I.*

Most of our contemporaries are highly critical of what they call “the unequal distribution of wealth.” As they see it, justice would require a state of affairs under which nobody enjoys what are to be considered superfluous luxuries as long as other people lack things necessary for the preservation of life, health, and cheerfulness. The ideal condition of mankind, they pretend, would be an equal distribution of all consumers’ goods available. As the most practical method to achieve this end, they advocate the radical expropriation of all material factors of production and the conduct of all production activities by society, that is to say, by the social apparatus of coercion and compulsion, commonly called government or state.

The supporters of this program of socialism or communism reject the economic system of capitalism for a number of reasons. Their critique emphasizes the alleged fact that the system as such is not only unjust, a violation of the perennial God-given natural law, but also inherently inefficient and thus the ultimate cause of all the misery and poverty that plague mankind. Once the wicked institution of private ownership of the material factors of production will have been replaced by public ownership, human conditions will become blissful. Everybody will receive what he needs. All that separates mankind from this perfect state of earthly affairs is the unfairness in the distribution of wealth.

The essential viciousness of this method of dealing with the fundamental problems of mankind’s material and spiritual welfare is to be seen in its preoccupation with the concept of distribution. As these authors and doctrinaires see it, the economic and social problem is to give to everybody his due, his fair share in the endowment that God or nature has destined for the use of all men. They do not see that poverty is “the primitive condition of the human race.”1 They do not realize that all that enables man to elevate his standard of living above the level of the animals is the fruit of his planned activity. Man’s economic task is not the distribution of gifts dispensed by a benevolent donor, but production. He tries to alter the state of his environment in such a way that conditions become more favorable to the preservation and development of his vital forces. He works.

Precisely, say the superficial among the critics of social conditions. Labor and nothing but labor brings forth all the goods the utilization of which elevates the condition of men above the level of the animals. As all products are the output of labor, only those who labor should have the right to enjoy them.

This may sound rather plausible as far as it refers to the conditions and circumstances of some fabulous non-human beings. But it turns into the most fateful of all popular delusions when applied to homo sapiens. Man’s eminence manifests itself in his being fully aware of the flux of time. Man lives consciously in a changing universe; he distinguishes, sooner and later, between past, present,2 and future; he makes plans to influence the future state of affairs and tries to convert these plans into fact. Conscious planning for the future is the specifically human characteristic. Timely provision for future wants is what distinguishes human action from the hunting drives of beasts and of savages. Premeditation, early attention to future needs, leads to production for deferred consumption, to the intercalation of time between exertion and the enjoyment of its outcome, to the adoption of what Böhm-Bawerk called round-about methods of production. To the nature-given factors of production, man-made factors are added by the deferment of consumption. Man’s material environment and his style of life are radically transformed. There emerges what is called human civilization.

This civilization is not an achievement of kings, generals or other Führers. Neither is it the result of the labors of “common” men. It is the fruit of the cooperation of two types of men: of those whose saving, i.e., deferment of consumption, makes entering upon time-absorbing, round-about methods of production possible, and of those who know how to direct the application of such methods. Without saving and successful endeavors to use the accumulated savings wisely, there cannot be any question of a standard of living worthy of the qualification human.

Simple saving, that is, the abstention from immediate consumption in order to make more abundant consumption at a later date possible, is not a specifically human contrivance. There are also animals that practice it. Driven by instinctive urges, some species of animals are also committed to what we would have to call capitalistic saving if it were done in full consciousness of its effects. But man alone has elevated intentional deferment of consumption to a fundamental principle of action. He abstains temporally from consumption in order to enjoy later the continuous services of appliances that could not have been produced without such a postponement.

Saving is always the abstention from some kind of immediate consumption for the sake of making an increase or improvement in later consumption possible. It is saving that accumulates capital, dissaving that makes the available supply of capital shrink. In acting, man chooses between increasing his competence by additional saving or reducing the amount of his capital by keeping his consumption above the rate correct accountancy considers as his income.

Additional saving as well as the non-consumption of already previously accumulated savings are never “automatic,” but always the result of an intentional abstention from instantaneous consumption. In abstaining from instantaneous consumption, the saver expects to be fully rewarded either by keeping something for later consumption or by acquiring the property of a capital good.

Where there is no saving, no capital goods come into existence. And there is no saving without purpose. A man defers consumption for the sake of an improvement of later conditions. He may want to improve his own conditions or those of definite other people. He does not abstain from consumption simply for the pleasure of somebody unknown.

There cannot be any such thing as a capital good that is not owned by a definite owner. Capital goods come into existence as the property of the individual or the group of individuals who were in the position to consume definite things but abstained from this consumption for the sake of later utilization. The way in which capital goods come into existence as private property determines the institutions of the capitalistic system.

Of course, today’s heirs of the capitalistic civilization also construct the scheme of a world-embracing social body that forces every human being to submit meekly to all its orders. In such a socialist universe everything will be planned by the supreme authority and to the individual “comrades” no other sphere of action will be left than unconditional surrender to the will of their masters. The comrades will drudge, but all the yield of their endeavors will be at the disposal of the high authority. Such is the ideal of socialism or communism, nowadays also called planning. The individual comrade will enjoy what the supreme authority assigns to him for his consumption and enjoyment. Everything else, all material factors of production, will be owned by the authority.

Such is the alternative. Mankind has to choose: on the one side—private property in the material factors of production. Then the demand of the consumers on the market determines what has to be produced, of what quality, and in what quantity. On the other side—all the material factors of production are owned by the central authority and thus every individual entirely depends on its will and has to obey its orders. This authority alone determines what has to be produced and what and how much each comrade should be permitted to use or consume.

If one does not permit individuals to keep as their property the things produced for temporally deferred utilization, one removes any incentive to create such things and thus makes it impossible for acting man to raise his condition above the level of non-human animals. Thus the anti-property (i.e., socialist or communist) authors had to construct the design of a society in which all men are forced to obey unconditionally the orders issued from a central authority, from the great god called state, society, or mankind.

II.

The social meaning and the economic function of private property have been widely misunderstood and misinterpreted because people confuse conditions of the market economy with those of the militaristic systems vaguely labeled feudalism. The feudal lord was a conqueror or a conqueror’s accomplice. He was anxious to deprive all those who did not belong to his own cluster of any opportunity to make a living otherwise than by humbly serving him or one of his class comrades. All the land—and this means in a primitive society virtually all the material factors of production—was owned by members of the proprietary caste and to the others, to those disdainfully called the “villains,” nothing was left but unconditional surrender to the armed hereditary nobility. Those not belonging to this aristocracy were serfs or slaves, they had to obey and to drudge while the products of their toil were consumed by their masters.

The eminence of the inhabitants of Europe and their descendants who have settled in other continents consists in the fact that they have abolished this system and substituted for it a state of freedom and civic rights for every human being. It was a long and slow evolution, again and again interrupted by reactionary episodes, and great parts of our globe are even today only superficially affected by it. At the end of the eighteenth century the triumphal progress of this new social system was accelerated. Its most spectacular manifestation in the moral and intellectual sphere is known as the Enlightenment, its political and constitutional reforms as the liberal movement, while its economic and social effects are commonly referred to as the Industrial Revolution and the emergence of modern capitalism.

The historians dealing with the various phases of this up-to-now most momentous and weighty period of mankind’s evolution tend to confine their investigations to special aspects of the course of affairs. They mostly neglect to show how the events in the various fields of human activity were connected with one another and determined by the same ideological and material factors. Unimportant detail sometimes engrosses their attention and prevents them from seeing the most consequential facts in the right light.

The most unfortunate outcome of this methodological confusion is to be seen in the current fateful misinterpretation of the recent political and economic developments of the civilized nations.

The great liberal movement of the eighteenth and nineteenth centuries aimed at the abolition of the rule of hereditary princes and aristocracies and the establishment of the rule of elected representatives of the people. All kinds of slavery and serfdom ought to be abolished. All members of the nation should enjoy the full rights and privileges of citizenship. The laws and the practice of the administrative officers should not discriminate between the citizens.

This liberal revolutionary program clashed very soon with another program that was derived from the postulates of old communist sects. These sects, many of them inspired by religious ideas, had advocated confiscation and redistribution of land or some other forms of egalitarianism and of primitive communism. Now their successors proclaimed that a fully satisfactory state of human conditions could be attained only where all material factors of production are owned and operated by “society,” and the fruits of economic endeavors are evenly distributed among all human beings.

Most of these communist3 authors and revolutionaries were convinced that what they were aiming at was not only fully compatible with the customary program of the friends of representative government and freedom for all, but was its logical continuation, the very completion of all endeavors to give to mankind perfect happiness. Public opinion was by and large prepared to endorse this interpretation. As it was usual to call the adversaries of the liberal4 demand for representative government the parties of the “right” and the liberal groups the parties of the “left,” the communist (and later also the socialist) groups were considered as “more to the left” than the liberals. Popular opinion began to believe that while the liberal parties represent only the selfish class interests of the “exploiting” bourgeoisie, the socialist parties were fighting for the true interests of the immense majority, the proletariat.

But while these reformers were merely talking and drafting spurious plans for political action, one of the greatest and most beneficial events of mankind’s history was going on—the Industrial Revolution. Its new business principle—that transformed human affairs more radically than any religious, ethical, legal, or technological innovation had done before—was mass production destined for consumption by the masses, not merely for consumption by members of the well-to-do classes. This new principle was not invented by statesmen and politicians; it was for a long time even not noticed by the members of the aristocracy, the gentry, and the urban patricians. Yet, it was the very beginning of a new and better age of human affairs when some people in Hanoverian England started to import cotton from the American colonies; some took charge of its transformation to cotton goods for customers of modest income; while still others exported such goods to the Baltic ports to have them ultimately exchanged against corn that, brought to England, appeased the hunger of starving paupers.

The characteristic feature of capitalism is the traders’ unconditional dependence upon the market, that is, upon the best possible and cheapest satisfaction of the most urgent demand on the part of the consumers. For every kind of production human labor is required as a factor of production. But labor as such, however masterfully and conscientiously performed, is nothing but a waste of time, material, and human effort if it is not employed for the production of those goods and services that at the instant of their being ready for use or consumption will best satisfy in the cheapest possible way the most urgent demand of the public.

The market is the prototype of what are called democratic institutions. Supreme power is vested in the buyers, and vendors succeed only by satisfying in the best possible way the wants of the buyers. Private ownership of the factors of production forces the owners—enterprisers—to serve the consumers. Eminent economists have called the market a democracy in which every penny gives a right to vote.

III.

Both the political or constitutional democracy and the economic or market democracy are administered according to the decisions of the majority. The consumers, by their buying or abstention from buying, are as supreme in the market as the citizens through their voting in plebiscites or in the election of officers are supreme in the conduct of the affairs of state. Representative government and the market economy are the product of the same evolutionary process, they condition one another, and it would seem today that they are disappearing together in the great reactionary counter-revolution of our age.

Yet, reference to this striking homogeneousness must not prevent us from realizing that, as an instrument of giving expression to the genuine wants and interests of the individuals, the economic democracy of the market is by far superior to the political democracy of representative government. As a rule it is easier to choose between the alternatives which are open to a purchaser than to make a decision in matters of state and “high” politics. The average housewife may be very clever in acquiring the things she needs to feed and to clothe her children. But she may be less fit in electing the officers called to handle matters of foreign policy and military preparedness.

Then there is another important difference. In the market not only the wants and wishes of the majority are taken into account but also those of minorities, provided they are not entirely insignificant in numbers. The book trade publishes for the general reader, but also for small groups of experts in various fields. The garment trades are not only supplying clothing for people of normal size, but also merchandise for the use of abnormal customers. But in the political sphere only the will of the majority counts, and the minority is forced to accept what they may detest for rather serious reasons.

In the market economy, the buyers determine with every penny spent the direction of the production processes and thereby the essential features of all business activities. The consumers assign to everybody his position and function in the economic organism. The owners of the material factors of production are virtually mandatories or trustees of the consumers, revocably appointed by a daily repeated election. If they fail in their attempts to serve the consumers in the best possible and cheapest way, they suffer losses and, if they do not reform in time, lose their property.

Feudal property was acquired either by conquest or by a conqueror’s favor. Once acquired, it could be enjoyed forever by the owner and his heirs. But capitalistic property must be acquired again and again by utilizing it for serving the consumers in the best possible way. Every owner of material factors of production is forced to adjust the services he renders to the best possible satisfaction of the continually changing demand of the consumers. A man may start his business career as the heir of a large fortune. But this does not necessarily help him in his competition with newcomers. The adjustment of an existing railroad system to the new situation created by the emergence of motor cars, trucks, and airplanes was a more difficult problem than many of the tasks that had to be solved by enterprises newly started.

The fact that made the capitalistic methods of the conduct of business emerge and flourish is precisely the excellence of the services it renders to the masses. Nothing characterizes the fabulous improvement in the standard of living of the many better than the quantitative role that the entertainment industries play in modern business.

Capitalism has radically transformed all human affairs. Population figures have multiplied. In the few countries where neither the policies of the governments nor obstinate preservation of traditional ways on the part of the citizens put insurmountable obstacles in the way of capitalistic entrepreneurship, the living conditions of the immense majority of people have improved spectacularly. Implements never known before or considered as extravagant luxuries are now customarily available to the average man. The general standard of education and of material and spiritual well-being is improving from year to year.

All this is not an achievement of governments or of any charitable measures. More often than not it is precisely governmental action that frustrates beneficial developments which the regular operation of capitalistic institutions tends to bring about.

Let us look upon one special case. In the precapitalistic ages, saving and thereby the betterment of one’s economic condition was really possible, apart from professional money-lenders (bankers), only to people who owned a farm or a shop. They could invest savings in an improvement or expansion of their property. Other people, the propertyless proletarians, could save only by hiding a few coins in a corner they considered as safe. Capitalism made the accumulation of some capital through saving accessible to everybody. Life insurance institutions, savings banks, and bonds give the opportunity of saving and earning interest to the masses of people with modest incomes, and these people make ample use of it. On the loan markets of the advanced countries, the funds provided by the numerous classes of such people play an important role. They could be an important factor in making the operation of the capitalistic system familiar to those who are not themselves employed in the financial conduct of business affairs. And first of all—they could more and more improve the economic and social standing of the many.

But unfortunately the policies of practically all nations sabotage this evolution in the most disgraceful manner. The governments of the United States, Great Britain, France, and Germany, not to speak of most of the smaller nations, were or are still committed to the most radical inflationist policies. While continually talking about their solicitude for the common man, they have without shame, again and again through government-made inflation, robbed the people who have taken out insurance policies, who are working under pension plans, who own bonds or savings deposits.

IV.

The authors who in Western Europe at the end of the eighteenth century and in the first decades of the nineteenth century developed plans for the establishment of socialism were not familiar with the social ideas and conditions in Central Europe. They did not pay any attention to the Wohlfahrtsstaat, the welfare-state of the German monarchical governments of the eighteenth century. Neither did they read the classical book of German socialism, Fichte’s Geschlossener Handelsstaat, published in the year 1800. When much later—in the last decades of the nineteenth century—the nations of the West, first among them England, embarked upon the Fabian methods of a temperate progress toward socialism, they did not raise the question why continental governments whom they despised as backward and absolutist had long before already adopted the allegedly new and progressive principles of social reform.

But the German socialists of the second part of the nineteenth century could not avoid dealing with this problem. They had to face the policies of Bismarck, the man of whom the pro-socialist Encyclopaedia of the Social Sciences says that he was “with reason regarded as the foremost exponent of state socialism in his day.”5 Lassalle toyed with the idea to further the cause of socialism by cooperation with this most “reactionary” paladin of the Hohenzollern. But Lassalle’s premature death put an end to such plans and, very soon, also to the activities of the socialist group of which he had been the chief. Under the leadership of the disciples of Marx, the German socialist party turned to radical opposition to the Kaiser’s regime. They voted in the Reichstag against all bills suggested by the government. Of course, being a minority party, their votes could not prevent the Reichstag’s approval of various pro-labor laws, among them those establishing the famous social security system. Only in one case could they prevent the creation of a government-supported socialization measure, viz., the establishment of a governmental tobacco monopoly. But all the other nationalization and municipalization measures of the Bismarck age were adopted in spite of the passionate opposition of the socialist party. And the nationalization policy of the German Reich that, thanks to the victories of its armies, in those years enjoyed all over the world an unprecedented prestige was adopted by many nations of Eastern and Southern Europe.

In vain did the German socialist doctrinaires try to explain and to justify the manifest contradiction between their fanatical advocacy of socialism and their stubborn opposition to all nationalization measures put into effect.6 But notwithstanding the support the nationalization and municipalization policy of the authorities got from self-styled conservative and Christian parties, it very soon lost its popularity with the rulers as well as with those ruled. The nationalized industries were rather poorly operated under the management of the administrators appointed by the authorities. The services they had to render to the customers became highly unsatisfactory, and the fees they charged were more and more increased. And, worst of all, the financial results of the management of public servants were deplorable. The deficits of these outfits were a heavy burden on the national treasuries and forced again and again an increase in taxation. At the beginning of the twentieth century, one could no longer deny the obvious fact that the public authorities had scandalously failed in their attempts to administer the various business organizations they had acquired in the conduct of their “state socialism.”

Such were conditions when the outcome of the First World War made the socialist parties paramount in Central and Eastern Europe and also considerably strengthened their influence in Western Europe. There was in those years in Europe practically no serious opposition to most radical pro-socialist plans.

The German revolutionary government was formed in 1918 by members of the Marxian social-democratic party. It had no less power than the Russian government of Lenin and, like the Russian leader, it considered socialism as the only reasonable and possible solution to all political and economic problems. But it was also fully familiar with the fact that the nationalization measures adopted by the Imperial Reich before the war had brought unsatisfactory financial results and rather poor service and also that the socialist measures resorted to in the years of the war had been unsuccessful. Socialism was in their opinion the great panacea, but it seemed that nobody knew what it really meant and how to bring it about properly. Thus, the victorious socialist leaders did what all governments do when they do not know what to do. They appointed a committee of professors and other people considered to be experts. For more than fifty years the Marxians had fanatically advocated socialization as the focal point of their program, as the nostrum to heal all earthly evils and to lead mankind forward into the new garden of Eden. Now they had seized power and all of the people expected that they would redeem their promise. Now they had to socialize. But at once they had to confess that they did not know what to do and they were asking professors what socialization meant and how it could be put into practice.

It was the greatest intellectual fiasco history has ever known and it put in the eyes of all reasonable people an inglorious end to all the teachings of Marx and hosts of lesser-known Utopians.

Neither was the fate of the socialist ideas and plans in the West of Europe better than in the country of Marx. The members of the Fabian Society were no less perplexed than their continental friends. Like these, they too were fully convinced that capitalism was stone dead forever and that henceforth socialism alone would rule all nations. But they too had to admit that they had no plan of action. The flamboyantly advertised scheme of Guild Socialism was, as all people had to admit very soon, simply nonsense. It quietly disappeared from the British political scene.

But, of course, the intellectual debacle of socialism and especially of Marxism in the West did not affect conditions in the East. Russia and other Eastern countries of Europe and China turned to all-round nationalization. For them, neither the critical refutation of the Marxian and other socialist doctrines nor the failure of all nationalization experiments meant anything. Marxism became the quasi-religion of the backward nations which were anxious to get the machines and, first of all, the deadly weapons developed in the West, but which abhorred the philosophy that had brought about the West’s social and scientific achievements.

The Eastern political doctrine asking for immediate full socialization of all spheres of life and the pitiless extermination of all opponents gets rather sympathetic support on the part of many parties and influential politicians in the Western countries. “Building bridges to the communist sector of the world” is a task rather prevalent with many governments of the West. It is fashionable with some snobbish people to praise the unlimited despotism of Russia and China. And, worst of all, out of the taxes collected from the revenues of private business some governments, first of all that of the United States, are paying enormous subsidies to governments that have to face tremendous deficits precisely because they have nationalized many enterprises, especially railroads, post, telegraph and telephone service, and many others.

In the fully industrialized parts of our globe, in the countries of Western and Central Europe and North America, the system of private enterprise not merely survives, but continually improves and expands the services it renders. The statesmen, the bureaucrats, and the politicians look askance upon business. Most of the journalists, the writers of fiction, and the university teachers are propagating various brands of socialism. The rising generation is imbued with socialism in the schools. Only very rarely does one hear a voice criticizing socialist ideas, plans, and actions.

But socialism is for the peoples of the industrial world no longer a living force. There is no longer any question of nationalizing further branches of business.7

None of the many governments sympathizing with the socialist philosophy dares today seriously to suggest further measures of nationalization. On the contrary. For example, the American government as well as every reasonable American would have reason to be glad if the new Administration8 could get rid of the Post Office with its proverbial inefficiency and its fantastic deficit.

Socialism started in the age of Saint-Simon as an attempt to give articulation to the ripeness of Caucasian man’s Western civilization. It tried to preserve this aspect when it later looked upon colonialism and imperialism as its main targets. Today it is the rallying cry of the East, of the Russians and the Chinese, who reject the West’s ideology, but eagerly try to copy its technology.

• *[Reprinted from The Intercollegiate Review 5 (Spring 1969)—Ed.]
• 1Jeremy Bentham, “Principles of the Civil Code,” vol. 1, in Works, J. Bowring, ed. (London: Simpkin, Marshall, 1843), p. 309.
• 2About the praxeological concept of “present” see Human Action, 3rd ed. (Chicago: Henry Regnery, 1966), pp. l00f.
• 3The term “socialism” was fashioned only many decades later and did not come into general use before the 1850s.
• 4“Liberal” is here used in its nineteenth-century meaning that still prevails in European usage. In America “liberal” is nowadays used by and large as synonymous with socialism or “moderate” socialism.
• 5See W. H. Dawson, “Births,” in Encyclopaedia of the Social Sciences, vol. 2 (New York: Macmillan, 1930), p. 573.
• 7The British Labor cabinet paid homage to its party ideology in dealing with the steel industry. But everybody knows that this is merely a facade to conceal a little the great failure of all that the various British left-wing parties were aiming at for many decades.
• 8[This was the first administration of Richard Nixon; he was elected president in 1968—Ed.]

I.*

The doctrine of natural law that inspired the eighteenth century declarations of the rights of man did not imply the obviously fallacious proposition that all men are biologically equal. It proclaimed that all men are born equal in rights and that this equality cannot be abrogated by any man-made law, that it is inalienable or, more precisely, imprescriptible. Only the deadly foes of individual liberty and self-determination, the champions of totalitarianism, interpreted the principle of equality before the law as derived from an alleged psychical and physiological equality of all men. The French declaration of the rights of the man and the citizen of November 3, 1789, had pronounced that all men are born and remain equal in rights. But, on the eve of the inauguration of the regime of terror, the new declaration that preceded the Constitution of June 24, 1793, proclaimed that all men are equal “par la nature.” From then on this thesis, although manifestly contradicting biological experience, remained one of the dogmas of “leftism.” Thus we read in the Encyclopaedia of the Social Sciences that “at birth human infants, regardless of their heredity, are as equal as Fords.”1

However, the fact that men are born unequal in regard to physical and mental capacities cannot be argued away. Some surpass their fellow men in health and vigor, in brain and aptitudes, in energy and resolution and are therefore better fitted for the pursuit of earthly affairs than the rest of mankind—a fact that has also been admitted by Marx. He spoke of “the inequality of individual endowment and therefore productive capacity (Leistungsfähigkeit)” as “natural privileges” and of “the unequal individuals (and they would not be different individuals if they were not unequal).”2 In terms of popular psychological teaching we can say that some have the ability to adjust themselves better than others to the conditions of the struggle for survival. We may therefore—without indulging in any judgment of value—distinguish from this point of view between superior men and inferior men.

History shows that from time immemorial superior men took advantage of their superiority by seizing power and subjugating the masses of inferior men. In the status society there is a hierarchy of castes. On the one hand are the lords who have appropriated to themselves all the land and on the other hand their servants, the liegemen, serfs, and slaves, landless and penniless underlings. The inferiors’ duty is to drudge for their masters. The institutions of the society aim at the sole benefit of the ruling minority, the princes, and their retinue, the aristocrats.

Such was by and large the state of affairs in all parts of the world before, as both Marxians and conservatives tell us, “the acquisitiveness of the bourgeoisie,” in a process that went on for centuries and is still going on in many parts of the world, undermined the political, social, and economic system of the “good old days.” The market economy—capitalism—radically transformed the economic and political organization of mankind.

Permit me to recapitulate some well-known facts. While under precapitalistic conditions superior men were the masters on whom the masses of the inferior had to attend, under capitalism the more gifted and more able have no means to profit from their superiority other than to serve to the best of their abilities the wishes of the majority of the less gifted. In the market economic power is vested in the consumers. They ultimately determine, by their buying or abstention from buying, what should be produced, by whom and how, of what quality and in what quantity. The entrepreneurs, capitalists, and landowners who fail to satisfy in the best possible and cheapest way the most urgent of the not yet satisfied wishes of the consumers are forced to go out of business and forfeit their preferred position. In business offices and in laboratories the keenest minds are busy fructifying the most complex achievements of scientific research for the production of ever better implements and gadgets for people who have no inkling of the theories that make the fabrication of such things possible. The bigger an enterprise is, the more is it forced to adjust its production to the changing whims and fancies of the masses, its masters. The fundamental principle of capitalism is mass production to supply the masses. It is the patronage of the masses that make enterprises grow big. The common man is supreme in the market economy. He is the customer who “is always right.”

In the political sphere, representative government is the corollary of the supremacy of the consumers in the market. Office-holders depend on the voters as entrepreneurs and investors depend on the consumers. The same historical process that substituted the capitalistic mode of production for precapitalistic methods substituted popular government—democracy—for royal absolutism and other forms of government by the few. And wherever the market economy is superseded by socialism, autocracy makes a comeback. It does not matter whether the socialist or communist despotism is camouflaged by the use of aliases like “dictatorship of the proletariat” or “people’s democracy” or “Führer principle.” It always amounts to a subjection of the many to the few.

It is hardly possible to misconstrue more thoroughly the state of affairs prevailing in capitalistic society than by calling the capitalists and entrepreneurs a “ruling” class intent upon “exploiting” the masses of decent men. We will not raise the question of how the men who under capitalism are in business would have tried to take advantage of their superior talents in any other thinkable organization of production. Under capitalism they are vying with one another in serving the masses of less gifted men. All their thoughts aim at perfecting the methods of supplying the consumers. Every year, every month, every week something unheard of before appears on the market and is soon made accessible to the many.

What has multiplied the “productivity of labor” is not some degree of effort on the part of manual workers, but the accumulation of capital by the savers and its reasonable employment by the entrepreneurs. Technological inventions would have remained useless trivia if the capital required for their utilization had not been previously accumulated by thrift. Man could not survive as a human being without manual labor. However, what elevates him above the beasts is not manual labor and the performance of routine jobs, but speculation, foresight that provides for the needs of the—always uncertain—future. The characteristic mark of production is that it is behavior directed by the mind. This fact cannot be conjured away by a semantics for which the word “labor” signifies only manual labor.

II.

To acquiesce in a philosophy stressing the inborn inequality of men runs counter to many people’s feelings. More or less reluctantly, people admit that they do not equal the celebrities of art, literature, and science, at least in their specialties, and that they are no match for athletic champions. But they are not prepared to concede their own inferiority in other human matters and concerns. As they see it, those who outstripped them in the market, the successful entrepreneurs and businessmen, owe their ascendancy exclusively to villainy. They themselves are, thank God, too honest and conscientious to resort to those dishonest methods of conduct that, as they say, alone make a man prosper in a capitalistic environment.

Yet, there is a daily growing branch of literature that blatantly depicts the common man as an inferior type: the books on the behavior of consumers and the alleged evils of advertising.3 Of course, neither the authors nor the public that acclaims their writings openly state or believe that that is the real meaning of the facts they report.

As these books tell us, the typical American is constitutionally unfit for the performance of the simplest tasks of a householder’s daily life. He or she does not buy what is needed for the appropriate conduct of the family’s affairs. In their inwrought stupidity they are easily induced by the tricks and wiles of business to buy useless or quite worthless things. For the main concern of business is to profit not by providing the customers with the goods they need, but by unloading on them merchandise they would never take if they could resist the psychological artifices of “Madison Avenue.” The innate incurable weakness of the average man’s will and intellect makes the shoppers behave like “babes.”4 They are easy prey to the knavery of the hucksters.

Neither the authors nor the readers of these passionate diatribes are aware that their doctrine implies that the majority of the nation are morons, unfit to take care of their own affairs and badly in need of a paternal guardian. They are preoccupied to such an extent with their envy and hatred of successful businessmen that they fail to see how their description of consumers’ behavior contradicts all that the “classical” socialist literature used to say about the eminence of the proletarians. These older socialists ascribed to the “people,” to the “working and toiling masses,” to the “manual workers” all the perfections of intellect and character. In their eyes, the people were not “babes” but the originators of what is great and good in the world, and the builders of a better future for mankind.

It is certainly true that the average common man is in many regards inferior to the average businessman. But this inferiority manifests itself first of all in his limited ability to think, to work, and thereby to contribute more to the joint productive effort of mankind. Most people who satisfactorily operate in routine jobs would be found wanting in any performance requiring a modicum of initiative and reflection. But they are not too dull to manage their family affairs properly. The husbands who are sent by their wives to the supermarket “for a loaf of bread and depart with their arms loaded with their favorite snack items”5 are certainly not typical. Neither is the housewife who buys regardless of content, because she “likes the package.”6

It is generally admitted that the average man displays poor taste. Consequently business, entirely dependent on the patronage of the masses of such men, is forced to bring to the market inferior literature and art. (One of the great problems of capitalistic civilization is how to make high quality achievements possible in a social environment in which the “regular fellow” is supreme.) It is furthermore well known that many people indulge in habits that result in undesired effects. As the instigators of the great anti-capitalistic campaign see it, the bad taste and the unsafe consumption habits of people and the other evils of our age are simply generated by the public relations or sales activities of the various branches of “capital”—wars are made by the munitions industries, the “merchants of death”; dipsomania by alcohol capital, the fabulous “whiskey trust,” and the breweries.

This philosophy is not only based on the doctrine depicting the common people as guileless suckers who can easily be taken in by the ruses of a race of crafty hucksters. It implies in addition the nonsensical theorem that the sale of articles which the consumer really needs and would buy if not hypnotized by the wiles of the sellers is unprofitable for business and that on the other hand only the sale of articles which are of little or no use for the buyer or are even downright detrimental to him yields large profits. For if one were not to assume this, there would be no reason to conclude that in the competition of the market the sellers of bad articles outstrip those of better articles. The same sophisticated tricks by means of which slick traders are said to convince the buying public can also be used by those offering good and valuable merchandise on the market. But then good and poor articles compete under equal conditions and there is no reason to make a pessimistic judgment on the chances of the better merchandise. While both articles—the good and the bad—would be equally aided by the alleged trickery of the sellers, only the better one enjoys the advantage of being better.

We need not consider all the problems raised by the ample literature on the alleged stupidity of the consumers and their need for protection by a paternal government. What is important here is the fact that, notwithstanding the popular dogma of the equality of all men, the thesis that the common man is unfit to handle the ordinary affairs of his daily life is supported by a great part of popular “leftist” literature.

III.

The doctrine of the inborn physiological and mental equality of men logically explains differences between human beings as caused by postnatal influences. It emphasizes especially the role played by education. In the capitalistic society, it is said, higher education is a privilege accessible only to the children of the “bourgeoisie.” What is needed is to grant every child access to every school and thus educate everyone.

Guided by this principle, the United States embarked upon the noble experiment of making every boy and girl an educated person. All young men and women were to spend the years from six to eighteen in school, and as many as possible of them were to enter college. Then the intellectual and social division between an educated minority and a majority of people whose education was insufficient was to disappear. Education would no longer be a privilege; it would be the heritage of every citizen.

Statistics show that this program has been put into practice. The number of high schools, of teachers and students multiplied. If the present trend goes on for a few years more, the goal of the reform will be fully attained; every American will graduate from high school.

But the success of this plan is merely apparent. It was made possible only by a policy that, while retaining the name “high school,” has entirely destroyed its scholarly and scientific value. The old high school conferred its diplomas only on students who had at least acquired a definite minimum knowledge in some disciplines considered as basic. It eliminated in the lower grades those who lacked the abilities and the disposition to comply with these requirements. But in the new regime of the high school the opportunity to choose the subjects he wished to study was badly misused by stupid or lazy pupils. Not only are fundamental subjects such as elementary arithmetic, geometry, physics, history, and foreign languages avoided by the majority of high school students, but every year boys and girls receive high school diplomas who are deficient in reading and spelling English. It is a very characteristic fact that some universities found it necessary to provide special courses to improve the reading skill of their students. The often passionate debates concerning the high school curriculum that have now been going on for several years prove clearly that only a limited number of teenagers are intellectually and morally fit to profit from school attendance. For the rest of the high school population the years spent in class rooms are simply wasted. If one lowers the scholastic standard of high schools and colleges in order to make it possible for the majority of less gifted and less industrious youths to get diplomas, one merely hurts the minority of those who have the capacity to make use of the teaching.

The experience of the last decades in American education bears out the fact that there are inborn differences in man’s intellectual capacities that cannot be eradicated by any effort of education.

IV.

The desperate, but hopeless attempts to salvage, in spite of indisputable proofs to the contrary, the thesis of the inborn equality of all men are motivated by a faulty and untenable doctrine concerning popular government and majority rule.

This doctrine tries to justify popular government by referring to the supposed natural equality of all men. Since all men are equal, every individual participates in the genius that enlightened and stimulated the greatest heroes of mankind’s intellectual, artistic, and political history. Only adverse postnatal influences prevented the proletarians from equaling the brilliance and the exploits of the greatest men. Therefore, as Trotsky told us,7 once this abominable system of capitalism will have given way to socialism, “the average human being will rise to the heights of an Aristotle, a Goethe, or a Marx.” The voice of the people is the voice of God, it is always right. If dissent arises among men, one must, of course, assume that some of them are mistaken. It is difficult to avoid the inference that it is more likely that the minority errs than the majority. The majority is right, because it is the majority and as such is borne by the “wave of the future.”

The supporters of this doctrine must consider any doubt of the intellectual and moral eminence of the masses as an attempt to substitute despotism for representative government.

However, the arguments advanced in favor of representative government by the liberals of the nineteenth century—the much-maligned Manchestermen and champions of laissez faire—have nothing in common with the doctrines of the natural inborn equality of men and the superhuman inspiration of majorities. They are based upon the fact, most lucidly exposed by David Hume, that those at the helm are always a small minority as against the vast majority of those subject to their orders. In this sense every system of government is minority rule and as such can last only as long as it is supported by the belief of those ruled that it is better for themselves to be loyal to the men in office than to try to supplant them by others ready to apply different methods of administration. If this opinion vanishes, the many will rise in rebellion and replace by force the unpopular office-holders and their systems by other men and another system. But the complicated industrial apparatus of modern society could not be preserved under a state of affairs in which the majority’s only means of enforcing its will is revolution. The objective of representative government is to avoid the reappearance of such a violent disturbance of the peace and its detrimental effects upon morale, culture, and material well-being. Government by the people, i.e., by elected representatives, makes peaceful change possible. It warrants the agreement of public opinion and the principles according to which the affairs of state are conducted. Majority rule is for those who believe in liberty not as a metaphysical principle, derived from an untenable distortion of biological facts, but as a means of securing the uninterrupted peaceful development of mankind’s civilizing effort.

V.

The doctrine of the inborn biological equality of all men begot in the nineteenth century a quasi-religious mysticism of the “people” that finally converted it into the dogma of the “common man’s” superiority. All men are born equal. But the members of the upper classes have unfortunately been corrupted by the temptation of power and by indulgence in the luxuries they secured for themselves. The evils plaguing mankind are caused by the misdeeds of this foul minority. Once these mischief makers are dispossessed, the inbred nobility of the common man will control human affairs. It will be a delight to live in a world in which the infinite goodness and the cogenital genius of the people will be supreme. Never-dreamt-of happiness for everyone is in store for mankind.

For the Russian Social Revolutionaries this mystique was a substitute for the devotional practices of Russian Orthodoxy. The Marxians felt uneasy about the enthusiastic vagaries of their most dangerous rivals. But Marx’s own description of the blissful conditions of the “higher phase of Communist Society”8 was even more sanguine. After the extermination of the Social-Revolutionaries the Bolsheviks themselves adopted the cult of the common man as the main ideological disguise of their unlimited despotism of a small clique of party bosses.

The characteristic difference between socialism (communism, planning, state capitalism, or whatever other synonym one may prefer) and the market economy (capitalism, private enterprise system, economic freedom) is this: in the market economy the individuals qua consumers are supreme and determine by their buying or not-buying what should be produced, while in the socialist economy these matters are fixed by the government. Under capitalism the customer is the man for whose patronage the suppliers are striving and to whom after the sale they say “thank you” and “please come again.” Under socialism the “comrade” gets what “big brother” deigns to give him and he is to be thankful for whatever he got. In the capitalistic West the average standard of living is incomparably higher than in the communistic East. But it is a fact that a daily increasing number of people in the capitalistic countries—among them also most of the so-called intellectuals—long for the alleged blessings of government control.

It is vain to explain to these men what the condition of the common man both in his capacity as a producer and in that of a consumer is under a socialist system. An intellectual inferiority of the masses would manifest itself most evidently in their aiming at the abolition of the system in which they themselves are supreme and are served by the elite of the most talented men and in their yearning for the return to a system in which the elite would tread them down.

Let us not fool ourselves. It is not the progress of socialism among the backward nations, those that never surpassed the stage of primitive barbarism and those whose civilizations were arrested many centuries ago, that shows the triumphant advance of the totalitarian creed. It is in our Western circuit that socialism makes the greatest strides. Every project to narrow down what is called the “private sector” of the economic organization is considered as highly beneficial, as progress, and is, if at all, only timidly and bashfully opposed for a short time. We are marching “forward” to the realization of socialism.

VI.

The classical liberals of the eighteenth and nineteenth centuries based their optimistic appreciation of mankind’s future upon the assumption that the minority of eminent and honest men would always be able to guide by persuasion the majority of inferior people along the way leading to peace and prosperity. They were confident that the elite would always be in a position to prevent the masses from following the pied pipers and demagogues and adopting policies that must end in disaster. We may leave it undecided whether the error of these optimists consisted in overrating the elite or the masses or both. At any rate it is a fact that the immense majority of our contemporaries is fanatically committed to policies that ultimately aim at abolishing the social order in which the most ingenious citizens are impelled to serve the masses in the best possible way. The masses—including those called the intellectuals—passionately advocate a system in which they no longer will be the customers who give the orders but wards of an omnipotent authority. It does not matter that this economic system is sold to the common man under the label “to each according to his needs” and its political and constitutional corollary, unlimited autocracy of self-appointed office-holders, under the label “people’s democracy.”

In the past, the fanatical propaganda of the socialists and their abettors, the interventionists of all shades of opinion, was still opposed by a few economists, statesmen, and businessmen. But even this often lame and inept defense of the market economy has almost petered out. The strongholds of American snobbism and “patrician-ship,” fashionable, lavishly endowed universities and rich foundations, are today nurseries of “social” radicalism. Millionaires, not “proletarians,” were the most efficient instigators of the New Deal and the “progressive” policies it engendered. It is well known that the Russian dictator was welcomed on his first visit to the United States with more cordiality by bankers and presidents of big corporations than by other Americans.

The tenor of the arguments of such “progressive” businessmen runs this way: “I owe the eminent position I occupy in my branch of business to my own efficiency and application. My innate talents, my ardor in acquiring the knowledge needed for the conduct of a big enterprise, my diligence raised me to the top. These personal merits would have secured a leading position for me under any economic system. As the head of an important branch of production I would also have enjoyed an enviable position in a socialist commonwealth. But my daily job under socialism would be much less exhausting and irritating. I would no longer have to live under the fear that a competitor can supersede me by offering something better or cheaper on the market. I would no longer be forced to comply with the whimsical and unreasonable wishes of the consumers. I would give them what I—the expert—think they ought to get. I would exchange the hectic and nerve-wracking job of a business man for the dignified and smooth functioning of a public servant. The style of my life and work would resemble much more the seigniorial deportment of a grandee of the past than that of an ulcer-plagued executive of a modern corporation. Let philosophers bother about the true or alleged defects of socialism. I, from my personal point of view, cannot see any reason why I should oppose it. Administrators of nationalized enterprises in all parts of the world and visiting Russian officials fully agree with my point of view.”

There is of course, no more sense in the self deception of these capitalists and entrepreneurs than in the daydreams of the socialists and communists of all varieties.

VII.

As ideological trends are today, one has to expect that in a few decades, perhaps even before the ominous year 1984, every country will have adopted the socialist system. The common man will be freed from the tedious job of directing the course of his own life. He will be told by the authorities what to do and what not to do, he will be fed, housed, clothed, educated, and entertained by them. But, first of all, they will release him from the necessity of using his own brains. Everybody will receive “according to his needs.” But what the needs of an individual are, will be determined by the authority. As was the case in earlier periods, the superior men will no longer serve the masses, but dominate and rule them.

Yet, this outcome is not inevitable. It is the goal to which the prevailing trends in our contemporary world are leading. But trends can change and hitherto they always have changed. The trend toward socialism too may be replaced by a different one. To accomplish such a change is the task of the rising generation.

• *[This article is reprinted from Modern Age (Spring 1961)—Ed.]
• 1Horace Kallen, “Behaviorism,” in Encyclopaedia of the Social Sciences, vol. 2 (New York: Macmillan, 1930), p. 498.
• 2Karl Marx, Critique of the Social Democratic Program of Gotha [Letter to Bracke, May 5, 1875] (New York: International Publishers, 1938).
• 3[For example, John K. Galbraith, The Affluent Society (Boston: Houghten Mifflin, 1958)—Ed.]
• 4Vance Packard, “Babes in Consumerland,” The Hidden Persuaders (New York: Cardinal Editions, 1957) pp. 90–97.
• 5Ibid., p. 95.
• 6Ibid., p. 93.
• 7Leon Trotsky, Literature and Revolution, R. Strunsky, trans. (London: George Allen and Unwin, 1925), p. 256.
• 8Marx, Critique of the Social Democratic Program of Gotha.

I.*

To apply the term “group tensions” to denote contemporary antagonisms is certainly a euphemism. What we have to face are conflicts considered as irreconcilable and resulting in almost continual wars, civil wars, and revolutions. As far as there is peace, the reason is not, to be sure, love of peace based on philosophical principles, but the fact that the groups concerned have not yet finished their preparations for the fight and, for considerations of expediency, are waiting for a more propitious moment to strike the first blow.

In fighting one another, people are not in disagreement with the consensus of contemporary social doctrines. It is an almost generally accepted dogma that there exist irreconcilable conflicts of group interests. Opinions differ by and large only with regard to the question, which groups have to be considered as genuine groups and, consequently, which conflicts are the genuine ones. The nationalists call the nations (which means in Europe the linguistic groups), the racists call the races, and the Marxians call the “social classes,” the genuine groups. But there is unanimity with regard to the doctrine that a genuine group cannot prosper except to the detriment of other genuine groups. The natural state of intergroup relations, according to this view, is conflict.

This social philosophy has made itself safe against any criticism by proclaiming the principle of polylogism. Marx, Dietzgen, and the radicals among the representatives of the “sociology of knowledge” teach that the logical structure of mind is different with different social classes. If a man deviates from the teachings of Marxism, the reason is either that he is a member of a nonproletarian class and therefore constitutionally incapable of grasping the proletarian philosophy; or, if he is a proletarian, he is simply a traitor. Objections raised to Marxism are of no avail because their authors are “sycophants of the bourgeoisie.” In a similar way the German racists declare that the logic of the various races is essentially different. The principles of “non-Aryan” logic and the scientific theories developed by its application are invalid for the “Aryans.”

Now, if this is correct, the case for peaceful human cooperation is hopeless. If the members of the various groups are not even in a position to agree with regard to mathematical and physical theorems and biological problems, they will certainly never find a pattern for a smoothly functioning social organization.

It is true that most of our contemporaries, in their avowal of polylogism do not go so far as the consistent Marxians, racists, etc. But a vicious doctrine is not rendered less objectionable by timidity and moderation in its expression. It is a fact that contemporary social and political science makes ample use of polylogism, although its champions refrain from expounding clearly and openly the philosophical foundations of polylogism’s teachings. Thus, for instance, the Ricardian theory of foreign trade is simply disposed of by pointing out that it was the “ideological superstructure” of the class interests of the nineteenth-century British bourgeoisie. Whoever opposes the fashionable doctrines of government interference with business or of labor-unionism is—in Marxian terminology—branded as a defender of the unfair class interests of the “exploiters.”

The very way in which social scientists, historians, editors, and politicians apply the terms “capital” and “labor” or deal with the problems of economic nationalism is the proof that they have entirely adopted the doctrine of the irreconcilable conflict of group interests. If it is true that such irreconcilable conflicts exist, neither international war nor civil war can be avoided.

Our wars and civil wars are not contrary to the social doctrines generally accepted today. They are precisely the logical outcome of these doctrines.

II.

The first question we must answer is: What integrates those groups whose conflicts we are discussing?

Under a caste system the answer is obvious. Society is divided into rigid castes. Caste membership assigns to each individual certain privileges (privilegia favorabilia) or certain disqualifications (privilegia odiosa). As a rule a man inherits his caste quality from his parents, remains in his caste for life, and bestows his status on his children. His personal fate is inseparably linked with that of his caste. He cannot expect an improvement of his conditions except through an improvement in the conditions of his caste or estate. Thus there prevails a solidarity of interests among all caste members and a conflict of interests among the various castes. Each privileged caste aims at the attainment of new privileges and at the preservation of the old ones. Each underprivileged caste aims at the abolition of its disqualifications. Within a caste society there is an irreconcilable antagonism between the interests of the various castes.

Capitalism has substituted equality under the law for the caste system of older days. In a free-market society, says the liberal1 economist, there are neither privileged nor underprivileged. There are no castes and therefore no caste conflicts. There prevails full harmony of the rightly understood (we say today, of the long-run) interests of all individuals and of all groups. The liberal economist does not contest the fact that a privilege granted to a definite group of people can further the short-term interests of this group at the expense of the rest of the nation. An import duty on wheat raises the price of wheat on the domestic market and thus increases the income of domestic farmers. (As this is not an essay on economic problems we do not need to point out the special-market situation required for this effect of the tariff.) But it is unlikely that the consumers, the great majority, will lastingly acquiesce in a state of affairs which harms them for the sole benefit of the wheat growers. They will either abolish the tariff or try to secure similar protection for themselves. If all groups enjoy privileges, only those are really benefited who are privileged to a far greater degree than the rest. With equal privilege for each group, what a man profits in his capacity as producer and seller is, on the other hand, absorbed by the higher prices he must pay in his capacity as consumer and buyer. But beyond this, all are losers because the tariff diverts production from the places offering the most favorable conditions for production to places offering less favorable conditions and thus reduces the total amount of the national income. The short-run interests of a group may be served by a privilege at the expense of other people. The rightly understood, i.e., the long-run interests are certainly better served in the absence of any privilege.

The fact that people occupy the same position within the frame of a free-market society does not result in a solidarity of their short-run interests. On the contrary, precisely this sameness of their place in the system of the division of labor and social cooperation makes them competitors and rivals. The short-run conflict between competitors can be superseded by the solidarity of the rightly understood interests of all members of a capitalist society. But—in the absence of group privileges—it can never result in group solidarity and in an antagonism between the interests of the group and those of the rest of society. Under free trade the manufacturers of shoes are simply competitors. They can be welded together into a group with solidarity of interests only when privilege supervenes, e.g., a tariff on shoes (privilegium favorabile) or a law discriminating against them for the benefit of some other people (privilegium odiosum).

It was against this doctrine that Karl Marx expounded his doctrine of the irreconcilable conflict of class interests. There are no castes under capitalism and bourgeois democracy. But there are social classes, the exploiters and the exploited. The proletarians have one common interest, the abolition of the wages system and the establishment of the classless society of socialism. The bourgeois, on the other hand, are united in their endeavors to preserve capitalism.

Marx’s doctrine of class war is entirely founded on his analysis of the operation of the capitalist system and his appraisal of the socialist mode of production. His economic analysis of capitalism has long since been exploded as utterly fallacious. The only reason which Marx advanced in order to demonstrate that socialism is a better system than capitalism was his pretension to have discovered the law of historical evolution; namely, that socialism is bound to come with “the inexorability of a law of nature.” As he was fully convinced that the course of history is a continuous progress from lower and less desirable modes of social production toward higher and more desirable modes and that therefore each later stage of social organization must necessarily be a better stage than the preceding stages were, he could not have any doubts about the blessings of socialism. Having quite arbitrarily taken for granted that the “wave of the future” is driving mankind toward socialism, he believed that he had done everything that was needed to prove the superiority of socialism. Marx not only refrained from any analysis of a socialist economy, he outlawed such studies as utterly “utopian” and “unscientific.”

Every page of the history of the past hundred years belies the Marxian dogma that the proletarians are necessarily internationally minded and know that there is an unshakable solidarity of the interests of the wage-earners all over the world. Delegates of the “labor” parties of various countries have consorted with one another in the various International Working Men’s Associations. But while they indulged in the idle talk about international comradeship and brotherhood, the pressure groups of labor of various countries were busy in fighting one another. The workers of the comparatively underpopulated countries protect, by the means of immigration barriers, their higher standard of wages against the tendency toward an equalization of wage rates, inherent in a system of free mobility of labor from country to country. They try to safeguard the short-run success of “pro-labor” policies by barring commodities produced abroad from access to the domestic market of their own countries. Thus they create those tensions which must result in war whenever those injured by such policies expect that they can brush away by violence the measures of foreign governments that are prejudicial to their own well-being.

Our age is full of serious conflicts of economic group interests. But these conflicts are not inherent in the operation of an unhampered capitalist economy. They are the necessary outcome of government policies interfering with the operation of the market. They are not conflicts of Marxian classes. They are brought about by the fact that mankind has gone back to group privileges and thereby to a new caste system.

In a capitalist society the proprietary class is formed of people who have well succeeded in serving the needs of the consumers and of the heirs of such people. However, past merit and success give them only a temporary and continually contested advantage over other people. They are not only continually competing with one another, they have daily to defend their eminent position against newcomers aiming at their elimination. The operation of the market steadily removes incapable capitalists and entrepreneurs and replaces them by parvenus. It again and again makes poor men rich and rich men poor. The characteristic features of the proprietary class are that the composition of its membership is continually changing, that entrance into it is open to everybody, that continuance in membership requires an uninterrupted sequence of successful business operations, and that the membership is divided against itself by competition. The successful businessman is not interested in a policy of sheltering the unable capitalists and entrepreneurs against the vicissitudes of the market. Only the incompetent capitalists and entrepreneurs (mostly later generations) have a selfish interest in such “stabilizing” measures. However, within a world of pure capitalism, committed to the principles of a consumers’ policy, they have no chance to secure such privileges.

But ours is an age of producers’ policy. Present day “unorthodox” doctrines consider it as the foremost task of a good government to place obstacles in the way of the successful innovator for the sole benefit of less efficient competitors and at the expense of the consumers. In the predominantly industrial countries the main feature of this policy is the protection of domestic farming against the competition of foreign agriculture working under more favorable physical conditions. In the predominantly agricultural countries it is, on the contrary, the protection of domestic manufacturing against the competition of foreign industries producing at lower costs. It is a return to the restrictive economic policies abandoned by the liberal countries in the course of the eighteenth and nineteenth centuries. If people had not discarded these policies then, the marvelous economic progress of the capitalist era would never have been achieved. If the European countries had not opened their frontiers to the importation of American products—cotton, tobacco, wheat, etc.—and if the older generations of Americans had rigidly barred the importation of European manufactures, the United States would never have reached its present stage of economic prosperity.

It is this so-called producers’ policy that integrates groups of people, who otherwise would consider each other simply as competitors, into pressure groups with common interests. When the railroads came into being, the coach drivers could not consider joint action against this new competition. The climate of opinion would have rendered such a struggle futile. But today the butter producers are successfully struggling against margarine and the musicians against recorded music. Present-day international conflicts are of the same origin. The American farmers are intent upon barring access to Argentinian cereals, cattle, and meat. European countries are acting in the same way against the products of the Americas and of Australia.

The root causes of present-day group antagonisms must be seen in the fact that we are on the point of going back to a system of rigid castes. Australia and New Zealand are democratic countries. If we overlook the fact that their domestic policies are breeding domestic pressure groups fighting one another, we could say that they have built up homogeneous societies with equality under the law. But under their immigration laws, barring access not only to colored but no less to white immigrants, they have integrated their whole citizenry into a privileged caste. Their citizens are in a position to work under conditions safeguarding a higher productivity of the individual’s work and thereby higher wages. The nonadmitted foreign workers and farmers are excluded from the enjoyment of such opportunities. If an American labor union bars colored Americans from access to its industry, it converts the racial difference into a caste quality.

We do not have to discuss the problem whether or not it is true that the preservation and the further development of occidental civilization require the maintenance of the geographical segregation of various racial groups. The task of this paper is to deal with the economic aspects of group conflicts. If it is true that racial considerations make it inexpedient to provide an outlet for the colored inhabitants of comparatively overpopulated areas, this would not contradict the statement that in an unhampered capitalist society there are no irreconcilable conflicts of group interests. It would only demonstrate that racial factors make it inexpedient to carry the principle of capitalism and market economy to its utmost consequences and that the conflict among various races is, for reasons commonly called noneconomic, irreconcilable. It would certainly not disprove the statement of the liberals that within a society of free enterprise and free mobility of men, commodities, and capital, there are no irreconcilable conflicts of the rightly understood interests of various individuals and groups of individuals.

III.

The belief that there prevails an irreconcilable conflict of group interests is age-old. It was the essential proposition of Mercantilist doctrine. The Mercantilists were consistent enough to deduce from this principle that war is an inherent and eternal pattern of human relations. Mercantilism was a philosophy of war.

I want to quote two late manifestations of this doctrine. First a dictum of Voltaire. In the days of Voltaire, the spell of Mercantilism had already been broken. French Physiocracy and British Political Economy were on the point of supplanting it. But Voltaire was not yet familiar with the new doctrines, although one of his friends, David Hume, was their foremost champion. Thus he wrote in 1764 in his Dictionnaire Philosophique: “être bon patriote, c’est souhaiter que saville s’enrichisse par le commerce et soit puissante par les armes. II est clair qu’un pays ne peut gagner sans qu’un autre perde, et qu’il ne peut vaincre sans faire des malheureux.”2 Here we have in beautiful French the formula of modern warfare, both economic and military. More than eighty years later we find another dictum. Its French is less perfect, but its phrasing is more brutal. Says Prince Louis Napoleon Bonaparte, the later Emperor Napoleon III: “La quantité’ des marchandises qu’un pays exporte est toujours en raison directe du nombre des boulets qu’il peut envoyer à ses ennemis, quand son honneur et sa dignité le commandent.”3

Against the background of such opinion we must hold the achievements of the classical economists and of the liberal policies inspired by them. For the first time in human history a social philosophy emerged that demonstrated the harmonious concord of the rightly understood interests of all men and of all groups of men. For the first time a philosophy of peaceful human cooperation came into being. It represented a radical overthrow of traditional moral standards. It was the establishment of a new ethical code.

All older schools of morality were heteronomous. They viewed the moral law as a restraint imposed upon man by the unfathomable decrees of Heaven or by the mysterious voice of conscience. Although a mighty group has the power to improve its own earthly well-being by inflicting damage upon weaker groups, it should abide by the moral law and forego furthering its own selfish interests at the expense of the weak. The observance of the moral law amounts to sacrificing some advantage which the group or the individual could possibly secure.

In the light of the economic doctrine things are entirely different. There are, within an unhampered market society, no conflicts among the rightly understood selfish interests of various individuals and groups. In the short run an individual or a group may profit from violating the interests of other groups or individuals. But in the long run, in indulging in such actions, they damage their own selfish interests no less than those of the people they have injured. The sacrifice that a man or a group makes in renouncing some short-run gains, lest they endanger the peaceful operation of the apparatus of social cooperation, is merely temporary. It amounts to an abandonment of a small immediate profit for the sake of incomparably greater advantages in the long run.

Such is the core of the moral teachings of nineteenth-century utilitarianism. Observe the moral law for your own sake, neither out of fear of hell nor for the sake of other groups, but for your own benefit. Renounce economic nationalism and conquest, not for the sake of foreigners and aliens, but for the benefit of your own nation and state.

It was the partial victory of this philosophy that resulted in the marvelous economic and political achievements of modern capitalism. It is its merit that today there are living many more people on the earth’s surface than at the eve of the Industrial Revolution, and that in the countries most advanced on the way to capitalism the masses enjoy a more comfortable life than the well-to-do of earlier ages.

The scientific basis of this utilitarian ethics was the teachings of economics. Utilitarian ethics stands and falls with economics.

It would, of course, be a faulty mode of reasoning to assume beforehand that such a science of economics is possible and necessary because we approve of its application to the problem of peace preservation. The very existence of a regularity of economic phenomena and the possibility of a scientific and systematic study of economic laws must not be postulated a priori. The first task of any preoccupation with the problems commonly called economic is to raise the epistemological question whether or not there is such a thing as economics.

What we must realize is this: if this scrutiny of the epistemological foundations of economics were to confirm the statements of the German Historical School and of the American Institutionalists that there is no such thing as an economic theory and that the principles upon which the economists have built their system are illusory, then violent conflicts among various races, nations, and classes are inevitable. Then the militarist doctrine of perpetual war and bloodshed must be substituted for the doctrine of peaceful social cooperation. The advocates of peace are fools. Their program stems from ignorance of the basic problems of human relations.

There is no social doctrine other than that of the “orthodox” and “reactionary” economists that allow the conclusion that peace is desirable and possible. Of course, the Nazis promise us peace for the time after their final victory, when all other nations and races will have learned that their place in society is to serve as slaves of the Master Race. The Marxians promise us peace for the time after the final victory of the proletarians, precisely, in the words of Marx, after the working class will have passed “through long struggles, through a whole series of historical processes, wholly transforming both circumstances and men.”4

This is meager consolation indeed. At any rate, such statements do not invalidate the proposition that nationalists and Marxians consider their violent conflict of group interests as a necessary phenomenon of our time and that they attach a moral value either to international war or to class war.

IV.

The most remarkable fact in the history of our age is the revolt against rationalism, economics, and utilitarian social philosophy; it is at the same time a revolt against freedom, democracy, and representative government. It is usual to distinguish within this movement a left-wing and a right-wing. The distinction is spurious. The proof is that it is impossible to classify in either of these groups the great leaders of the movement. Was Hegel a man of the Left or of the Right? Both the left wing and the right wing Hegelians were undoubtedly correct in referring to Hegel as their master. Was Georges Sorel a Leftist or a Rightist? Both Lenin and Mussolini were his intellectual disciples. Bismarck is commonly regarded as a reactionary. But his social-security scheme is the acme of present-day progressivism. If Ferdinand Lassalle had not been the son of Jewish parents, the Nazis would call him the first German labor leader and the founder of the German Socialist Party, one of their greatest men. From the point of view of true liberalism, all the supporters of the conflict doctrine form one homogenous party.

The main weapon applied by both the right-and the left-wing anti-liberals is calling their adversaries names. Rationalism is called superficial and unhistoric. Utilitarianism is branded as a mean system of stockjobber ethics. In the non-Anglo-Saxon countries it is, besides, qualified as a product of British “peddler mentality” and of American “dollar philosophy.” Economics is scorned as “orthodox,” “reactionary,” “economic royalism” and “Wall Street ideology.”

It is a sad fact that most of our contemporaries are not familiar with economics. All the great issues of present-day political controversies are economic. Even if we were to leave out of account the fundamental problem of capitalism and socialism, we must realize that the topics daily discussed on the political scene can be understood only by means of economic reasoning. But people, even the civic leaders, politicians, and editors, shun any serious occupation with economic studies. They are proud of their ignorance. They are afraid that a familiarity with economics might interfere with the naive self-confidence and complacency with which they repeat slogans picked up by the way.

It is highly probable that not more than one out of a thousand voters knows what economists say about the effects of minimum wage rates, whether fixed by government decree or by labor-union pressure and compulsion. Most people take it for granted that to enforce minimum wage rates above the level of wage rates which would have been established on an unhampered labor market is a policy beneficial to all those eager to earn wages. They do not suspect that such minimum wage rates must result in permanent unemployment of a considerable part of the potential labor force. They do not know that even Marx flatly denied that labor unions can raise the income of all workers and that the consistent Marxians in earlier days therefore opposed any attempts to decree minimum wage rates. Neither do they realize that Lord Keynes’s plan for the attainment of full employment, so enthusiastically endorsed by all “progressives,” is essentially based on a reduction of the height of real wage rates. Keynes recommends a policy of credit expansion because he believes that “gradual and automatic lowering of real wages as a result of rising prices” would not be so strongly resisted by labor as any attempt to lower money wage rates.5 It is not too bold a statement to affirm that with regard to this primordial problem the “progressive” experts do not differ from those popularly disparaged as “reactionary labor baiters.” But then the doctrine that there prevails an irreconcilable conflict of interests between employers and employees is deprived of any scientific foundation. A lasting rise in wage rates for all those eager to earn wages can be attained only by the accumulation of additional capital and by the improvement in technical methods of production which this additional wealth makes feasible. The rightly understood interests of employers and employees coincide.

It is no less probable that only small groups realize the fact that the free traders object to the various measures of economic nationalism because they consider such measures as detrimental to the welfare of their own nation, not because they are anxious to sacrifice the interests of their fellow citizens to those of foreigners. It is beyond doubt that hardly any German, in the critical years preceding Hitler’s rise to power, understood that those fighting aggressive nationalism and eager to prevent a new war were not traitors, ready to sell the vital interest of the German nation to foreign capitalism, but patriots who wanted to spare their fellow citizens the ordeal of a senseless slaughter.

The usual terminology classifying people as friends or foes of labor and as nationalists or internationalists, is indicative of the fact that this ignorance of the elementary teachings of economics is an almost universal phenomenon. The conflict philosophy is firmly entrenched in the minds of our contemporaries.

One of the objections raised against the liberal philosophy recommending a free-market society runs this way: “Mankind can never go back to any system of the past. Capitalism is done for because it was the social organization of the nineteenth century, an epoch that has passed away.”

However, what these would-be progressives are supporting is tantamount to a return to the social organization of the ages preceding the Industrial Revolution. The various measures of economic nationalism are a replica of the policies of Mercantilism. The jurisdictional conflicts between labor unions do not essentially differ from the struggles between medieval guilds and inns. Like the absolute princes of seventeenth-and eighteenth-century Europe, these moderns are aiming at a system under which the government undertakes the direction of all economic activities of its citizens. It is not consistent to exclude beforehand the return to the policies of Richard Cobden and John Bright if one does not find any fault in returning to the policies of Louis XIV and Jean-Baptiste Colbert.

V.

It is a fact that the living philosophy of our age is a philosophy of irreconcilable conflict and dissociation. People value their party, class, linguistic group, or nation as supreme, believe that their own group cannot thrive but at the expense of other groups, and are not prepared to tolerate any measures which in their opinion would have to be considered as an abandonment of vital group interests. Thus a peaceful arrangement with other groups is out of the question. Take for instance the implacable intransigence of Leninism or of the French nationalisme integral or of the Nazis. It is the same with regard to domestic affairs. No pressure group is ready to renounce the least of its pretensions for considerations of national unity.

It is true that powerful forces are fortunately still counteracting these tendencies toward disintegration and conflict. In this country the traditional prestige of the Constitution is such a factor. It has nipped in the bud the endeavors of various local pressure groups to break up the economic unity of the nation by the establishment of interstate trade barriers. But in the long run even these noble traditions may prove insufficient if not backed by a social philosophy, positively proclaiming the primacy of the interests of the great society and their harmony with the rightly understood interests of each individual.

• *[Reprinted from Approaches to National Unity, Lyman Bryson, ed. (New York: Harper and Row, 1945)—Ed.]
• 1Mises uses the term “liberal” in its nineteenth-century European sense, meaning laissez faire—Ed.]
• 2This quote from Voltaire is translated as: to be a good patriot is to hope that one’s town enriches itself through commerce and is powerful, in arms. It is clear that a country cannot gain unless another losses and it cannot prevail without making others miserable.
• 3Louis Napoloen Bonaparte, Extinction du Paupérisme (Paris: La Guilotiére, 1848), p. 6, and is translated as: The quantity of goods which a country exports is always directly related to the number of bullets which it can send against its enemies with honor and dignity demanded.
• 4Karl Marx, Der Bürgerkrieg in Frankreich, Pfemfert, ed. (Berlin: Politische Aktions Bibliothek, 1919), p. 54.
• 5John Maynard Keynes, The General Theory of Employment Interest and Money (London: Macmillan, 1936), p. 264. For a critical examination of this idea see H. Albert Hahn, Deficit Spending and Private Enterprise (Postwar Readjustments Bulletin, no. 8, U.S. Chamber of Commerce, 1944), pp. 28–29.

I.*

In this year 1967, in which the University of Chicago celebrates its seventy-fifth anniversary, the present-day world’s most powerful political movement, Marxism, commemorates the two most important dates of its history. A hundred years ago the literary foundation of Marxism was laid by the publication of the first volume of Das Kapital, the only volume published by Marx himself. And fifty years later, in 1917, the first Marxian government was established in the vast expanses up to that time subject to the rule of the Tsars of Russia. It seems appropriate to choose these jubilees for an appreciation of the role Marxism played and still plays in the evolution of the modern world.

Karl Marx was in his lifetime known only to small groups of uninfluential people. In the circles of revolutionary agitators in which he moved he had more enemies than friends. When he died in 1883, many newspapers did not find it necessary to report the fact.

All the economic and sociological doctrines of Marx and all his interpretations of history have been conclusively disproved. The great overwhelming success of Marxism, the adoption of its programs by Russia and the other Slavonic countries of the European East as well as by China, constitutes in itself a spectacular refutation of the fundamental tenets of essential Marxian theories. For according to these teachings one had to expect either that all countries will at the same time turn communist or that the industrially most advanced nations of Western Europe and North America will take the lead.

All this and much more has to be said to demonstrate the futility of all the allegedly scientific achievements of Marx. But when all this is said, there remains the fact that the ideas of this penniless writer, whose name even was unknown to most of his contemporary statesmen and politicians, influenced in the last seventy or eighty years the course or world affairs more than any other philosophy. Whatever one may think about Marx, one must not belittle the role he plays in our world. He is one of the great political leaders, perhaps the most influential political leader the world has ever known.

The history of literature preserves the names and sometimes also the writings of powerless dreamers who took pleasure in contriving plans for an earthly paradise. The common characteristic of all these schemes was that the inmates of the proposed utopia were destined to be unconditionally subject to the orders first of its founder and later of his successors. What the

Utopias envisioned were in fact all-embracing prisons. Perhaps one can excuse some of their authors as psychopaths.

The critical spirit that the Enlightenment generated killed the prestige of all Utopian projects and thereby also of the communist idea. The historical role of Karl Marx was that he taught an epistemology in the light of which the discredited idea could be resurrected and made seemingly safe against any attempt at refutation. This Marxian theory consists of three dogmas:

(1) As long as there is no socialism, mankind is divided into social classes the vital interests of which are irremediably opposed to one another.

(2) A man’s thinking is necessarily always determined by his class affiliation. His thoughts mirror the special interests of his class, incurably antagonistic to the interests of the members of all other classes.1

(3) The conflict of the class interests results in the pitiless class-struggle that unavoidably leads to the victory of the most numerous and most wronged class, the proletariat. Then the everlasting age of socialism dawns.

As this doctrine sees it, there cannot be any peaceful discussion concerning any serious problems between people belonging to different classes. They can never come to an agreement. For the result of their thinking will always be “ideological,” i.e., determined by the special interests of their own class. The war between the classes is permanent. It will come to an end only by the radical “liquidation” of all “exploiting classes” and their “sycophants,” the wretched peoples who betray their class comrades.

There had been, long before Marx, doctrines teaching the total war leading to the radical extinction or enslavement of the defeated. There was the ominous aphorism, repeated again and again, that no man can profit but by the loss of others. It was precisely the great achievements of the classical liberal doctrine to have demonstrated by an irrefutable chain of reasoning the solidarity of the rightly understood interests of all individuals and classes of individuals, whatever mark may have been applied to characterize class membership.

But all these endeavors to provide a rational basis for peaceful human cooperation within the frame of society appear vain in the light of the Marxian epistemology. There is, as long as the “classless” society has not been established by the radical liquidation of the exploiting classes, no such thing as a doctrine the truth of which can and must be acknowledged by all reasonable people. There are only class ideologies, i.e., doctrines adequate to the special interests of the thinker’s class that are implacably opposed to the interests of all other classes and their members. There cannot be any question of dealing with the pros and cons of any ideology that originated from a member of an exploiting class. All that has to be done to destroy it is to reveal the class affiliation of its author.

The essence of all that Marx said is: The trend of historical evolution leads irresistibly to the establishment of an ideal, in every regard perfect state of affairs called socialism. Those denying the truth of this statement are badly prejudiced and must be pitilessly “liquidated.” Their cause is doomed, as in virtue of the ineluctable laws of cosmic becoming the future belongs to socialism.

The political success of the Marxian propaganda revived the aspirations of other militant groups. There are deadly foes of socialism who claim for their race or for their linguistic group hegemony on the surface of our planet in the same way in which Marx claims it for the proletarian class.

In the liberal age of the nineteenth century the most consistent liberal group, the British Manchester School, expected that the general adoption of free trade and laissez-faire will result in perpetual peace. In our age there is no longer any question of such an “abolition of war.” There are on the one hand people who abhor foreign wars and preach revolution and civil war, and there are on the other hand people who want peace within their own nation or race and pitiless total war against all foreigners.

The philosophy of the Enlightenment considered as its most precious achievement the principle of toleration, the liberty to uphold one’s opinions in religious and philosophical matters without being harassed by the government. It was no less anxious to give to everybody the right to choose the way by which he planned to integrate himself into the system of social cooperation. The great ideal of the age of classical liberalism was liberty, the freedom to make the plans for one’s own life. Today people are longing and fighting for the substitution of “planning” for the market economy. Planning, as they employ the term, means: plans made by others will prescribe to me what I am to do and how to do it. All my life I will live like the boy in the boarding school, like the soldier in the army, like the prisoner in his cell. I will see, hear, read and learn what my superiors will consider as fit for me. I will be a cog in a vast machine the operation of which is directed by the authorities. There is only one philosophy, one ideology, one quasi-religion that people are free to profess and to propagate. Any deviation from the tenets of this dogmatism is a death-deserving crime.

II.

Thus Marxism is the most radical and unconditional rejection of all the ideals of freedom and liberty. It does not acknowledge any dissenting opinion’s right to existence. In its endeavors to extirpate all traces of any view it deems heretical, it is in no way inferior to any persecutors, inquisitors and witch-hunters of the darkest ages. But it parades as the only legitimate continuation of all the past struggles for freedom.

That Marxism could, in spite of all its inherent deficiencies, attain the powerful position it holds in the present-day world is due to the fact that statesmen, politicians and the immense majority of our intellectuals and businessmen are entirely ignorant of the most blatant defects of the Marxian reasoning. Let us look at the central thesis of Marxism, at the doctrine of the inevitability of the great social revolution that will transform capitalism into the everlasting bliss of socialism.

The coming of this revolution, says Marx, it unavoidable because the “immanent laws of capitalistic production” must make “the mass of misery, oppression, slavery, degradation and exploitation” of the working-class grow to such a degree that the proletarians are finally driven into rebellion, expropriate their oppressors, and establish the socialist system that will last forever. Thus the progressing impoverishment of the working masses, that is allegedly inherent in the capitalistic mode of production, leads to the great social catastrophe out of which the final radical revolution and thereby the age of everlasting bliss are born.

Now let us first compare Marx’s unconditional forecast with the facts of these one hundred years that have passed. Nobody will deny that in all capitalistic countries the average standard of living of the earners of wages and salaries has improved to an unprecedented and unexpected degree. These people enjoy amenities of which the richest princes and lords of ages gone by could not even dream.

Marx and all the others who developed similar doctrines entirely failed to realize that the characteristic feature of capitalism is that it is mass production for the satisfaction of the needs of the masses. In the precapitalistic ages the processing trades worked only for supplying the well-to-do. The innovation that capitalism brought consisted in the establishment of shops producing for the many. Thus, e.g., the textile industries and the garment industries where not substitutes for activities of artisans who had previously done spinning, weaving and tailoring for the common man. Such a class of businessmen selling to the “lower strata” of the population did not exist in precapitalistic ages. The activities the textile and the garment industries displaced were those of the female members of the family. In the early stages of capitalism factories turning out consumers’ goods worked almost exclusively for the poorer strata of the population. And also today only a fraction of all the products of industry is consumed by those in the upper income brackets. The much greater part is consumed by the same people who are working in the factories, shops and offices.

This alleged law of the inevitably progressing pauperization of the working class, which has been spectacularly disproved by history, was for Marx and is still for his followers one of the two fundamental laws of economics and of historical evolution. Its companion law was, long before Marx adopted it, to the economists known as the “iron law of wages,” a term that Marx for purely personal reasons disliked although all his economic doctrines as expounded in the Communist Manifesto and in Das Kapital are based upon this iron law. And now there are two rather important things to say about this alleged iron law: first that it had been rejected as nonsensical and contrary to fact by all reasonable men already before Marx published his Kapital book, and, secondly that it is logically incompatible with the other fundamental law of Marxism, the law of the progressive pauperization of the wage-earning masses.

This alleged iron law of wages declares that wages can never rise above the minimum requisite to keep the laborer in bare existence as a laborer. Any increase in wages above this height will lead to an increase in population, and then the competition of increased numbers for employment will force wages down again to the minimum. We do not have to deal with the inherent fallacy of this pseudo-law. But if one adopts its reasoning in order to demonstrate that in the long run no rise in the average wage rate above the minimum is possible, one must also imply that no fall in the average rate can occur. The progressive impoverishment of the working masses which those famous observations at the end of the twenty-fourth chapter of Das Kapital describe cannot happen in the capitalistic system as depicted and analyzed by Marx in the preceding chapters of this book. The main thesis of Marx’s great historical prognostication, the progressive impoverishment of the wage-earning masses, contradicts the main thesis of Marx’s economic doctrine, the iron law of wages. Besides, as has been said already, it has been spectacularly refuted by the facts.

III.

To appreciate correctly the meaning and the historical effects of the Marxian philosophy we must confront it with the economic teachings prevalent in the middle of the nineteenth century. By and large economists at that time agreed in the statement that the improvement of the material well-being of all strata of the population depends on the accumulation of capital. Not only the capitalists but also all other people gain by the increase of the her-head quota of capital available. There are no means by which the wages of all those eager to sell their labor can be raised other than by accelerating the increase of capital as compared with population.

Daily experience showed to all not hopelessly prejudiced men that all the attempts to deny this fundamental truth were vain. The essential fact about the capitalistic industries, the flourishing of which excited the envy of the anticapitalistic authors, is and was that the main consumers of their products are the same people who are toiling in their production. Only a few years after the publication of the first volume of Das Kapital Jevons, Menger and Walras developed the marginal utility approach to economic problems that clearly demonstrated the stake the laborers have in the increase of capital available. Today nobody dares to deny that what is most badly needed for any improvement of people’s material well-being is a richer supply of capital.

The precapitalistic method of fighting poverty was charity. Those who had were asked or forced to give to those who had less. The capitalistic method is to produce more and cheaper; its application requires the accumulation of larger quantities of capital through saving. Charity cannot improve the average standard of living. Saving and capital accumulation do.

Socialism cannot alter these basic ontological facts. Also in a socialist or communist commonwealth any improvement of the average standard of living is conditioned by a previous accumulation of additional capital. The only successful “war against poverty” consists in removing impediments that retard saving and in abolishing conditions making for capital decumulation.

We human beings, subject to all the frailties and errors of human existence, cannot know how our earthly affairs may look when viewed by a superhuman intellect. But we can observe the fact that all noncapitalistic peoples implicitly acknowledge the superiority of our capitalistic methods in eagerly clamoring for their products.

When the Bolsheviks took over the government of Russia, they and all their friends in other countries where fully convinced that their noisily propagandized five-year plan would transform Russia into an earthly paradise. The world has now the experience of half a century of communist management in the countries that offer in Europe and in northwestern Asia the most propitious conditions for agricultural production and are also extremely rich in mineral and other natural resources. The results achieved by the socialist methods of management were simply catastrophic. There is no need to stress the fact, not denied by any sane observer, that the capitalistic methods of production are by far superior to those advocated by the communist or socialist parties.

The superiority of the capitalistic system of production is due to the fact that it remunerates everybody according to his contribution to the satisfaction of his fellow men. It thus stimulates everybody, within the system of the social division of labor, to exert himself to the utmost. The better a man serves others, the better for him. In the capitalistic market economy the consumers are supreme. In his capacity as a producer of commodities and services everybody is forced to serve the consumers.

The wage earner is remunerated according to the price the consumer is prepared to pay for his contribution to the qualities of the product. If the employer were to pay more to the worker, he would suffer losses in selling his wares. If he were to pay less, he would gain a surplus and this fact would attract new competitors whose endeavors to snatch away the workers would raise wage rates back to the break-even point.

It does not matter how people judge this system of remuneration from a more or less biassed point of view. One may call unfair the fact that an opera singer or a boxing champion earns many times more than a stevedore or a charwoman. But then we must put the blame upon nature for not having endowed more people with the qualities required for singing or boxing.

Production of goods ready for consumption requires the use of capital goods, that is, of tools and of half-finished material. Capital comes into existence by saving, i.e., the temporary abstention from consumption. The share that goes to the owners of the capital goods does not deprive either the workers or the consumers. It is the price the capitalists receive for the postponement of consumption.

There is no such thing as production in general. The main problem of production is the plan: what to produce, in what quantity and quality, how and where. Production is necessarily always production for the satisfaction of future needs. As future conditions are uncertain, production is always speculative. It may result either in a surplus or in a deficit in the means of the entrepreneur.

In the market economy everybody is free to choose the way in which he plans to serve his fellow men. There is—and this distinguishes the capitalistic system from the status society of the past and from the totalitarian despotism of the contemporary dictatorial regimes—no compulsion forcing the individual to adopt a definite way of life and assigning to him a definite place in the frame of society. The sovereign consumers in their never relaxing greed for more goods are always anxious to entrust the entrepreneurial functions to those best fitted for the conduct of business affairs. And the entrepreneurs are always in search for the best managerial and technological help. Under capitalism everybody has the chance to attain a position in which he can best serve the consumers, i.e., his fellow men. The supremacy of the consumers is not contested by any capitalistic institution. Every piece of capital goods must be invested in the lines in which it contributes to the satisfaction of the most urgent of the not yet fully satisfied wants of the public.

The unprecedented success of capitalism is due to the fact that in its sphere the long-run interests of the individual always coincide with those of other individuals. Thus the individual in serving his own concerns serves also or, at least, does not prejudice the concerns of other people. The incompetency of the socialist society manifests itself in the fact that under prudent management the individual’s interests do not agree with those of other individuals.

In the market economy the height of the individual worker’s compensation is determined by the value his work adds to the merchandise. The better a man works, the higher is his pay. He is personally interested in doing a good job.

But under socialism the individual has no personal incentive to exert his strength fully. If he works more fervently, all the toil and trouble of his overexertion inconvenience him and him alone; but at best he will enjoy an infinitesimal fraction only of the additional product that his overexertion has brought about. In the socialist system, in which all the fruits of the various individuals’ labor are appropriated by the supreme office of production management and then distributed among the comrades without any regard for the worth of their individual contribution, there is no inducement for an individual to exert his strength. Everyday experience proves again and again the correctness of this statement. And nobody realizes its truth better than all those men who are directing the affairs of communist Russia.

The individual citizen in the capitalistic countries knows that he will fare the better, the more and the better he is able to contribute to the well-being of his fellow citizens. In working for the satisfaction of others, he always works for his own benefit. This is valid for all members of the capitalistic society, for the capitalists and for the entrepreneurs no less than for the wage earners.

A characteristic mark of all anticapitalistic ideas is their failure to comprehend the role capitalistic saving and its result, the accumulation of capital, play in the human endeavors to survive. Animals and savages live from hand to mouth. What characterizes man is that he accumulates goods that make it possible for him to embark upon more time consuming roundabout methods of providing for his needs. All the cultural and spiritual eminence of man is conditioned by the accumulation of capital. Saving in order to make these roundabout methods of production possible is the fundamental and only method to improve the physiological, intellectual and moral status of mankind. All that distinguishes the material conditions of this country from those of the countries one calls poor, backward, underdeveloped, or barbarian is due to the higher per-head quota of capital accumulated and employed—invested—in production processes.

Nature has endowed many parts of the earth’s surface much better than the territories originally inhabited by the white men who have developed the modern capitalistic methods of production. All the achievements of Western civilization were made possible by the establishment of moral and legal institutions that protected the individuals’ savings and their investment for productive purposes against the rapacity of the rulers. While in the East private property was practically at the mercy of the officeholders, the West’s legal systems considered it the basic principle of society’s organization.

IV.

The market economy and the capitalistic system have been described as a consumers’ democracy in which every penny gives a right to vote.2 Such metaphorical descriptions are always optional. But if we accept the metaphor in this case, we must not forget to point out some very momentous differences between the two systems of what is called democracy.

First: In the political democracy of representative government one votes for men. The voter renounces virtually his prerogative in favor of the elected officeholder. In the market democracy the objective of the voting process is not a man, but a man’s achievements, the products of his exertion. The voter does not express blind confidence in the future comportment of one of the candidates. He approves or disapproves of an already accomplished service.

Secondly: The average voter is as a rule not qualified to form a pertinent judgment about the problems of governmental policies. But the average housewife is by and large capable of distinguishing between what is good and wholesome for her family and what is not.

Political democracy and economic democracy condition one another. A democratic constitution is the political corollary either of a primitive community of the owners of family farms or of a market economy. A socialist system implies unlimited dictatorial powers of the chief. What created representative government in the countries of Western civilization was the gradual substitution of capitalism for the disintegrating feudal system. What inaugurated a new age of bloody dictatorship was the step by step progress of government interference with business.

The socialist system not only abolishes the democracy of the market. It is no less incompatible with political democracy. Most people are misled in this regard by the inappropriate terminology of present-day political language, the spurious distinction between left-wing parties and right-wing parties. In the European parliaments of the early nineteenth century the parties fighting absolutism and asking for more parliamentarianism were traditionally seated to the left of the chairman, and their opponents, the stooges of absolutism, at his right. Today in this country one calls the advocates of constitutional and economic freedom “rightists” and the supporters of socialist or communist dictatorship “leftists.” A really Babylonic confusion of tongues!

Many more things are to be said about the achievements of the capitalistic system and the failure of all socialist and half-socialist experiments. And there is first of all need to refer to the economists’ fundamental critique of socialism, viz., the fact that a socialist system would not be able to establish any kind of economic calculation and would therefore lack any method of distinguishing between what is more and what is less fit to satisfy human wants. A world-embracing socialist system would therefore not merit the name of an economic system. It would rather be a groping about in the dark, not being able to distinguish what is, from its own point of view, i.e., from the point of view of the socialist managers and the people for whom they have to provide, more or less desirable. Today this inability to calculate does not yet trouble the dictators of the communist nations. They can use and do use for this purpose the prices established on the markets of the capitalistic nations.

The greatness and the incomparable efficiency of the market economy are due to the fact that all economic actions can be calculated. This means: it is possible to find out what the costs of every action are, what we have to renounce in order to get the thing the costs of which we are trying to determine in terms of money. There are also many actions that cost more than merely things that have a price on the market. But these things are objects the value of which is directly determined by those enjoying it. If a municipality considers a project that—apart from monetary costs—requires the demolition of a historical landmark, it can fully take into account its emotional significance without assigning to it a definite monetary appreciation.

Economic calculation is the vital power that animates all manifestations of human action and cooperation in matters commonly called economic. It is the triumph of the human mind, the intellectual instrument that has enabled man to bring about all that elevates his life above that of the brutes.

As present to our mind, the history of economic activities and technological achievements records only radical changes and innovations, turning points of mankind’s intellectual and chrematistic evolution. It refers, e.g., to the adoption of steam power and deals with the conditions of what is called the age of steam power. In resorting to such a simplification one easily forgets that the concept “steam power” encompasses a great variety of methods employed for the utilization of steam. The oldest and most primitive specimens of a steam engine underwent a long series of transformations and improvements that adjusted the device for various uses. In the technology of the capitalistic economy there is nothing permanent or stable but a continuous tendency to adapt production methods daily anew to the best possible and cheapest satisfaction of the wants of the consumers. A thousand or several thousand changes—most slight ones only, some, of course, of momentous consequences—transformed the automobile as it was constructed in the last decade of the nineteenth century into what is called an automobile today. What makes this inherent disposition toward improvement mentally possible is the system of bookkeeping by double entry. It enables the entrepreneur to calculate the costs of every item of his products and thus to discover the most appropriate methods for the conduct of his operations. It is the mental device that provides the opportunity to compare degrees in the usefulness of various methods of production. It makes it possible to eliminate technological waste of definite amounts of labor or of material, i.e., their employment for a production that withholds specific labor or material from an employment in which it would satisfy consumers’ demand in a more satisfactory way.

The economic history of the last two or three centuries provides ample illustration for the beneficial effect of this capitalistic method. The average standard of living of the masses of Western and Central Europe was, seen from our present-day point-of-view, shockingly bad. What brought about a radical change was not authoritarian decrees, but the ideas and the deeds of enterprising men whose energy and diligence were challenged by the profit motive. It was such men that in a process that fortunately is still going on transformed the almost completely autarkic economies of their nations into predominantly industrial systems and the isolation of various economic regions into the world market. The present standard of living of these countries—a very high one when compared with that of all other countries but that of the United States—is entirely due to the export of manufactured goods, most of which are produced out of imported raw materials. Economic calculation enabled all these improvements and adjusts the activities of business daily anew to the continually changing state of demand and supply of various commodities and services.

V.

Marx was not the author of the socialist idea and he did not contribute anything to the futile attempts to demonstrate the soundness and the practicability of the plans for the establishment of a socialist commonwealth. He passionately rejected all such efforts as unscientific. For his own socialism, the prognostication of the inevitability of socialism’s coming, he claimed the epithet scientific. In his opinion this settled the issue for the contemporaries of Darwin and Maxwell.3 How could any decent fellow dare to question what science taught! In vilifying everything that existed as hopelessly contaminated by the capitalistic surrounding, Marxism acquired the aureole of representing the unspoiled excellence of pure science and the golden age to come.

Marx was opposed to all claims of nationalism and chauvinism. But among the factors that contributed to the adoption of the Marxian teachings these nationalistic sentiments played a not negligible role. Modern capitalism developed first in England. The chauvinists of Western and Central Europe had the uneasy feeling that their own peoples were only imitators of methods that the British had invented and perfected. With the spread of the capitalistic methods over all parts of the earth this kind of resentment grew more and more. The Slavonic peoples of Europe and the inhabitants of Asia and Africa are plagued by the fact that in all matters of literary, artistic, scientific, social, technological and economic affairs they are following in the wake of the advanced nations of Europe and their descendants. In condemning capitalism as the worst of all evils that befell mankind, Marxism reestablishes their moral equilibrium. In the light of the Marxian philosophy, not to be responsible for the emergence of this most unfair and harmful system is no longer seen as the proof of moral and intellectual inferiority but, on the contrary, as the test of eminence.

Under the impact of the socialist idea governments and municipalities embarked upon the nationalization and municipalization of various enterprises. Paramount in these policies was the Imperial Government of Germany led by Prince Bismarck whom the Encyclopaedia of the Social Sciences calls “the foremost exponent of state socialism in his day.”4 But the trend toward socialism prevailed also in all other countries. Already in the ’eighties of the nineteenth century Sidney Webb, the leader of Fabian socialism, declared that the socialist philosophy is “but the conscious and explicit assertion of principles of social organization which have been already in great part unconsciously adopted.” And he added that the economic history of the nineteenth century was “an almost continuous record of the progress of socialism.”5 A few years later an eminent British statesman, Sir William Harcourt, stated: “We are all socialists now.”6 In 1913 an American author, Elmer Robert, qualified the economic policies of the German Imperial Government as “monarchical socialism.”7

It was precisely these socialist actions of various governments and municipalities that for the first time directed general attention to the main problems of socialism, the inherent inefficiency of the public management of enterprises. Poor service and rising deficits were the characteristic features of almost all nationalized or municipalized undertakings. All people agreed that a radical reform of their conduct of affairs was peremptory. But no practical suggestions turned up.

The Germans whom the crushing defeat in the First World War had deprived of their moral and political equilibrium were in 1918 even more anxious to adopt integral socialism than were the Russians. They considered this as the best method to wreak vengeance upon the victorious capitalist nations, the United States, Great Britain and France. But there was first a great obstacle to overcome; there was the unsolved problem of funding a method that would make a satisfactory management of the socialized enterprises possible. This task the German Revolution entrusted to a committee of socialist luminaries and university professors. It was really an absurd spectacle. The revolutionary part of the social democrats, victorious after a struggle of more than half a century, fully convinced that thanks to their action mankind has reached the most momentous turning-point in its history, is forced to admit that it does not know how to put the cardinal, the only point in its program that matters into effect and expects that a committee of experts and professors will tell them what to do! And, of course, this committee whose best known members were Doctor Hilferding and Professor Schumpeter, produced a collection of volumes dealing with various subjects, but did not solve the insoluble problem for the solution of which it had been established. It did not indicate a method for a reasonable and successful conduct of business operated by other principles than those of capitalistic profit-seeking.

It is important to keep in mind these facts if one wants to understand the course history took in the last fifty years. The masses of the civilized and industrialized nations of the West were easily talked, by fanatical agitators, into accepting anticapitalistic doctrines and voting for the parties that aim at subjecting all economic activities to the orders of the authorities. In the civilized countries this side of the Iron Curtain the masses of the voters and the members of the government fully sympathize with the socialist creed, and at the educational institutions and in the press hardly any critics of the socialist ideas are tolerated. But there is the undeniable fact of the irremediable inadequacy of the socialist methods of work, to say nothing of the absolute impossibility of any kind of economic calculation in a world embracing socialist system. Public management of any undertakings and concerns unavoidably results in financial failure and poor service. The inefficiency of the bureaucratic conduct of affairs is proverbial. The very thought of an expansion of public management of industries makes even the most bigoted socialist politicians shudder.

Russia went communist in 1917 and many half-civilized nations followed in its wake because their intellectuals did not know anything that could not be learned from reading the writings of Marx and Engels. Thus, e.g., Lenin thought that he could convincingly reject all qualms about the proper functioning of the socialist conduct of business affairs by pointing out that these socialist organizations will work like the post office!8 In his eyes the “chief things necessary for the organizing of the first phase of Communist society” were “accounting and control” and these he asserted have been “simplified by capitalism to the utmost, till they have become the extraordinary simply operations of watching, recording and issuing receipts, within the reach of anybody who can read and write and knows the first four rules of arithmetic.”9

Such blatant nonsense could be told to the ignorant self-styled intellectuals of Russia who prided themselves on being the vanguard of Marxism and thereby of progress and civilization. It gave comfort to the chauvinists of all backward nations who had an uneasy feeling in comparing their own country’s culture with that of the West. But it did not appeal to the industrialized nations of the West. Americans could not be fooled by the promise that the socialist system will succeed and will make everybody happy because it will take for its model the post office and will organize the whole of society as “one office and one factory with equal work and equal pay.”10

Such are today conditions in the countries of Western civilization. People are by and large enthusiastic admirers of Marxism and socialism or communism. The officeholders whom they elect seldom miss any occasion to demonstrate their anticapitalistic fanaticism by seriously disturbing the functioning of the market economy. But once the opportunity is given to them to put fully into practice their plans for all-round socialization of business, they shrink back. Nobody expects any longer that the West German Social Democrats or the British Labor Party will put into effect the fundamental principle of their socialist program. All they do is to harass the businessmen and to take pleasure in sabotaging their efforts to improve the methods of production.

What divides the nations today is not the ideological antagonism of capitalism and socialism. Also in the non-communist countries the governments and the immense majority of those called the intellectuals are more or less committed to the socialist creed. What prevents these self-styled liberals and progressivists from adopting the Lenin methods of all-round socialization is the fact that they cannot help reluctantly admitting the lamentable inadequacy of the socialist methods of economic management. They apprehend that every farther step forward on the road toward the socialization of enterprises will seriously impair the quantity and the quality of the products of every industry. Everybody knows that this will hurt first of all the workers as the main beneficiaries of the capitalistic methods of doing business are the masses of those employed in offices and workshops. Very few, of course, have the courage to refer publicly to this fact; but everybody is aware of it.

Pre-Marxian socialist authors had developed detailed plans for the organization and operation of a socialist commonwealth. It was easy for economists to demonstrate the impractability and absurdity of these designs. Marx carefully avoided dealing with this tricky problem and condemned as Utopian phantasies all attempts of earlier socialists to treat it. Socialism is bound to come as the highest stage of mankind’s evolution, he repeated again and again, and will arrange everything in the best possible way. But the crux is that every step toward the realization of the socialist ideals invariably resulted and will always result in economic failure and that the socialists are at a loss to discover any method of avoiding this outcome.

What stopped and stops the progress of the socialist policies is the fact that people have today the opportunity to compare the working of socialism with the working of capitalism. The socialists of Eastern Germany, the self-styled German Democratic Republic, spectacularly admitted the bankruptcy of the Marxian dreams when they built a wall to prevent their comrades from fleeing into the non-socialist part of Germany.

• *[This article appears to have been written in 1967 and is previously unpublished—Ed.]
• 1There is a flaw in this point of the doctrine, a special privilege granted to its authors, the bourgeois Marx and Engels. They belong, says the Communist Manifesto, to a group “of bourgeois ideologists who have raised themselves to the level of comprehending theoretically the historical movements as a whole.”
• 2[Cf. Frank A. Fetter, The Principles of Economics, 2nd ed. (New York: The Century Company, 1910), p. 394—Ed.]
• 3[James Clark Maxwell developed the theory of electromagnetic waves—Ed].
• 4Encyclopaedia of the Social Sciences, vol. 2 (New York: Macmillan, 1930), p. 573.
• 5Sidney Webb in Fabian Essays in Socialism, first published in 1889 (New York: Humboldt, 1891), p. 4.
• 6Cf. G. M. Trevelyan, Shortened History of England (London: Longmans, 1942), p. 510.
• 7Elmer Roberts, Monarchical Socialism in Germany (New York: C. Scribner’s Sons, 1913).
• 8V.I.Lenin, State and Revolution (New York: International Publishers, 1917), pp. 43f.
• 9Ibid., pp. 83f.
• 10Cf. Ibid., pp. 83f.

The bosses of the Russian Communist Administration are disturbed by the fact that economic conditions in the countries which have not adopted the methods of the Communist International are by far more satisfactory than those in their own country.* If they could succeed in keeping their “comrades” in complete ignorance of the achievements of Western capitalism, they would not mind the low efficiency of their own plants and farms. But as some scanty information about the “affluence” in the West penetrates to Russia, its masters are upset by the fear of the pro-capitalist reaction in their own house. This fear impels them on the one hand to foment sedition all over the “capitalist sector” of the earth, and on the other hand to ventilate various projects aiming at some minor reforms in their own methods of management.

Nobody is today more firmly convinced of the incomparable superiority of the capitalistic methods of production than the “production tsars” of the countries behind the Iron Curtain. The present-day strength of communism is entirely due to the mentality of the pseudo-intellectuals in the Western nations who still enjoy the products of free enterprise.

I.

The market economy—capitalism—is a social system of consumers’ supremacy. There is in its frame only one method of earning a living and of acquiring property, viz., one must try to serve one’s fellow men, the consumers, in the best possible way. A daily and hourly repeated plebiscite determines again and again every individual’s earning and place in society. By their buying and abstention from buying the consumers allocate ownership of all the material factors of production to those who have succeeded in satisfying the most urgent of their not yet satisfied wants in the best possible and cheapest way. Ownership of the material factors of production can be acquired and can be preserved only be serving the consumers better than other people do. It is a revocable public mandate as it were.

The supremacy of the consumers is no less complete with regard to labor, the human factor of production. Wage rates are determined by the price the consumer, in buying the product, is prepared to refund to the employer for the worker’s contribution to the process of its production. Thus the consumers’ valuation fixes the height of every worker’s remuneration.1 And let us not forget: the immense majority of the consumers are themselves earners of salaries and wages and in this capacity instrumental in the determination of their own compensation.

The unique efficiency of the capitalistic system is due to the incentive it gives to everybody to exert his forces to the utmost in serving his fellow citizens. Not a vague altruism, but rightly understood selfishness impels a man to put forth all his strength in the service of his fellow men. The system of economic calculation in terms of money, the commonly used medium of exchange, makes it possible to compute precisely all projects in advance and the result of every action performed in retrospect, and, what is no less important, to ascribe to every factor the size of its contribution to the outcome.

The characteristic feature of socialism is precisely the fact that it substitutes for this market system of consumers’ supremacy a dictatorial system, the “plan.” In the planned economy the individuals are not driven by the desire to improve their own conditions but either by dutifulness or by the fear of punishment. It is impossible for the individual workers to improve their own exertion, they alone are burdened by the implied sacrifices, but only an infinitesimal fraction of the product of their additional exertion will benefit themselves. On the other hand they can enjoy in full the pleasures of carelessness and laziness in the performances of the tasks assigned to them while the resulting impairment of the total national product curtails their own share only infinitesimally.

The economists always pointed to this inherent deficiency of socialism. Today all people in the socialist countries know that this criticism was fully justified. All their projects for an improvement of the quality and an increase in the quantity of economic goods and services turn around this problem. They all aim—unfortunately in vain—at discovering a scheme that could make the individual members of a socialist system self-interested in the effect of their own contribution to the collective’s effort.

That the socialists acknowledge this fact and are anxious to find a solution amounts in itself already to a spectacular refutation of two of the most zealously advanced arguments in favor of socialism. On the one hand the socialists asserted that in the market economy that the wage earners are not interested in improving the output of their own work. They expected that socialism would bring about an unprecedented improvement of the individual worker’s contributions because everybody will be incited by the knowledge that he does not labor for an exploiter but works for his own best interest. On the other hand the socialists vilified profit-seeking as the most pernicious and “socially” injurious institution and indulged in reveries about the blessings of what they called a substitution of “production for use” for “production for profit.”

No less significant an admission of the viciousness of the socialist ideology is provided by the small plots the exploitation of which for the account of the rural workers (falsely labeled for “private profit”) alone prevented famines in the country that includes a good deal of the world’s most fertile arable soil. The urgency of the Soviet productivity problem is due to the fact that in the processing industries no analogous expedient is at hand.

II.

The much discussed reform projects of Professor Liberman2 and other Russian authors do not refer to the essential characteristics of the Soviet system of central planning of all activities commonly called economic. Neither do they deal in any way with the problem of economic calculation. (For present-day Russian planners this problem does not yet have primary importance as, operating within a world of the price system, they are in a position to rely upon the prices determined on the markets of the West.)

What the reformers want to attain is improvement in the conduct of factories and workshops turning out consumers’ goods by the adoption of new methods for the remuneration of directors, supervisors or foremen. The salaries of such people should henceforth be meted out in such a way that they should have a pecuniary interest in producing articles that are considered as satisfactory by the consumers.

It is a serious blunder to employ in dealing with this issue any reference to the concept of “profit” or to declare that the suggested method of payment would mean something like “profit-sharing.” There is within a socialist system no room for the establishment and computation of a magnitude that could be called profit or loss.

The task of production is to utilize the available human and material factors of production for the best possible satisfaction of future wants concerning which there cannot be any certain knowledge today.

Technology indicates for what purposes the various factors of production could be employed; it thus shows goals that could be attained provided this is considered as desirable. To choose from this bewildering multitude of possible ways of production those which most likely are fit to satisfy the most urgent of the future wants of the consumers is in the market economy the specific task of the entrepreneur. If all entrepreneurs were right in their appreciation of the future state of the market, the prices of the various complementary factors of production would already have today attained the height corresponding to this future state. As, under these conditions, no entrepreneurs would have acquired some or all of the complementary factors of production at prices lower or higher than those which later events proved to be the correct ones, no profits or losses could emerge.

One profits by having expended less than one—later—receives from the buyers of the product, and one loses if one can sell only at prices that do not cover the costs expended in production. What determines profit or loss is choosing the goal to be set for the entrepreneurial activities and choosing the methods for its attainment.

Thus it is investment that results either in profit or in loss. As in a socialist system only “society” invests, only society can profit or suffer losses. But in a socialist system the material factors of production are res extra commercium. That means: they can neither be bought not sold and thus no prices for them are determined. Therefore it is impossible to find out whether a definite production activity resulted in profit or loss.

The eminence of capitalism consists precisely in the fact that it tends to put the direction of production into the hands of those entrepreneurs who have best succeeded in providing for the demands of the consumers. In the planned economy such a built-in process of selection is lacking. There it does not matter whether the planning authorities have erred or not. The consumers have to take what the authorities offer them. Errors committed by the planning authority do not become known because there is no method to discover them.

In the market economy the emergency of profit demonstrates that in the eyes of the consumers one entrepreneur served them better than others did. Profit and loss are thus the effect of comparing and gauging different suppliers’ performance. In the socialist system there is nothing available to make possible a comparison between the commodities fabricated and the services rendered by the plan and its executors with something originating from another side. The behavior of the people for whom the plan and its executors are supposed to provide does not indicate whether or not a better method of providing for their needs would have been feasible. If in dealing with socialism one speaks of profits, one merely creates confusion. There are no profits outside the “profit and loss system.”

If the authorities promise to the director of a shoe factory a bonus to be determined as a percentage of sales, they do not give him a share in “profits.” Still less can it be called a return to the profit system. Profits can only be calculated if one deducts total costs from total receipts. Any such operation is unfeasible under the conditions of the case. The whole factory, fully equipped, was handed over by the authorities to the care of the director and with it all the material needed and the order, to produce, with the help of workers assigned to the outfit, a definite quantity of footwear for delivery to definite shops. There is no method available to find out the costs incurred by all the operations preceding the first interference of the director. The bonus granted to him cannot have any relation to the numerical difference between such total costs and the proceeds from the sale of the final product.

III.

In fact the problem of reform as today passionately discussed in the communist countries does not deal with the profitability of the various plants and productive processes. It turns virtually around a different problem: Is it possible within a socialist system to remunerate a worker, especially also the supreme foreman of a plant, according to the value the consumers, the people, attach to his contribution to the accomplishment of the product or the service?

In the capitalistic or market economy the employer is bound to pay a hired worker the price the consumers are prepared to refund to him in buying the product. If he were to pay more, he would suffer losses, would forfeit his funds and would be eliminated from the ranks of the entrepreneurs. If he tried to pay less, the competition of other employers would make it impossible for him to find helpers. Under socialism no such connection between the amounts expended in the production of a commodity and its appreciation by the consumers prevails. There cannot therefore in general be any question of remunerating workers according to their “productivity” as appreciated by the consumers. Only in exceptional cases is it possible to separate the contribution of one worker in such a way from those of all other contributors that its separate valuation by the consumers and therefore its remuneration according to this valuation become feasible. For instance: all seats in the opera house can be sold at the regular price of m. But if a tenor of world fame sings the main part, the house is sold out even if the price of admission is raised m + n. It is obvious that such cases are extremely rare and must not be referred to in dealing with the problem of wage rate determination under socialism.

Of course, a socialist management can determine for many kinds of work “normal” tasks to be performed by the laborer and on the one hand reward those who accomplish more and on the other hand penalize those who fail to produce their quotas. But such a norm in no way depends on any market phenomena. It is the outcome of a more or less arbitrary decision of the authorities.

In the market economy the salaries paid to people who turn out commodities or render services that cannot be sold on the market and for which therefore no prices are available are indirectly determined by the structure of the market. The employer—in such cases as a rule the government—must pay to such people enough to prevent them from preferring a job in the orbit of the market. Such indirect determination of the height of wage rates too is unfeasible in a socialist system.

Of course, the government is always free to grant to any of the officials it employs a salary equal to the value the supreme chief or planner attaches to this man’s services. But this does not have any reference to the social problem around which the discussion turns.

• *[Reprinted from The Freeman (May 1966)—Ed.]
• 1This is to what the jargon of the Hollywood industry refers in using the term “box office account.” But it is no less valid for all other fields of business.
• 2[Yevsei Liberman in the 1960s began writing in the Soviet Union that profits should be the “the index of the efficiency of an enterprise.” In 1966 a plan was instituted granting autonomy to 43 different enterprises in various industries. The result was an increase in productivity and worker income, leading to greater individual savings and more exportable goods, Socialism: The Grand Delusion, Brian Crozier and Arthur Seldon, eds. (New York: Universe Books, 1986), pp. 138-39. The plan was an embarassing success for the advocates of state socialism—Ed.]

THE COOPERATIVE IDEA*

I. Cooperatives not a Method of World Reconstruction

In spite of their steady expansion and the growth of their turnover, the cooperatives as they exist and operate today are merely dim shadows of what they were designed to be in the ambitious schemes of their first promoters. Robert Owen, William King, and Ferdinand Lassalle planned a cooperative organization of industrial production as a “New System of Society.” They wanted to eliminate the entrepreneurs and the capitalists altogether. Henceforth, associations of the workers themselves should operate the plants, “their” plants, without any interference on the part of the “useless exploiters.”

The object of the movement was the abolition of the wages system and the organization of industry in the form of producers’ cooperatives. Each worker should own an equal share in the plant, workshop or farm in which he was employed. He should share equally in the products or the earnings of this outfit. He should become his own employer, controlling its operations and retaining its proceeds.

Nobody will deny that all attempts to realize these far-fetched plans failed lamentably. If there are any producers’ cooperatives today, their number is so negligible that hardly anybody pays attention to them. Even most of the books dealing with the cooperative movement avoid reference to the schemes for cooperative producers’ associations.

The farmers are producers. But the farmers’ cooperatives do not organize the farmers in their capacity as agricultural producers; they organize the farmers only as buyers of various equipment and articles required for their production and as sellers of the products. The individual farmer remains an independent entrepreneur and is, as far as his production activities are concerned, not integrated into a cooperative production outfit.

The purchasing cooperatives have entered the field of production in many branches of business. But these plants are not producers’ cooperatives. They are not owned by the people employed in them. They are owned by the various cooperatives or associations of cooperatives. The employees are hired hands like the wage earners hired by any other enterprise. They have no say in the conduct of the business. The proceeds go to the owners, i.e., the cooperatives or associations of cooperatives, not to the employees. There is no question of abolition of the wages system.

All that remains of the ambitious projects of the glorified pioneers of cooperation is three types of cooperative organizations: consumers’ cooperatives, farmers’ purchasing cooperatives, and farmers’ marketing cooperatives. It is a rhapsodic overstatement to speak, in referring to these cooperatives, of the cooperative way as a method of world reconstruction.1

II. Not the Cooperatives, but Private Profit-Seeking Business is the Harbinger of Economic Improvement

The capitalistic market economy, the system of private profit-seeking enterprise, is essentially social cooperation under the division of labor. The various specialized enterprises and branches of industry cooperate with one another. The objective of each of them is collaboration for the production of all those goods and services which the consumers want to use. Within each enterprise, the various divisions and subdivisions cooperatively turn out products which are delivered to other enterprises which again use them for the production of more elaborate products. Finally, when all these cooperative processes come to an end, the finished product reaches the consumer. Seen from this point of view, the system of capitalism appears as a world-embracing cooperative organization in which each individual promotes his own well-being by serving his fellow men.

Now, the cooperatives have sequestrated to themselves the exclusive use of the epithet “cooperative.” It is implied that they alone are cooperative and all other business enterprises non-cooperative. It is indeed a poor semantic makeshift.

In the face of this pretentious attitude on the part of the various cooperative associations, there is a need to stress the fact that they have contributed nothing to the substantial improvement of the material conditions of the people. For many decades, they have been thriving very well under the benevolent assistance granted to them by the authorities. But there is no record of any important innovation which owes its introduction to the cooperatives. While private business, overburdened by taxes from which the cooperatives are exempt, improves, year by year, the quality and increases the quantity of products and fills the markets with new articles unheard of before, the cooperatives are sterile. Not the cooperatives, but the much abused profit-seekers, are the harbingers of economic progress. If we look into the home of an average American worker or farmer and at his family’s daily life, we may learn about the enormous changes which were brought about by the operation of private enterprise. The cooperatives hardly played any role in this miraculous transformation. The “rise of the consumer”2 was not an accomplishment of the cooperative movement. It was an achievement of the “production for profit” engineered by “rugged individualists” and “economic royalists.”

III. The Marketing Cooperatives of the Farmers and the Consumers’ Cooperatives

Within the cooperative movement of all countries, it is possible to distinguish two main groups: the farmers’ cooperatives and the consumers’ cooperatives of the non-farming population.

The objectives of the farmers’ cooperatives are the marketing of farm products on the one hand and the distribution of farm supplies and the consumers’ goods which the farmers require on the other hand. Both objectives are in themselves perfectly legitimate and could, apart from the problem of tax and credit privileges, be approved by everybody.

However, it is impossible to look upon the farmers’ cooperatives as an isolated phenomenon and not to notice that they are merely one device in a complex system of farm policies and political activities of the farmers’ organizations. As a pressure group, the organized farmers aim at enhancing the prices of agricultural products. In the plans for the realization of this goal an important role is assigned to the marketing cooperatives. They are a cog in a political machine constructed for the raising of the price of food, an objective radically opposed to that of the consumers’ cooperatives of the non-rural population.

It is not the task of a study concerning the cooperatives to bring into full relief all the aspects of this great antagonism between the political organizations of the food producers and those of the masses of the food consumers. What must be said, however, is that the aims of the farmers’ cooperatives are irreconcilably opposed to the aims which the consumers’ cooperatives pretend to seek. The consumers’ cooperatives say that they want to cheapen the prices of the necessities of life. The farmers’ cooperatives aim avowedly at raising the prices of food and of other articles like cotton, tobacco, and wool. It is therefore strange indeed that between these two classes of cooperatives there is amicable collaboration and friendship and that they are united in cooperative alliances.

The consumers’ cooperatives make light of this contradiction by pointing out that both branches of the cooperative movement agree in their eagerness to eliminate superfluous middleman. Thus, it will be possible to raise the price the farmer receives for his product and at the same time to lower the price the consumer must expend for its purchase. The plea is lame. First, it is not true that the elimination of the private businessman, the “middleman,” has reduced sales costs. It has, on the contrary, increased them. The proof is that the farmers’ marketing cooperatives could not stand the competition of private business without the aid of tax exemptions and cheap credit. Second, the elimination of the middleman is only a minor issue in the comprehensive program of the pressure groups of farming. Their main goal is to raise the prices of foodstuffs and other agricultural products by various governmental measures.

The vast propaganda literature of the cooperatives deals much more with the consumers’ cooperatives than with the two types of farmers’ cooperatives. It passes over in silence the conflict between the interests of the urban consumers of agricultural products and the endeavors of the farmers’ cooperatives to make the government resort to various restrictive measures with regard to these products. Most of the arguments advanced in favor of cooperativism refer exclusively to the cooperatives of urban consumers. This is especially paradoxical in the United States where the cooperatives of urban consumers play only an insignificant role when compared with the farmers’ cooperatives.

IV. The Philosophy and Theology of Consumption

Capitalism needs neither propaganda nor apostles. Its achievements speak for themselves. Capitalism delivers the goods.

But the cooperatives cannot do without passionate propaganda. They call their promotional campaigning “cooperative education.”

The end and sole purpose of production is consumption. All that profit-seeking business aims at is to serve the consumer in an unceasing effort to turn out more, better and cheaper goods. The businessman is fully aware of the fact that there is no means of increasing consumption other than by increasing production. Since consuming causes delight and is in itself pleasant, there is no need to expatiate copiously on its pleasurableness. It is supererogatory to teach people how gratifying it is to consume more and better amenities. Even the untutored mind knows all about the sweetness of a higher standard of living.

But the toil and trouble required for production are painful. There are very few people who fail to take advantage of an opportunity to increase their own consumption. But there are many people who look with disdain upon work. The temptation of idleness is very great and a serious danger to society. This is why parents and educators since time immemorial have been intent upon teaching the rising generation the philosophy of travail. Young people must learn that the gratification of the good life must be paid for by exertion and hard work. They must realize that he who wants to consume must first produce. There cannot be any question of “a consumer economy.”3 The economy must always be an economy of production for the sake of consumption.

It is vain to speak of the “primacy of consumption.”4 Production must invariably precede consumption. It is futile to propagate an alleged philosophy of consumption as opposed to the philosophy of production.

In their excessive zeal, the champions of cooperativism have also entered the field of theology. They would have us believe “that the social teachings of the Christian and Jewish religions naturally lead to the formation of cooperatives.”5 They find “the beatitudes of Jesus” in “the practice and principles of the cooperatives.”6 It seems appropriate to leave the examination of this dogmatical issue to the doctors of the various churches and to the rabbis.

V. The True Objectives of the Cooperative Movement

The avowed objective of consumers’ cooperatives and of the farmers’ purchasing cooperatives is to provide their members with commodities and services at lower prices than those which they would have to expend in the absence of these associations. This is a perfectly legitimate task. We shall have to examine whether and how cooperatives really attain this end.

To save money in making a purchase is certainly a good thing. We can understand the satisfaction a man derives from such a reduction in his expenses. We may heartily congratulate him on his success. But it is quite a different thing when the champions of the cooperatives deal with these mammonistic economies in high-flown language. The members of cooperatives are people who want to buy at the lowest possible price. The employees of the cooperatives are people who believe that the most remunerative job they can find is a job with their employer, a cooperative. In defending the tax privileges and other prerogatives granted to the cooperatives, these cooperators and cooperative employees fight for their own material interests. They want to improve their own standard of living; they are eager to consume more. It is not seemly for them to resort to phrases which are appropriate only in describing the self-denying work of devout monks and nuns nursing people affected with leprosy.

A cooperative business enterprise aims at lowering the price of soap and gasoline; it is not “a concrete expression of the brotherhood of man.”7 In their purchases, cooperatives bargain with the purveyors; in hiring help, they bargain with employees. The mutual contractual relations between the cooperative association and its members are precisely determined by articles of incorporation, by-laws, and statutes carefully drafted by lawyers. To apply the term “brotherhood” to such purely mammonistic issues guided by the principle “do ut des” is an insult to the intelligence of the public. If this be brotherhood, then the operations of I. G. Farben, the world’s biggest manufacturer of beneficial medicinal substances, were likewise manifestations of the brotherhood of man. The phraseology of the propaganda literature of the cooperative movement is disgusting. They speak of spiritual values,8 of culture, of liberty, and freedom,9 where the issue is to reduce the price of various things by a few cents.

In his Utopia, Plato refers to the ancient saying, “friends have all things in common.”10 If this is true, the cooperators are badly mistaken in calling their associations friendly societies. They have no “things in common.” They have a punctilious system of accounting and auditing. The rights and the duties of the members of the cooperatives are neatly defined.11

THE PRINCIPLES AND METHODS OF COOPERATIVES

I. The Origin of Cooperation

The world-embracing system of the social division of labor originated from occasional assistance mutually granted to one another by neighbors. John, more efficient in the processing of iron, manufactured a plough-share for Paul who was less efficient in this art. On the other hand, Paul, more efficient in leather work, fabricated a pair of shoes for John who was less gifted in this kind of production. It was all friendship and neighborly fellow-feeling. Out of these modest beginnings developed the marvelous specialization of industry as it operates today.

It would be nonsense to refer to those remote sources of the division of labor in dealing with present-day industrial conditions. Nobody is so unreasonable as to base any claims and pretensions upon the fact that the exchange of commodities and services was originally a display of pure brotherly sympathies. No modern steel corporation asks for any privileges or subsidies on account of the fact that once, in the ages of primitive mankind, a mythical John offered his services voluntarily to his no less mythical neighbor, Paul.

In the treatment of the affairs of the cooperatives, however, such a procedure is quite common.

We may admit, for the sake of argument, that cooperation originated from friendly relations between neighbors. The villager John went to town to buy five pounds of coffee. His neighbor Paul asked him to buy five pounds for him too. When John cam back and handed the five pounds of coffee over to Paul, Paul reimbursed John for what John had expended for them. Perhaps the two also shared the transportation costs incurred by John. On the other hand, if the purchase of ten pounds of coffee was done at a wholesale price, John passed the difference on to his friend, Paul, and the latter also enjoyed the advantages inherent in wholesale buying.

This all was certainly comradeship and amicable sodality. But it is an impermissible display of naivete to refer to these mythical characters, John and Paul, in matters of the cooperatives as they operate today. These cooperatives are big businesses with millions of members who never meet one another. Their turnover amounts to billions of dollars. They are organized in a complicated hierarchy of simple cooperatives, super-cooperatives, and super-super associations. They have established gigantic vertical organizations. They do business with the government and are active in international trade. They own factories, oil wells, and transportation facilities; they engage in financial operations and enter all divisions of commercial and industrial activities. Their affairs are so complicated that their handling requires the employment of hosts of directors, managers, clerks, accountants, and lawyers. There are special schools for the training of the personnel of the cooperatives. Many universities have established chairs for the teaching of the cooperative methods of business management and accounting and of the laws of cooperatives.

It is ridiculous to conjure up the spectres of mythical John and Paul in dealing with these mammoth enterprises.

In the writings of those fighting for the preservation of cooperative privileges, the cooperatives are described as agents of the memberships. However, no matter how lawyers define the term “agent” from the point of view of the valid laws of the nation, which, after all, are liable to alteration on the part of the legislature, from the economic point of view it is obvious that the cooperatives cannot be considered in any other sense as agents or mandatories of their membership than any other enterprise operating under the division of labor. If the cooperative is called the member’s agent because it passes the gasoline it acquires on to the members, the term also fits the activities of any other enterprise. Then the steel corporation is the agent of all those whose well-being depends on the use of steel. If there were no steel works, every individual would have to produce the steel he needs for himself. The operation of steel works relieves the individuals from the necessity of taking care of an important branch of production for themselves. The steel corporations do not turn out products for their own use, but for that of all. Without a radical change in their standard of living and their daily activities, people could do without the services rendered by cooperatives; but they would fall back into the conditions of primitive barbarism and penury if the specialized industries were to go out of business.

When a cooperative buys some commodities, it looks after the interests of its members who ask for these commodities. But the same is no less the case when the businessmen and farmers are intent upon producing all those things which the average man needs for his own consumption.

Decency would require that the champions of the cooperatives cease to boast of their own idealism and disinterestedness. All those whose work contributes to the business of the cooperatives make their living from this job. To establish this truth is not to disparage these men. They are no less honest and useful citizens than any businessman, farmer, or wage earner. But they cannot be called idealists in any other sense than that which would apply to every other man engaged in a gainful occupation. Civil society is not based upon mere idealism and unselfishness. Its driving force is the rightly understood selfishness of every reasonable man. Selfishness, rightly understood, urges everybody to integrate himself into the system of the social division of labor. In rendering useful services to his fellow-men, he furthers his own vital concerns.

The reference to idealism, unselfishness, and similar high-sounding notions is especially inappropriate with regard to farmers’ cooperatives. The farmers are businessmen and entrepreneurs of the type which the cooperative literature denounces as hard-boiled callous egoists. They do not till the soil for a heavenly reward, but for their own gain. They do not fill the markets with cereals to perform an act of charity for the consumers, but to make money and to buy the products of the processing trades. They use their political power and form pressure groups in order to attain special privileges enhancing their incomes. They are anxious to pay less taxes than the rest of the people, to receive subsidies out of the public funds, to be protected by import duties, and to enjoy a thousand other privileges and prerogatives. There is certainly no idealism involved in the anti-margarine laws.

The endeavors of the farmers’ cooperatives to save the farmers some money are perfectly sound and legitimate insofar as they do not ask for special privileges at the expense of all the people. Farmers are manufacturers and it is all right for them to be concerned with keeping down costs of production. But it is quite another thing if they want to attain this aim by evading taxes and other burdensome obligations which must be borne by all other producing citizens.

II. Producers and Consumers

The characteristic feature of the free society of competitive capitalism is the unlimited sovereignty of the consumers. The capitalists, the owners of land and the entrepreneurs are by the inescapable law of the market forced to employ their ingenuity and the material factors of production at their disposal in such a way as to fill the most urgent of the not yet satisfied wants of the consumers in the best possible and cheapest way. Businessmen are not irresponsible production tsars. They are unconditionally subject to the supremacy of the consumers. If they fail to obey the orders of the consuming public, they suffer losses. If they do not alter their conduct of affairs very soon in such a way as to adjust it to the demands of the public, they are forced to go out of business and forfeit their eminent position. The consumers, by their buying and abstention from buying, make poor people rich and rich people poor. They determine who should own the capital and the land and who should run the enterprises. They determine what should be produced, of what quality and in what quantity. The market economy is a democracy of the consumers.

It is true that sinister elements are intent upon sapping the unhampered market economy and substituting a producers’ supremacy for the consumers’ supremacy. A general tendency prevails among present-day governments and political parties to shelter the less efficient producer against the competition of the more efficient producer. The very essence of government interference with business is to paralyze the operation of the unhampered market which invariably tends towards the attainment of that end which is today, not very appropriately, called “freedom from want.” While flamboyantly advertising their alleged concern about the masses’ material well-being, those in political office are firmly committed to restrictive practices which curtail the quantity of commodities available for consumption. They call their pernicious acts “social policy, “Sozialpolitik,” “New Deal,” “progressivism” and smear all opponents as “reactionaries” and “economic Bourbons.”

The most enthusiastic supporters of restrictions are the organized pressure groups of the farmers and of the wage earners. Deluded by fallacious pseudo-economic doctrines, these pressure groups believe that they can improve their own material well-bring by all kinds of restriction and feather bedding, by subsidies and other privileges.

Now, it is true that a privilege granted to a special group of producers improves in the short run the material conditions of those favored by this privilege at the expense of the rest of the population. Within a society based on the social division of labor, each specialized group is only a minority. If a privilege is granted to such a minority group, the result is certainly an improvement of its members’ conditions. But it is quite hopeless for such a minority to remain lastingly in the exclusive possession of a privileged position. However gullible the rest of the people may be, they will finally discover that they are suckers who must foot the bill for the privileges granted to a comparatively small group. They will not tolerate the preservation of such a state of affairs. They will either abolish the privileges granted to other people or they will secure for themselves similar privileges.

Unfortunately, what prevails in our day is the second alternative. Faced with the problem of privilege, those not privileged do not ask for the abolition of all privileges. They ask for privileges for themselves too. They are too dull to comprehend that this system, when carried to its ultimate logical consequences, is the acme of the nonsense. What a man may gain qua producer by a privilege granted to his branch of production, he loses qua consumer in buying the products of the other equally privileged branches. What remains is merely a deterioration in the material well-being of all people on account of the general drop in the productivity of labor.

It seems to be a very good thing for the milk farmers to outlaw margarine and for the musicians to outlaw recorded music. But if in every other branch of production, progress is likewise stopped, nobody gains and all people are hurt. The milk farmers’ and the musicians’ incomes are raised, but the prices of all the goods they want to buy are raised concomitantly. What remains is that all people miss all those advantages they could derive from technological progress.

This nonsensical and self-defeating policy of privilege parades today under the misleading label of “producers’ policy.” The worst sin of capitalism, contend the champions of the producers’ privileges, is that it assigns the primacy of the “idle” consumer and not to the “industrious” producer. They fail to realize that producers and consumers are the same people. It is only the thinking of economic analysis that distinguishes between man as a producer and man as a consumer. In life and reality these two aspects of each individual are inextricably linked together. You cannot favor man in his producer quality without hurting him in his consumer quality. The primacy of consumption as manifested in the unhampered operation of the capitalistic market economy is the consummation of the fact that consumption is the sole end and purpose of production.

If the cooperative movement were to attack the errors of this alleged “pro-producer” policy, it would render a very valuable service to the promotion of welfare. However, in spite of the lip service they pay to what they call the primacy of the consumer, the consumers’ cooperatives are far from raising any objections to the restrictive practices of our day. They are, on the contrary, among the most zealous supporters of these disastrous methods. Many of their members are precisely those people who most obtrusively ask for such producers’ policies: farmers and labor union members.

All this bombastic talk about the alleged blessings of cooperation is vain, as the cooperatives acquiesce in the existence of vast producers’ privileges. The farmer may save pennies as a member of a cooperative, but he loses dollars on account of feather bedding and hostility to technological improvement as displayed by labor unions. The wage earner may at best save pennies when buying in a cooperative store, but the pro-farmer privileges cost him dollars.

There is only one really efficient way to further the interests of the consuming masses, namely the way of free private enterprise. Not to hinder the more efficient producer to outdo the less efficient rival, is a much better method to have the farmer and the urban consumer supplied more amply and at lower costs than anything else. In diverting the public’s attention from the main economic evil, viz., the policy of restriction and producers’ privileges, and in concentrating upon the trifling issue of saving pennies where dollars are at stake, the cooperative movement does more harm than good.

The cooperators have certainly no claim to glorify themselves as the champions of the consumers. Their achievements are meager indeed when compared with those of the businessmen who succeed in turning out more, better, and cheaper products.

III. The Place of the Cooperatives within the Frame of the Competitive System

Economic liberalism, today disparaged as Manchesterism, maintains that the government should not place any obstacles in the way of people who want to serve their fellow citizens. As the liberals interpret the principle of consumes’ sovereignty, the consumers alone should decide whether a business unit is good or bad. This is what the much abused slogan “laissez faire” means: let the consumers choose for themselves and not a Führer for them.

The market economy gives everybody a chance. What a man needs to become a captain of industry is merely good ideas and the ability to make these ideas work. No inherited wealth and no capital is required in order to succeed. The capitalists, driven by their own selfish interests and eager to find the most profitable investment for their funds, are always in search of ingenious men to whom they can entrust their funds.

The harbingers of totalitarian government omnipotence would have us believe that under present conditions, in the era of what they call “mature” capitalism, this is no longer true. Today, they say, conditions are rigid. There is no longer any opportunity for a penniless newcomer to challenge the vested interests of the old firms and big corporations. The poor are doomed to remain poor forever, and the rich are getting richer from day to day.

This fable distorts the actual state of affairs no less than all the other Marxian and Keynesian fables. It is, of course, correct that today all branches of government cooperate in the effort to prevent technological progress and the emergence of new enterprises and new millionaires. But in spite of all these handicaps there is still room left for the success of self-made men. The greater part of the present-day leaders of business are not sons and still fewer grandsons of the millionaires of days gone by. As far as a family succeeds in preserving its place on the top of the social ladder for several generations, it owes its eminence to the ability and zeal of its younger generations. There is nothing in the operation of the unhampered market economy that could, in the long run, afford to vested interests a safe protection against the competition of improved methods of production, new products, better quality and cheaper prices. It is precisely because such protection is absent in the unhampered market that those, who by indulgence in routine, lack of inventiveness, incompetence, laziness, and negligence endanger their own prosperity, are asking for protection on the part of the government.

The principle of not interfering with market conditions and giving a chance to everybody applies no less to new methods of business organization. The corporative form of business enterprise owes its present role not to any assistance offered on the part of the laws and the administrative officers. On the contrary. From its early beginnings it had to meet the hostility of those in power. This hostility developed in the last decades into undisguised persecution. The authorities discriminate in many respects, first of all in the field of taxation, against the corporations. The corporations are singled out for much more burdensome taxation than non-corporate business. But the enormous efficiency of the corporate form of business has victoriously withstood the onslaughts of the power to destroy.

The cooperatives entered the scene of business with passionate diatribes against the merchants and especially against the retailers. It would have been comprehensible if the retailers had asked the authorities to suppress these new competitors who seemed to expect less from serving their members than from smearing the established firms. A demand of retail business for outlawing the cooperatives and suppressing their activities altogether would not have been more perverse than are the endeavors of the farmers to outlaw margarine and to cut down the importation of meat and cereals. But apart from the angry utterances of a few hotspurs, no such demands were ever raised. The fairness of the much calumniated merchants and their full endorsement of the principle of free competition manifested themselves in the attitude these men showed in dealing with the cooperatives. They did not ask the police to silence these insidious slanderers and defamers. All they asked was that they not be coddled with privileges and prerogatives. Fully committed to the fundamental maxim of free enterprise and free competition, all that private businessmen are aiming at is equality in the treatment of all forms of business enterprise. They ask for neither privileges for themselves nor hostile discrimination against any group of rivals. All they ask is that the government stay neutral. Neither privileges nor discrimination. The freedom of the public to choose between the multiplicity of competing sellers and to prefer the shop that best serves them should not be curtailed by virtual subsidies granted to less efficient enterprises. For the sake of consumers’ sovereignty and for the benefit of the whole people, there should be equality in the treatment of all kinds and varieties of business enterprise.

IV. The Character of the Cooperatives’ Profits

There are three different elements included in the conception of profit as popularly employed in mundane language and in statistics: interest on invested capital, compensation for the entrepreneur’s own labor expended in the conduct of the business and finally, profit proper. In the case of corporations and cooperatives, the second of these elements is absent as the owners of the enterprise are legally distinguished from those performing any labor in the conduct of business even if these latter own stock in the corporation or are members of the cooperative.

Profit proper is the surplus an enterprise earns from selling at prices exceeding the total amount of costs expended. There is no need to enter into an examination of the conditions required for the emergence of profits proper, their economic significance and the role they play in the operation of all economic affairs. Such an analysis is the task of treatises dealing with economic theory.

The cooperatives contend that the objective of their conduct of business is not profit making and that the surplus they are passing on to their customers in proportion to the purchases each of them made is not a dividend, but a “patronage refund”; that it is not profit, but savings resulting from the conduct of the business. Upon this doctrine the cooperatives base their vast claims to a privileged position and especially to tax exemption.

It is possible to imagine a method of conducting a cooperative’s business in such a way that no such surplus emerges at all. The cooperative could sell every article at a price which merely includes the costs the cooperative itself incurred in acquiring it plus full compensation for the costs incurred in the manipulation of this article. Actually no cooperative has adopted this procedure. The cooperatives sell above costs. At the end of a definite period, there remains, provided the conduct of operations was successful, a net profit, i.e., a surplus of sales proceeds over costs.

Mrs. Beatrice Potter Webb (Lady Passfield), that adamant apologist of the worst excesses of Bolshevism, tried to explain why the cooperatives do not realize “the Owenite ideal of eliminating profit in the transaction of business,” why they do not sell “their commodities at cost price plus the expenses of management.” As Mrs. Webb saw it, the blame must be put upon the imperfection of monetary institutions. The sale of small quantities at cost price, she contended, “involves the use of fractions not represented in current coin.”12 Yet the fact that the divisibility of coins is not unlimited has never prevented business from nicely adjusting prices to each height required by the structure of the market. In the retailing of fruit and other necessities of daily life, such prices as “five pieces for seven cents” and “three pieces for eleven cents” are quite common. There is no reason why the cooperatives should not adopt the same procedure. Actually they do adopt it, as it is indispensable. But when they adopt it, their aim is not the elimination of profit, but rather the necessity of competing with their rivals.

Mr. Jacob Baker explains these procedures of the cooperatives in a different way. In his opinion, it would take too much bookkeeping to calculate the wholesale cost and proportional share of operating expenses on each dozen of eggs and each pound of butter.13 However, a businessman who would not figure out neatly what his own costs are and would grope about in the dark, is a clumsy bungler and headed for bankruptcy. Competition enjoins upon every seller—whether profit-seeking merchant or allegedly altruistic cooperative store or oil station—the necessity of not asking more than the market price. But every seller must know whether each of his transactions involves a profit or a loss. If he were to ignore this and to sell below his own costs, he would very soon forfeit his position in the framework of the social division of labor. If economic calculation shows a businessman that he cannot carry a definite article without losing money, he must as a rule discontinue this branch of activity. In exceptional cases, he may go on deliberately carrying this article for special considerations such as not making his customers stop patronizing his shop or similar matters. But even then, he must be fully aware of the import of his conduct. In the operation of commerce, there is no room left for ignorance and carelessness. Computing costs as correctly as possible is the backbone of trade.

Actually, the immense majority of well-run cooperatives have fully adopted the well-tried accounting methods as developed by many generations of businessmen. They even boast of their achievements in the field of bookkeeping and financial statements.14

The method of selling above costs must certainly not be excused by referring to the alleged fact that cooperatives do not know what their own costs are.

The true reasons for these methods are very different from those advanced by these apologetic doctrines.

A surplus of sales proceeds over costs appears only if the transaction was successful. Even the most ingenious businessman cannot always avoid losses. He may sometimes misjudge the trend of prices and expend more in the acquisition of an article than later actual developments would have justified. Business is always speculative as it is based upon the anticipation of the future from which business profits and losses stem. In a world without change in which the tomorrow does not differ from the today, there would be neither profit nor loss. Our actual world is fortunately not stagnate. There is continuous change in conditions and—at least still in this country—a continuous trend toward improvement. Under such a state of affairs, prices are in ceaseless fluctuation. He who buys in order to sell can only reap a profit if he has bought at a price which is lower than the price at which he sells minus total sales costs.

Cooperative enterprise is no exception. It too is subject to the law of the market. If a cooperative buys 10,000 pounds of an article at $2,000 and its operating sales costs are five cents per pound if there is to be no loss. But if in the time lag between the purchase and the sale, the retail price drops to 18 cents, it is forced to sell at a loss of seven cents per pound and total loss of $700. Of course, a cooperative that would engage exclusively in such unwise deals would very soon go to the dogs. With a prosperous cooperative, over a definite period of time, the total amount of profits must at least equal the total amount of losses. But in every business enterprise, whether cooperative or other, the various individual deals contribute in different ways to the final result of business transacted over a definite period of time. Some of these individual deals are more profitable, others either less profitable or producing losses of various amounts.

It is these hard facts that make it peremptory for the cooperatives not to sell each article precisely at the proportional shares of their own total costs (wholesale price expended plus operating or sales costs). If they were to try this, they could not sell at all that part of their stock which was bought at prices which appear unreasonable when seen from the angle of the present structure of retail prices.

Cognizance of the state of affairs explodes entirely the cooperative doctrine concerning patronage refunds or patronage dividends. These refunds have nothing at all to do with the purchases of the individual members. They are not adjusted to the margin above costs at which the concrete purchases were billed to the individual members. They are distribution of the total profit earned by the cooperative over a definite period of time. They have no relation whatever to the individual’s purchases. A member who bought only articles in the sale of which the cooperative suffered losses is no less entitled to a refund in proportion to the total amount of his purchases than any other member.

If the cooperative were merely an agent of the members, the members would have the obligation of absorbing their share of the cooperative’s purchases and to make good all the costs incurred by the cooperative no matter whether or not this is advantageous for them. They would have the obligation of buying even if this would mean for them buying above the price they would have to expend in buying elsewhere. This is the inference to be drawn from the much talked about fable of John and Paul. If John asks Paul to buy a necktie for him in New York, he must take the necktie and reimburse Paul for what he has expended in the purchase. It is immaterial whether or not John discovers that he could have bought an equivalent necktie in his own place of residence at a much lower price. He has given to Paul the discretionary power to act as his agent in the purchase of a necktie and must bear the consequences.

It is therefore obvious that the doctrine of the cooperators according to which a private store sells articles to its customers while a cooperative store buys them for its members,15 is moonshine. The cooperative sells no less than a private store and it must induce its own members to patronize the cooperative store by the same methods to which private retailers resort, namely by asking lower prices than its competition. The cooperative’s purchases are not more closely tied up with its sales than are the purchases and sales of every private retailing business. Membership in a cooperative does not enjoin upon any member the obligation to buy any commodities in the cooperative store or oil station, still less the obligation to reimburse the cooperative, in the purchase of any commodity he may buy, for all it has expended in acquiring this concrete article plus operating expenses. The individual cooperator has the right to buy in the cooperative store in the same way in which every man—cooperator and non-cooperator alike—has the right to buy in every private shop. The phrase “the cooperative buys for its members” is not a more correct description of the actual state of affairs than the phrase, “the private retailer buys for his customers.”

The essential fact is that the surplus of total sales proceeds over total costs which the cooperative distributes among its customers does not stem from the various concrete purchases of the individual members, but from the successful conduct of the cooperative’s aggregate business over a definite period of time. Such a surplus appears only if the managers of the cooperative were skillful enough to buy at such low prices that the later sale can be made in a remunerative way.

The economic character of a cooperative does not differ from that of a private store. Success or failure result with a cooperative from the same sources from which they result with a private retail shop. Success nets profits, failure losses.

V. The Disposition of the Cooperatives’ Profits

If a cooperative’s conduct of business was successful over a definite period of time and consequently the balance sheet shows a net surplus, i.e., a profit, this profit is handled in the same way in which every private business handles its profits. The profit is either distributed or ploughed back into the business as an addition to its working capital, or it is partly distributed and partly ploughed back.

It is immaterial what legal forms are resorted to in this accumulation of undistributed profits and how this increment to the working capital is called in the book entries. What alone counts is that the whole amount of profit earned or a part of it is withheld from distribution and added to the capital stock. By not distributing profits, the cooperatives accumulate additional capital in the same way as all other types of business enterprises. Capital accumulation is always the result of not consuming the total amount of profits earned.

The evolution of cooperatives from simple independent stores into big businesses has brought about a very complicated variety of membership rights. There are active voting members who own regular membership shares corresponding to the common stock of corporations. There are shares of non-active members who have no right to vote and therefore do not share in the control of the cooperative. There are fully-paid shares and part-paid shares. Thus it is possible to choose sometimes for the accumulation of additional capital methods which seemingly appear as a payment of a dividend. If the dividend is paid in shares, the result is actually an increase in the capital ploughed back into the cooperative. It does not affect the value of the members’ equity whether the profit is simply retained by the cooperative or whether it is retained by giving an additional share to each member. In both cases, the individual member’s portion of the total amount of the cooperative’s total net assets is the same.

Cooperatives employ their capital funds only partially in the conduct of their own affairs. They have founded large-size wholesale enterprises and production outfits. They have organized these enterprises in a hierarchy of super-cooperatives, super-super cooperatives and super-super-super cooperatives. Each of these associations earns its own profits and either retains them as undistributed profits or distributes them among its members, the cooperative associations of a lower rank.

VI. Is the Cooperative Movement Economically Sound?

The vast propaganda literature of the cooperatives boasts in extreme language of the achievements of the cooperative movement. From modest beginnings, the cooperatives developed into big business with an ample supply of capital. They have millions of members, many thousands of organizations, over a hundred mills, factories, oil wells, refineries and pipelines. Their yearly turnover is enormous. This thriving condition is not limited to this country. It is a world phenomenon. The International Cooperative Alliance had at the outbreak of the Second World War affiliates with a membership of more than 70 million in thirty-eight different countries. What a marvelous success!

At closer examination, however, one discovers some flaws in this fascinating picture. First of all, there is the fact that cooperation is much stronger abroad than it is in the United States. Before the war, the consumers’ cooperatives of Finland handled about 30 per cent of the country’s retail trade; in Sweden the figure was 12 per cent; in Great Britain, France, and Denmark, 10 per cent. But in the United States, it was only a fraction of one per cent.16

This is an amazing fact. Precisely in that country in which the common man’s standard of living is highest, the role played by the cooperatives in the field of retailing is very modest when compared both with conditions abroad and with the total turnover of domestic retailing. The United States is foremost in the world with regard to the material well-being of the masses, but rather backward with regard to the development of consumers’ cooperatives. Hence, it is obvious that the prosperity of the average citizens does not depend on the flowering of cooperatives but on other factors.

The second idea which comes to the mind of an impartial observer is that the cooperatives were denied the opportunity to test their efficiency under equal competitive conditions as against other types of enterprise. In all countries of the world, they were pampered in a lavish way by privileges, especially by tax exemptions and cheap credit. They did not stand the competition of the private or corporate retailer and the private or corporate manufacturer by their own means and by their own accomplishments. The virtual subsidies they received at the expense of the public revenue were considerable enough to make them flourish even in spite of lamentable inefficiency and wasteful and inept management. The experience of the long history of the cooperative movement cannot prove anything in favor of cooperative methods. It merely proves that tax privileges in this age of confiscatory taxation are very valuable and make those privileged prosper. The ardor with which the spokesmen of the cooperatives are fighting for the preservation of these privileges and their reiterated assertions that the abolition of these privileges would doom the cooperative movement suggest that they themselves have very little confidence in the power of the cooperatives to hold their own against the competition of private business.

The very fact that the private retailer is able to stand the rivalry of a cooperative store bears witness to the economic superiority of profit-seeking free enterprise. The cooperative enjoys ample tax privileges; it is backed by an organization whose capital by far exceeds that of the average retailer and it enjoys many other privileges. Private business is in every institutional and political respect handicapped in its competitive effort. It owes its flowering exclusively to its superior efficiency and to the fact that it serves the customer best.

The pro-cooperative propaganda overflows with arguments purporting to show why profit-seeking retail trade must necessarily be wasteful and costly and why the cooperatives are more economical and can sell at cheaper prices. If these statements were right, the cooperatives would long since—even without the ample subsidies they enjoy in the shape of tax privileges—have superseded private retailing. But the fact remains that the cooperatives are not able to outdo the private distributor either in regard to the height of prices (i.e., the net charge to the buyer) or in regard to the other services they render to their patrons. The fact that the overwhelming majority of the American housewives patronize the private retailers and that by and large only less than one cent of each dollar spent by the consumers goes into the cooperative stores amounts to a striking expression of the nation’s acknowledgment of the private storekeeper’s superiority. There is no need to unmask the fallacies implied in all these sophisticated demonstrations of the alleged shortcomings of private business. The housewife, passing by the cooperative store and walking into the private distributor’s shop, explodes them more convincingly than any theorist could.

The cooperative doctrine’s fundamental error is the misconstruction of the role played by the distributors and retailers. As the champions of the cooperative doctrine see it, retailing is sterile because it does not add anything to the physical and chemical properties of the merchandise. The merchant is merely a superfluous middleman whose interposition enhances the price without improving the quality of the product or rendering any valuable services. One could easily dispose of this drone and of his undeserved gain.

If the cooperatives had not enjoyed their ample tax privileges, they would have very soon learned from experience that this seemingly plausible argument is utterly wrong. The retailer is not just a dispensable intermediary. Retailing is a necessary function within the operation of the market economy. It is one of the devices daily adjusting production anew to the changing demands of the consumers. Although as a rule, the retailer does not alter the physical and chemical properties of the merchandise, he adds to its value by keeping it ready for use precisely at those places and at that time in which it is most urgently asked for. The services that the retailer renders to the public are not overpaid, as competition—always very acute in the field of distribution—keeps their prices within the most narrow margin possible. In dealing with the consumers’ cooperatives one cannot often enough stress the point that the cooperatives, in spite of their tax prerogatives, are not in a position to supplant the private merchant. It is this fact that demolishes all the verbose disquisitions of the cooperative literature.

VII. The Political Element in the Cooperative Movement

From its very beginnings, the cooperative movement was primarily a political movement. It was, in the plans of its initiators, not so much an instrument for improving the conditions of its members as a weapon to be used for the destruction of the “bourgeoisie” and the “bourgeois or capitalistic mode of production.” Because they appreciated the cooperatives from this point of view, the socialist parties always sympathized with the cooperative movement. Apart from the farmers’ cooperatives, a great many of the members of consumers’ cooperatives are socialists. In the imagination of these socialist cooperators, the socialist paradise of the future will be organized as an association of the associations of consumers’ cooperatives. The foundation of a new cooperative store and the expansion and improvement of already operating cooperatives are steps forward on the road that leads to mankind’s social salvation.

Now, all this is utterly confused and contradictory talk. Within the frame of a socialist system of production there cannot be any question of cooperatives. Socialism is the very antithesis of any freedom and discretion granted to the consumers. It abolishes the market, market exchange and all the rights of the buyers. Under socialism, the individual must be content with what the authority deigns to give him. Socialism is the supremacy of the production tsar.

It is, of course, possible for a socialist commonwealth to retain the name “cooperative” and to call its distribution shops “cooperatives.” The communists in Soviet Russia, as well as the Nazis in Hitler Germany, resorted to this trick. But nobody can be fooled by such a terminological makeshift.

One of the characteristic features of the capitalist system (which the Marxians dub the system of “wage-slavery” where “labor is a commodity”) is that the wage earner is free to spend his earnings as he likes. The consumer’s buying and abstention from buying ultimately determines what should be produced and in what quantity and quality. This supremacy of the consumer is warranted by the competitive order of industrial production which all producers, however different their products may be, compete with one another for the greatest possible share in the buyer’s dollar. If there is only one producing agency, viz., the government, this competition ceases; then the housewife must take in the shop what the agent of the government is prepared to give her. Under capitalism, the shopkeeper, whether he is a private merchant or the employee of a cooperative, is anxious to serve the patrons; once the deal is finished, he thanks the customer for having patronized his shop and asks him to patronize it in the future too. Under socialism, the shopkeeper is eager to please the government, his superiors; he dispenses the merchandise as a favor and admonishes the recipient to be grateful to the sublime donor, the great dictator.

Those people who associate with the word socialism the image of clean cooperative stores, amply stocked with merchandise, in which courteous salesmen attend on the customers are badly mistaken. The cooperative stores are clean, amply stocked with goods and staffed with obliging clerks because they must compete with private profit-seeking retailing. The stores of a socialist system will be very different.

VIII. Monopolistic and Totalitarian Tendencies in the Cooperative Movement

The managers of the cooperatives are fully aware of the fact that the cooperatives would not be able to stand the competition of private business if they had to vie with them under equal conditions. It is this insight which on the one hand makes them passionately defend their precious privileges and on the other hand, pushes them toward monopolistic and totalitarian ventures.

The writings and the speeches of the cooperative propaganda never tried to conceal their monopolistic ambitions. They disparage competition as such and exuberantly praise the blessings of what they call unity. In each country, the local cooperatives tend to unite to form a national organization. The national societies of the world are federated in the International Cooperative Alliance. It is the avowed ideal of the champions of cooperativism to abolish every kind of competition by eliminating not only private free enterprise but also state owned and operated outfits. They dream of a world embracing “Cooperative Union of the World” into which virtually supreme power will be vested in the coming “Consumers’ Cooperative Era.”17 This “Union,” supreme and unrivalled in both production and distribution, is to enjoy a monopolistic position in every field of economic activities. It will have precisely the same exclusive totalitarian power the Nazis assigned to their Reichswirtschaftsministerium and the Bolsheviks to their Gosplan.

In this imperfect world, however, the cooperatives are forced to moderate their pretensions. They are anxious to combine and to conspire for the elimination of competition and for the restraint of trade. Their activities provide the classical example both of horizontal and vertical combination. They tend to ramify into all fields even in such as are only loosely associated with their main activities. In these efforts, they are greatly encouraged by the direct and indirect support various departments of the federal and the state governments accord to them. But the inherent inferiority of the cooperative way of business offsets all these privileges and favors. The progress which the consumers’ cooperatives have made on the way toward their final goal, the monopolistic control of the retail markets, is comparatively slow because it is not easy to fool the housewife. The fact that in the United States the consumers’ cooperatives are but small and insignificant when compared with those of many European countries is the proof of the American consumers’ greater shrewdness and greater capacity to distinguish between better and poorer merchandise.

IX. Are the Cooperatives Democratic?

The more manifest the weakness of the economic arguments advanced in favor of cooperativism becomes, the more its protagonists lay stress upon its alleged democratic character. As they see it, cooperativism is democratic while profit-seeking business is reactionary; the establishment of political democracy demands the establishment of economic democracy, viz., supremacy of the cooperatives.

The truth is that the market economy is the full and only possible realization of the principle of economic democracy. The market process is a daily repeated voting in which every penny gives a right to vote. The buyers, by preferring those commodities which in regard to price and quality are best fitted to satisfy their needs, make and conduct of each enterprise profitable or unprofitable, make small-size business big and penniless beginners rich. On the market, nothing ultimately counts but the buyer’s dollars. It is true, these ballot papers are not equally distributed among the public. The rich put more of them into the ballot-box than their less prosperous fellow-citizens. But to be rich is in itself the outcome of a vote taken, as in the market economy not only the acquisition but no less the preservation of wealth requires continuous success in best supplying the consumers. The capitalist who does not invest his funds in those lines in which they serve the satisfaction of the most urgent wants of the public is penalized by losses and loses his wealth entirely if he does not alter his conduct in time.

Political democracy as embodied in representative government is the corollary of the economic democracy of the market. From the point of view of a consistent application of Marxian dialectic materialism, one must describe parliamentarism, government by the people and all the freedoms granted by the bills of rights as the “ideological and political superstructure of the capitalistic system of private enterprise.” At any rate, the Marxians were consistent enough to deprecate and to disparage democracy as “pluto-democracy” and parliamentarism as a “bourgeois bogus.” Never were there more adamant foes of any kind of democratic institutions than the Bolsheviks. Only when the menace of the Nazis made them beseech the aid of the capitalistic nations of the West, did they begin to arrogate to themselves the appellation democratic. Only then did the communists and their allies in Western Europe and America discover that the cooperatives are democratic institutions, even the very paragon of economic democracy.

In resorting to this semantic innovation, the pro-cooperative agitators adopted a terminology which owes its origin to Mrs. Beatrice Potter Webb (Lady Passfield). It was Mrs. Webb who camouflaged the labor union movement as “industrial democracy” and described the cooperative movement as one aspect of industrial democracy.18 There is no need to enter into an examination of these claims. What Mr. and Mrs. Sidney Webb call democracy and freedom is the very opposite of both. In their eyes, the Soviet dictatorship is true democracy and the ruthless extermination of all those who do not fully agree with the rulers is genuine freedom.

The cooperative as a type of business organization is neither democratic nor anti-democratic. It is one of the legal patterns for group ownership. In a free society, cooperatives are allowed to function in the same way in which other types of the business corporation are allowed. If the cooperatives were not to enjoy any government favors, one would be right in declaring that they owe the role they play and the rise of their turnover to the voluntary support of their patrons as manifested in the democratic process of the market. But this is precisely not the case. The cooperatives are amply subsidized by government favoritism. What makes their membership rolls swell is neither their own achievements nor the services they render to the patrons but the cumulation of government favors. In joining the cooperative, the consumer does not approve of the cooperative idea; what he aims at is to share in the benefits which the government bestows upon the cooperators.

The cooperative propaganda lays great stress upon the fact that the cooperatives are voluntary associations. Such statements entirely distort the true state of affairs.

First, the government interferes in a momentous way with the final decision of an individual on the point of choosing between joining or not joining a cooperative. The cooperative is privileged to the disadvantage of all taxpayers who are not enlisted members. If from two competing bus lines, the red line and the blue line, the tickets of the former are subject to a tax while those of the latter are exempt, it would be misleading to say that a passenger who prefers the blue line made his choice voluntarily. He acted under duress as, due to the government’s interference, the choice of the red line is penalized.

Second, it is a sad fact that in many communities the cooperators resort to social pressure and to more or less open threats in order to increase enrollment. It is true that these abuses are less frequent in the United States than in the European countries. But this is not a proof that the American cooperators are more democratically minded and have due respect for the rights and freedoms of their fellow citizens. It merely shows that the United States is still a country in which laws and legality are enforced.

The cooperatives are neither more nor less democratic than any other business organization to which the democratic market economy offers the opportunity to show what they are able to achieve. However, the cooperatives do not dare to risk the trial of such an examination and are looking for the shelter of favoritism.

THE PRIVILEGES, PREROGATIVES AND IMMUNITIES OF THE COOPERATIVES

I. The Governments’ Bias in Favor of the Cooperatives

No human being can free himself from partiality and particular bias in favor of or against persons, institutions, or things. A government is always composed of mortal men and is therefore never aloof from the strife of peoples, parties, and ideologies. Only state idolatry describes the rulers as unaffected arbiters and directors of earthly affairs. Realistic observers know how different the real officeholders and administrators are.

What is wrong with contemporary governments is not merely that they are excessive in their predilections and prepossessions, but still more that they are guided by blind prejudices. The result is that their best intentions are frustrated and that they invariable spread havoc.

The whole fabric of modern economic developments is built upon the functioning of two main types of business organization: individual and proprietorship and partnership on the one hand and the corporation on the other hand. All the unprecedented achievements of modern industrialism that have procured a continually improving standard of living for an ever-increasing population were effected by these two types of business organization. It was exclusively profit-seeking business that transformed the world of horses, sailing ships, and wind mills into the world of steam power, electricity, and mass production for the needs of the masses. It was profit-seeking private business that accumulated the capital, i.e., the tools and machines, which alone have the power to raise the productivity of labor and thereby wage rates. Even the most bigoted partisans of cooperativism cannot dare to claim any of these merits for the cooperatives. The best that could be said to the praise of the cooperatives is that?of course, taking advantage of the lavish privileges accorded to them?they more or less aptly copied some of the well-tried technical methods of profit-seeking business. It would be impossible to write the history of our age without assigning the first place to the efforts of private business that daily supplies the household of the average with new, better, and cheaper products. But the historian would omit nothing noteworthy if he did not mention the fact that some of these products are distributed or marketed through cooperatives and that some of the more simple processes of manufacturing are also executed in plants owned by cooperative associations. There is no American whose daily life would not be less comfortable if private business had been prevented from accomplishing all that it has brought about in the last hundred years. But the great majority of the nation would not be in any respect worse off if there had never been cooperatives.

Nonetheless the governments behave as if private business were an objectionable thing and as if the salvation of mankind were to depend on the cooperatives. They openly and avowedly discriminate against private business in subjecting its surpluses to a burdensome taxation from which a surplus made by a cooperative is exempt. They discriminate especially against the corporations in taxing corporate incomes both on the corporation and on the shareholders who receive dividends. Confiscatory rates of personal-income taxation curtail the amount of venture capital available for the conduct of private business while the cooperatives are allowed to accumulate capital either without being taxed at all or without being taxed to the extent private business is taxed.

In all countries of the world, the cooperatives enjoy ample privileges.

In the United States, both state and federal laws provide that the ordinary activities of the cooperative associations are not to be deemed violations of anti-trust laws. The Department of Agriculture makes available to farmers’ cooperatives free legal, statistical, and technical advisory service. Government agencies supply the cooperatives with loans at low rates of interest.

The most valuable privileges are those granted in the field of taxation. Some of these exemptions do not count very much, e.g., the exemption from the annual franchise taxes. But the exemptions in the matter of income taxation are of primordial importance.

From its very beginnings, the federal income tax legislation exempted cooperatives. These exemptions were widened and enlarged in the later Acts. On the other hand, they became the more helpful and profitable as the tax rates increased to confiscatory levels. With the present tax rates, they are tantamount to lavish subsidies at the expense of all taxpayers and the whole nation.

II. The Essential Problems Concerning the Tax Privilege

In defending and justifying their tax privileges, the cooperatives purposely dwell upon trifling technicalities and legalistic syllogisms in order to divert the public’s attention from the essential issue.

As has been pointed out already, from the beginning of the federal income tax legislation it was the intention to exempt the cooperatives. The political constellation in the nation and in Congress was such that no law could be passed without the votes of certain senators and representatives from whom these tax exemptions were of paramount importance. Hence, all the definitions and provisions of the tax laws were so formulated as to leave the cooperatives unmolested. When the practical experience of the laws’ application and the rulings of the courts demonstrated that these privileges were not so broad as the cooperatives wanted them to be and when, with the tax burden continually becoming heavier, the cooperatives’ appetite for exemptions increased, these formulations were again and again redrafted. Although some congressmen tried to make the fundamental constitutional principle of equality under the law prevail, the cooperatives’ prerogatives were virtually always enlarged by such redrafting.

Under this state of affairs, it is easy to understand why the cooperators are eager to make the discussion turn around the problem whether or not the cooperatives make profits in the technical sense that the income tax laws attribute to this term. This present legal definition of income was influenced by the intention of making the cooperatives exempt. It is no wonder that it can be interpreted by the cooperatives in their own favor.

Of course, these interpretations are contradictory and indefensible. No dialectical artifices can bring about a tenable definition of income that would include the surplus earned by a corporation and exclude that earned by a cooperative. But the exemption of the cooperatives does not depend on the definition of income as written into the law. The cooperatives are specifically exempt both by the federal and by the state laws.

A discussion concerning what the law should be must radically differ from the interpretation of the existing law. While the latter problem is strictly limited to the letter and the spirit of the law, the former knows only one yardstick, viz., public welfare and economic expediency.

Taxes are levied in order to raise the funds needed for the conduct of government affairs. To contribute one’s share to these funds is a civic duty. It is not a penalty. The government does not penalize its citizens for owning a home, smoking cigarettes, or travelling on the railroad. It taxes them according to the standards provided by these conditions.

The same holds true for the income tax. It is not a penalty for having earned profits. Its idea is that people whose income is higher have a greater faculty or ability-to-pay than those with smaller incomes. (There is no need to investigate whether this ability principle of taxation is sound and whether it is not already at the point of showing its own absurdity.) But the cooperators, entangled in their prepossession that private profits earned by businessmen are an evil that must be eradicated, consider the income tax as a fine imposed upon the “profiteers.” In their opinion the income tax is the legal vehicle to brush away profit-seeking business and to give to the cooperatives that role that the most ambitious cooperators are aiming at, namely, the exclusive monopoly in supplying the consumers with all commodities and services they are asking for and the control of the plants turning out these commodities.

At the bottom of the cooperatives’ argument lies the idea that selling a commodity at a price exceeding costs incurred is unfair and should be penalized by confiscation of at least a part of the surplus. But if this were true, it would apply no less to the surpluses earned by the cooperatives than to those earned by corporations.

Let us review in detail the arguments advanced by the cooperatives in favor of their tax privileges.

1. The transaction between a cooperative and its members is not a sale and a purchase. The process, says an eminent spokesman of the cooperatives, Mr. James Peter Warbasse, President Emeritus of the Cooperative League of the U.S.A., is “simple. A group of people pool a certain amount of money with which they buy goods to put on the shelves of their retail store. They own the goods and so cannot sell them to themselves. When a member wants some of the goods, he goes to the store and takes away, for example, a can of peas. The peas are already his?he has already paid for them.”19 Now, this description is from the beginning to the end inappropriate and misleading.

The group of people of whom Mr. Warbasse is speaking do not merely pool a certain amount of money. They establish an association organized under the provisions of a specific statute of their state. They act in this way purposely and with full consideration of the law because they desire that this association should be recognized by the laws and the courts as a legal entity which can sue and be sued only in the corporate name and that the individual associates should not be liable for the debts of the association. Consequently it is not true that the members “own the goods and cannot sell them to themselves.” The goods are owned by the association and not by the individual members. If a member wants to acquire them in a legally correct way—and not through theft or embezzlement—he must buy them from the association. He must not “take them away from the shelves.” In this respect, there is not the slightest difference between a corporation and a cooperative. The member of a cooperative has no better title to take away a can of peas from the shelves of the cooperative store than has the shareholder of a department store with regard to the cans on the shelves of the department store.

This is not merely a legal technicality. It is the life blood of the cooperative that it is regarded by the laws as a person whose assets and liabilities are distinct from the assets and liabilities of its members. The whole system of cooperative business would immediately collapse if this principle were to be abandoned.

2. Even if one were to accept the vicious argument that the cooperatives in selling to members do not really sell, it would not fit all those frequent instances in which cooperatives sell to non-members. It is paradoxical that associations engaged in all kinds of wholesale and retail transactions, in export trade and in government contracts, resort to such a lame excuse.

3. The employment of the total gross surplus of sales proceeds over all costs expended is to be classified into three groups:

a. One portion is laid aside in a depreciation fund to replace the equipment worn out.

b. One portion is ploughed back into the business as an enlargement of the capital invested either in the existing outfit itself or in its affiliates.

c. One portion is withdrawn from the business and goes to those entitled: the owner of the private firm, the shareholders of the corporation, and the members of the cooperative.

The portions b and c together are also from the legal point of view net income. The advocates of the cooperatives in contending that the patronage refunds are not profits refer only to the portion c. However, the portion b is no less important; it is even more important as the main social and historical function of profit-making is the accumulation of additional capital. The enormous role that the ploughing back of profits and the investment of profits in new enterprises play in the evolution of cooperative business is well known. Almost all equity capital operating in the super-cooperatives and especially in their production and transportation enterprises was provided by such profits.

4. An examination of the principles and methods according to which the cooperatives conduct their business operations and of the rules they employ in bookkeeping and accounting clearly reveals that they are—like all other types of business enterprise—guided by the urge to make a surplus or profit and to avoid losses. Their reluctance to allow the use of the term “profit” with regard to their affairs is pure verbalism without any substantial foundation.

Let us look at an official document of the Cooperative League of the United States, published under the title Learning the Language.20 Here the authors freely admit that “we,” i.e., the cooperatives, “are in business to make money.” Hence, they say, many cooperators ask the same question the private businessman does, namely the question: “Have we made a profit or loss?” The private businessman calls the statement which gives us the answer a “profit and loss statement.” But the authors of the booklet do not like this appellation. Cooperative accountants and cooperative members, they say, should avoid the use of the term “profit and loss statement,” preferring either “income and expense statement” or “operating statement.”21

This is a purely semantic manipulation. The authors do not even venture to demonstrate that these ominous “earnings,” which they want to withdraw from taxation, are not income or profit. All they do is to give them another name. If it were enough to avoid income taxes by changing the name of the “profit and loss statement” to “operating statement,” all private firms and corporations could do so.

The same verbalism manifests itself in the Cooperative League’s suggestion to substitute the term “savings return” for “rebate,” “patronage dividend,” or “purchase refund.”22

5. The cooperatives deny that they enjoy tax exemption and are thus privileged as against profit business. Their tax exemption, they say, is not a privilege as the private businessman could easily enjoy the same freedom. Let him give back to his customers the difference between the cost price and the selling price, as the cooperatives do, and the problem is solved. refund.”23 If is obvious that this reasoning does not apply to the tax exemption granted to that part of a cooperative’s profits which is not distributed but reinvested. Neither does it apply to that part which stems from selling to non-members and from previous investment in affiliates. Setting aside these minor points, it must be observed that the concept of cost price is different with regard to cooperatives and with regard to the private owner of a store or a filling station. With the cooperative, it includes the salaries and other payments made to the officers and managers of the cooperative business. With the private grocer, it does not include a remuneration for the grocer’s own labor performed. It the private grocer or owner of a filling station were to “give back” to the customers the difference between the cost price and the selling price, he would not have any income at all; he would work for a heavenly reward while only the staff of the cooperatives receives its pay.

III. How Capital and Labor are Wasted by the Cooperatives

The eminence of the competitive market economy consists primarily in the fact that it ceaselessly tends to convey the means of production into the hands of those people who employ them in the most economical way for the best possible satisfaction of the needs of the consumers. It tends to eliminate the less efficient producers and to give control of production management to the most efficient. To comprehend the meaning of this function of the market, it is necessary to realize that everybody’s material well-being is harmed if material factors of production or human labor are anywhere employed in such a way as not to yield the highest output they could yield when more properly managed. As against more economical methods of operation, less economical methods result in a restriction of total output. They make the nation as a whole and all its members poorer.

In the absence of government interference with business an enterprise which requires a higher amount of capital and labor than is necessary under the given conditions cannot survive. As its costs of operation are higher, it is finally forced by more efficient competitors to go out of business. Only the most efficient outfits remain.

But as soon as the government interferes by subsidies, cheap credit, or tax exemptions, the state of affairs can be altered entirely. If the inefficient grocer A is exempt from a tax which his more efficient competitor B is forced to pay, the power of A to stand the competition of B is strengthened. A‘s operating costs proper (i.e., operating costs exclusive of taxes) are still higher than those of B. But against this difference in the operating costs proper must be held the advantage which A derives from tax exemption. Although A‘s conduct of affairs is wasteful, although it absorbs an amount of capital and labor which, without curtailment of the services received by the public, could be made available for the satisfaction of other wants which cannot be satisfied precisely on account of A‘s wastefulness, his shop can continue in business. The government shelters A against the consequences of his own inefficiency.

A‘s tax exemption is therefore not merely a matter that would concern exclusively him and B and would not affect the interests of all other people. What the government achieves by taxing B alone instead of distributing this tax equally between A and B, is not merely a disarrangement of the mutual competitive position between A and B. The main social and economic effect is the preservation of a high cost unit at the expense of a low cost unit, the preservation of a quite useless and obviously pernicious squandering of scarce factors of production.

This inefficient A whom the government pampers in order to make it possible for him to compete with B, is the cooperative in its capacity as a beneficiary of tax exemption and other government favors. It is of no avail how the friends of cooperativism try to justify these tax privileges in resorting to metaphysical arguments. The simple truth is: the government interferes in order to make it possible for the cooperatives to stand the competition of private business which they admittedly could not stand when unaided.

The fathers of the cooperative idea and the founders of the first cooperatives were committed to the erroneous belief that the cooperatives could serve the public at lower costs than private business. However, a century of cooperative experience has exploded this assumption as utterly delusive. The cooperatives did not stand the test. Where they thrive and as far as they thrive, they owe their existence to various government privileges, especially to tax exemptions and cheap government credit.

These privileges become the more valuable for the cooperatives and the more detrimental for the nation’s whole industrial effort and economic well-being, the more the cooperatives engage in production activities.

In the unhampered market economy there prevails a tendency to invest capital available for the execution of new projects only in those enterprises which offer the best expectations that they will avoid waste and inefficiency. However, favoritism shown to the cooperatives counteracts these tendencies. As the government on the one hand taxes private business heavily and taxes the corporations twice and on the other hand leaves the cooperatives free, it gives to inefficient cooperative factories the delusive appearance of efficiency and the opportunity to amass a surplus. The champions of cooperativism are boasting that today in the United States owners of factories approach cooperatives and offer to sell their plants and that the banks come to the cooperatives and tell them where there is a factory that can be bought cheaply and offer to lend the money to buy it.24 Such offers are, however, not as the cooperative champions assume, the proof of the superiority of the cooperative mode of production. They merely show that factories which on account of the fact that they are producing at too high a cost are doomed on the free market, can quietly survive as soon as the ample privileges of the cooperatives are granted to them.

While the tax system both of the federal government and of the states considerably checks the accumulation of capital on the part of corporations, private firms, and individuals, it encourages capital accumulation on the part of the cooperatives. The cooperatives are fully aware of the tremendous potentiality of this state of affairs. They have coined the slogan “Factories Are Free.”25 Their most eminent spokesman, in reporting a definite transaction of a consumers’ cooperative, says: “It was good business for the members of the cooperative, for without sacrifice on their part they made themselves the owners of a manufacturing business.”26 Now, there are no such things as can be acquired without sacrifice. It is true that the members of the cooperative acquired the manufacturing business in question “without sacrifice on their part.” But this was only the case because the government forced other people to make a sacrifice for the benefit of the members of the cooperative. It forced these other people to pay higher taxes in order to free the cooperative from the burden of taxes. The cooperative acquired the factory by a subsidy which it received in the shape of tax exemption.

The cooperatives in dealing with their expansion pass over their privileges in silence. They ascribe their success exclusively to the fact that they “do not have to make any profit.”27 It is not necessary to enter anew into an examination of all the problems implied in this profit issue. Let us look at the matter from a purely pragmatic point of view.

The essential point in the reasoning of the fathers and pioneers of cooperativism was this: the retailers and distributors, these quite useless middlemen, enhance the price of the commodities because they are anxious to make profits. The cooperators will eliminate profit and thereby be in a position to sell the goods to their members at lower prices than those charged by private profit-seeking business. As everybody is eager to buy in the cheapest market, the evolution of the cooperatives will very soon supersede the private retailer.

History has entirely refuted this doctrine. The cooperatives are not in a position to stand the competition of private profit-seeking business. They would have long since completely disappeared if they were not to enjoy ample privileges on the part of the government.

The very fact that in spite of these privileges they have not made greater inroads into the field of retailing is a proof of their inherent inefficiency.

By splitting hairs and indulging in subtle syllogisms concerning the concepts of profits, savings, earnings, surplus, costs, and so on, the cooperators evade the discussion of the main issue. In a free country, such as the United States, the immense majority of the buying public prefers to patronize private business and not the cooperatives. The cooperatives always insist upon the fact that they give back to their customers the difference between the cost price and the selling price in the shape of the patronage dividend while private business, as they say, retains this difference as profit. But the intelligent customer in choosing between private business and cooperative business takes into account all the terms of the contract, the quality of the merchandise as well as its price and the value of all the further services rendered by the seller; in considering a purchase with a cooperative, he also takes duly into account the patronage dividend to be expected. It is a fact that in the United States, this comparison between the private store and the cooperative store in the immense majority of cases decides in favor of private business. The conduct of the American people in buying bears witness to the fact that one buys cheaper or better or both cheaper and better in the private store notwithstanding the patronage rebate. Hence it is proved that the private businessman’s profit is not due to overcharging the customer. It is earned by an enterprise that in the majority of cases serves the consumer better and cheaper than the “altruistic” cooperative. The cooperatives have no reason whatever to boast of the patronage dividends. The private retailer is giving the customer more, either in the shape of better merchandise or of a lower price or of other services.

IV. Cooperative Operation of Manufacturing and other Production Enterprises

The spectacular expansion of manufacturing and other production and transportation activities of the cooperatives and of the various associations of cooperatives was, as has been already mentioned above, a consequence of the fact that the tax privileges of the cooperatives became the more valuable the more the taxes for the groups of business not tax-exempt were made increasingly burdensome.

The differences between a production plant owned and operated by a cooperative or an association of cooperatives and such a plant owned and operated by a corporation or a private profit-seeking firm are two-fold:

1. The former’s management is less efficient than the latter’s.

2. The former enjoys privileges in the field of taxation and credit procurement which are denied to the latter.

Those who would be prepared to question the first of these statements are at a loss to explain why the competition of these privileged enterprises does not completely crush their non-privileged competitors. An eminent expert, Mr. A. G. Black, former governor of the Farm Credit Administration, declared prior to the Second World War that “when taxes are absorbing a large part of the earnings of private business, the cooperative form of business really provides an enormous advantage.”28 This enormous advantage is entirely swallowed by the cooperative bureaucracy to offset the inefficiency of their conduct of affairs. No part of it is passed on to the consumers as the consumers, due regard being had to the quality of the products or services rendered, are not supplied by the cooperatives at lower net prices (that means: prices minus patronage dividends) than those of the private firms which are not tax-free. Neither do the workers employed in the cooperatives’ plants receive higher pay than other workers.

The nation’s treasury, in granting these tax privileges to the production activities of the cooperatives, renounces revenues which it would pocket if these plants were owned by corporations or if no privileges were granted to the cooperatives. Public expenditure must be curtailed correspondingly. Some benefits which a budgetary allowance could make must be foregone. Who profits from all this? The answer is: nobody. The equivalent of the drop in revenue is squandered by ineptitude, negligence, and clumsiness.

If this were not true, the cooperatives could either, selling at the same prices as other firms, reap enormous profits or, at lower prices, ruin all their rivals. In either case, they would have long since already reached what they consider as the ultimate goal of their movement, namely a state of affairs under which the cooperatives produce in their own factories everything that their members require. The mere fact that their success was much more modest proves that there is in cooperativism itself a factor that checks its progress in spite of the enormous support they receive from the government. We cannot help calling this factor economic inferiority.

V. How Favoritism Harms the Cooperatives

Favoritism harms those favored no less than those at whose expense the favors are granted. It corrupts and enfeebles the protegé.

Placing their trust in political tutelage, the cooperatives have often neglected to appoint as officers, managers, and staff members men efficient in the conduct of business and have given preference to people versed in political affairs, propaganda and lobbying and popular with politicians and bureaucrats. In the continental countries of Europe whose cooperative activities the American cooperators praise lavishly and set up as a pattern for their own activities, the cooperatives are in complete dependence on the various political parties. Each of the most important parties—especially the Social Democrats, the Catholic Socialists, the non-Catholic Christian Parties, the various nationalist parties—has established its own system of cooperatives which closely collaborates with the political leadership.

Private business is eager to succeed by improving the quality of its products and services and by lowering their prices. It resorts to advertising in order to make the public familiar with the commodities it offers for sale. A profit-seeking merchant’s advertisement sets into relief the advertiser’s own achievements and the advantages which the prospective customers could derive from them. It never smears the competitors. The propaganda of the cooperatives is at a loss to find enough praiseworthy in the cooperatives’ own accomplishments. Its leitmotif is the vilification of private enterprise and the insinuation that its profits are earned by cheating the customers.

When the private merchant is dissatisfied with the yield of his store, he tries to improve his conduct of affairs. When a cooperative works unsatisfactorily, the first thought of the responsible officers and managers is not the recourse to an appropriate reform of the operations. It is easier for them to ask for more tax exemption and for more and cheaper public credit.

The authors of the innumerable books, pamphlets, and periodicals published by the cooperative propaganda are so much preoccupied with the political aspects of cooperativism that they never raise the question which cannot be answered without entirely exploding the essential dogmas of the cooperative movement. They never ask: Were the fathers of cooperativism right in assuming that the elimination of profit will make it possible to supply the consumer more cheaply than he is supplied by profit-seeking business? If the answer to this question were to be given in the positive, it would be impossible to explain how private business—even apart from all the privileges granted to the cooperatives—could compete with the cooperatives. The spectacular failure of the consumers’ cooperatives in the urban agglomerations of the United States, that is the only problem to be dealt with by a serious and honest book on cooperativism. How could this failure happen in spite of all taxes charged to private business and of all the ample privileges accorded to the cooperatives?

The champions of cooperativism think that they have sufficiently excused themselves from answering this question by heaping invective and insulting terms on all those who disagree with them. The foul language the pro-cooperative literature employs in its polemics is utterly disgusting. But the very fact that they resort to such abusive words proves that they are fully aware of their inability to refute the objections raised by the economists.

Neither is it of any use to throw dust in people’s eyes by expatiating upon the success of cooperativism in other parts of the world. The fact that Iceland is in proportion to its population the “most highly cooperatized country in the world”29 does not outweigh the fact that the United States, the country with the highest standard of living, is—as far as consumers’ cooperatives are concerned—the least cooperatized one. The expansion of cooperativism in those countries of Eastern Europe which never experienced liberal institutions will certainly not count very much in the eyes of the citizens of free countries.

The cooperative literature lacks entirely the spirit of self-criticism and realistic appreciation of facts. It is full of conceit, vainglory, and self-adulation. It repeats again and again old fallacies, a hundred times refuted, and never gives a serious thought to any new idea. It thus faithfully mirrors the intellectual sterility of a movement which owes its development exclusively to the benevolent partisanship of the politicians.

CONCLUSION

The cooperative movement is entirely based on the very popular but utterly fallacious idea that profit is an unfair toll which the businessman levies on his patrons and on the contention that, by rights, the businessman should not ask more than what the merchandise cost him. The cooperatives were designed as devices for the general abolition of the vicious practice of selling above costs.

Experience of a hundred years of cooperative association has clearly proved that cooperatives are not able to take their chances on a free market. They cannot maintain themselves by their own efforts. At least it cannot be denied that there is no record of cooperatives which did stand the competition of private business without government favoritism. In all countries of the world, the cooperative movement owes its development and its present expansion, whatever they may be, to tax exemptions, cheap government credit and other privileges. In passionately asserting that the abolition of these privileges would amount to a suppression of the cooperatives, the spokesmen of the cooperatives confess that they themselves consider these privileges as indispensable for the survival of cooperativism.

Business is not an end in itself. It exists and operates for the benefit of the public. The only justification of the conduct of a business lies in the patronage voluntarily given to it by a sufficient number of people. If people do not patronize a shop of their own accord, it is certainly not the task of government to favor it at the expense of the public revenue and thereby to bring to it as members people who are eager to share in the enjoyment of these favors. A business outfit that owes its survival to political pressure and not to the voluntary support of the buying public is parasitic. Its preservation results in the squandering of labor and material factors of production, it curtails the total amount of goods available for consumption, it is pernicious from the point of view of public welfare.

The cooperative type of business organization can justify its existence only by renouncing the privileges which it enjoys today. Only as far as the cooperatives are able to hold their own without the support of tax exemptions, cheap government credit and other favors can cooperativism be considered as a legitimate method of doing business in a free society.

• *[This article is part one in Cooperatives in the Petroleum Industry a report prepared by the Petroleum Industry Research Foundation for the Empire State Petroleum Association and the Illinois Petroleum Marketers Association, 1947—Ed.]
• 1J.P. Warbasse, The Cooperative Way, a Method of World Reconstruction New York: Barnes and Noble, 1946).
• 2H. M. Kallen, The Decline and Rise of the Consumer (Chicago: Packard, 1945).
• 3Ibid., pp. 196–97.
• 4Ibid., p. 422.
• 5Cf. E. S. Bogardus, Dictionary of Cooperation (New York, and Chicago: Cooperative League of the U.S.A., 1943 and 1945), p. 54.
• 6Cf. Kallen, The Decline and Rise of the Consumers, p. 294.
• 7Cf. Bogardus, Dictionary of Cooperation, p. 54.
• 8Cf. Kallen, The Decline and Rise of the Consumers, p. 294.
• 9Ibid., p. 435.
• 10Plato, The Laws, bk 5, p. 739.
• 11The most amazing product of cooperative propaganda is the already mentioned book by Professor Kallen. On pp. 436–59, Professor Kallen introduces a fictitious character, President Robert Adam Owen Smith, who, in the year 2044 addresses the “Cooperative Union of the World” and in this address narrates the history of the cooperative movement, viz., also for the years which separate our generation from the year 2044. This is what Mr. Smith says about the future history of the cooperative movement: “Big business ... used all its cunning and all its power to wreck it, resorting to arms as well as to financial oppression. ... These endeavors having failed, armed gangs were employed to destroy cooperative establishments and murder cooperators” (p. 443). No comment is needed.
• 12Cf. B. Potter Webb, The Cooperative Movement in Great Britain, 10th ed (London: G. Allen, 1920), p. 65.
• 13Cf. J. Baker, Inquiry on Cooperative Enterprise (Washington, D.C.: U. S. Government Printing Office, 1937), p. 7.
• 14Cf. Learning the Language of Study and Action (Cooperative League of U. S. A.: Pamphlet no. 43).
• 15C.f. Baker, Inquiry on Cooperative Enterprise, p. 6.
• 16Cf. M. L. Steward, Cooperatives in the U.S.—a Balance Sheet. (Public Affairs Pamphlets no.32, 1944), p. 6.
• 17Cf. Kallen, The Decline and Rise of the Consumers, p. 436.
• 18In 1891. Cf. Webb, The Cooperative Movement in Great Britain, p. xxiii.
• 19Cf. Warbasse, The Cooperative Way, a Method of World Reconstruction, p. 115.
• 20Cooperative League of U. S. A., Pamphlet no. 43.
• 21Ibid., p. 18.
• 22Cf. W. E. Regli, A Primer of Bookkeeping for Cooperatives, 2nd ed. (1937), p. 5.
• 23Warbasse, The Cooperative Way, a Method of World Reconstruction, p. 158.
• 24Ibid., p. 45–46.
• 25Ibid., p. 46.
• 26Ibid., pp. 46–47.
• 27Ibid., p. 46.
• 28As quoted in Tax-Free Manufacturing Cooperative Associations (prepared by the National Tax Equality Association., 1945), p. 2.
• 29Cf. Warbasse, The Cooperative Way, a Method of World Reconstruction, p. 126.

I.*

If no radical changes in the prevailing political trends and tendencies occur very soon, the system of full government control of human activities will within a few years triumph in all countries this side of the Iron Curtain.

The doctrine today accepted by all those statesmen and politicians who do not openly embrace all the teachings of communism and totalitarianism maintains that it is the duty of the government to interfere with the operation of the market whenever the outcome of this operation appears to the government as “socially” undesirable. This means: the individuals in their production activities and in their buying and selling on the market are free as far as they precisely do what the government wants them to do; but they are not permitted to deviate from the course approved by the authorities. This doctrine of government omnipotence is, of course, today not yet completely enforced. The governments have not yet attained the formal power to control prices and wage rates. But the resistance offered to the enactment of such powers is weakening more and more. The government of the United States, in its endeavors to go on in its reckless inflationary policy, continually threatens the nation with the specter of all-round control of prices and wages. And only a few voices of protest are raised.

People who declare that they are in favor of the preservation of the market economy are called “extremists” and their arguments are not deemed worthy of a refutation. Even members of minority groups join in this enthusiasm for government omnipotence, although this system would deprive them of the only opportunity they have for overcoming the animosity of the majority by excelling in the service of the public, the consumers. Almost all educational institutions, for the most part carefully avoiding the ticklish terms communism and socialism, are propagandizing for—all-round—planning and for “production for use.”

Gone are the days when people, and first of all the youth, held liberty in esteem. Our contemporaries long for the “plan,” the strict regimentation of everybody’s life, work, and leisure by decrees of the paternal dictator.

II.

The only goal of production is to provide for the satisfaction of wants, that is consumption. The eminence of the market economy is to be seen in the fact that all production activities are ultimately directed by the consumers. Man is sovereign in his capacity as a consumer. In his capacity as a producer he is bound to comply with the wishes of the consumers.

By their buying and by their abstention from buying the consumers determine all that happens in the sphere of what is commonly called economic affairs. Their behavior ultimately determines everybody’s place and function in the social apparatus of production. They allot ownership of the material factors of production to those who have succeeded in directing them into employments in which they best satisfy the most urgent of the needs of the consumers. Property in material factors of production, wealth, can be acquired and preserved in the capitalistic or market economy only by serving the consumers better or more cheaply than others do. Such property is a public mandate, as it were, entrusted to the proprietor under the condition that he use it in the best possible way for the benefit of the consumers. The capitalist must never relax in endeavors to serve the public better and more cheaply. If he feels that he cannot achieve this without help from other people, he must choose adequate partners or lend his funds to such men. Thus there is built into the system of the market economy a mechanism, as it were, that inexorably forces the owners of all material factors of production to invest them in those lines in which they best serve the consumers.

In a similar way the consumers determine the height of the earnings of those working for salaries and wages. The employer is under the necessity of paying to each helper the full price the consumers are prepared to refund to him for what this worker has contributed to the qualities of the product. He cannot pay more, for then the employment of the worker would involve a loss; neither can he pay less, for then his competitors would lure away the job seekers from his plant. It is not the valuation of the employer, but that of the consumers that is instrumental in granting high wages to popular actors and athletes and low wages to street sweepers and charwomen.

That this system benefits all nations and all individuals within every nation has been spectacularly demonstrated by the unprecedented increase in population figures it has brought about. Wherever governments and pressure groups resorting to violent action have not fully succeeded in their endeavors to sabotage the operation of the market, industry has provided the masses with amenities of which the wealthiest princes and nabobs of the past did not even dream.

If one compares economic conditions in the most prosperous parts of the earth with those in the so-called underdeveloped countries, one cannot help realizing the correctness of the fundamental principle of nineteenth-century economic liberalism. Against the vagaries and revolutionary delusions of the socialist and communist agitators, the economists, opposed the thesis: there is but one method available to improve the conditions of the whole population, viz., to accelerate the accumulation of capital as against the increase in population. The only method of rendering all people more prosperous is to raise the productivity of human labor, i.e., productivity per man hour, and this can be done only by placing into the hands of the worker more and better tools and machines. What is lacking in the countries usually described as underdeveloped is saving and capital accumulation. There is no substitute for the investment of capital. If any further proof of this fundamental principle were needed, it is to be seen in the eagerness of all backward nations to get foreign capital for their industries.

III.

In dealing with the pros and cons of socialist management, one unfortunately neglects to pay sufficient attention to those effects which are commonly considered as non-economic. One fails to pay attention to the human aspect of the problem.

The distinctive feature of man consists in his initiative. An animal’s life takes precisely the course peculiar to all members of the species it belongs to. A deviation from this line can be brought about only be external force, the interference of a human will. But man is in a position to choose between various ways of conduct open to him. His fate depends to some extent on the mode in which he reacts to the conditions of his environment and integrates himself into the social system of peaceful cooperation. He is, within definite limits drawn by nature, the founder of his fortune. Not to be restricted in the pursuit of his own plans by anything else than the same freedom accorded to his fellow men, is what is commonly called freedom. Freedom does not mean unbridled license to indulge in any acts of ferocity and it does not conflict with the operation of a “state,” i.e., a social apparatus for the violent repression of the recourse to brute force on the part of unruly individuals or gangs. On the contrary, it can work only where the peaceful cooperation of individuals is protected in such a way against oppression and usurpation.

Constitutional government by elected officeholders—representative government—is an institution to give the citizens in the administration of public affairs a supremacy as far as possible analogous to the sovereignty they enjoy in their capacity as consumers in the market economy. Supplanting the rule of the aristocratic lords of the feudal ages and all systems of slavery and serfdom, it developed in the countries of Western civilization simultaneously with the gradual disintegration of the economic self-sufficiency of families, villages, counties, and nations and the evolution of the world-embracing system of the international division of labor. It is the political corollary of the economic democracy of the market economy, and it gives way to a dictatorial regime whenever and wherever the voluntary cooperation of men under the system of free markets is abolished by the establishment of any kind of socialist management.

For the planned economy is the most rigid system of enslavement history has ever known. Its advocates implicitly admit it in calling it a method of social engineering, that is: a system that deals with human beings—with all of them but the supreme dictator—in the way in which the engineers deal with the dead material out of which they build houses, bridges, and machines. To the individual no other choice is left but between unconditional surrender or hopeless rebellion. Nobody is free to deviate from the role the plan assigns to him. From the cradle to the coffin all actions of a man as well as his behavior in the time styled leisure hours are exactly prescribed by the authorities.

Such are conditions in the regime after which the immense majority of our intellectuals and the masses of common men are passionately hankering. The children and grandchildren of the generations that were full of enthusiasm for liberty are enraptured by the image of a utopia in which they themselves will be nothing but pawns in the hands of other people. To those familiar with the long history of the struggles for freedom it gives a peculiar impression to see today the old and the young, the professors and the ignorant, the artists and the boors longing for the unlimited rule of “big brother.”

This infatuation of the intelligentsia as well as of the illiterate masses is so firm that no adverse experience can weaken it. The more information about the real state of affairs in the communist countries reaches the Western nations, the more fanatical become the daily swelling ranks of those longing for the “dictatorship of the proletariat.”

IV.

The radical change that has buried in oblivion the ideal of liberty and extols to the skies unconditional submission to the “plan” is reflected in the alteration of the meaning of almost all terms designating political parties and ideologies.

In the nineteenth century the term liberal (derived from liberty) denoted those aiming at representative government, at government by laws and not by men, and at restricting the power of the government to the preservation of peaceful interhuman relations against any possible attacks on the part of domestic gangsters or of external foes. Today in the United States to be liberal means: to advocate full government control of all human activities in domestic policy and, in foreign policy, to sympathize with all revolutions aiming at the establishment of a communist dictatorship. No term is left to signify those who favor the preservation of the market economy and of private property in the material factors of production. Such “reactionaries” are not considered worthy of having a party name.

In some parliamentary chambers of nineteenth-century Europe the members of the party advocating government by the people and full civil liberties were seated to the left of the chairman. Hence the designation left came into use to signify them and the designation right to signify their opponents, the advocates of despotic government. In present-day American usage the meaning of these terms has been inverted. The champions of the “dictatorship of the proletariat,” of the Russian and Chinese methods of unlimited tyranny of those in power, are nowadays called leftists and the advocates of constitutional government and civil liberties rightists. In this terminology not only Lenin, who on January 6, 1918, dispersed the Constituent Assembly by military force, is to be called a leftist, but no less his predecessors in the impolite treatment of parliaments: Oliver Cromwell and the two Napoleons. But Karl Marx, who vehemently rejected this Bonapartist method of suppressing the opposition in one of his best known pamphlets,1 would have a fair claim to be qualified as a member of the “extreme right.”

The truth is that any kind of socialist or communist regime is incompatible with the preservation of civil liberties and representative or constitutional government. Representative government and civil liberties are the constitutional or political corollary of capitalism as unlimited despotism is the corollary of socialism. No semantic prattle can alter this fact. The socialist movement is not a continuation of the liberal movement of the nineteenth century, but the most radical reaction against it. The total state of the Lenin and Hitler pattern is the embodiment of the ideals of all the great tyrants of all ages.

V.

Unintentionally the words a man chooses in his speaking and writing reveal something about his ideas that he would not be prepared to express directly.

The noun revolution originally signified a revolving motion and then a transformation. But since the American and the French Revolutions it means first of all violence, civil war, war against the powers that be. When Arnold Toynbee used for his rather biased account of the evolution of modern industrialism in England (first published in 1884) the title Industrial Revolution he unintentionally disclosed his interpretation of history as a succession of violent conflicts, of killing and destroying.

The same disposition explains the use of the expression “the conquest of a market” to describe the fact that Ruritanian merchants succeeded in selling their wares in Laputania.

Many more examples could be quoted. But it is sufficient to mention one: the United States’ “war against poverty.” The only method of reducing poverty and of supplying people more amply with consumers’ goods is to produce more, better, and cheaper. This is what profit-seeking business aims at and achieves, provided sufficient capital has been accumulated by saving. All that a government can do in this process is to protect the operation of the market economy against violent or fraudulent aggression. What lessens poverty is not taking something away from Paul and giving it to Peter, but making commodities more easily accessible by producing more, better and cheaper. There is nothing in this sequence of events for the appellation of which the term “war” would seem to be adequate. A governmental system that spends every year billions of dollars of the taxpayers’ money to make essential foodstuffs, cotton and many other articles more expensive should certainly have the decency not to boast of an alleged war against poverty.

VI.

What distinguishes the mentality of our contemporaries most radically from that of their grandparents is the way they look upon their relation to the government. To the nineteenth-century liberals state and government appeared as institutions to give to the people the opportunity to live and to work in peace. Everything else, the development of material welfare as well as the cultivation of man’s moral, intellectual, and artistic faculties, was the concern of the individuals.

The citizens had to comply with the laws of the country and they had to pay taxes to defray the costs incurred by the government apparatus. In their household accounts the state was an item of expenditure. Today the individual sees in the state the great provider. Together with his fellows organized as a pressure group, he expects material assistance from the authorities. He is convinced that the state’s funds are inexhaustible as it can fleece the rich endlessly.

The state which the citizens supported in paying taxes could be democratic. The state from which the citizens are getting subsidies cannot remain democratic. People competing with one another for bounties submit humbly to the candidate for dictatorship bidding the most.

What the masses in their thirst for lucre do not see is that they themselves will have to pay the costs of the “presents” the government gives them. Inflation, the main source of the Santa Claus state’s funds, makes their savings wither away. While investors in real estate and common stock profit from the progressive weakening of the monetary unit’s purchasing power during an inflation, the investments of the less wealthy strata, predominately consisting in savings deposits, bonds, and insurance policies, melt away. The popularity inflationary measures enjoy among the masses of wage earners, who are victimized by them more than the rest of the nation, shows clearly their inability to see what their genuine interests really are.

• *[This article was written in 1951 and is previously unpublished.—Ed.]
• 1The Eighteenth Brunmaire of Louis Bonaparte