit expansion. As they see it, only the selfish class interests of bankers and usurers are opposed to credit expansion.

The overwhelming success of the inflationist party manifests itself in the monetary and credit policies of all countries. The doctrinal and semantic changes that preceded this victory, which made this victory possible and which now prevent the adoption of sound monetary policies, are the following:

a. Until a few years ago, the term inflation meant a substantial increase in the quantity of money and money-substitutes. Such an increase necessarily tends to bring about a general rise in commodity prices. But today the term inflation is used to signify the inevitable consequences of what was previously called inflation. It is implied that an increase in the quantity of money and money-substitutes does not affect prices, and that the general rise in prices which we have witnessed in these last years was not caused by the government’s monetary policy, but by the insatiable greed of business.

b. It is assumed that the rise of foreign exchange rates in those countries, where the magnitude of the inflationary increment to the quantity of money and money-substitutes in circulation exceeded that of other countries, is not a consequence of this monetary excess but a product of other agents, such as: the unfavorable balance of payments, the sinister machinations of speculators, the “scarcity” of foreign exchange and the trade barriers erected by foreign governments, not by one’s own.

c. It is assumed that a government, which is not on the gold standard and which has control of a central bank system, has the power to manipulate the rate of interest downward ad libitum without bringing about any undesired effects. It is vehemently denied that such an “easy money” policy inevitably leads to an economic crisis. The theory, which explains the recurrence of periods of economic depression as the necessary outcome of the repeated attempts to reduce interest rates artificially and expand credit, is either intentionally passed over in silence or distorted in order to ridicule it and to abuse its authors.

3. Thus the way is free to describe the recurrence of periods of economic depression as an evil inherent in capitalism. The capitalist society, it is asserted, lacks the power to control its own destiny.

4. The most disastrous consequence of the economic crisis is mass unemployment prolonged year after year. People are starving it is claimed, because free enterprise is unable to provide enough jobs. Under capitalism technological improvement which could be a blessing for all is a scourge for the most numerous class.

5. The improvement in the material conditions of labor, the rise in real wage rates, the shortening of the hours of work, the abolition of child labor and all other “social gains” are achievements of government pro-labor legislation and labor unions. But for the interference of the government and the unions, the conditions of the laboring class would be as bad as they were in the early period of the “industrial revolution.”

6. In spite of all the endeavors of popular governments and labor unions, it is argued, the lot of the wage earners is desperate. Marx was quite right in predicting the inevitable progressive pauperization of the proletariat. The fact that accidental factors have temporarily secured a slight improvement in the standard of living of the American wage earner is of no avail; this improvement concerns merely a country whose population is not more than 7% of the world’s population and moreover, so the argument runs, it is only a passing phenomenon. The rich are still getting richer; the poor are still getting poorer; the middle classes are still disappearing. The greater part of wealth is concentrated in the hands of a few families, Lackeys of these families hold the most important public offices and manage them for the sole benefit of “Wall Street.” What the bourgeois call democracy means in reality “pluto-democracy,” a cunning disguise for the class rule of the exploiters.

7. In the absence of government price control, commodity prices are manipulated ad libitum by the businessmen. In the absence of minimum wage rates and collective bargaining, the employers would manipulate wages in the same way too. The result is that profits are absorbing more and more of the national income. There would prevail a tendency for real wage rates to drop if efficient unions were not intent upon checking the machinations of the employers.

8. The description of capitalism as a system of competitive business may have been correct for its early stages. Today it is manifestly inadequate. Mammoth size cartels and monopolistic combines dominate the national markets. Their endeavors to attain exclusive monopoly of the world market result in imperialistic wars in which the poor bleed in order to make the rich richer.

9. As production under capitalism is for profit and not for use, those things manufactured are not those which could most effectively supply the real wants of the consumers, but those the sale of which is most profitable. The “merchants of death” produce destructive weapons. Other business groups poison the body and soul of the masses by habit-creating drugs, intoxicating beverages, tobacco, lascivious books and magazines, silly moving pictures and idiotic comic strips.

10. The share of the national income that goes to the propertied classes is so enormous that, for all practical purposes, it can be considered inexhaustible. For a popular government, not afraid to tax the rich according to their ability to pay, there is no reason to abstain from any expenditure beneficial to the voters. On the other hand, profits can be freely tapped to raise wage rates and lower prices of consumers’ goods.

These are the main dogmas of the “unorthodoxy” of our age, the fallacies of which economic education must unmask. Success or failure of endeavors to substitute sound ideas for unsound will depend ultimately on the abilities and the personalities of the men who seek to achieve this task. If the right men are lacking in the hour of decision, the fate of our civilization is sealed. Even if such pioneers are available, however, their efforts will be futile if they meet with indifference and apathy on the part of their fellow citizens. The survival of civilization can be jeopardized by the misdeeds of individual dictators, Führers or Duces. Its preservation, reconstruction and continuation, however, require the joint efforts of all men of good will.

Extracts from a memorandum (1948) to Leonard E. Read, founder and president of the then newly established Foundation for Economic Education; previously published only in Spanish translation.

• 1Mill, On Liberty, Third Edition, London 1864, pp. 38-39.

An interview by Professor Percy L. Greaves, Jr., reprinted from the minibook published in 1969 by Constitutional Alliance, Inc.

Professor Greaves: What is the most important political problem for the world today?

Professor Mises: The prevention of a third world war which might doom our entire civilization.

Greaves: What is the most important problem from the viewpoint of domestic economic policies?

Mises: The re-establishment of financial integrity and making an end to inflation.

Greaves: What do you mean by the term “inflation”?

Mises: Inflation is a policy of increasing the quantity of money in order to make it possible for the government to spend more than it collects in taxes or borrows from the public. It is first of all a way to avoid the necessity of explaining to the people why higher taxes are necessary. The government wants to spend more than the duly elected representatives of the nation are ready to permit it to collect in taxes. Out of nothing, the government creates money by fiat, and then spends it. The government’s action does not add anything to the available supply of useful goods and services. It merely provides more money and thus brings about a tendency to make prices soar. Those groups of the population to whom the government gives some of this increased quantity of money are now in a position to buy more than they used to buy before. Their appearance on the market leaves a smaller share of the previously available commodities for those persons to whom the government did not give any of the increased money. Faced with higher prices, these people with no additional money are forced to restrict their purchases. Thus every inflationary action on the part of the government?and no other group or institution is able to resort to inflationary measures?results in a boon for some people and necessarily a disaster for the rest of the nation.

There cannot be justice in the distribution of the additional quantity of money that the government creates. It is impossible to deal out this additional quantity of new money in a way which will be acknowledged by all people as a “just” distribution. This is what economists have in mind when they refer to what they call the “non-neutrality of money.” The pseudo-economists are completely ignorant of this fundamental fact about government interference with the quantity of money. Thus many of them suggest that the government ought to increase the quantity of legal tender money year by year by a definite quantity?2% or 5% or 7%?they change it from year to year. They make these suggestions without realizing that such increases necessarily mean that one group of the population is helped while the rest of the population is hurt.

These advocates of annual increases in the quantity of money never mention the fact that for all those who do not get a share of the newly-created additional quantity of money, the government’s action means a drop in their purchasing power which forces them to restrict their consumption. It is ignorance of this fundamental fact that induces various authors of economic books and articles to suggest a yearly increase of money without realizing that such a measure necessarily brings about an undesirable impoverishment of a great part, even the majority, of the population.

Greaves: Whom does the inflation help? And whom does it hurt?

Mises: The various groups of the population are not affected in the same way by the inflation. There are some people whose economic standard the inflation improves.

Greaves: Who are they?

Mises: These are, this I mentioned already, the people to whom the government gives the newly-created quantities of money. Then there are the people who are profiting from the fact that those first receivers of the additional money are buying goods and services which they are selling. But those who are selling goods and services for which the demand doesn’t increase, or even drops, on account of the inflation, are losers. Still worse is the situation of those who are living on pensions and the income from savings.

Greaves: What is the effect of inflation on the savings of the masses?

Mises: This is a very important part of the problem. The servants of government say, “Who is against this increase in the quantity of money? The rich people. We are doing something very useful and necessary and beneficial for the masses. Why? Because if the quantity of money increases, the purchasing power of the dollar decreases. This means that the burden of debts becomes easier and thus the poor debtors are favored at the expense of the rich creditors.”

This was perfectly correct 2,500 years ago in Athens, when the great statesman Solon exacted economic reforms canceling public and private debts. Solon, had to deal with what we today call “social problems.” At that time the debtor was typically the poor man and the creditor was the rich man. The rich people could save and increase their possessions by investing in real property, houses, businesses, forests and other landed property. For the masses of the people things were different. Most of them couldn’t save at all, and those who could save a few pieces of money could only hide them in a dark corner of their premises, but this was all. They were not in a position to make savings grow by lending them against interest.

But we no longer live in Athens in the days of Solon. Nor do we live under the conditions of the Middle Ages or of the 16th, 17th, and 18th centuries, when the poor people couldn’t save. Under capitalistic conditions the situation is very different. Capitalism has enriched the masses, not all of them, of course, because capitalism still has to fight the hostility of the governments. But under capitalistic conditions it is no longer true that the creditors are the rich and the debtors the poor.

Capitalism has made it possible for the masses of the poorest strata of the population, the people who have less?I don’t want to say they are poor in the sense in which one frequently uses the term, only that they are poorer than the rich people?to save and invest their savings indirectly in the operation of business. They invest in savings deposits, insurance policies, and bonds. The rich people who are familiar with business conditions invest their savings in the common stock of corporations and in the purchase of real estate. But corporations and owners of real estate owe money, either because they have issued bonds, or because they have some connection with a bank which lends them money for the conduct of their affairs. The banks obtain this money from the savings accounts of simple citizens and the large insurance companies buy bonds with premiums paid by these poorer people.

The masses, people with less wealth than the richer people, have invested their savings “for a rainy day” in bonds, savings deposits, pension funds, and insurance policies. The value of all these investments depends on the value of the monetary unit. When the purchasing power of the monetary unit drops, their value shrinks. The masses, therefore, on account of having invested their savings in these assets, are creditors; the millionaires, the owners of real estate, common stocks, and so on, are debtors. Then if the government embarks on a policy of inflation, the fact that the debts are getting smaller does not hurt the rich so much, but the middle classes and the masses of people who have saved all their lives in order to enjoy a better old age, or to take care of themselves during periods of sickness, or to make it possible for them to educate their children, and so on. These poorer people are the big losers from inflation. This is what people do not realize when they are talking about various plans for increasing the quantity of money. The main victims of an inflationary policy are the less fortunate members of the population, while those who experience a boom are the owners of business enterprises and real estate who owe money to banks, insurance companies, or bond holders.

Greaves: What is the effect of inflation on charitable, educational, and other endowed institutions?

Mises: One of the effects of inflation is the financial destruction of all institutions and foundations based upon funds invested in bonds. One of the great evils that the fantastic inflations of world wars brought to the European countries was the almost complete disappearance of the funds of many humanistic, scientific, and charitable institutions. All European countries asked that the funds of such institutions be invested in bonds issued by the government or its subdivisions. The World War inflations wiped these funds out almost entirely.

For instance, an Austrian, who had been raised and educated in an Austrian orphan asylum, migrated to the United States. There, as a U.S. citizen, he acquired a considerable fortune. He died a short time before the outbreak of World War I, leaving about $2 million in U.S. funds for an orphan asylum in Austria. According to Austrian law, such funds had to be invested in domestic bonds while plans were made for new buildings. The construction had to wait, of course, until after the war. By that time, the inflation had entirely destroyed the purchasing power of this benefaction; nobody received any benefits from it at all.

Greaves: Could this happen again?

Mises: We may say that can’t happen here. But what we are now experiencing every day is that the savings of the majority of the American population invested in insurance policies, savings accounts, bonds, pension funds, and so on, are melting away.

Greaves: If the government stops inflating, must we have more unemployment?

Mises: The unemployment problem consists of the fact that people are asking for too much. It would be better not to talk about unemployment but about wage rates that are too high. Unemployment is the necessary effect of the fact that workers are not ready to work at wage rates which consumers are prepared to refund to the employer in buying the product. In the case of wages, people do not wish to admit what they admit with respect to everything else. They do not realize that persons who overrate their own skills and ask for higher wages than the customers are prepared to repay their employer must remain unemployed.

An employer cannot pay more to an employee than the equivalent of the value the employee, according to the judgment of the buying public, adds to the value of the product. If the employer were to pay more, he would suffer losses and finally go bankrupt. In paying wages, the employer acts, as it were, as an agent of the consumers. It is on the consumers that the incidence of the wage rates falls.

If nominal wage rates?wage rates expressed in terms of money?are too high for the state of the market, a part of the potential labor force will be unemployed. If the government then increases the quantity of money, that is, inflates, the unemployed can get jobs again. However, this happens only because, under the changed monetary conditions, prices are rising, or, in other words, the purchasing power of the monetary unit is dropping. The same amount of money wages then means less in real wages?that is, in terms of the goods and services that can be bought with the money wages. Inflation can cure unemployment only by reducing the potential wage earner’s real wage.

But then the unions ask for a new increase in wages in order to keep up with the rising cost of living and we are back where we were before, with large-scale unemployment. This is what has happened in this country in recent years, as well as in many other countries.

If you want higher wage rates, you have to accumulate more capital. The more capital?other things being equal?the higher wage rates climb in a free market, that is a market not manipulated by the government or the unions. At these market wage rates all who want to be employed can get jobs.

Now, as the majority of the consumers are precisely the same people who are working and earning wages, it is in fact the workers themselves who determine what wages are compatible with full employment. The idea that workers and consumers are different persons is erroneous. Ultimately the workers and the consumers are the same people. For instance, the railroad workers themselves are consumers who are consuming all those products which cannot be produced and brought to places of consumption without the cooperation of the railroads. If the railroad employees get an increase in wage rates, this means that the railroad employees, as consumers, will be among those who will also have to pay more for the services rendered by the railroads.

The faulty ideas which underlie all discussions concerning labor and wage rates is that the masses of wage earners are producing for an upper “class” of capitalists and do not themselves enjoy the fruits of their efforts. The truth is that by far the greater part of all that is produced by the wage earners is also consumed by them, the wage earners, who are members of the same “class.” The main characteristic of capitalism is precisely the fact that it is mass production for supplying the masses. What is not understood by the philosophy underlying union policies is that by far the greater part of all the goods and services produced under capitalism is consumed by the same people who are working in the shops, yards and factories.

Unemployment cannot be fought by inflation. Unemployment is always due to the fact that to employ a man at the wage rate he is asking for results in a loss for the employer. As long as the employment of an additional man is profitable, because there are buyers who are ready to refund to the employer what he has spent in hiring the worker, there is no unemployment.

There prevails on a free labor market a constant tendency toward full employment. In fact, the only reasonable and successful full employment policy is to let the free market determine the height of wage rates. If union pressure or government decrees raise wage rates above this free market height, unemployment of a part of the potential labor force necessarily develops.

Greaves: Then minimum wage laws do not raise workers’ wages?

Mises: People think that if they raise the minimum wage rates they will improve somebody’s conditions. This is one of the most dreadful mistakes, for there are people whose work, in the opinion of the buying public?i.e., the consumers?is not worth the higher wage rates. Therefore these people remain unemployed. Legally decreed minimum wage rates are either useless, or they create additional unemployment. If the consumers, in buying the product are not prepared to refund to the employer all that he has spent in producing the product, he will be forced to stop production and therefore the employment of workers.

Greaves: Many influential people say the cause of our monetary trouble is the unfavorable balance of payments. They imply that the higher prices due to the fall in the purchasing power of the dollar are a result of the fact that Americans are spending abroad more than foreigners are spending in the United States. They think that the balance of payments determines the purchasing power of the dollar in foreign trade and consequently in domestic prices, so they want to stop the American inflation by passing laws to reduce imports and to stop American citizens from traveling or spending money abroad. What do you have to say about that?

Mises: This interpretation of American monetary troubles is absolutely wrong The balance of payments argument is made in order to deny the government’s responsibility for inflation. It is an attempt to exonerate the government policy of increasing the quantity of money and to indict the American people for the tendency of prices to rise. From this point of view the government wants to restrict the importation of goods which they consider unnecessary and to prevent Americans from traveling abroad.

Now let us see what this means. When U. S. citizens buy some imported product, they must pay for it. When the government prevents them from buying this foreign product, let us say French champagne, they will not put these dollars into a package and send this package to the government so it will have more money to pay the deficits of its enterprises?the post office, for instance. The citizens will buy something else on the domestic market. The prices of the domestic products they purchase will then go up on account of the fact that there is now a greater demand for them. This will bring about higher prices for some things which were previously exported and these things will no longer be exported.

In addition, the fact that an American law makes it impossible or more expensive for Americans to buy certain foreign products that they used to buy will bring about a lowering of the demand for these foreign products. Consequently, in order to make it possible for the foreign producers to sell all their production, they will tend to drop the prices of these foreign products. As a result, the foreigners will no longer be in a position to buy as much, to maintain the same standard of living as they did before. They will have to restrict their consumption. They will, for instance, have to restrict the purchase of some imported commodities, let us say, American cars. Thus, it comes about that when a country restricts its imports, it necessarily also restricts its exports. When foreigners sell less on our markets, they then have less means to buy our products.

The truth is that exports and imports depend on one another and in this sense are balanced. If we restrict the quantity of U.S. funds in the hands of foreigners, by anti-import measures and anti-overseas travel measures, we are necessarily restricting the quantity of the means?the money?that these foreigners are able to spend on U.S. goods or visits to America.

If all the countries of the world, keeping consistently to this balance of payments theory, were to make imports impossible, they would thereby also make exports impossible. Then every country would remain economically isolated. Prices and living costs would go up, not only because the government increases the quantity of domestic money, but also because the consumers would no longer have access to products that could be produced abroad under more favorable conditions. The result of all these policies would be more and more restriction of international trade.

Foreign trade is not one-sided. It is always necessarily a mutual exchange of goods and services between various countries for the mutual advantage of their citizens. A restriction of foreign trade means a reduction in the standard of living of the citizens of the countries whose trade is restricted.

Greaves: Why does this “balance of payments” situation develop only between countries and not between different sections of one country? There are many states in the United States with populations larger than, or at least not much smaller than the populations of many independent European nations. Why don’t we hear the same complaints about the citizens of Illinois spending their money in Florida that we hear about the people who go to Paris and buy French perfumes, supposedly enriching France while impoverishing the United States?

Mises: Because the various American States have no independent monetary policies. There cannot be any inflation in Iowa that is not at the same time and to the same extent also an inflation in the 49 other states of the Union.

And you needn’t think only of trade among the states. People say it is harmful that France produces and sells to the United States only goods which are very bad, frivolous, immoral?books, novels, champagne, concerts, theatrical performances, and opera productions in Paris. But you could say the same thing also about, let us say, Brooklyn and Manhattan. Manhattan sells concerts, conferences, theatrical performances, opera productions, and so on, to the people from Brooklyn. Brooklyn people are spending their money in Manhattan. A Brooklyn man could say: “Why does my neighbor spend his money to attend an opera performance in Manhattan? Why does he not spend his money in Brooklyn?” And if you carry this reasoning step by step farther in the same direction, you would arrive eventually at perfect autarky, i.e., self-sufficiency, economic isolation of every group and political unit.

Greaves: What needs to be done?

Mises: What is needed in order to avoid all these unwelcome effects of inflation is to restore honesty in the conduct of monetary affairs. This means to restore integrity in the conduct of all governmental affairs also and especially in observing precisely the financial provisions of the Constitution.

Greaves: Which provisions do you mean?

Mises: Those financial provisions which make it illegal for the government to spend more than the budget permits. Every penny the government spends ought to be collected by the tax authorities, proceeding in strict conformity with the laws of the country.

Greaves: Then you wouldn’t permit the Federal Government to borrow?

Mises: If Congress wants to spend more it should make legal the issuance of additional quantities of government bonds-to be sold to the public, not to the commercial banks.

Greaves: It has long been illegal for Americans to own gold.1  Has this contributed to the problem?

Mises: The law that forbids the holding of gold to U. S. citizens makes it impossible for them to prevent the government’s attempts to inflate. If individual citizens had had the right to hoard gold, the lunacy of the attempts to substitute paper for gold would have become visible long ago.

Greaves: Then you don’t believe in “paper gold”?

Mises: There is gold and there is paper, but there is no such thing as “paper gold.” If private citizens in this country had the right to buy and to hold gold, a considerable quantity of gold would be owned today by U.S. citizens and it wouldn’t be difficult to restore the U.S. monetary standard, nor to restore the monetary standards of the whole Western civilization.

Greaves: Would increasing the “price of gold” help?

Mises: What is called, in rather mendacious terminology, “raising the price of gold” means in fact acknowledging legally the effects of inflation. The raising of the “price of gold” is in fact the acknowledgment by the government of the depreciation of the country’s legal currency system. An honest description of the case would not talk of raising the “price of gold” but of raising the price of all necessities, of all the things people need for daily consumption.

Greaves: Many people believe that money is necessarily a creation of the government. Is this so?

Mises: Money is a phenomenon of the market, a medium of exchange. But governments think of money as a product of government activity. Money is not a creation of the government. This should be repeated again and again. All these doctrines begin with the idea that there is something more in money than the agreement of the parties to exchange something against a definite kind and quantity of this money. It is government interference that has destroyed money in the past and it is government interference that is destroying money again.

Money, as such, is an institution of the market economy. It is one of the fundamental institutions of the market. A market without money is impossible. A market is precisely the freedom of the people to produce, to trade and to consume. When money is destroyed, when monetary exchange becomes impossible, then the existence of the market economy also comes to an end. And a free system without a market is impossible.

A thing cannot serve as money if the government has the right to increase its quantity ad libitum.

Greaves: Would it be more satisfactory if the government didn’t mint or print the money, but left that function to private institutions?

Mises: That assumes the manufacture of money by private institutions would be free from government interference. The trouble is not due to the fact that the government has the mint and the printing presses. Even if the governments had never tried to manufacture money, their influence would not have been different from what it is today.

The problem comes from the fact that it is the function of governments to adjudicate all disputes which might otherwise give rise to violence involving any of its citizens. The opportunity for governments to deal with monetary problems comes about in the same way in which they are concerned with all contracts providing for the exchange of goods and services. For example, governments are called upon every day to decide whether or not one of the parties to an exchange contract has failed to comply with his contractual obligations. A court’s finding of such a failure then justifies compulsion on the part of the governmental apparatus of violent oppression.

If both parties fulfill their contractual obligations instantly and simultaneously, no disputes are likely to arise which would induce either of the parties to appeal to the courts. However, if the obligations of one or both parties are deferred for a period of time, it may happen that the courts will be asked how the terms of the contract are to be enforced. If the payment of a sum of money is involved, this involves the task of determining what meaning is to be given to the monetary terms in the contract. Actually, the court is asked to define what must be legally accepted as money, The power to give certain pieces of paper legal tender quality is one that requires constant watching.

The transition from coins to paper made it easy to inflate. All the monetary troubles come from the fact that many governments, for financial purposes, abuse the power to determine that pieces of paper are the legal equivalent of the coins of the realm. The power that this abuse of the judicial supremacy of the laws and the courts confers on the governments is the sole source of all the monetary troubles. The private minting and printing of money would not eliminate this power.

Greaves: In your many writings on monetary problems you have always spoken highly of the gold standard. Why?

Mises: The practical problem of money today in the whole world is precisely this: Taxes are unpopular. And the most unpopular thing is to substitute a higher tax for a lower tax. The government wants to spend more without increasing taxes. Now what does the government do in such a situation? The government increases the quantity of money?it resorts to inflation. Prices necessarily go up as a greater quantity of money appears on the market and “chasing” after a not-increased quantity of goods.

The gold standard did not fail. The governments sabotaged it and still go on sabotaging it. The governments established a legal ratio between gold and the monetary unit. (For the United States the ratio established by law is that one ounce of gold is the legal equivalent of $35.)2  But then, by inflating, the government makes it impossible to maintain this legal tender ratio. This is the monetary problem. Governments do not want to admit that an increased quantity of paper money brings about higher prices, in terms of the government-issued paper money, for all commodities and, of course, also for gold.

The quantity of money is the decisive problem. The quality that makes gold fit for service as money is precisely the fact that the quantity of gold cannot be manipulated by governments. The gold standard has one quality, one virtue. It is that the quantity of gold cannot be increased in the way that paper notes can be increased. The usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability of mining gold, and thus checks large-scale inflationary ventures on the part of governments.

Gold cannot be produced in a cheaper way by any governmental bureau, committee, institution, office, international agency, or so on. This is the only justification for the gold standard. One has tried again and again to find some method to substitute these qualities of gold in some other way. But all these methods have failed, and will ever fail as long as governments are committed to the idea that it is all right for a government, which has not collected enough money to pay its expenses by taxing its citizens or by borrowing on the market, to increase the quantity of money simply by printing it.

The eminence of the gold standard is to be seen in the fact that the gold standard alone makes the determination of the monetary unit’s purchasing power independent of the ambitions and activities of dictators, political parties and pressure groups. No government is powerful enough to destroy the gold standard as long as the market economy is not entirely suppressed. The gold standard alone is what the 19th-century champions of representative government, civil liberties, and prosperity for all meant by “sound money.”

• 1The right to own gold, denied to U.S. citizens in 1933, and still denied at the time of this interview (1969), was finally restored as of January 1, 1975.
• 2This artificially maintained ratio of $35.00 to one ounce of gold was raised in December 1971 to $38.00, and in February 1973 to $42.42. And then the ratio of the U.S. paper dollar to gold was allowed to float on the international market.

What is nowadays called governmental monetary management encompasses two kinds of policy. It is, on the one hand, deficit spending, i.e., undisguised inflation to enable the government to spend over and beyond the amount of funds collected by taxation or borrowed from the public. It is, on the other hand, a policy of easy money, i.e., of attempts to lower the market rate of interest by credit expansion.

The governments as well as their henchmen are fully convinced that this expansionist policy is highly beneficial to the immense majority of all decent people. They emphatically deny that increasing the quantity of money in circulation is what economists, politicians, and all sane people used to call and still call “inflation.” As they see it, inflation has nothing to do with the quantity of money in circulation; rather it is a reprehensible procedure of greedy businessmen that ought to be prevented by government control of prices. In the eyes of the official doctrine, interest is essentially a factor hindering the development of “really productive” business. Such a doctrine views interest as a tribute that the industrious members of society are compelled to pay to a race of lazy moneylenders.

Only a few outsiders have the courage to deviate from the government-decreed methods of dealing with the expansionist policy. Very seldom does one meet in public discussion of the problem of rising prices and wage rates any reference to the government-made inflation. It is not that the authors of books, articles, and speeches about the problems involved knowingly avoid dealing with the genuine cause of the phenomena investigated. They are honest in their argumentation. Their “new economics” has told them that nothing but evil can emerge from the “anarchy” of the market. Their panacea is the “plan,” i.e., the government’s unlimited dictatorship in all economic and political affairs.

In monetary matters mankind has already for many years enjoyed the benefits of a world-embracing planning office, but it seems that the results do not satisfy anybody. There is irritating talk about an international or world problem of the nations’ mutual monetary relations. There are national and international committees and conferences for the study of the matter. Many books and innumerable pamphlets and articles deal with the subject. There is general agreement that the present state is unsatisfactory and that a change is unavoidable. With this in mind, let us examine the international monetary problem.

Balance of Payments Doctrine

When the servants of a government search for the cause of some unsatisfactory condition, they always discover that the authorities have done all that could be done for a perfectly satisfactory solution of the matter in question. But the beneficial effects of their action failed to appear because the people frustrated the wise plan of their rulers. The best-known doctrine of this type was once the balance of trade theory and later its modern offshoot, the balance of payments theory.1

After all, it made some sense in the 19th century when some people still referred to this long-since entirely refuted doctrine as justification for some restrictions on the importation of foreign merchandise and on other payments to foreigners. It gave the government an excuse?of course, a vicious one?for maintaining that by indulging in foreign luxuries people were sabotaging their ruler’s wise monetary policy. When domestic money is shipped to foreign countries as payment for imported “superfluous luxuries,” proclaimed the officials, it becomes superabundant abroad and therefore its price, in terms of foreign money, falls, causing the price of the foreign money to rise in terms of the domestic money. This unwelcome rise in the price of foreign exchange in terms of the domestic money is caused, it is said, by an “unfavorable balance of payments,” due to sending money abroad to pay for foreign imports. This doctrine explained the depreciation of the domestic money by the “unpatriotic” consumption habits of consumers. It is, therefore, the sacred duty of good government to prevent such bad citizens from damaging the interests of the nation.

But in recent decades the declarations of U.S. government authorities with reference to the “balance of payments” bogey could not even seemingly exonerate the government and make the people responsible. The government of the United States in this period not only spent scores of billions of dollars for the conduct of foreign wars and for garrisoning armed forces in far distant parts of the world. It distributed alms of many dozens of billions under the newfangled title of “foreign aid.” It was ridiculous demagogy to mention the “balance of payments” issue in connection with the expenses of American tourists visiting the Acropolis, of American students attending the University of Paris, and to pass over in silence the subsidies that enabled various “F?hrers” of semibarbarous countries to establish and to preserve their despotic regimes. Only ignorance on the part of the representatives of the “new economics” can explain their attempts to revive the long since entirely discredited “balance of payments” interpretation of mutual exchange ratios between various currencies.

The theory maintained by economists, the so-called purchasing-power-parity theory, says: the exchange ratio between different currencies tends toward a point at which it does not make any difference which currency is employed in selling or buying. The parity is characterized by the fact that no gains can be made by buying against units of A currency and selling against units of B currency or vice versa. Any deviation from this parity will be corrected?”automatically,” as a frequently misinterpreted term says?by the actions of people who want to profit by such buying and selling. This insight was already implied in the reasoning of Gresham’s law. When domestic inflation makes prices in the country of A currency rise while there is no inflation and therefore no general upward movement of prices in the country of B currency, the previous exchange ratio between the two currencies A and B must change.2

International Exchange Ratios

If all over the world there prevailed the strict and pure gold standard, no other monetary problems would exist other than technological ones, e.g., that of properly minting the coins. No government interference with the technical production of coins would be necessary. The same would be the case if there could be established a world monetary center, not a bank operated by angels removed from all earthly concerns and interests.

In our actual world every government claims national sovereignty in all monetary matters. Even this state of affairs could result, at least for a majority of civilized nations, in rather satisfactory conditions, i.e., a state of affairs characterized by the absence of any monetary problems and crises. In order to achieve and to preserve such a state of affairs every nation belonging to this group of civilized nations would have to abstain from any kind of “monetary welfarism.” It would have to strictly avoid any policy that would interfere with the?once and for all time?established exchange ratio between its domestic currency and the currencies of all the other nations that proceeded in the same way and thereby belonged to this group of civilized nations.

The actual state of affairs is entirely different. Most of the civilized nations are officially committed to a policy of a stable exchange ratio either between their national currency and gold or, what ought to be the same, between their national currency and the currencies of countries, that also aim officially at a stable exchange ratio between their own currency and those of other nations that are committed to the same principle. But the government economists maintain there are conditions that make it extremely difficult or even quite impossible for the monetary authorities of a nation to preserve this officially-decreed exchange ratio. There are unpatriotic citizens whose business transactions impair the nation’s balance of payments. And, still worse, there are speculators who aim directly at making the price of foreign exchange rise above the parity fixed by the authorities. To frustrate these “attacks” upon the stability of the foreign exchange rates is believed to be one of the foremost duties of good government.

In the terminology of economics, what the military jargon employed by monetary authorities qualifies as “attacks” is a rising demand for foreign exchange. Notwithstanding its policy of increasing the quantity of money and lowering interest rates, the government wants to maintain a definite exchange ratio between the domestic (national) currency on the one side and gold and foreign exchange of other countries committed to the same policy on the other side. As the demand for gold or foreign exchange rises, the government sees the amount of its “reserves” dwindle. This is the situation in which the governments and public opinion declare that “something must be done.” There is no need to expatiate about this fact and its consequences. The question to be raised and answered is: What is it that increases the demand for foreign exchange and moves people to offer higher prices in domestic currency for it?

Inflation and Inflationism

Practically all governments consider the two foremost goals of monetary policy to be: first, to inflate their nation’s currency system in order to be able to spend more than the amounts collected by taxation or borrowed from the public; and secondly, to bring about credit expansion in order to lower the rates of interest below the height they would attain on a free money market. It is these policies that necessarily and inevitably produce all those phenomena which the monetary authorities ascribe to the alleged unfavorable state of the balance of payments and to the machinations of speculators.

Let us begin with inflation and inflationism. Inflation is an increase in the quantity of money in circulation that surpasses the increase in the demand for money for cash holding. Inflationism is a government policy of increasing the quantity of money in order to enable the government to spend more than the funds provided by taxation and borrowing. Such “deficit spending” is nowadays, as everybody knows, the characteristic signature of the U.S. government’s financial policies. It is highly praised under the label of “the new economics.”

Of course, these advocates of boundless inflation have adopted a terminology that attaches to the words a different meaning. They use the term “inflation” to refer to what is merely the unavoidable effect of inflation, namely the general tendency of prices and wages toward higher points, and they ascribe this tendency to the greed and avarice of businessmen. They pretend that the government is sincerely and honestly committed to a policy of price stability.

Let us see. The government plans an additional expenditure. Let us assume that the government wants to raise the salaries of a group of public servants. It collects the funds required by raising the taxes to be paid by certain people. Then the increase in purchases, in terms of the national money on the part of those benefited by higher salaries corresponds to the drop in purchases on the part of those who were forced to pay higher taxes. By and large, no change in the purchasing power of the monetary unit results.

But if the government simply provides the funds required for the higher salaries by issuing an additional quantity of legal-tender money, things are different. Those benefited by the new additional money compete on the market with all those whose demand had already been instrumental in the determination of the previous prices. An increased quantity of money is offered to buy a not-increased quantity of goods. The outcome is higher prices for vendible merchandise, or, what is the same, a drop in the “purchasing power” of the country’s monetary unit.

Let us assume the exchange ratio between the Ruritanian rur and the Maritanian mar was 1 to 2. Now the Ruritanian government inflates and consequently prices expressed in rurs are rising while no changes occur in Maritania. It is obvious that such a state of affairs must necessarily bring about a corresponding alteration in the price of rurs expressed in mars or, what is the same, in the price of mars expressed in rurs. For now one rur buys only a smaller quantity of merchandise than 2 mars. One can gain by buying against mars, selling against rurs, and then exchanging these rurs at the rate of 1:2 against mars. Such transactions are inevitably bound to transform the previous exchange rate and finally to establish again a purchasing-power-parity rate adequate to the altered purchasing power of the rur.

The regular course of events under present conditions is this: Ruritania inflates and consequently Ruritanian prices are rising. But the Ruritanian government is anxious to preserve the previous exchange rate against foreign currencies. It tries to maintain this rate in its own exchange operations. As it is profitable to buy mars at the official rate, the demand for them increases and the monetary authorities of Ruritania see their “reserves” of foreign exchange drop. This is the emergency that is called “illiquidity” and makes the official circles clamor for more “reserves.”

Then there is a second kind of government policy that results likewise in an increased demand for foreign exchange. The governments want to lower the market rate of interest. They resort to various measures for the attainment of this end. As far as these measures bring about credit expansion, they produce the same effects which the simple inflation of deficit spending brings about. But they disarrange besides the equilibrium of the market for short-term loans. Funds are withdrawn from the country’s market for short-term loans, usually called money market, precisely because the authorities have temporarily succeeded in lowering domestic interest rates. This movement too results in a rising demand for foreign exchange.

We see now that this intensified demand for foreign exchange, these “attacks” upon the “reserves” in the hands of the monetary authorities, the central bank or its equivalent, are neither acts of God nor the outcome of machinations on the part of antipatriotic selfish citizens or of foreign enemies. They are the inevitable reaction of the market upon the monetary interventionism of the government, its misguided and misplaced monetary welfarism.

Inflationism is not a variety of economic policies. It is an instrument of destruction; if not stopped very soon, it destroys the market entirely. There is no need to refer to historical experiences, such as that of the German Weimar Republic of the years of 1920-1923. It is a shame that in the discussions concerning present-day monetary problems some of the nonsense is revived that was brought forward in earlier periods of inflation.

Inflation Cannot Last

Any variety of inflationism and any attempts of institutionally lowering the rate of interest are incompatible with plans for the establishment of something that could be called an international system or order of monetary affairs. As long as the governments of many or even of most of the commercially important nations are committed to such policies, it is idle to talk about an efficient international organization of monetary matters.

Nothing characterizes the state of present-day “official” economic doctrine better than the fact that in the great flood of books and articles published about the international monetary problems there is hardly any reference to the issues of inflation and anti-interest measures. In the light of this literature and the pronouncements of the “monetary authorities” there prevails some mysterious evil, mostly called lack of liquidity, that thwarts the allegedly well-designed endeavors of governments and central banks to render international monetary conditions perfectly satisfactory. There is not enough “liquidity”; the “reserves” of the central banks, or of the institutions to which the functions of a central bank have been entrusted, are not large enough. The remedy is obvious: one needs more reserves. How can this be achieved? Of course, by “creating” more legal tender of those nations for whose notes and deposits the demand is most urgent.

Ruritania has succeeded in lowering its domestic loan market’s interest rates. The result is a withdrawal of short-term funds from Ruritania, and a rising demand for mars. The Ruritanian central bank sees its reserve in mars and in other foreign currencies dwindle. There is, say the experts, a solution for this problem: let the Maritanian central bank or other central banks lend to their Ruritanian sister the mars or other foreign money required. That means: let the foreign banks inflate up to a point at which their own currencies are no longer better than that of Ruritania.

The insufficiency of this suggestion moved some authors to elaborate plans for a “reserve currency.” This currency should serve merely as an increase in the “reserve” of central banks. But the withdrawals of funds from Ruritania are made not only by other nations’ central banks; they are made first of all by people who want to invest or to spend the funds withdrawn. For these people a “reserve currency” is useless. They want to get “real” money, not a “reserve” money.

Whatever people may say about a policy of increasing the quantity of fiat money, there is one aspect of it that even the most obstinate of its advocates cannot deny: Inflationism cannot last; if not radically stopped in time, it must lead inexorably to a complete breakdown. It is an expedient of people who do not care a whit for the future of their nation and its civilization. It is the policy of Madame de Pompadour, the mistress of the French King Louis XV—Après nous le Déluge.

Today we are still able to stop the progress of inflation and to return to sound principles of financing government expenditure. But will we have the same opportunity tomorrow?

Appendix

To prevent a misinterpretation of the preceding statements concerning the height of the rate of interest and the height of profits some additional remarks are appropriate.

In dealing with the problems of an inflationary upward movement of prices, when one refers to the gross rate or market rate of interest, one must realize that the expectation of such a change in the height of prices will affect the size of the gross interest rate. People who expect a rise in definite prices are prepared to borrow at higher gross rates of interest than they would be ready to pay if they were to expect a less momentous rise in prices, or no rise at all. On the other hand the lender under such conditions grants loans only if the gross rate agreed upon is higher than it would be in the absence of such expectations. Thus, the expectation of rising prices has the tendency to make the market rate, the gross rate of interest, rise. There appears in this gross market rate a component?called the “price premium” by economists?that owes its existence to the cognition and anticipation of the inflationary movement of prices.

There is need to stress this point to show the futility of the usual methods of distinguishing between what people call low and high rates of interest. When the market rate rises above the height they consider “normal,” people believe that everything possible has been done to keep “speculation” under control. From this point of view they gauge the raising of the rate of discount by one or a few percentage points by the monetary authorities as a “check” upon “inflationary speculation.”

Another fact to be noted concerns the height of profits. All customary methods of accounting are necessarily based upon the unit of the nation’s currency system. They do not pay heed to changes in this unit’s purchasing power. One result of this neglect is that with the progress of inflation the habitual depreciation quotas shrink substantially, and that profits calculated without taking this fact into consideration are illusory. A second source of overvaluation of an enterprise’s profits is due to the drop in the money’s purchasing power occurring in the period between the acquisition and sale of merchandise. And then come the tax authorities and the labor unions and claim their share of these “excessive” profits that in fact i.e., when calculated in gold or a not-inflated foreign currency, may be not profits at all, but losses.

Reprinted from American Opinion, March 1967.

• 1 For a brilliant critique of the balance of payments theory of foreign exchange see Rothbard, Man, Economy and State, Princeton 1962, pp. 719-722.
• 2For a detailed exposition see the writings of Gustav Cassel, Edwin Cannan, and Benjamin McAlester Anderson and my own contributions.

A characteristic feature of the contemporary policies of all the not outright socialist nations is animosity against business. Public opinion contrasts the mean selfishness of those engaged in the conduct of business with the lofty altruism of the politicians and the public servants. The profits made by those enterprises that succeed in filling, in the best possible and cheapest way, the most urgent wants of the consumers, i.e., of everybody, are called “unearned” income in the tax laws and are subject to confiscatory and discriminatory imposts. To restrict as much as possible the sphere in which private enterprise is free to operate?the so-called private sector of a nation’s economy?and to expand concomitantly the public sector is considered as one of the foremost goals of economic policies. While paying lip service to the principle of free enterprise, nations are step by step adopting the principles of socialism and totalitarianism.

In spite of all the obstacles put in its way, private enterprise demonstrates anew each day its incomparable efficiency. New and better products appear again and again on the market and are made accessible to the many, not only to a small minority of privileged nabobs. The “common man” enjoys in the capitalistic countries amenities of which the richest people of ages gone by did not even dream. Not so long ago the socialist critics of capitalism used to blame the market economy for the penury of a part of the population, that is, for the fact that capitalism had not yet totally wiped out the unfortunate effects of the precapitalistic methods of production. Today they criticize capitalism for the “affluence” of the private citizen and suggest methods for depriving them of a great part of this “affluence” in order to enable their rulers to spend more for objectives for which the individual citizens do not spend, obviously because they do not approve of them.

The only goal of production is to provide for consumption in the best possible and cheapest way. To serve the consumers is the objective of all business activities. Profits can be earned only by supplying the consumers in the best possible and cheapest way with all those things they want to use. In the market economy the consumers—the people—are supreme.

In competing for the patronage of the consumers, the capitalistic factory outstripped the traditional handicrafts that had prevailed in precapitalistic ages. Romantic dreamers whose information about the old artisans stems from works such as Richard Wagner’s Meistersinger1  may deplore this fact. But consumers are now getting more, better and cheaper shoes than in the time of artisan cobblers. It would be a boon for the barefooted masses of India if the old-fashioned workshops of their shoemakers had to give way to modern shoe factories.

Small Businesses

In the present there is in capitalistic countries, by and large, no longer a keen rivalry between big business and small business. There are lines in which the small-size enterprise can hold its own. Again and again changes in technological conditions and in marketing methods give bigger enterprises the opportunity to enter fields which hitherto have been a domain of small outfits. But on the other hand new specialties develop in which the small shop prevails. There is still room left for small-scale enterprise not only in the repair business, in the service trades and in some fields of retailing, but even in some highly specialized processing jobs and certainly also in many categories of agriculture.

It is, of course, misleading to seek from statistics information about the role small units play in the structure of modern business. The features on the basis of which statistics classify an outfit as independent refer to legal, administrative, and technological characteristics. They qualify as independent businesses many jobs that substantially depend on a big-size concern. In many branches the distribution of the products and the rendering of the various services which the buyer expects and regularly gets from the seller is customarily accomplished by firms or individuals whose business has the legal character of an autonomous existence, although it is essentially merely an outlet of a big concern.

Neither can we obtain more reliable information about the actual number of flourishing small business outfits by observing the purchasing habits of people. Even in the shopping districts of the big urban agglomerations we see interspersed among the numerous outlets of chain stores a rather impressive variety of seemingly independent retailers and artisans. But here again it is impossible, without a searching scrutiny of every individual case, to sift those that are really independent from those that are not.

A substantial antagonism between big concerns and small independent businessmen still prevails in retailing. Chain stores, department stores, and supermarkets are annexing more and more of the field previously served by the small shopkeeper. In almost every country trade associations of small businesses try to delay or even to stop this evolution. They aim at a privileged position for themselves and at legal and administrative restriction of the operations of their financially more potent competitors. Public opinion sympathizes with their claims and political parties promise to support them. But the consumers do not back up these endeavors. More and more people stop patronizing the small shops and turn to their competitors.

Those trade associations and pressure groups of small businesses that plan to improve the competitive power of their members’ outfits by legislative measures, restricting the operations of big-scale enterprises, are engaged in a hopeless venture. In the long run the consumers will not acquiesce in a policy the costs of which would burden them heavily.

Measures to “Help” Small Businesses

The main argument advanced in favor of measures aiding the small independent shop in its competition with bigger enterprises refers to the moral and civic values inherent in economic independence. People contrast the position of a businessman who is his own boss and is responsible only to himself with that of an employee who is integrated in a huge apparatus and subject to a hierarchy of superior officers. Whatever weight this argument may have, it is out of place in justifying government intervention for the benefit of definite groups of businessmen. The more effective the government’s measures of such intervention become, the more do they deprive its beneficiaries of their autonomy and their independence. The outward appearance of economic independence may be retained, but in fact the beneficiary of government support turns more and more into a ward of the administration. He is no longer a self-reliant citizen, but depends on the disposition of government officers and politicians. His discretion is restricted and finally entirely nullified by a bureaucratic apparatus. The policy inaugurated for the preservation of independent middle-class individuals leads to subjecting them to a virtual guardianship.

The best example is provided by the American farm policy. Its objective was to preserve the “family farm” and the free independent farmer, the type of man that made the United States and laid the foundations of its greatness. But the champions of farm aid were not aware of the insoluble contradiction between the ideal aimed at and the methods resorted to for its realization. A farmer supported by the government at the expense of the rest of the population, the immense majority of the people, is no longer independent. The government tells him what to produce and in what quantity, and thus virtually converts him into a public servant. The free farmer depended on the market; his income came from the consumers. The supported farmer depends on the discretion of a huge apparatus of government agencies. He is the lowest subordinate of a hierarchy of superiors. It is true that at the top of this hierarchy stand the President and Congress in whose election he cooperates. Because they canvass his votes, the politicians promise him aid. But it is precisely this aid that necessarily obliterates his independence. One cannot subsidize a man to render him independent. The very fact of receiving aid deprives the recipient of his discretion to determine the conduct of his affairs. This is the dilemma that the men who, in the last years, directed the course of American farm policies had to face, and could not solve because it cannot be solved.

It is the same in all other spheres of business. If the government grants privileges to certain categories of small business, it must neatly circumscribe the conditions that entitle a man to claim these privileges and must enforce these regulations. But then the privileged entrepreneur forfeits his independence and turns into a subordinate of the administrative apparatus entrusted with the enforcement of the law.

There is need to stress the fact that the terms “small business” and “big business” are rather vague and that the classification of a unit of business as big or small is different in different countries and has changed considerably with the passing of time. Those politicians and reformers who in the last decades of the 19th century in some of the continental countries of Europe aimed at legislative measures to protect “small business” against the competition of bigger enterprises, were guided by a nostalgic desire to re-establish the conditions of the precapitalistic ages in which artisans?such as tailors, shoemakers, carpenters and bakers?prevailed in many or most of the branches of processing. But the ideas that inspired in the eighties of the past century the German Baron Vogelsang and the Austrian Prince Liechtenstein find today hardly any support. Perhaps they are a factor in the popular appeal of the French Poujade movement.2  But no nation can today seriously consider “abolishing” factories and chain stores and replacing them by independent artisans or by cooperative organizations of craftsmen. In the field of the processing industries the era of the handicrafts is gone.

In the industrially most advanced countries people in speaking nowadays of small business in production more often than not have in mind enterprises that, in regard to the amount of capital invested, the size of their turnover and the number of employees, fifty or a hundred years ago would have been called big business. These companies and firms are called small only when compared with the mammoth concerns. Here again we must realize that statistics do not provide any reliable information about the number of such really independent enterprises. For many of the corporations belonging to this group are more or less controlled or even fully owned by big concerns.

In dealing with these medium-size business units one must stress the fact that what makes it rather inconvenient for such enterprises to preserve their independence and causes them to sell out to bigger concerns is very often conditions that are not the effect of the state of the market, but of government policies. While the governments and political parties pretend to condemn “concentration,” they are committed to policies that are furthering it.

A typical example: An enterprising man in his twenties starts a new business. He succeeds very well and after twenty or thirty years of strenuous work his firm is rather flourishing. But then it is time for the owner to think of what may happen after his death. His heirs will be liable to pay inheritance taxes of a height that will force them to sell the outfit. Such forced sales bring much less than the price that corresponds to the real worth and net yield of the going business. It could happen that the family will retain but little after having paid their tax liability. In view of these possibilities it appears to the owner more advantageous to sell, while he is still in full vigor, to a big concern for a price paid in stock of the buying corporation. These securities have a broad market and his heirs will be able to sell them without any discount. The inheritance tax will deprive them of a part of the heritage, but not of more than the law was designed to impose upon them.

Capitalism Is Mass Production

Capitalism is mass production for the provision of the masses. The many, the same people who are working in the offices, the shops, the factories and the farms, consume the greatest part of all the products turned out. In their capacity as consumers they make small enterprises grow into big businesses and force inefficient enterprises to go out of business. It is the efficiency of business, especially also of the biggest?the mammoth?concerns, that provides the masses with the comparatively high standard of living that the common man, the “proletarian” of the Marxian terminology, enjoys in the capitalistic countries. Any further improvements in the average standard of living can be expected only from a still further development of bigness in business. Governmental measures designed to curb big business are slowing down or entirely checking further progress in the material well-being of the masses. They prejudice the interests of the consumers. The bigger an industrial or commercial concern is, the more it depends on the patronage of the masses and the more it is eager to satisfy them.

In the precapitalistic past there was a broad gulf between the voluptuous habits of the well-to-do and the strained circumstances of the many. There was a sharp distinction between the luxuries of the rich and the necessities of the poor. From its very beginnings business, by improving the methods of production, was intent upon making accessible to a greater number of people many of the amenities previously enjoyed only by a tiny minority of wealthy people. But it still took a long time, sometimes many centuries, until an innovation lost its character as a luxury of the few and turned into a commonly used necessity. Capitalism has more and more shortened this period of transition and finally succeeded in virtually eliminating it. In the case of the motor car it still took several decades before the new vehicle turned from a pastime of playboys into an implement of every family. But with the new products developed by contemporary big business this time lag is so short that it practically does not count any longer. There was no sensible period in which the canned and frozen foods, the new textile fibers, radio and television sets, moving pictures and many other innovations were only within the reach of the wealthy. Products of big business as they are, they can only be designed for mass consumption.

In the precapitalistic ages the difference between rich and poor was the difference between traveling in a coach and four and traveling, sometimes without shoes, on foot. Today in the industrialized parts of the U.S. the difference between rich and poor is the difference between a late model Cadillac and a second-hand Chevrolet. It is difficult to see how this result could have been achieved without bigness in business.

The instigators of the campaign against bigness in business know very well that there cannot be any question of splitting up the large concerns into medium size enterprises and of preventing the further growth of firms into bigness. They expatiate about the alleged evils of big business in order to make popular their socialist program. They aim at “social control of business,” i.e., at subjecting the conduct of business to the control of government agencies.

Nationalization

The original socialist, or communist, scheme as advanced by the pre-Marxian socialists, the Marxians, the Prussian “state socialists” and the Russian Bolshevists, aimed at wresting the conduct of business from private citizens and transferring it to the government. In order to distinguish his own brand of socialism from that of his foremost rival, the German socialist, Ferdinand Lassalle (1825-1864), Karl Marx substituted the term “society” (Gesellschaft) for the terms “state” and “government.” And he substituted the term “socialization” (Vergesellschaftung) of the means of production to distinguish his doctrine from “nationalization” (Verstaatlichung) as practiced by the German Chancellor Prince Otto von Bismarck (1815-1898). But the term “socialization” as employed by the German Social-Democrats and the Second International did not mean anything other than “nationalization.” The distinction between “socialization” and “nationalization” was merely verbal, a makeshift invented to cope with the special conditions of the German political scene in the age of Bismarck and his successors in office. Both terms signified the same, viz., to take over plants hitherto operated by private citizens and to manage them by government employees. In this sense Lenin approved the opinion that the post office is “an example of the socialist system.” He declared as the aim of socialism “to organize the whole national economy like the postal system” and promised that “this will free the laboring classes.”3

What Marx, Lenin and all their followers failed to see was the fact that all-round nationalization was impracticable in a modern industrial economy. The very idea of nationalization had been hatched by people who lacked the mental capacity to grasp the essential characteristics of the market economy. They looked upon the existing structure of business as upon something permanent. They planned to expropriate the various plants and shops and then to operate them in the way the expropriated “exploiters” had done. They failed to realize the fact that what matters is to adjust daily anew the conduct of affairs to changing conditions and that the eminence of the entrepreneurial system is in its unceasing craving after improvement and the satisfaction of previously latent needs. The entrepreneurs are not people who simply continue what has already been accomplished before. They are essentially innovators, creators of things never heard of previously. This is what those have in mind who speak of the “dynamism” inherent in the capitalistic system of production.

When a nation turns to all-round nationalization of industry, it deprives its people of the benefits they derived from this capitalistic “dynamism.” The fanatically anti-capitalistic mentality of our age made the masses in Russia acquiesce in this outcome. It is probable that also the German people would have submitted to these effects willy-nilly if the Germans had adopted Bolshevist methods after their defeat in the first World War. However, the economic conditions of Germany made it impossible to proceed in this way.

Post-World War I Germany

Germany—like most of the other countries of Central and Western Europe—is a predominantly industrial country. This means it cannot feed and clothe its population and supply it with the most urgently needed manufactures out of domestic resources. It must import foodstuffs and many badly needed raw materials. It has to pay for these imports by exporting manufactures, most of them produced out of imported raw materials. It must compete on foreign markets with the industries of all other industrial nations. If its exports drop considerably, starvation must result. In 1918 all German political parties were ideologically biased against private enterprise and in favor of nationalization. But the experience of several decades of nationalized and municipalized enterprises had shown them the inefficiency of public conduct of economic affairs. They were clear-sighted enough to realize that concerns operated by bureaucrats, according to the pattern of the postal service, would not be able to rebuild the German export trade shattered by the events of the four years of war. Not only the “bourgeois,” but no less the majority of those who voted the Social-Democratic ticket were fully aware of the fact that only the much-abused “exploiters” and “jobbers” could succeed in competing on foreign markets with the businessmen of all other nations. For Germany in 1918 there could not be any question of imitating the Soviet policies. The hard facts of Germany’s economic situation caused Karl Kautsky [German socialist (1854-1938)] and his party comrades who, for many decades had impetuously advocated full socialization, to shrink from the realization of their program. Of course, they were not keen enough to see that their resignation implied the abandonment of the essential policies recommended by the first [fl. 1864-1874] and the second [fl. 1889-1914] Socialist International, and were bitterly offended when Lenin branded them as “social traitors.”

The attitude that the German “majority socialists” adopted in 1918 and 1919 marks a turning point in the socialist movement in the countries of Western industrial civilization. The nationalization issue receded more and more into the background. Only some adamant visionaries, entirely blinded by Marxian dogmatism and unfit to face reality, still cling in Germany, England and the United States to the outworn nationalization slogan. With all other foes of the market economy the party cry is now “planning.”

While the nationalization scheme was, at least in principle, developed by British and French authors, the all-round planning scheme is of German origin. In the first World War the German Government, adopting the socialist ideas of Walter Rathenau (1867-1922), “centralized” one branch of business after the other, i.e., deprived the individual firms and corporations of the power to direct the conduct of their business affairs. Control of their enterprises was transferred to a committee whose members?the nominal entrepreneurs of the branch concerned?were merely an advisory board of a commissary appointed by the Reich’s government and bound to obey its orders. Thus the government obtained virtual control of those branches of business that were most important for the provision of the armed forces, As the war went on, the authorities proclaimed in the “Hindenburg plan” the application of this system for all branches of German trade and production. But the Hindenburg program was not yet completely put into effect when the Kaiser’s Reich collapsed and its administrative apparatus disintegrated.

As long as the war lasted, people grumbled about this system called “war socialism” or “Zwangswirtschaft“ (compulsory economy). However, it became popular as soon as it had been abolished. In spring of 1919 a memorandum drawn up by Rudolf Wissell and Wichard G. 0. von Moellendorff proclaimed planning, Zwangswirtschaft, as the royal road toward socialism and the only program proper for a sincerely socialist party. Henceforth the parties dubbed as the “right” openly advocated it, while the parties of the “left” undecidedly wavered between the support of planning (Zwangswirtschaft) and that of nationalization. When in 1930 Heinrich Br?ning, an outstanding member of the Catholic Centrum Party, was appointed Chancellor, he began to prepare the return to all-round planning that a short time later was consummated by Hitler. The innovations added to the Zwangswirtschaft scheme by Hitler were merely verbal, such as the substitution of the term Betriebsf?hrer (shop manager) for the term entrepreneur, the revival of the feudal term Gefolgschaft (retinue) to signify a plant’s total labor force, and the suppression of the term “labor market.”

Socialism in the United States and Great Britain

In the United States the National Industrial Recovery Act (NIRA) of 1933 was an attempt to impose at one stroke the Zwangswirtschaft. The attempt failed because the Supreme Court declared the Act unconstitutional. But as planning remained the great slogan of American “leftism,” entrepreneurial discretion in the conduct of business has been step by step restricted by vaguely defined powers delegated to an array of administrative agencies.

Great Britain in the second World War adopted by and large the war socialism of the German pattern. But the Labour Party in its stubborn dogmatism failed to realize the fact that this system of central planning was the only form of socialism that could be considered in a predominantly industrial country dependent on the export of manufactures. Just as the German Marxians had done during the first World War, they rejected war socialism as a “bourgeois” makeshift to which the appellation socialism ought to be denied. They proclaimed nationalization as the only method of converting a market economy into a socialist regime. They nationalized the Bank of England, the railroads, the coal mines and the steel industry. However, this belated revival of the nationalization issue did not substantially affect the trend of British pro-socialist policies. As in the United States, Germany, and the other predominantly industrial countries, in Great Britain too the pro-socialist tendencies manifest themselves today [1961]4  chiefly in the advocacy of planning, i.e., of measures restricting the individual enterprises’ discretion by subjecting them more and more to “social control,” i.e., to the control of government agencies.

“Social Control” or “Planning”

The characteristic feature of this system of social control or planning is to be seen in the fact that it preserves to some extent a sphere in which the initiative of the entrepreneurial spirit can benefit the consumers. The heads of the industrial and commercial concerns are still free to devise improvements and measures to adjust the operation of their plants to the changing conditions of the market. Of course, their discretion is limited by the powers assigned to the bureaucrats. But the inefficiency, indolence, and laxity of some of these controllers prevents them from crippling altogether the initiative of business. A modicum of initiative is still left to the enterprising promoter, especially in matters of foreign trade.

The greatest of all the achievements of capitalism is to be seen in the fact that in spite of all the obstacles put in its way by governments and by labor unions it still continues to supply the masses with more, better, and cheaper goods. While governments, political parties, bureaucrats, and union bosses are indefatigably intent upon sabotaging the operations of business, private enterprise still succeeds in improving the services it renders to consumers. We can only guess what these much-maligned speculators, promoters and jobbers could do for the benefit of the people if their initiative were not enchained by the policies of the welfare state.

The reasons why the powers that are prefer, although reluctantly, the “social control” or “planning” system to the system of nationalization are, of course, not to be seen in the inestimable bounties that accrue to the consumers. Politicians care little about such things. What counts for them is, apart from the considerations of export trade, the effect of the two systems upon government finance.

Take the case of the American railroads. The railroad companies are subject to the most rigid control on the part of various government agencies. The government determines the height of the rates the companies are permitted to charge for the services they render to travelers and to shippers. The government agencies cooperate with the unions in fixing the height of the wage rates the employees receive. They connive at the system of featherbedding which forces the companies to support a host of idle loafers. They force the companies to run trains for which the demand of the public is so small that their operation involves substantial losses. They prohibit many reforms that would reduce waste and unnecessary expenditure; they are especially opposed to mergers. Besides, the companies are hurt by heavy discriminatory taxation on the part of the local authorities. Yet most of the companies have avoided bankruptcy and earn surpluses out of which they have to pay to the federal government millions in taxes.5

Now compare this with the conditions of nationalized railroad systems operating in other countries. The management of most of these nationalized railroads involves year after year considerable losses, and these deficits must be made good by contributions out of the government’s revenue from taxes. For the United States Treasury the railroads?and equally the telegraph and the telephone systems?are a source of revenue. For many countries the nationalized railroads and telegraph and telephone systems are an item of expenditure.

If the American postal system were operated by private enterprise, it would, even when subject to the control of some government agencies, probably not only render better and cheaper service to the public but also produce a surplus of revenue over costs. It would figure in the Federal budget, not as an item of great expenditure, but as a source of revenue.

Whatever one may think about the inherent faults of the system of “social control” of business or “planning,” the fact remains that it is, at least in its present shape, in every regard superior to nationalization, the alternative system of socialist management.

Government Regulation

The antagonism between the two methods available for the transformation of the capitalistic market economy into a socialist system dominates present-day economic discussion. There is practically no longer any political party that would stand for the unhampered market economy. What the politicians nowadays call economic freedom is a system in which the government “regulates” the conduct of business by innumerable decrees and administrative orders and prohibitions. The Western nations do not endorse the Soviet methods of all-round nationalization of all enterprises and farms. But they no less reject the market economy which they smear as Manchesterism [the theory of 19th-century advocates of free markets], laissez-faire system or economic royalism. They give to their own system various names such as New Deal, Fair Deal or New Frontier in the United States, and “soziale Marktwirtschaft“ in Germany. The authorities credit their own activities that in manifold ways paralyze the entrepreneurial initiative to introduce improvements in the methods of production and to, improve the people’s standard of living, and they blame business for all the mischief’s resulting from their own interference with it.

Not only the politicians and bureaucrats committed to these policies of progressively restricting the sphere of private business, but also the authors of books and essays dealing with these problems fail to realize that their program leads no less to integral socialism than to the nationalization program. If it is within the jurisdiction of the authorities to determine which prices, wage rates, interest rates, and profits are to be considered as fair and legal and which not, and if the police and the penal courts are called upon to enforce these decisions, the essential functions of business are transferred to the government. There is no longer any market and no longer a market economy. It is obvious that the countries this side of the Iron Curtain are more and more approaching this state of affairs. The businessmen, threatened by the menace of such controls, are well aware of the fact that they can escape the enactment of “controls,” i.e., full government control of all prices, only if they avoid asking prices of which public opinion does not approve. They have long since virtually lost any influence upon the determination of wage rates. Moreover there cannot prevail any doubt about the fact that the bulk of the funds required for financing the ambitious plans for additional government projects will be collected by taxing away what is still left of the “unearned income” of the shareholders. Even with the present height of the rates of income and inheritance taxation, the greater part of the capital invested in business will in a few decades be expropriated and government owned.

What the advocates of planning and of social control of business consider as a fair arrangement of economic conditions is a state of affairs in which the various enterprises do precisely what the authorities want them to do and every individual’s income after taxes is determined by the government. Although all political parties again and again protest their abhorrence of the Hitler regime, they are eager to duplicate Hitler’s economic methods. This is what they have in mind when talking about “discipline.” They do not realize that discipline and control are incompatible with freedom. Obsessed with the idea that the entrepreneurs and capitalists are irresponsible autocrats and profits are an unfair lucre, they want to deprive the consumers of the power to determine, by their buying and abstention from buying, the course of all production activities, and to entrust this power to the government.

The political corollary of the supremacy of the consumers in the market economy is the supremacy of the voters under the system of representative government. Where the individuals qua consumers become wards of the government, representative government gives way to the despotism of a dictator.

Bureaucratic Management

Among the many spurious arguments advanced against big business, the reproach of bureaucratization plays an important, but somewhat peculiar role. Those censuring big business for bureaucratization implicitly admit that the business method of profit management is by far superior to bureaucratic management. But, they maintain, with the growth into bigness an enterprise necessarily becomes more and more bureaucratic. The subjection of an economic system in which big concerns prevail, to the supremacy of a governmental bureaucracy, therefore does not amount, they say, to a substitution of the less efficient bureaucratic methods of management for the more efficient profit management. It merely means the replacement of one bureaucracy by another bureaucracy. It will therefore not result in a diminution of the quantity and an impairment of the quality of the goods available for consumption.

It is certainly true that bureaucratic methods are adopted to some extent by big concerns. But the critics of this phenomenon not only grotesquely exaggerate its scope, they blame the enterprise?as is the case with most of the faults they find in big business?for something that is the outcome of their own cherished policies of restricting and sabotaging the operation of business by government interference.

Business management, also called profit management, is the method of conducting affairs for the best possible and cheapest provision of the consumers with all the commodities and services they are most urgently asking for. For the businessmen nothing counts but the approval of their actions by the buying public. Those who best succeed in satisfying the consumers earn profits. Those who fail in these endeavors suffer losses; if they do not learn the lesson and do not improve their conduct, they are forced to go out of business. Profit management means the full supremacy of the consumers. In this sense some economists called the market a democracy in which every penny gives a right to vote.

Bureaucratic management is the management of affairs rendering services that on account of their peculiar character cannot be sold on the market to those benefited by them. The services a police department renders in curbing gangsterism are of the highest value for every citizen. But they cannot be sold piecemeal to the individuals in the way a railroad sells its services. As the “product” of the police activities has no market price, it is impossible to compare the effect of these activities with the costs expended in the way a business compares the costs expended in producing merchandise with the price at which it is sold on the market.

The services the shoe industry renders to the public could be considerably improved by increasing the amount of capital invested in this line of business. There would be more and cheaper shoes available for the consumers. But such an expansion of one industry could be brought about only by withholding or withdrawing capital and labor from other lines, e.g., from the production of shirts. The question is therefore whether or not the consumers approve of such an expansion of one industry and the restriction of some other industry necessarily induced by it. It is the consumers who by their comportment in buying shoes and shirts determine how much capital and labor should be dedicated to each of these industries. It is the profit motive that forces the entrepreneurs to employ to the best of their ability the material as well as the human factors of production according to the wishes of the consumers. The size of each industry and the quantity and quality of products it turns out are thus ultimately determined by the consumers. An entrepreneur who, defying the wishes of the consumers, would use?waste?capital and labor for the production of something for which the demand of the consumers is less urgent would be penalized by losses.

The service that the police department of a city renders to the public could certainly be improved by multiplying the funds devoted to it. But the question of whether or not the citizens consider the advantages to be expected from such an enlargement of the police department as a sufficient compensation for the additional expenditure with which it burdens them, cannot be decided in the way it is done in the case of commodities and services negotiated on the market. The accounts of the police department can only provide information about the expenses incurred. The results obtained by the money expended cannot be expressed in money equivalents. The citizens must directly determine the amount of services they want to get and the price they are prepared to pay for them. They discharge this task by electing councilmen whose duty it is to allocate the available funds to the various municipal services.

This is the fundamental difference between profit management and bureaucratic management. The activities of profit-seeking private business enterprise are subject to the most rigid control on the part of the buying public. Every firm, each of its subdivisions and branches, every employee is in all activities forced to comply with the wishes of the consumers. The ultimate standard in the conduct of business is provided by the accounts that confront expenditure with proceeds. An employee or a branch that absorbs more money than it contributes to the concern’s gross yields is looked upon as a failure. All parts of a business concern whether large or small are committed to one principle only: make profits and avoid losses. That means: serve the consumers.

But it is different with the administration of affairs the product of which has no price on the market. Here the confrontation of costs expended and prices paid by the public for the resulting services cannot serve as guidance. The constitutional institution that allocates a definite sum out of public revenue for their conduct must prescribe what quantity and what kind of services it wants to get from the department concerned. The budget and the instructions issued for the spending of the allocation provide the ultimate standard. In business there prevails the rule, provide what the consumers want to buy at prices exceeding the costs expended. In bureaucratic affairs the rule is to comply strictly with the instructions issued. There is no excuse for a man in business who does not satisfy the consumers. There is no excuse for a bureaucrat who defies the instructions issued by his superiors. The first thing a bureaucrat must try to find out when faced with a new problem is: what do the regulations say?

Bureaucratic management as such is not an evil. It is the only method available for the administration of the proper affairs of government. The public servants would become irresponsible despots if they were not obliged to behave in the conduct of the affairs entrusted them precisely in the way the authorities, the office holders elected by the people, order them to behave. But bureaucratism turns into a nuisance if it invades the conduct of profit-seeking business and induces it to substitute for the business principle “serve the customer” the bureaucratic principle “comply with the regulations and instructions.”

What makes big business adopt in some regards bureaucratic methods is not its size but the policies practiced today of government interference with business. As conditions are today it is more profitable for a concern to be on good personal terms with men in the various government agencies that are harassing business than to improve the services it renders to the consumers. The main problem for many enterprises is how to avoid as much as possible the animosity of officeholders. Men who for some reasons are not popular with the ruling party are considered unfit to manage the affairs of a company. Former employees of government agencies are hired by business, not on account of their abilities but on account of their connections. The boards of directors find it necessary to spend large sums out of the shareholders’ property for purposes that have no relation to the company’s business and do not yield anything for it but popularity with the administration and the party in power. In considering changes in production and marketing, the first question is often: “How will this move affect our “public relations’?” Big business is fully aware of the fact that the authorities have the power to harm it by proceeding further in the discriminatory methods of taxation and in many other regards. Big business is the main target in the undisguised war that government is waging against private enterprise.

In the last years a number of books?fiction and non-fiction?were published in which the bureaucracy of big companies has been taken to task. It escaped the notice of the public that the experience with which the authors of these books deal refers to those bureaus of the corporations that handle public relations and government affairs and not to the production and marketing of the goods they turn out. Apart from the effects of the union-enforced seniority rules, there is fortunately not yet too serious mischief done by bureaucratization in the conduct of the genuine operations of the plants.

People as Consumers Versus People as Voters

In their beginnings the attacks upon big business were prompted by the aspiration of some groups of artisans, shopkeepers and small farmers for special privileges that would enable them to meet the competition of bigger outfits. In some countries this motive still plays a role. But with the further evolution of economic affairs all people had to realize that there cannot be any question of a return to the conditions of the precapitalistic ages in which small units prevailed in almost all branches of production and distribution. Thus the meaning of the condemnation of bigness in business radically changed. It no longer suggests a return to medieval handicrafts. It is a plea for the establishment of all-round “planning” and “social control,” i.e., government control of business. It is a plea for a step-by-step substitution of socialism of the Zwangswirtschaft (compulsory) type for the market economy. The long lists of the alleged crimes of big business compiled by the advocates of socialism cannot invalidate the fact that a nation is the more prosperous the more big business it has. The people of the United States enjoy the highest average standard of living because their country has up to now hindered less the growth of enterprises into bigness than other countries.

The question to be decided is: Who should determine the size of the enterprises, the consumers by their striving to buy what suits them best or the politicians who know only how to tax away and to spend?

It is true that the same people who in their capacity as consumers make the efficient suppliers’ business grow into bigness, in their capacity as voters entrust the politicians with the power to give free rein to their anti-business ventures. But in considering this blatant inconsistency and contradiction in the behavior of our contemporaries we must not forget the fact that the ability of the average citizen to deal with the issues of his own household and with those of economic policies is different. The housewife who buys one brand knows what is best for herself and her family. She has learned from experience and is fully competent to manage the affairs of her household. But she and likewise her husband are certainly less able to choose among various political and economic programs. Thus we see that the voters support policies that contradict their own wishes and vital interests as manifested by their behavior qua buyers and consumers. Here again the most instructive example is provided by the American farm policies. The immense majority of the nation are in favor of cheap prices for agricultural products. Nonetheless they have been, for many decades, electing senators and congressmen committed to a policy of spending billions of the taxpayers’ money for measures to raise the prices of farm products far above the height that would prevail on an unhampered market. This policy of raising the prices of the vital necessities is so obviously nonsensical from whatever point of view you may judge it that even Cabinet Secretaries of Agriculture and members of the President’s Council of Economic Advisers condemned it. But the voters are still voting for it.

Incidentally, we may add that most of the predominantly industrial countries of Europe are also committed to a policy of artificially raising the prices of essential foodstuffs high above the level they would attain on a free market.

Thus we must not be too much astonished to realize that also in the matter of big business the average voter, deceived by ruthless propaganda, supports what hurts his own interests. There is only one means available to change this mentality. One has to try to instruct the public.

Paper presented at the 1961 (Turin, Italy) meeting of the Mont Pelerin Society.

• 1Die Meistersinger von Nürnberg, an opera by Richard Wagner (1813-1883) laid in 16th-century Nuremburg. Hans Sachs, a kind and elderly Meistersinger (master singer), a cobbler whose shop is seen in a couple of scenes, enables a young knight to become a Meistersinger and win the hand of his ladylove.
• 2Prince Alois von Liechtenstein (1846-1920) a leader of the Austrian Christian-Socialist Party and a social reformer. K. Freiherr [Baron] von Vogelsang, a convert to Catholicism, and a theoretician of the Christian Socialists. Pierre Poujade, a French politician, responded to the dissatisfaction of farmers and small merchants with tax and economic policy, founding a short-lived movement, the Union de défense des commerçants et artisans (UCDA), which in January 1956 won 52 seats in the National Assembly, but won none in 1962.
• 3Lenin, State and Revolution (ed. International Publishers, New York, 1932, pp. 43 f).
• 4This trend toward “planning” in Great Britain has slowed in recent years as a result of the privatization of some government enterprises.
• 5Since 1961, when this paper was written, government regulations and controls led to the bankruptcy of the country’s major railroads and their reorganization in the 1970s into the quasigovernmental agencies, heavily subsidized Conrail and Amtrak, with local communities taking over the commuter lines.

We intend to deal with the achievement of Utilitarian Philosophy and Classical Political Economy as far as they constitute a theory of peaceful human cooperation. One of the fundamental theses of Classical Economics is the theory of the harmony of the rightly understood—we prefer today to speak of the long-run—interests of all individuals and groups of individuals within a society of private ownership of the means of production and free enterprise.

Conflict of Interest Philosophies

Older social philosophies saw only conflicts of interests. They were prepared to assume that every individual is impelled by his own selfish interests to prejudice the interests of his fellow men. A nation cannot thrive but by damaging other nations. If every individual were to look only after his own well-being, no social cooperation would be possible. If every nation were intent only upon its own national prosperity, no peace could last. Peace, both within a country and in international relations, is therefore possible only if individuals and nations are prepared to renounce their selfishness for its sake. State and Church it was held, are disciplinarian institutions whose aim it is to subdue the selfish and antisocial instincts of man. Civilization and social cooperation and the moral law are not of human origin. They are instruments by means of which God or Nature directs human action according to inscrutable design. The individual, in forsaking some selfish advantage for the benefit of society, and the king, in forsaking some conquest to avoid disturbing the peace, will be rewarded in the beyond, and they may find an earthly reward in the quiet of their conscience. The just should abide by the moral law. But this obedience is, from the point of view of his selfish interests, a burden. It is true that Heaven as a rule blesses the just citizen and the fair king in their earthly pilgrimages. But this is not always the case. In many instances the unjust, precisely on account of his wrongdoing, fares in this life better than the just.

What is needed to make social life satisfactory is, therefore, a powerful state which forces its citizens to behave in a fair way and does not covet what is rightly the domain of other states. For the inescapable laws of nature result in irreconcilable conflicts between the selfish interests of various men and groups of men. Nature has limited the means for human subsistence. Equally distributed, they are sufficient for all. However, they are not rich enough to quench entirely the appetite for more. Hence, covetousness, the propensity to appropriate other people’s portions, originates. If men or groups of men take more than their fair share, they rob others of as much of their welfare as they increase their own portions above the mean.1

From the point of view of “natural law” the only just state of affairs is equality of income. The unfathomable decrees of Heaven have brought about inequality. It would be tantamount to a rebellion against divine and human law for the underprivileged to resort to violence in order to abolish this injustice. By such methods they could profit on earth, but they would imperil their spiritual salvation. On the other hand, the rich have only one means to atone for their questionable riches. They must make the proper use of their wealth, that is, they must be charitable and must subordinate their greed to justice and fairness.

The selfish earthly interests of individuals and of groups of individuals are antagonistic. If left alone, they would result in violent conflicts. Social cooperation and peace are possible only where men are motivated—either by voluntary obedience to the moral law or by compulsion on the part of the powers that be—to curb their egoism.

Social Cooperation and the Division of Labor

Utilitarianism and Classical Economics have entirely overthrown this philosophy.

Their reasoning runs this way: The means of subsistence are scarce, and their limited quantity puts a check upon the number of animals that may occupy the surface of the earth. But, while the beasts know no method of improving their own conditions other than to snatch food away from their rivals, man is in a much more propitious position. Reason taught him the advantages of social cooperation and its corollary, the division of labor. Labor performed under the system of the division of tasks is much more productive than the isolated efforts of self-sufficient individuals. Every step forward to a higher degree of the division of labor directly and immediately improves the material well-being of the individuals and groups concerned. The advantages of social cooperation are so manifest that nobody can ignore them. Their acknowledgment is the motive that pushes man toward social behavior.

It is, therefore, a mistake to assume that an individual in adjusting his conduct to the requirements of life within society and a nation in renouncing war to avoid endangering the international division of labor, sacrifice, for the sake of a heteronomous morality, their own selfish interests for reasons not open to rational explanation. What pushes a man toward social behavior and law abidance is his own rightly understood selfishness. What speaks in favor of international peace is precisely the consideration of a nation’s own rightly understood selfish interests. If a man abstains from robbing a fellow man or if a nation abstains from aggression against other nations, each foregoes a smaller immediate gain in order to reap a bigger indirect profit. Society is for every individual the foremost means for the attainment of all ends sought.

It is furthermore erroneous to believe that individuals, in renouncing the alleged blessings of a fabulous state of nature and entering into society, have forgone some advantages and have a fair claim to be indemnified for what they have lost. The idea that anybody would have fared better under an asocial state of mankind and is wronged by the very existence of society is absurd. The natural condition of man is extreme poverty and insecurity. It is romantic nonsense to lament the passing of the happy days of primitive barbarity.

It is no less vain to deplore the inequality in the distribution of income and wealth. The notion of “distribution” is itself preposterous. There is in the framework of a market society no such thing as an apportionment of shares out of a fund accumulated before. Goods are not produced into a common chest from which they must be doled out to various people. The mode of production is such that they already come into existence as somebody’s property.

It is a fallacy to assume that society is responsible for the fact that not everybody enjoys the advantages that riches give to a small number of people. The relative poverty of the poorer members of society is not the corollary of the relative abundance of the richer members. Poverty is precisely the condition of all in the state of nature. Society has not only created wealth for those who possess it; it has also immensely improved the material well-being of those who are considered poor when compared with the richer.2  Those whose income is lower than the average would prejudice their own rightly understood interests if they were to overthrow a social system which makes them much more prosperous than any other realizable organization of society.

The eulogists of the social institutions of ages gone by can easily be dismissed. A return to the social conditions of the Middle Ages would require both a drastic decrease in population and a tremendous lowering of the standard of living for those surviving. Mankind is not free to go back with impunity from a higher degree of the division of labor to a lower degree.

It is different with the schemes drafted by the interventionists and the socialists. These schools do not suggest an abandonment of the division of labor. They pretend that the realization of their plans would increase the productivity of labor to an unprecedented extent and, at the same time, distribute income among the citizens in a way which they consider fairer than the distribution of incomes within a market society. To investigate the soundness of such suggested reforms is one of the main tasks of economics.

Now the economists are convinced that their careful scrutiny of the socialist and interventionist utopias has proved in an irrefutable way that all these schemes are impracticable and unfeasible and that every attempt to realize them must result in social disintegration and in misery for all. The champions of the doctrines exploded were at a loss to find any argument for the invalidation of the economists’ devastating criticism of their plans.

Karl Marx and his disciples do not waste any words upon the hopeless tasks of proving the soundness of socialist ideas and of refuting the pertinent critique of these ideas by the economists. They declare taboo all discussions and investigations concerning the economic and social problems of a socialist society as “utopian” and utterly “unscientific.” Finally, Marx renders these and other arbitrary and fallacious statements proof against any objections by establishing the principle of polylogism.3  The logic of those who do not blindly accept the Marxian dogmas is disparaged as a spurious logic of the bourgeoisie. This bourgeois logic cannot produce truth, but only “ideologies” hatched merely for the defense of the unfair claims of an exploiting class. Thus Marxians appear to be relieved of the necessity of refuting by discursive reasoning the theorem of the harmony of the rightly understood interests of all members of a market society. They simply ridicule it as a piece of bourgeois ideology.

Critics of Liberalism

The foes of Liberalism (i.e., classical liberalism) view the 19th-century achievements of the natural sciences and especially Darwinism from two different aspects. Liberalism, says one group of these adversaries, is an outcome of the doctrine of natural law. All men are created equal and are by God or Nature endowed with certain inalienable and imprescriptible natural rights; one of these fundamental natural rights is the right to existence or even to affluence.

Now, observe these critics of Liberalism, it is an undeniable fact that men are not born or created equal. There exist very remarkable differences in the innate physiological and mental equipment of various individuals and groups of individuals. The basic assumption of Liberalism is thus exploded as contrary to fact. Furthermore, these critics reject the idea of natural rights. They go on to say, it is a fact that nature does not grant any rights to any living being, much less a right to existence or to a life in affluence. In limiting the means of subsistence nature condemns to death by starvation many of those who are born. In nature there is only a merciless struggle for survival. Nature does not accord to man more rights than to an amoeba. The whole doctrine of natural law and all conclusions drawn from it are illusory.

The second group of anti-Liberals maintains that no social philosophy can avoid acknowledging the fact that there exist among men irreconcilable conflicts of interests. Scholars differ, they say, only with regard to the determination of the roots of these conflicts. The racists see the conflicts among various races, the nationalists among various nations, the Marxians among various social classes. But all agree that conflict and not peace is the normal pattern of interhuman relations. Liberalism, they say, is inconsistent in its assertions. On the one hand, it establishes that ruthless competition is a fundamental principle of the social order and may therefore be called a forerunner of the Darwinian doctrine of the struggle for existence. But, on the other hand, it indulges in illusions concerning a fabulous harmony of the rightly understood interests of all men, classes, nations, and races.

All these anti-Liberals are mistaken because they are not familiar with the Liberal doctrine they want to refute. They do not realize that in the political movement of the 18th and early 19th centuries two quite different strains of thought were merged: the doctrine of inalienable natural rights, on the one hand, and the Utilitarian philosophy of the economists and of the champions of parliamentary government, on the other hand.

The doctrine of natural rights can be traced back to ancient and medieval philosophy. It was easy to coin this natural rights doctrine into popular catchwords which appealed to the masses. It supplied the revolutionaries with fanatical fervor. But its illusiveness again and again frustrated the initial success of the reforms inaugurated, and resulted in terrorism and tyranny.

Utilitarian Liberalism

The Utilitarian doctrine also can be traced back to an almost forgotten and generally loathed school of ancient philosophy, Epicureanism. But the teachings of Classical Political Economy radically altered its application to the problems of social utility. The essence of the teachings of Utilitarian Liberalism is that the market system based on private property is the only workable pattern of social organization. Its operation results in a steady improvement of the material well-being of all individuals and groups of individuals. What is needed is a system of government that safeguards the undisturbed working of this beneficial mode of production. As violent conflicts disintegrate the division of labor, a system of government is required which prevents as far as possible both civil war and foreign war, namely, representative democracy. If all citizens, no matter how different they may be in their bodily and mental abilities, are equal under the law and are in a position to determine by majority vote who shall rule and according to what principles, there is no longer any cause left for revolution and civil war. Within a world of private property a democratic nation cannot derive any advantage from conquest, war no longer pays, and peace becomes durable. Thus reason and the consideration of each individual’s and each nation’s rightly understood selfish interests recommend Liberalism. The economic democracy of the consumers and its corollary, the political democracy of the voters, will bring about prosperity for all and durable peace.

In this cool reasoning there is no reference to the ideas of natural law and innate rights. The Utilitarians were vehemently hostile to them. The Utilitarian philosopher, Jeremy Bentham (1748-1832) opposed to the “terrorist language” of the champions of natural rights “the language of reason and plain sense.” He shouted: “Natural rights is simple nonsense: natural and imprescriptible rights, rhetorical nonsense.”4  Both the 19th-century school of Historicism and the sect of Social Darwinism boast that they have demolished Liberalism by exploding the illusiveness of the ideas of natural law and of the origination of governments from a contract. However, Utilitarian Liberalism had nothing to do with these natural rights fictions. The Utilitarians themselves must be credited with the merit of having once and for all refuted them.

It is furthermore a grotesque mistake to consider competition among individuals in a market society as tantamount to the extermination of adversaries in wars and revolutions. Under capitalism, competition is the peaceful method to assign to every individual that place in society in which he renders the most valuable services to his fellow men. It is not a variety of struggle, but a mode of selecting the individual best fit for every assignment. One speaks of the “mortality” of firms and of the “conquest” of markets. But the “death” of a firm is not a death; it is the elimination of an individual lacking entrepreneurial abilities from a position for which he is unfit and his transfer to a place which better fits his qualities. Neither is the “conquest” of a market a conquest; a newcomer offering better and cheaper commodities supplants a less efficient rival.

The short-run interests of the competitors are antagonistic. But the longrun?i.e., the rightly understood?interests are not. All people would be worse off under a social system that discriminates against more efficient competitors and thus grants privileges to the inefficient.

The general aversion to any occupation with problems raised by the Classical Economists is best demonstrated by the oblivion into which Ricardo’s law of association has fallen.

The economists deal with this law as the law of comparative costs only as far as it concerns problems of international trade. In fact the law is much more universal. It proves that cooperation under the division of labor always results in the mutual benefit of all individuals participating, even if one partner or group of partners is in every regard superior and more efficient than the other partner or group of partners. Ricardo’s law is the fundamental law of human cooperation, the formation of society and the inherent tendency of history toward a progressive intensification of the division of labor.

The law of association is extremely unpopular. It is assailed by all those anxious to be safeguarded against more efficient competitors. However, it provides, of course, the most powerful argument that can be advanced against discrimination and privilege.

The Montaigne Fallacy

The Leitmotiv of social philosophy up to the emergence of economics was: The profit of one man is the damage of another; no man profits but by the loss of others.5  This is not a philosophy of social cooperation, but of dissociation and social disintegration. For the sake of expediency, we call this doctrine after its proponent, essayist Michel Eyquem de Montaigne (1533-1592). In the light of this Montaigne fallacy, human intercourse cannot consist in anything but the spoliation of the weaker by the stronger.

There were, of course, philosophers who spoke of an exchange in which neither party profits or loses because the objects given away and received are of equal value. This Aristotelian idea was the core both of the Scholastic doctrine of the just price and of the tenets of Marxism. But what is the sense of exchanging things if both parties assign to the thing received the same value they assign to the thing given away? Why do they bother about exchanging if they do not improve thereby their own condition?i.e., if they do not derive any profit from the transaction?

Contemporary foreign-trade policies provide a striking example of the logical consequences of the Montaigne fallacy. It is easy to explain why this fallacy when applied to the problems of merchant-consumer relations results in the belief that only selling is profitable while buying is tantamount to a loss. The businessman’s profit becomes manifest in the entries of the books recording his transactions, while the consumer does not keep such books and records. In the field of international trade the Montaigne fallacy consequently leads to the statement that only exporting is profitable while importing is disastrous. Only a few people realize that restricting imports must concomitantly restrict exports and that protectionism, when carried out to its ultimate consequences, must bring about autarky [self-sufficiency]. People criticize only the protectionism of other nations and are slow in discovering the flaw in their own country’s protectionist policy.

In the light of the Montaigne fallacy the mere fact that a nation imports merchandise is the proof that it is exploited by foreigners. It is hardly possible to exaggerate the role played by this idea in the domestic propaganda of the German Nazis, the Italian Fascists, and the nationalists in all other countries.

With regard to the employer-employee nexus it is not the employee-seller but the employer-buyer of labor whom the Montaigne fallacy brands as profiteer and exploiter. Here again the reason is that the profit of the employer appears in the books of the firm while the employees do not keep such books.

There are, of course, special conditions, as during an inflation or deflation, when the source of the buyer’s or the seller’s profit is the other party’s loss. The main feature of an inflation or deflation is that the prices of various goods and services change neither at the same time nor to the same extent. But this is a special instance which unfortunately is not taken into consideration by those fanatically advocating an easy-money policy, credit expansion, and other similar inflationary measures as a patent medicine.

It is not correct to say that the doctor’s profit is derived from the patient’s disaster. The ailing man’s misfortune is his illness. The doctor’s profit stems from his relieving the patient’s suffering. The source of the baker’s profit is not the hunger of the buyers of bread, but his providing a merchandise which can remove hunger.

The source of the businessman’s profits is always his successful foresight in providing for future needs. If the entrepreneur has correctly forecast the future needs, he earns a profit. If he has failed in this task, he suffers losses.

In a hypothetical world without economic improvement, the profits made by one group of entrepreneurs would be equal to the losses suffered by the other group. In such a world no part of the national income would go into profits. Our actual world is, however, a world in which there is improvement. Its most characteristic feature is its inherent tendency toward the production of more, better, and cheaper goods. As long as this tendency prevails, there is, in the whole of society, an excess of profits over losses.

The error of the Montaigne fallacy is that it looks at events as if they were isolated acts of God and does not judge them from the point of view of the working of the whole social system of production. It sees only the remedy which the pharmacist sells to a man who suffers from kidney trouble. It does not see that decades before the patient concerned was afflicted with his malady, a whole branch of business was eager to prepare an appropriate remedy and to furnish all pharmacists with it in order to supply without delay those who might one day need it. It does not see the entrepreneurs who established in some far remote corner of the earth plantations for the growing of one of the raw materials required for the production of this drug. Nor does it see the other entrepreneurs who built railroads and ships for the transportation of this raw material to the place in which the patient lives.

Social Cooperation

The economists do not fail to realize that in the short run there is a conflict of interests between buyer and seller. What they say is that these short-run conflicts are superseded by the harmony of the long-run interests, i.e., the rightly understood interests.

The only relevant question is whether any other system of the social organization of human cooperation could possibly succeed better in the satisfaction of human needs and wants.

The answer to this question can be provided only by economics. In the debates concerning society’s social and economic organization, only people fully conversant with the most difficult and intricate problems of economics are in a position to form an independent opinion. To establish this fact does not mean to indulge in the habit of scientific specialists who overrate the importance of their own branch of knowledge and want to assign to themselves, as the representatives of this specialty, a controlling position in the conduct of all human affairs. Neither does it mean an acceptance of the Marxian materialist conception of history.

It is not the economists but the immense majority of our contemporaries who consider economic matters the most important thing. All political parties regard material interests as the primary problem; their programs promise their followers higher incomes and a higher standard of living. All political conflicts refer to antagonisms concerning economic issues. Present-day parties are fighting for prices, interest rates, and wage rates. Present-day wars are fought for raw materials and markets. The churches of all denominations are today speaking more about these problems than about questions of creed and Christian doctrine.

But while everybody’s main concern is economic problems, nobody thinks it necessary to pay any attention to serious economic studies. The Montaigne fallacy is the universal substitute for economic knowledge. The logical outcome of this state of affairs is the popular conviction that the best method to further one’s own interests is to inflict as much damage as possible on other people. Hence, domestic conflicts and foreign wars.

Blinded by the Montaigne fallacy, people are completely at a loss to see in the problems of social organization anything but the struggle for greater portions of a cake whose magnitude does not depend on the mode of social organization. Nobody seems to doubt that to prevent some people from acquiring riches is a policy extremely beneficial for the rest of society. Everybody is sincerely convinced that technological progress is an act of God not conditioned by the methods of social organization. Enjoying all the new products which free enterprise provides, they are tormented by one thought only: that some people have become rich in creating these new things.

A Consumers’ Democracy

It is a faulty way of dealing with the subject to look at it as if it were a matter of ethics. People ask: “Why should the entrepreneur not be satisfied to sell his product at a price that does not allow for any profit at all or, at best, yields him not more than the average income of an employee?”

The social function of business profits and losses is to place the material factors of production in the hands of those men who are best fitted to use them in the most efficient way for the satisfaction of the wants of the consumers. The market of a capitalist society is a consumers‘ democracy. The consumers decide by their buying and their abstention from buying who should own the material factors of production. In a perfect market society, i.e., in a social system where there is no government tampering with commodity prices, wage rates, interest rates and profits, the only method of acquiring and keeping wealth is to satisfy the needs of the consumers in the best and cheapest way. Business profits shift the means of production to those who have succeeded in these endeavors, and business losses take them away from those who have not. Profits and losses are instrumental in making the consumers sovereign and in forcing the entrepreneurs to adjust production to their wishes. In the absence of profits and consequently of losses, the entrepreneurs would lack any orientation concerning the desires of the consumers. There would be stagnation, not because the entrepreneurs are selfish, but because they would not know whether projected changes would suit the public.

The incessant tendency toward technological progress, which is inherent in the capitalist system, is the outcome of the fact that profits enlarge the sphere of action of the efficient entrepreneur and that losses restrict the influence of the inefficient. The confiscation of business profits does not benefit the masses. It prevents the efficient entrepreneur from expanding his efforts to supply the consumers in a better and cheaper way, and it shelters the less efficient against the competition of more efficient newcomers. It substitutes rigidity and immutability for progress and continuous improvement.

The inequality of wealth and income has a definite social function within a free-market society; it is the dynamic element safeguarding a permanent progress toward a better supply for the consumers. But when government interference curtails profits, this function ceases. Then the inequalities of wealth and income become privileges of those who have inherited wealth from preceding generations and are no longer useful to the whole of society and to each of its members.

The question is not whether it is just or not that a man who has succeeded in supplying his fellow men in the cheapest and best way should become rich. The question is not whether this man merits his affluence from any metaphysical point of view. The question is only whether any system other than that making the successful servant of the consumer’s wishes rich could be more conducive to the constant progressive improvement of the masses’ standard of living.

It is true that some of those rich today are the heirs of men who did not acquire their wealth by serving the consumers but by robbing people. Many aristocratic families of Europe are the descendants of expropriators or of men whom the expropriators presented with gifts out of their booty. However, in a free-market society these people too can preserve their wealth only by serving the consumers. If they succeed in this endeavor, they legitimize their wealth through the vote of the consumers. What is needed is only to deny them privileges which could protect them against the competition of other citizens more efficient in serving the consumers.

One of the poorest tricks of the champions of government omnipotence and of totalitarian methods of economic management is to stigmatize all their opponents as defenders of the vested interests of those who happen to be rich today. In fact, the advocates of the free-enterprise system are the most radical foes of any kind of protection of vested interests. The defenders of the vested interests are precisely those asking for tariffs, “parity” prices, price stabilization, and similar measures.

Economic liberalism does not fight for the interests of those who are rich today. On the contrary, what economic liberalism wants is a free hand left to everybody who has the ingenuity to supplant today’s rich by providing consumers with better and cheaper products. Its main concern is to remove all obstacles to a future improvement of mankind’s material well-being, or, in other words, to attain freedom from want.

It is therefore irrelevant to argue against those who recommend the free enterprise system as the most appropriate method of removing want and raising the general standard of living, by saying that the capitalists and entrepreneurs are themselves not blameless. Of course, capitalists and entrepreneurs are sinners too. But the economists do not advocate a market economy for the sake of these people. They do not intend to reward an alleged virtue on the part of the businessmen by allocating to them larger portions of wealth and income. They simply establish the fact that the free-enterprise system is better fitted to promote the well-being of the masses than any other social order.

The Conclusions of Economic Analysis

The logical deficiencies in the popular treatment of economic matters are really amazing. The most characteristic feature of the economic policies in the years between the two world wars was restriction of output of basic raw materials and foodstuffs. There were international agreements concerning the restriction of the production of rubber, tin, sugar, cocoa, coffee, and many other necessities. Domestic policies aimed at the same end. We cannot help recording the astonishing fact that the governments, statesmen, and politicians responsible for these restrictions could publicly boast that they are intent upon substituting an economy of plenty and abundance for what they disparaged as an economy of scarcity.

What is needed most seems to be a return to common sense and logical consistency.

It is not the aim of the foregoing casual observations to suggest any comprehensive answers to the most fervently discussed questions of our age. Their only aim is to make the conscientious reader realize that at the bottom of all these issues there are very intricate problems, which require a thorough and searching scrutiny.

In the field of economic studies no specialization is feasible. In the same way in which it is impossible for a mathematician to specialize in triangles and to neglect the study of circles, it is impossible to be an expert on wage rates without at the same time mastering the problems of profits and interest, commodity prices, and currency and banking. All the elements of the economic system are closely interconnected and influence one another. There are only economists and laymen. There are no such things as labor economists or farm economists.

Nobody is in a position to acquire an intuitive knowledge of economics from the mere opportunity provided by his vocation. Neither businessmen nor statesmen may pose as economic experts if they have not acquired special information by troublesome effort.

Economics is called inhuman because it shows what the inextricable consequences are of protecting less-efficient producers against the more efficient and of preserving by various means outstripped modes of production. However, the economists do not say: Thou shalt wear rayon and nylon stockings and thus hurt the cotton growers. It is the consumers who prefer rayon and nylon goods and thus restrict their demand for cotton. Neither do the economists say: Thou shalt not subsidize submarginal cotton growers, i.e., those for whom producing does not pay at the lower market price of cotton. The economists merely point out on whom the burden of such subsidies falls and what the social consequences of generally espousing the policy of such subsidies must be. They dispel the fallacious belief that these subsidies could be granted by the State without any burden to the citizens and without lowering the productivity of labor and the general standard of living. If to say this is inhuman, then so is every expression of truth. If to say this is inhuman, then the physicians who exploded the myth of the healing power of mandrake were inhuman, too, because they hurt the people employed in gathering mandrake.

The main achievement of economics is that it has provided a theory of peaceful human cooperation. This is why the harbingers of violent conflict have branded it as a “dismal science” and why this age of wars, civil wars, and destruction has no use for it.

Paper presented at the Sixth Meeting of the Conference on Science, Philosophy and Religion in their Relation to the Democratic Way of Life, August 1945.

• 1Cf. Kant, Fragmente aus dem Nachlass, Collected Works, ed. by Hartenstein, Vol. VIII, Leipzig, 1868, p. 622.
• 2Cf. Bentham, Principles of the Civil Code, Works, ed., by Bowring, Vol. I, Edinburgh, 1839, p. 309.
• 3The doctrine that members of different “classes” reason on the basis of their class’s own unique logic.
• 4Cf. Bentham, Anarchical Fallacies; Being an Examination of the Declaration of Rights issued during the French Revolution, Works, ed. by Bowring, Vol. II, Edinburgh, 1843, p. 501.
• 5Cf. Montaigne, Essais, Book I, Chapt. 22, ed. F. Strowski, Bordeaux, 1906, 1, pp. 135-136. For the role played by this idea in social doctrines, cf. A. Oncken, Geschichte der Nationaloekonomie, Leipzig, 1902, pp. 152-153; E. F. Heckscher, Mercantilism, transl. by M. Shapiro, London, 1935, Vol. II, pp. 26-27.

The program of liberalism (in the original sense of the term as it was understood in 19th-century Europe and not in present-day America where it is sometimes a synonym for radical interventionism, or more often for socialism and communism) was based upon cognizance that within the market economy, i.e., within the social system of private ownership of the means of production and the division of labor, harmony prevails among the rightly understood or long-term interests of all individuals and groups of individuals.

The Only Fact that Matters

Earlier ages had labored under the misapprehension that no man or group of men can profit but by the loss of others. In entirely demolishing this fallacy, 18th-century social philosophy and economics paved the way for the unprecedented achievements of modern Western civilization.

The decline of liberalism in its original sense consists precisely in the fact that the policy of all nations is again guided by the idea that there prevails an irreconcilable conflict between the interests of various classes in the Marxian sense, and of the various nations, and races. The decline of liberalism is not one of a series of equally important events that can be lifted out of the context of the history of recent generations and treated separately. It is the essence of this history, the only fact that matters. All that has happened during these decades was the consistent application of the philosophy of irreconcilable conflict.

Big Business, Great Service

In the market economy the consumers, by their buying or abstention from buying, ultimately determine what is to be produced, of what quality and in what quantity. They are continuously shifting control of the material factors of production into the hands of those entrepreneurs, capitalists, and landowners who have succeeded in supplying them in the best possible and cheapest way with all they are asking for.

The characteristic principle of capitalism is mass production for the satisfaction of the wants of the masses. Industry serves, first of all the consumers, the much-talked-about common man. All the major branches of industry, all enterprises, which ignorance and envy belabor as “big business,” produce for the many. Plants turning out what are considered luxury goods for the few never exceed small or medium size. Capitalism multiplies population figures and provides a standard of living for the average man which even the well-to-do of earlier ages would have deemed fabulous.

Economics shows that no other thinkable system of society’s economic organization could attain the degree of productivity which capitalism attains. It has entirely refuted all the arguments advanced in favor of socialism and interventionism.

There are, of course, people who do not want to acquiesce in the verdict of economic theory. They reject economic thinking as an allegedly spurious waste of time and declare that they trust only the teachings of experience. If, for the sake of argument, we admit their claims, we may ask: “Where is the experience that bears witness to the merits of socialism and the evils of capitalism?”

If historical experience could teach anything, it would be that no nation has ever reached or preserved prosperity and civilization without the institution of private property. Recent experience of the United States, Great Britain, Germany, and other countries has again shown that the repeal of any of the interventionist measures?the abandonment of inflationary policies, and even the limited re-establishment of the supremacy of the market?has immediately improved the general economic situation.

Blessings Of Capitalism

Again there are people who contend that to look upon the problems of social organization merely with a concern for an ample supply of various goods and services is the disclosure of a vicious mentality. They reject this “mean materialism” on moral grounds and want to deal with the issues involved from what they call a higher and loftier point of view. Such ideas certainly agree with the world-view of a Buddhist monk. In his eyes a life in dirt and penury has a positive value, and earthly possessions are dangerous because they could divert a man from the right path.

It is different with the theological and philosophical moralists of the West. These men find fault with capitalism because there are still people whom the blessings of capitalism have not yet benefited and who are, therefore, in an unsatisfactory condition. They wish that the quantity of goods made available to these poor could be increased. They know that this could be effected only by intensifying production, that is, by intensifying capitalism. But, lightheartedly and unthinkingly endorsing all the socialist fallacies, they recommend methods that would decrease the total amount of goods available for sustenance and thereby impair the standard of living.

The anti-capitalistic attitudes of a great many contemporary religious leaders and teachers of a secular morality are dictated by resentment and ignorance. The achievements of capitalism?e.g., the drop in infant mortality, the successful fight against plagues and famines, the general improvement of the standard of living?are to be highly valued also from the point of view of the teachings of any religious creed and of any system of ethical doctrines. No religious or ethical tenet can justify a policy that aims at the substitution of a social system under which output per unit of input is lower for a system in which it is higher.

Mistaken “Moderates”

The dismal conditions that the Bolshevik “experiment” has brought about and the lamentable failure of all ventures of partial socialization and nationalization have to some extent damped the fanatical bigotry with which several generations of zealots were fighting for Georges Sorel’s ideal, the destruction of all that exists.

The design of a “social revolution” which at one blow would transform the earth into the land of Cockaigne has lost a good deal of its attraction. It was a tremendous shock for the parlor Communists, the socialist professors and bureaucrats, and the union bosses when they discovered that the revolutionary Moloch devours not only the capitalists, “sycophants of the bourgeoisie,” and kulaks, but also people of their own kind. They stopped talking about the necessity of “finishing the unfinished revolution” and turned to a program for bringing about socialism step by step in a series of interventionist measures. They returned to the plan that Marx and Engels had outlined in the Communist Manifesto, but virtually had dropped in the later development of their doctrine because it was incompatible with the essential dogmas of dialectic materialism and the Marxian scheme of a philosophy of history.

The few lines in which the Communist Manifesto explains and justifies its ten-point program for the gradual realization of socialism are the best Marx and Engels ever wrote about economic issues; they are in fact the only acceptable observations contributed by Marx and Engels to economics. They call the measures they suggest “despotic inroads on the rights of property and on the conditions of bourgeois production” and declare that these measures “appear economically insufficient and untenable,” and that “in the course of the movement they outstrip themselves and are unavoidable as a means of entirely revolutionizing the mode of production.”

Later, 40 years after the first publication of the German text of the Manifesto, five years after the death of Marx, when an “authorized English translation” of the Manifesto, “edited and annotated by Frederick Engels,” was published, Engels provided an addition to the text in order to explain what the rather puzzling words “outstrip themselves” (?ber sich selbst hinaustreiben) meant. He inserted between the words “outstrip themselves” and “and are unavoidable” the words “necessitate further inroads upon the old social order.” In these eight words Engels condensed the teachings of classical economics concerning the effects of interference with the market and to some extent even anticipated the modern economists’ theory of interventionism.

This theory of interventionism deals with the effects of coercion and compulsion on the part of the government or agencies, like the labor unions to whom the government has virtually granted the privilege of resorting to violence. Such coercion and compulsion force entrepreneurs and capitalists to employ some of the factors of production differently from what they would have if they were obeying only the dictates of the consumers as conveyed to them by the state of the market.

This theory points out that the effects of such an interference are?from the very point of view of the government and the advocates and supporters of the measure concerned?more undesirable than the previous state of affairs that it was designed to alter. If the government is prepared neither to repeal its intervention nor to acquiesce in the unsatisfactory state of affairs that it has generated, then it is forced to add to its first intervention a second one, and as the result is, again from the government’s point of view, more unsatisfactory than the previous state, a third one, and so forth until its authoritarian decrees regiment every aspect of human activities and thereby establish the social system that is known under the terms socialism, communism, planning, totalitarianism.

When people who aim at the substitution of socialism for the market economy advocate interventionist measures, they are consistent from the point of view of their aims. But those people are badly mistaken who consider interventionism as a third solution of the problem of society’s economic organization, a system which, as they say, is as far from socialism as from capitalism, while combining what is “good” in each of these two systems and avoiding what is “bad” in them.

Interventionism cannot be considered a lasting system of society’s economic organization. It is a method of realizing socialism by installment. Production can be directed either by the wishes of the consumers?as shown in their buying or desisting from buying?or by the state, the social apparatus of coercion and compulsion. A concrete factor of production?for instance a specific piece of steel?can either be used according to the orders of the consumers or according to the orders of the police. There is nothing in between.

What optimists view as a revival of true liberalism is merely the slowing down of the march toward socialism that the spectacular failure of all socialist adventures has begotten. If the New Deal had not failed to do away with mass unemployment in the 1930s, and if the Tennessee Valley Authority had not been an extremely costly fiasco, if the nationalization of British coal mining and steel making had made any sense, if German Nazism and Italian Fascism had not ruined everything that could be ruined, if the state-operated post offices, telegraphs and telephones, railroads, and other services had not, through their deficits, jeopardized many nations’ budgetary equilibrium, the self-styled “progressives” would still pursue their policies with the same vigor with which their forerunners proceeded some years ago.

It is a mistake to look upon these “moderates” as if they were liberals in the classical sense of the term. The American Eisenhower Republicans and the British Conservatives are not advocates of the market economy and of economic freedom. What distinguishes them from the New Deal Democrats and from the Labour Party is not principles, but the degree of their reformist ardor and the pace of their march toward statism. They are always retreating, putting up today with measures which they vehemently opposed some time ago. In a few years they will very likely adopt measures which make them shudder today.

The German Ordo-Liberalism is different only in details from the Sozialpolitik of the Schmoller and Wagner school.1  After the episodes of Weimar radicalism and Nazi socialism, it is a return in principle to the Wohlfahrtstaat of Bismarck and Posadovsky.2

All these movements are, of course, moderate when compared with the thoroughness of the dictators. But there is no substantial difference between more or less moderate interventionism. All interventionist measures, as Engels pertinently observed, “necessitate further inroads upon the old social order” and thereby finally lead to full socialism.

The Need for Sound Money

Interventionism believes that lowering the rate of interest below the height it would attain in an unhampered market is very beneficial, and considers credit expansion as the right means for the attainment of this end. But the boom artificially created by credit expansion cannot last. It must end in a general depression of trade, an economic crisis.

From this explanation of the trade cycle, the so-called monetary or circulation credit theory, one must infer that there is only one means to avoid the return of periods of economic depression, viz., to abstain from any attempts to produce by credit expansion a passing artificial boom. But the interventionists are not prepared to renounce their cherished policy of making people happy for a short time by an illusory prosperity. Fully aware of the fact that it is impossible to refute and to discredit the monetary theory of the trade cycle, they pass over it in silence, or distort it and sneeringly deride it.

In place of this banished doctrine, officialdom and the universities propagate a doctrine which, like that of Karl Marx, interprets the periodical return of industrial crises as a necessary outgrowth of capitalism. The crises, declares the Communist Manifesto, disclose the inability of the capitalistic mode of production, of private property and free enterprise, to manage productive forces. Economic crises are an inherent feature of the bourgeois system, and will return at ever shorter intervals, each time more threateningly, as long as socialist all-round planning has not been substituted for the capitalistic “anarchy of production.”

Socialists and interventionists agree that the crises are necessary outcomes of the very operation of the market economy. They disagree with regard to the methods to be resorted to for the prevention of future periods of economic depression.

The orthodox Marxians declare that there is but one means available for this purpose, the unconditional and total adoption of the Soviet type of socialist management.

The interventionists, however, ascribe to the government the power to prevent or, at least, to mitigate considerably the harshness and duration of the slump by measures which they call “anti-cyclical.” Under this high-sounding name they recommend, for the emergency in which government revenue is shrinking on account of the depression, tax abatement, on the one hand and, on the other hand, a huge increase in government spending through gigantic public works and an increase in unemployment compensation. Though the crisis is the inevitable outcome of the creation of additional quantities of money and money substitutes, the interventionists want to cure it by still further inflation. They blithely neglect to take cognizance of the teachings of both theory and history concerning the final outcome of a protracted inflationary policy.

Inflation is also the only solution interventionism suggests for the problem of mass unemployment. Here again the fateful concatenation of all attempts at tampering with the market wreaks havoc. First, the government or the labor unions decree and enforce minimum wage rates that are higher than the potential market rates. Then, as this inevitably results in prolonging mass unemployment indefinitely, the government proceeds to inflation. The inflation results in higher commodity prices and a higher cost of living which cause the government and the unions to interfere in order to raise wage rates anew above the potential market rate. And so on.

A liberal (in its original sense) movement must never forget that sound money is one of the fundamental principles of liberalism, old or new.

Fables Can Cause War

The legal foundations of Western civilization and prosperity were provided by the institution of private property. What separates East and West is precisely the fact that the Orient did not develop the ideological, legal, and political framework within which property rights and their efficacious protection against arbitrariness on the part of rulers could thrive. Under these conditions no capital accumulation and no large-scale investment could be effected and result in the development of industrial plants and factories.

The natural conditions for production were in large parts of Asia more favorable than in Europe north of the Alps. On the eve of the “Industrial Revolution,” India and China were considered as richer than even the most flourishing European countries. In technological skill and in the talents required for success in scientific research, Asian students of Western methods seem not to be inferior to the Europeans. What was lacking and is still lacking in the East is the spirit of freedom, which generated that great concept of the individual’s rights that no one must infringe upon.

The vital principle of a liberal constitution is the independence of the judiciary that protects the individual and his property against any violator, whether king or common robber. To the institutions which the “Progressives” try to ridicule with ironical sneers by dubbing them “the divine rights of capital,” the “proletarians” of the West owe all that distinguishes their conditions from those of the indigent masses in Asia and Africa.

The inhabitants of the “underdeveloped” countries hanker for the material paraphernalia of Western capitalism and thereby implicitly acknowledge the superiority of Western methods of economic management. But their governments, in this regard fully supported by the “intellectuals,” are sabotaging any attempts to intensify production and thereby to improve the average standard of living. What these countries need, first of all, is more investment of more capital. Yet their policies prevent both the accumulation of domestic capital and the importation of foreign capital.

Conditions in England and other European countries were no less grievous on the eve of the “Industrial Revolution” than they are today in many Asian and African lands. But while England had to lift itself by its own bootstraps, assembling the capital acquired and accumulating technological experience in a time-consuming process, these latter countries can freely use the technology of the West. And they got, and could still get if they did not prevent it, substantial aid by the investment of foreign capital.

Confused by the Communist fables that depict foreign investment as an outgrowth of predatory imperialism, Western “progressivism” labors under a sense of guilt in dealing with the conditions of the East. Western European and later also North American capitalists built most of the railroads, canals, other transportation and communication facilities, and public utilities in the “underdeveloped” countries, developed their natural resources, and constructed factories. A great part, perhaps the greater part of the capital invested in this way in these “underdeveloped” countries, has been expropriated under various pretexts. The amazing thing is that these confiscatory measures were enthusiastically approved by the “progressive” countrymen of the capitalist victims of such expropriation. Many governments not only did not protest against the expropriation of these investments, but virtually encouraged its perpetrators.

One of the main paradoxes of the modern world is this: The achievements of laissez-faire liberalism and the capitalistic market economy have finally instilled in all Eastern peoples the conviction that what the Western ideologies recommend and the Western policies practice is the right thing to be done. But by the time the East got this confidence in Western ways, the ideologies and policies of socialism and interventionism had supplanted liberalism in Europe and America.

In adopting the doctrines that condemned all things labeled “bourgeois” as the worst of all evils, the East meant to adopt the ideas that had made for the West’s prosperity and civilization. From these allegedly modern and progressive American and Western doctrines, the Easterners got the inspiration for the war cries they are using today in their fight against the West. This applies also to Russian Communism which, from the Russian point of view, is seen as Western ideology imported by disciples of Hegel, Fourier, Marx, Sorel, and the Webbs, with the outspoken intention of “westernizing” their backward nation.

Led by the Soviet power, the peoples of Asia and Africa are engaged in what they believe is a struggle for their emancipation from the “yoke of capitalism.” From the point of view of the Western nations, their fanatical anti-Westernism is certainly a highly deplorable fact. But it also hurts the vital interests of the Eastern peoples more seriously than those of the West, And it may kindle a new, an atomic, world war.

Dissenters’ Role

The advocates of socialism (communism or planning) want to substitute for private control public (government) control of the means of production.

The advocates of interventionism declare that they do not want to abolish the market economy entirely. They want, they say, only to improve its functioning by various acts of government interference with business.

These two doctrines are today taught at schools, expounded in books, magazines and newspapers, professed by political parties, and practiced by governments. There are socialist schools, books, periodicals, parties, and governments, and there are interventionist schools, books, periodicals, parties, and governments.

There are also a few dissenters, who think that the market economy, the laissez-faire system or capitalism, is the only system that makes for prosperity and civilization, and that it alone can prevent the ruin of the West and the relapse into chaos and barbarism. Some of these dissenters have published books and articles. But almost no politician or bureaucrat takes notice of their ideas. Public opinion is not aware of the fact that such doctrines exist. The political idiom of the United States does not even have a word to signify them and their supporters. The word “liberal” means in America today socialist or interventionist. . . .

The state of affairs we have to face is this: The interventionist policies adopted by all governments and supported by all parties this side of the Iron Curtain will sooner or later bring about, to put it mildly, very unsatisfactory conditions. Since public opinion mistakenly considers these interventionist policies as pro-capitalistic policies, or as the Communists and many allegedly anti-Communist authors say “as a last desperate effort to salvage capitalism,” people will argue, “Now capitalism has failed; nothing is left to us except to try the Russian methods.”

These people will not see that what failed was not capitalism, not the system of the unhampered market economy, but interventionism. How could they realize this, when there are so many groups eager to represent a policy of interventionism as a policy for the preservation of economic freedom and the market economy? . . .

Therefore nothing is more important today than to enlighten public opinion about the basic differences between genuine liberalism, which advocates the free market economy, and the various interventionist parties which are advocating government interference with prices, wages, the rate of interest, profits and investment, confiscatory taxation, tariffs and other protectionist measures, huge government spending, and finally, inflation.

Response to a 1957 questionnaire from French economist Jacques Rueff. Rueff was seeking to revive the Centre Paul Hymans, which, on account of World War II, had not met since its international conference in Paris in 1938. This article appeared in the January 17, 1958, issue of U.S.A. magazine.

• 1Gustav Schmoller (1838-1917) and Adolf Wagner (1835-1917) were economists. Both men were advocates of social reform, the welfare state, and state socialism.
• 2Arthur Posadovsky (1845-1932), a prominent official in the German government from 1897 through World War I, was responsible for much of the social and economic reform of that era.