11. Entrepreneurship with Fiat Property and Fiat Money

Let me begin with a brief description of what a capitalist-entrepreneur does, and then explain how the job of the capitalist-entrepreneur is changed under statist conditions.

What the capitalist does is this: He saves (or borrows saved funds), hires labor, buys or rents capital goods and land, and he buys raw materials. Then he proceeds to produce his product or service, whatever it may be, and he hopes that he will make a profit.

Profits are defined simply as an excess of sales revenue over the costs of production. The costs of production, however, do not determine the revenue. If the cost of production determined price and revenue, everyone could be a capitalist. No one would ever fail. Rather, it is anticipated prices and revenues that determine what production costs the capitalist can possibly afford.

The capitalist does not know what the future prices will be or what quantity of his product will be bought at such prices. This depends on the consumers, and the capitalist has no control over them. The capitalist must speculate what the future demand for his products will be, and he can go wrong in his speculation, in which case he does not make profits but will incur losses instead.

To risk your own money in anticipation of an uncertain future demand is obviously a difficult task. Great profits may await you, but so also may total financial ruin. Few people are willing to take this risk, and even fewer are good at it and stay in business for any length of time.

In fact, there is even more to be said about the difficulty of being a capitalist.

Every capitalist stands in permanent competition with every other one for the invariably limited amounts of money to be spent on their goods and services by consumers. Every product competes with every other product. Whenever consumers spend more (or less) on one thing, they must spend less (or more) on another. Even if a capitalist has produced a successful product and earned a profit, there is nothing that guarantees that this will go on. Other businessmen can imitate his product, produce it more cheaply, underbid his price and out compete him. To prevent this, every capitalist must thus continuously strive to lower his production costs. Yet even trying to produce whatever you produce ever more cheaply is not enough.

The set of products offered by various capitalists is in constant flux, and so is the evaluation of these products by consumers. Continuously new or improved products are offered on the market and consumer tastes constantly change. Nothing remains constant. The uncertainty of the future facing every capitalist never disappears. There is always the lure of profits but also the threat of losses. Again, then, it is very difficult to be continuously successful as a businessman and not to sink back to the rank of an employee.

In all of this there is only one thing that the businessman can count on and take for granted, and that is his real, physical property—and even that is not safe, as we will see.

His real property comes in two forms. First, there are the physical resources, the means of production, including labor services, that the capitalist has bought or rented for some time and that he combines in order to produce whatever he produces. The value of all of these items is variable, as already explained. It depends ultimately on consumer evaluations. What is stable about them is only their physical character and capability. But without this physical stability of his productive property the capitalist could not produce what he produces.

Second, besides his productive property, the capitalist can count on his ownership of real money. Money is neither a consumer good nor a producer good. It is the common medium of exchange. As such, it is the most easily and widely sold good. And it is used as the unit of account. In order to calculate profit and loss, the capitalist needs recourse to money. The input factors and the output, his products to be produced, are incommensurable, like apples and oranges. They are made commensurable only insofar as they can all be expressed in terms of money. Without money, economic calculation is impossible, as Ludwig von Mises above all has explained. The value of money, too, is variable, like the value of everything else. But money, too, has physical characteristics. It is commodity money, such as gold or silver, and money profits are reflected in an increase in the supply of this commodity, gold or silver, at the disposal of the capitalist.

What can be said, then, about both the capitalist’s means of production and his money, is this: their physical characteristics do not determine their value, but without their physical characteristics, they would have no value at all, and changes in the physical quality and quantity of his property do affect the value of his property, whatever other factors (such as changing consumer evaluations) may affect the value of his property also.

Now let me introduce the state and see how it affects the business of the capitalist.

The state is conventionally defined as an institution that possesses a territorial monopoly of ultimate decision-making in every case of conflict, including conflicts involving the state and its agents, and, by implication, the right to tax—i.e., to unilaterally determine the price that its subjects must pay to perform the task of ultimate decision-making.

To act under these constraints—or rather, lack of constraints—is what constitutes politics and political action, and it should be clear from the outset that politics, then, by its very nature, always means mischief.

More specifically, we can make two interrelated predictions as to the effect of a state on the business of business. First, and most fundamentally, under statist conditions real property will become what may be called fiat property. And secondly and more specifically, real money will be turned into fiat money.

First, with the state being the ultimate arbiter in every case of conflict including those in which it is involved itself, the state has essentially become the ultimate owner of all property. In principle, it can provoke a conflict with a businessman and then decide against him by expropriating him and making itself (or someone of its liking) the owner of the businessman’s physical property. Or else, if it doesn’t want to go as far, it can pass legislation or regulations that involve only a partial expropriation. It can restrict the uses that the businessman can make of his physical property. Certain things the businessman is no longer permitted to do with his property.

The state cannot increase the quality and quantity of real property. But it can redistribute it as it sees fit. It can reduce the real property at the disposal of businessmen or it can limit the range of control that they are allowed over their property; and it can thereby increase its own property (or that of its allies) and increase its own range of control over existing physical things.

The businessmen’s property, then, is their property in name only. It is granted to them by the state, and it exists only as long as the state does not decide otherwise. Constantly, the sword of Damocles is hanging over the heads of businessmen. The execution of their business plans is based on their assumption of the existence, at their disposal, of certain physical resources and their physical capabilities, and all of their value speculations are based on this physical basis being given. But these assumptions about the physical basis can be rendered incorrect at any time—and their value calculations vitiated as well—if only the state decides to change its current legislation and regulations.

The existence of a state, then, heightens the uncertainty facing the businessman. It makes the future less certain than would be the case otherwise. Realizing this, many people who might otherwise become businessmen will not become businessmen at all. And many businessmen will see their business plans spoiled—not because they did not correctly anticipate future consumer demand, but because the physical basis, on which their plan was based, was altered by some unexpected and unanticipated change in state laws and regulations.

Second, rather than meddling with a businessman’s productive capital through confiscation and regulation, however, the state prefers to meddle with money. Because money is the most easily and widely salable good, it allows the state operators the greatest freedom to spend their income as they like. Hence the state’s preference for money taxes, i.e., for confiscating money income and money profits. Real money becomes subject to confiscation and changing rates of confiscation. This is the first sense in which money becomes fiat money under statist conditions. People own their money only insofar as the state allows them to keep it.

But there is also a second, even more perfidious, way in which money becomes fiat money under statist conditions.

States everywhere have discovered an even smoother way of enriching themselves at the expense of productive people: by monopolizing the production of money and replacing real, commodity money and commodity credit with genuine fiat money and fiat or fiduciary credit.

On its territory, per legislation, only the state is permitted to produce money. But that is not sufficient. For as long as money is a real good, i.e., a commodity that is costly to produce, there is nothing in it for the state except expenses. More importantly, then, the state must use its monopoly position in order to lower the production cost and the quality of money as close as possible to zero. Instead of costly, quality money such as gold or silver, the state must see to it that worthless pieces of paper, which can be produced at practically zero cost, will become money.

Under competitive conditions—i.e., if everyone is free to produce money—a money that can be produced at zero cost would be produced up to a quantity where marginal revenue equals marginal cost. And since marginal cost is zero, the marginal revenue, i.e., the purchasing power of this money, would be zero as well. Hence, the necessity to monopolize the production of paper money, so as to be able to restrict its supply, in order to avoid hyperinflationary conditions and the disappearance of money from the market altogether (and a flight into “real values”)—and the more so the cheaper the money commodity.

Having monopolized the production of money and reduced its production cost and quality to virtually zero, the state has made a marvelous accomplishment. It costs almost nothing to print money and one can turn around and buy oneself something really valuable, such as a house or a Mercedes.

What are the effects of such fiat money, and in particular what are the effects for the business of business? First and in general, more paper money does not in the slightest affect the quantity or quality of all other, nonmonetary goods. Rather, what the additional money does is twofold. On the one hand, money prices will be higher than they would otherwise be and the purchasing power per unit of money will be lower. And secondly, with the injection of additional paper money existing wealth will be redistributed in favor of those receiving and spending the new money first and at the expense of those receiving and spending it later or last.

And specifically regarding the capitalist, then, paper money adds another dose of uncertainty to his business. If and as long as money is a commodity, such as gold or silver, it may not be exactly “easy” to predict the future supply and purchasing power of money. However, based on information about current production costs and industry profits, it is very well possible to come up with a realistic estimate. In any case, the task is not pure guesswork. And while it is conceivable that, with gold or silver as money, nominal money profits may not always equal “real” profits, it is at least impossible that a nominal profit should ever amount to nothing at all. There is always something left: quantities of gold or silver.

In distinct contrast, with paper money, the production of which is unconstrained by any kind of natural (physical) limitations (scarcity) but dependent solely on subjective whim and will, the prediction of the future money supply and purchasing power does become guesswork. What will the money printers do? And it is not just conceivable but a very real possibility that nominal money profits will turn out to represent literally nothing but bundles of worthless paper.

Moreover, hand in hand with fiat money comes fiat or fiduciary credit, and this creates still more uncertainty.

If the state can create money out of thin air it also can create money credit out of thin air. And because it can create credit out of thin air, i.e., without any previous savings on its part, it can offer cheaper loans than anyone else, at below-market rates of interest, even at rates as low as zero. The interest rate is thus distorted and falsified, and the volume of investment will become divorced from the volume of savings. Systematic mal-investment is thus generated, i.e., investment un-backed by savings. An unsustainable investment boom is set in motion, necessarily followed by a bust, revealing large-scale clusters of entrepreneurial errors.

Last but not least, under statist conditions, i.e., under a regime of fiat property and fiat money, the character of businessmen and of doing business is changed, and this change introduces another hazard into the world.

Absent a state, it is consumers that determine what will be produced, in what quality and quantity, and who among businessmen will succeed or fail. With the state, the situation facing businessmen becomes entirely different. It is now the state and its operators, not consumers, who ultimately decide who will succeed or fail. The state can keep any businessman alive by subsidizing him or bailing him out; or else it can ruin anyone by deciding to investigate him and find him in violation of state laws and regulations.

Moreover, the state is flush with taxes and fiat money and can spend more money than anyone else. It can make any businessman rich (or not). And the state and its operators have a different spending behavior than normal consumers. They do not spend their own money, but other people’s money, and in most cases not for their own, personal purposes, but for those of some anonymous third parties. Accordingly, they are frivolous and wasteful in their spending. Neither the price nor the quality of what they buy is of great concern to them.

In addition, the state can go into business itself. And because it doesn’t have to make profits and avoid losses, as it can always supplement its earnings through taxes or made-up money, it can always outcompete any private producer of the same or similar goods or services.

And finally, by virtue of its ability to legislate, to make laws, the state can grant exclusive privileges to some businesses, insulating or shielding them from competition, and by the same token partially expropriate and disadvantage other businesses.

In this environment, it is imperative for every businessman to pay constant and close attention to politics. In order to stay alive and possibly prosper, he must spend time and effort to concern himself with matters that have nothing to do with satisfying consumers, but with power politics. And based on his understanding of the nature of the state and of politics, then, he must make a choice: a moral choice.

He can either join in and become a part of the vast criminal enterprise that is the state. He can bribe politicians, political parties or public officials, whether with cash or in kind (including promises of future employment in the “private” sector as “board-members,” “advisors,” or “consultants”), in order to gain for himself economic advantages at the expense of other businesses. That is, he can pay bribes to secure state contracts or subsidies for himself and at the exclusion of others. Or he can pay bribes for the passing or maintenance of legislation that secures him and his business legal privileges and monopoly profits (and capital gains) while partially expropriating and thus screwing his competitors. Needless to say, countless businessmen have chosen this path. In particular big banking and big industry have thus become intricately involved in the state, and many a wealthy businessman has made his fortune more on account of his political skills than his abilities as a consumer-serving economic entrepreneur.

Or else, a businessman can choose the honorable but at the same time also the most difficult path. This businessman is aware of the nature of the state. He knows that the state and its operators are out to get him and bully him, to confiscate his property and money and, even worse, that they are arrogant, self-righteous, haughty, and full of themselves. Based on such understanding, this very different breed of businessman then tries his best to anticipate and adjust to the state’s every evil move. But he does not join the gang. He does not pay bribes to secure contracts or privileges from the state. Instead, he tries as well as he can to defend whatever is still left of his property and property rights and make as large profits as possible in doing so.

*A speech delivered at the Edelweiss Holdings Symposium held in Zurich, Switzerland, on September 17, 2011.