CAPITALISM Internet PDF

CAPITALISM
CAPITALISM
A Treatise on Economics
Prepublication, Interim Edition
George Reisman
TJS Books, Laguna Hills, California

Copyright © 1998, 1996, 1990 by George Reisman.
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ISBN: 978-1-931089-25-8
ISBN for eBook Edition: 1-931089-28-0
Library of Congress Control Number: 2009900111
Manufactured in the United States of America
14 13 12 11 10 09 / 9 8 7 6 5
To Ludwig von Mises, my teacher, and Edith Packer, my wife.
CONTENTS IN BRIEF
PREFACE xxxix
INTRODUCTION 1
PART ONE
THE FOUNDATIONS OF ECONOMICS
CHAPTER 1. ECONOMICS AND CAPITALISM 15
CHAPTER 2. WEALTH AND ITS ROLE IN HUMAN LIFE 39
CHAPTER 3. NATURAL RESOURCES AND THE ENVIRONMENT 63
PART TWO
THE DIVISION OF LABOR AND CAPITALISM
CHAPTER 4. THE DIVISION OF LABOR AND PRODUCTION 123
CHAPTER 5. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM I 135
CHAPTER 6. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM II:

THE PRICE SYSTEM AND ECONOMIC COORDINATION 172
CHAPTER 7. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM III:

PRICE CONTROLS AND ECONOMIC CHAOS 219
CHAPTER 8. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM IV:

SOCIALISM, ECONOMIC CHAOS, AND TOTALITARIAN DICTATORSHIP 267
CHAPTER 9. THE INFLUENCE OF THE DIVISION OF LABOR ON THE INSTITUTIONS

OF CAPITALISM 296
CHAPTER 10. MONOPOLY VERSUS FREEDOM OF COMPETITION 375
CHAPTER 11. THE DIVISION OF LABOR AND THE CONCEPT OF PRODUCTIVE ACTIVITY 441
PART THREE
THE PROCESS OF ECONOMIC PROGRESS
CHAPTER 12. MONEY AND SPENDING 503
CHAPTER 13. PRODUCTIONISM, SAY’S LAW, AND UNEMPLOYMENT 542
CHAPTER 14. THE PRODUCTIVITY THEORY OF WAGES 603

viii CAPITALISM
CHAPTER 15. AGGREGATE PRODUCTION, AGGREGATE SPENDING, AND THE

ROLE OF SAVING IN SPENDING 673
CHAPTER 16. THE NET-CONSUMPTION/NET-INVESTMENT THEORY OF PROFIT AND INTEREST 719
CHAPTER 17. APPLICATIONS OF THE INVARIABLE-MONEY/NET-CONSUMPTION ANALYSIS 809
CHAPTER 18. KEYNESIANISM: A CRITIQUE 863
CHAPTER 19. GOLD VERSUS INFLATION 895
EPILOGUE
CHAPTER 20. TOWARD THE ESTABLISHMENT OF LAISSEZ-FAIRE CAPITALISM 969
A BIBLIOGRAPHY OF WRITINGS IN DEFENSE OF CAPITALISM 991
INDEX 999
CONTENTS
LIST OF FIGURES xxxv
LIST OF TABLES xxxvii
PREFACE xxxix
Notes l
INTRODUCTION
1. Procapitalist Economic Thought, Past and Present 1
2. Pseudoeconomic Thought 6
Marshallian Neoclassical Economics: The Monopoly Doctrine and Keynesianism 7
Mathematical Economics 8
3. Overview of This Book 9
Notes 11
PART ONE
CHAPTER 1. ECONOMICS AND CAPITALISM
PART A. THE NATURE AND IMPORTANCE OF ECONOMICS

1. Economics, the Division of Labor, and the Survival of Material Civilization 15
2. Further Major Applications of Economics 16
Solving Politico-Economic Problems 16
Understanding History 17
Implications for Ethics and Personal Understanding 17
Economics and Business 18
Economics and the Defense of Individual Rights 18
PART B. CAPITALISM
1. The Philosophical Foundations of Capitalism and Economic Activity 19
2. Capitalism and Freedom 21
Freedom and Government 21
Freedom as the Foundation of Security 22

x CAPITALISM
The Indivisibility of Economic and Political Freedom 23
The Rational Versus the Anarchic Concept of Freedom 23
The Decline of Freedom in the United States 26
The Growth of Corruption as the Result of the Decline of Freedom 26
3. Capitalism and the Origin of Economic Institutions 27
4. Capitalism and the Economic History of the United States 28
5. Why Economics and Capitalism Are Controversial 31
The Assault on Economic Activity and Capitalism 31
The Prevailing Prescientific Worldview in the Realm of Economics 32
Economics Versus Unscientific Personal Observations 32
Economics Versus Altruism 33
Economics Versus Irrational Self-Interest 34
Economics Versus Irrationalism 35
6. Economics and Capitalism: Science and Value 36
Notes 37
CHAPTER 2. WEALTH AND ITS ROLE IN HUMAN LIFE
1. Wealth and Goods 39
2. Economics and Wealth 41
3. The Limitless Need and Desire for Wealth 42
Human Reason and the Scope and Perfectibility of Need Satisfactions 43
Progress and Happiness 45
The Objectivity of Economic Progress: A Critique of the Doctrines of Cultural Relativism

and Conspicuous Consumption 46
The Objective Value of a Division-of-Labor, Capitalist Society 48
4. The Law of Diminishing Marginal Utility and the Limitless Need for Wealth 49
5. Applications of the Law of Diminishing Marginal Utility 51
Resolution of the Value Paradox 51
Determination of Value by Cost of Production 52
Determination of Consumer Spending Patterns 52
Say’s Law 53
CONTENTS xi
6. “Scarcity” and the Transformation of Its Nature Under Capitalism 54
7. Time Preference and the Scarcity of Capital 55
The Foundations of Time Preference 55
The Scarcity of Capital 56
A Word on Capital Accumulation and the Rate of Return 58
Time Preference, Rationality, and Freedom 58
8. Wealth and Labor 58
The Scarcity of Labor and Its Ineradicability 59
Notes 61
CHAPTER 3. NATURAL RESOURCES AND THE ENVIRONMENT
PART A. NATURAL RESOURCES
1. The Limitless Potential of Natural Resources 63
The Energy Crisis 66
2. The Law of Diminishing Returns 67
The Law of Diminishing Returns and the Limitless Potential of Natural Resources 69
Diminishing Returns and the Need for Economic Progress 70
3. Conservationism: A Critique 71
PART B. THE ECOLOGICAL ASSAULT ON ECONOMIC PROGRESS

1. The Hostility to Economic Progress 76
2. The Claims of the Environmental Movement and Its Pathology of Fear and Hatred 76
The Actual Nature of Industrial Civilization 76
The Environmental Movement’s Dread of Industrial Civilization 78
The Toxicity of Environmentalism and the Alleged Intrinsic Value of Nature 80
The Alleged Pollution of Water and Air and Destruction of Species 83
The Alleged Threat from Toxic Chemicals, Including Acid Rain and Ozone Depletion 85
The Dishonesty of the Environmentalists’ Claims 86
The Alleged Threat of “Global Warming” 87
Why Economic Activity Necessarily Tends to Improve the Environment 90
3. The Collectivist Bias of Environmentalism 91
Environmentalism and Irrational Product Liability 95

xii CAPITALISM
Environmentalism and the Externalities Doctrine 96
4. The Economic and Philosophic Significance of Environmentalism 98
5. Environmentalism, the Intellectuals, and Socialism 99
6. Environmentalism and Irrationalism 106
The Loss of the Concept of Economic Progress 106
Irrational Skepticism 106
The Destructive Role of Contemporary Education 107
The Cultural Devaluation of Man 112
Notes 115
PART TWO
CHAPTER 4. THE DIVISION OF LABOR AND PRODUCTION
1. The Division of Labor and the Productivity of Labor 123
The Multiplication of Knowledge 123
The Benefit from Geniuses 124
Concentration on the Individual’s Advantages 125
Geographical Specialization 125
Economies of Learning and Motion 126
The Use of Machinery 127
2. The Division of Labor and Society 128
3. Rebuttal of the Critique of the Division of Labor 129
4. Universal Aspects of Production 130
Notes 133
CHAPTER 5. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM I
PART A. THE NATURE OF THE DEPENDENCIES

1. Dependence of the Division of Labor on Private Ownership of the Means of Production 135
Socialism and Collectivism Versus Economic Planning 136
Capitalist Planning and the Price System 137
2. The Dependence of the Division of Labor on Saving and Capital Accumulation 139
CONTENTS xiii
3. The Dependence of the Division of Labor on Exchange and Money 141
4. The Dependence of the Division of Labor on Economic Competition 144
5. The Dependence of the Division of Labor on the Freedom of Economic Inequality 145
Egalitarianism and the Abolition of Cost: The Example of Socialized Medicine 148
Government Intervention, Democracy, and the Destruction of the Individual’s Causal Role 150
Summary 150
PART B. ELEMENTS OF PRICE THEORY: DEMAND, SUPPLY, AND COST OF PRODUCTION

1. The Meaning of Demand and Supply 152
2. The Law of Demand 155
The Concept of Elasticity of Demand 158
Seeming Exceptions to the Law of Demand 161
The Derivation of Supply Curves 162
Limitations of Geometrical Analysis 165
Confusions Between Supply and Cost 167
The Circularity of Contemporary Economics’ Concept of Demand 169
Notes 169
CHAPTER 6. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM II:

THE PRICE SYSTEM AND ECONOMIC COORDINATION
PART A. UNIFORMITY PRINCIPLES

1. The Uniformity-of-Profit Principle and Its Applications 172
Keeping the Various Branches of Industry in Proper Balance 173
The Power of the Consumers to Determine the Relative Size of the Various Industries 174
The Impetus to Continuous Economic Progress 176
Profits and the Repeal of Price Controls 180
The Effect of Business Tax Exemptions and Their Elimination 183
Additional Bases for the Uniformity-of-Profit Principle 183
Permanent Inequalities in the Rate of Profit 185
2. The Tendency Toward a Uniform Price for the Same Good Throughout the World 187
Why the Arab Oil Embargo Would Not Have Been a Threat to a Free Economy 188
Tariffs, Transportation Costs, and the Case for Unilateral Free Trade 190
xiv CAPITALISM
3. The Tendency Toward Uniform Prices Over Time: The Function of Commodity Speculation 191
Rebuttal of the Charge That the Oil Shortages of the 1970s Were “Manufactured” by
the Oil Companies 192
4. The Tendency Toward Uniform Wage Rates for Workers of the Same Degree of Ability 194
Equal Pay for Equal Work: Capitalism Versus Racism 196
5. Prices and Costs of Production 200
PART B. ALLOCATION PRINCIPLES

1. The General Pricing of Goods and Services in Limited Supply 201
2. The Pricing and Distribution of Consumers’ Goods in Limited Supply 202
3. The Pricing and Distribution of Factors of Production in Limited Supply 206
4. The Free Market’s Efficiency in Responding to Economic Change 209
A Rational Response to the Arab Oil Embargo 211
5. The Economic Harmonies of Cost Calculations in a Free Market 212
More on the Response to the Oil Embargo 213
Appendix to Chapter 6: The Myth of “Planned Obsolescence” 214
Notes 217
CHAPTER 7. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM III:

PRICE CONTROLS AND ECONOMIC CHAOS
PART A. PRICE CONTROLS AND SHORTAGES

1. Price Controls and Inflation 219
Price Controls No Remedy for Inflation 219
Inflation Plus Price Controls 220
2. Shortages 221
3. Price Controls and the Reduction of Supply 222
a. The Supply of Goods Produced 222
b. The Supply of Goods in a Local Market 222
The Natural Gas Crisis of 1977 222
The Agricultural Export Crisis of 1972–73 223
Price Controls as a Cause of War 223
c. The Supply of Goods Held in Storage 223
Hoarding and Speculation Not Responsible for Shortages 224

CONTENTS xv
Rebuttal of the Accusation That Producers Withhold Supplies to “Get Their Price” 224
Price Controls and the “Storage” of Natural Resources in the Ground 225
d. The Supply of Particular Types of Labor and Particular Products of a Factor of Production 226
e. Price Controls and the Prohibition of Supply 226
The Destruction of the Utilities and the Other Regulated Industries 227
4. Ignorance and Evasions Concerning Shortages and Price Controls 228
Inflation and the Appearance of High Profits 228
The Destructionist Mentality 230
A Defense of Inventory Repricing 231
The Campaign Against the Profits of the Oil Companies 231
How the U.S. Government, Not the Oil Companies, Caused the Oil Shortage 234
The Conspiracy Theory of Shortages 237
Rebuttal of the Charge That Private Firms “Control” Prices 238
PART B. FURTHER EFFECTS OF PRICE CONTROLS AND SHORTAGES
1. Consumer Impotence and Hatred Between Buyers and Sellers 239
How Repeal of Rent Controls Would Restore Harmony Between Landlords and Tenants 240
2. The Impetus to Higher Costs 241
The Administrative Chaos of Price Controls 243
3. Chaos in the Personal Distribution of Consumers’ Goods 243
4. Chaos in the Geographical Distribution of Goods Among Local Markets 244
5. Chaos in the Distribution of Factors of Production Among Their Various Uses 245
Hoarding 246
6. Shortages and the Spillover of Demand 247
Why Partial Price Controls Are Contrary to Purpose 247
How Price Controls Actually Raise Prices 248
The Absurdity of the Claim That Price Controls “Save Money” 248
Applications to Rent Controls 249
How Repeal of Our Price Controls on Oil Reduced the Price Received by the Arabs 254
PART C. UNIVERSAL PRICE CONTROLS AND THEIR CONSEQUENCES
1. The Tendency Toward Universal Price Controls 256

xvi CAPITALISM
2. Universal Price Controls and Universal Shortages 257
Excess Demand and Controlled Incomes 257
3. The Destruction of Production Through Shortages 258
The Prosperity Delusion of Price Controls: The World War II “Boom” 262
4. Socialism on the Nazi Pattern 263
Notes 264
CHAPTER 8. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM IV:

SOCIALISM, ECONOMIC CHAOS, AND TOTALITARIAN DICTATORSHIP
PART A. THE CHAOS OF SOCIALISM

1. Socialism 267
2. The Essential Economic Identity Between Socialism and Universal Price Controls 267
3. The Myth of Socialist Planning—The Anarchy of Socialist Production 269
The Soviet Quota System 273
Shortages of Labor and Consumers’ Goods Under Socialism 274
4. Further Economic Flaws of Socialism: Monopoly, Stagnation, Exploitation,

Progressive Impoverishment 275
5. Socialism’s Last Gasp: The Attempt to Establish a Socialist Price System and
Why It Is Impossible 279
PART B. THE TYRANNY OF SOCIALISM

1. The Tyranny of Socialism 282
2. The Necessity of Evil Means to Achieve Socialism 282
3. The Necessity of Terror Under Socialism 283
4. The Necessity of Forced Labor Under Socialism 286
Forced Labor in the Soviet Union 287
The Imposition of Forced Labor in the United States 287
5. Socialism as a System of Aristocratic Privilege and a Court Society 288
6. From Forced Labor to Mass Murder Under Socialism 290
7. From Socialism to Capitalism: How to Privatize Communist Countries 290
Notes 294
CONTENTS xvii
CHAPTER 9. THE INFLUENCE OF THE DIVISION OF LABOR ON THE INSTITUTIONS

OF CAPITALISM
PART A. PRIVATE OWNERSHIP OF THE MEANS OF PRODUCTION

1. The General Benefit from Private Ownership of the Means of Production 296
The Benefit of Capital to the Buyers of Products 296
The Benefit of Capital to the Sellers of Labor 298
The Direct Relationship Between the General Benefit from Capital and Respect for the
Property Rights of Capitalists 298
2. The Capitalists’ Special Benefit from Private Ownership of the Means of Production 300
Implications for Redistributionism 300
Destructive Consequences of Government Ownership 303
Profit Management Versus Bureaucratic Management 304
The “Successful” Nationalizations of Oil Deposits: A Rebuttal 305
3. The General Benefit from the Institution of Inheritance 306
The Destructive Consequences of Inheritance Taxes 307
4. The General Benefit from Reducing Taxes on the “Rich” 308
5. Private Ownership of Land and Land Rent 310
How Private Ownership of Land Reduces Land Rent 313
Land Rent and Environmentalism 316
The Violent Appropriation Doctrine 317
The Demand for Land Reform 319
6. Private Property and Territorial Sovereignty 322
A Defense of Foreign “Exploitation” of Natural Resources 323
PART B. ECONOMIC INEQUALITY

1. Economic Inequality Under Capitalism 326
2. Critique of the Marxian Doctrine on Economic Inequality 330
Economic Inequality and the Law of Diminishing Marginal Utility 332
Economic Inequality and the Normal Curve 336
3. The “Equality of Opportunity” Doctrine: A Critique 337

xviii CAPITALISM
Education and the Freedom of Opportunity 342
Everyone’s Interest in the Freedom of Opportunity 342
PART C. ECONOMIC COMPETITION

1. The Nature of Economic Competition 343
2. The Short-Run Loss Periods 345
The Enemies of Competition as the True Advocates of the Law of the Jungle 348
3. Economic Competition and Economic Security 348
4. The Law of Comparative Advantage 350
International Competition and Free Labor Markets 351
Comparative Advantage Versus the Infant-Industries Argument 354
How the Less Able Can Outcompete the More Able in a Free Labor Market 355
5. The Pyramid-of-Ability Principle 357
Freedom of Competition and the General Gain from the Existence of Others 357
6. The Population Question 358
Worldwide Free Trade 360
Free Trade and the Economic Superiority of the United States Over Western Europe 361
International Free Trade and Domestic Laissez Faire 361
The Birth Rate 362
7. Free Immigration 362
Refutation of the Arguments Against Free Immigration 363
Free Immigration and International Wage Rates 366
Capital Export 366
8. The Harmony of Interests in the Face of Competition for Limited Money Revenues 367
Notes 371
CHAPTER 10. MONOPOLY VERSUS FREEDOM OF COMPETITION
1. The Meaning of Freedom and of Freedom of Competition 375
High Capital Requirements as an Indicator of Low Prices and the Intensity of Competition 376
2. The Political Concept of Monopoly and Its Application 376
Monopoly Based on Exclusive Government Franchises 377

CONTENTS xix
Licensing Law Monopoly 378
Tariff Monopoly 380
The Monopolistic Protection of the Inefficient Many Against the Competition of the
More Efficient Few 381
Monopoly Based on Minimum-Wage and Prounion Legislation: The Exclusion of the

Less Able and the Disadvantaged 382
Government-Owned and Government-Subsidized Enterprises as Monopoly 385
The Antitrust Laws as Promonopoly Legislation 387
Socialism as the Ultimate Form of Monopoly 387
3. Further Implications of the Political Concept of Monopoly: High Costs Rather Than High Profits 387
Patents and Copyrights, Trademarks and Brandnames, Not Monopolies 388
All Monopoly Based on Government Intervention; Significance of Monopoly 389
4. The Economic Concept of Monopoly 389
5. The Alleged Tendency Toward the Formation of a Single Giant Firm Controlling the
Entire Economic System: A Rebuttal 392
Incompatibility With the Division of Labor—Socialism as the Only Instance of Unlimited

Concentration of Capital 392
Inherent Limits to the Concentration of Capital Under Capitalism 393
Government Intervention as Limiting the Formation of New Firms 394
The Incentives for Uneconomic Mergers Provided by the Tax System 395
In Defense of “Insider Trading” 395
6. Economically Sound Mergers 396
The Trust Movement 397
7. The Predatory-Pricing Doctrine 399
More Than One Firm in an Industry as the Normal Case 402
“Predatory Pricing” in Reverse: The Myth of Japanese “Dumping” 403
The Chain-Store Variant of the Predatory-Pricing Doctrine 403
Contract Pricing 405
The Predatory-Pricing Doctrine and the Inversion of Economic History 406
The Myth of Predation With Respect to Suppliers 406
The Myth of Standard Oil and the South Improvement Company 407
xx CAPITALISM
8. Marginal Revenue and the Alleged “Monopolistic Restriction” of Supply 408
Competitors’ and Potential Competitors’ Costs—Ultimately, Legal Freedom of Entry—as

Setting the Upper Limit to Prices in a Free Market 411
Ricardo and Böhm-Bawerk on Cost of Production Versus the Elasticity of Demand 414
Pricing Under Patents and Copyrights 417
Contract Pricing and Radical Privatization 420
Private Streets 421
Eminent Domain 421
9. Cartels 423
Cartels and Government Intervention 424
10. “Monopoly” and the Platonic Competition of Contemporary Economics 425
The Doctrine of Pure and Perfect Competition 430
Implications of Marginal-Cost Pricing 432
The Alleged Lack of “Price Competition” 434
11. A Further Word on Cost of Production and Prices 437
Notes 438
CHAPTER 11. THE DIVISION OF LABOR AND THE CONCEPT OF PRODUCTIVE ACTIVITY
PART A. THE ROLE OF MONEYMAKING IN PRODUCTIVE ACTIVITY

1. The Division of Labor and Productive Activity 441
The Doctrine That Only Manual Labor Is Productive 441
2. Productive Activity and Moneymaking 442
Consumptive Production 443
3. Productive Expenditure and Consumption Expenditure 444
4. Capital Goods and Consumers’ Goods 445
Classification of Capital Goods and Consumers’ Goods Not Based on Physical Characteristics 445
Government a Consumer 446
Producers’ Labor and Consumers’ Labor 446
Producers’ Loans and Consumers’ Loans 447
Government Borrowing 447
Capital Goods and Consumers’ Goods Internally Produced; Other Revenues 447
CONTENTS xxi
Capital and Wealth 448
Capital Value and Investment 448
Productive Expenditure and Capital Value 450
Common Confusions About Capital Goods 450
Answers to Misconceptions of the Concepts Presented 452
Adam Smith on “Productive and Unproductive Labor” 456
5. Critique of the Concept of Imputed Income 456
6. Critique of the Opportunity-Cost Doctrine 459
PART B. THE PRODUCTIVE ROLE OF BUSINESSMEN AND CAPITALISTS

1. The Productive Functions of Businessmen and Capitalists 462
Creation of Division of Labor 462
Coordination of the Division of Labor 463
Improvements in the Efficiency of the Division of Labor 464
2. The Productive Role of Financial Markets and Financial Institutions 464
The Specific Productive Role of the Stock Market 466
3. The Productive Role of Retailing and Wholesaling 467
4. The Productive Role of Advertising 471
PART C. BUSINESSMEN AND CAPITALISTS: CLASSICAL ECONOMICS VERSUS

THE MARXIAN EXPLOITATION THEORY
1. The Association Between Classical Economics and the Marxian Exploitation Theory 473
2. Correcting the Errors of Adam Smith: A Classical-Based Critique of the Conceptual

Framework of the Exploitation Theory 475
Smith’s Confusion Between Labor and Wage Earning 475
The Conceptual Framework of the Exploitation Theory 476
Smith’s Failure to See the Productive Role of Businessmen and Capitalists and of the
Private Ownership of Land 477
The Primacy-of-Wages Doctrine 477
A Rebuttal to Smith and Marx Based on Classical Economics: Profits, Not Wages, as
the Original and Primary Form of Income 478
Further Rebuttal: Profits Attributable to the Labor of Businessmen and Capitalists Despite
Their Variation With the Size of the Capital Invested 480
A Radical Reinterpretation of “Labor’s Right to the Whole Produce” 482

xxii CAPITALISM
Implications for the Incomes of “Passive” Capitalists 483
Acceptance of the Conceptual Framework of the Exploitation Theory by Its Critics 484
3. Necessary Revisions in Classical Economics 485
4. The Labor Theory of Value of Classical Economics 486
Harmonization of the Labor Theory of Value With Supply and Demand and the Productive
Role of Businessmen and Capitalists 486
Other Classical Doctrines and the Rise in Real Wages 487
Classical Economics’ Limitations on the Labor Theory of Value 487
The Actual Significance of Quantity of Labor in Classical Economics 491
5. The “Iron Law of Wages” of Classical Economics 491
Diminishing Returns and the Malthusian Influence 492
Ricardo’s Reservations 492
Adam Smith’s Mistaken Belief in the Arbitrary Power of Employers Over Wage Rates 493
Ricardo’s Confusions Concerning the “Iron Law of Wages” 494
The Actual Meaning Ricardo Attached to “A Fall in Wages” 495
Classical Economics’ Mistaken Denial of the Ability to Tax Wage Earners 497
6. Marxian Distortions of Classical Economics; The Final Demolition of the Exploitation Theory 497
Notes 498
PART THREE
THE PROCESS OF ECONOMIC PROGRESS
CHAPTER 12. MONEY AND SPENDING
1. The Quantity Theory of Money 503
The Quantity Theory of Money as the Explanation of Rising Prices 505
2. The Origin and Evolution of Money and the Contemporary Monetary System 506
The Potential Spontaneous Remonetization of the Precious Metals 510
The Government and the Banking System 511
3. The Quantity of Money and the Demand for Money 517
Changes in the Quantity of Money as the Cause of Changes in the Demand for Money 519
4. The Demand for Money: A Critique of the “Balance of Payments” Doctrine 526
The Balance of Payments Doctrine and Fiat Money 528

CONTENTS xxiii
The Balance of Payments Doctrine Under an International Precious Metal Standard 531
Inflation as the Cause of a Gold Outflow 533
Unilateral Free Trade and the Balance of Trade 535
5. Invariable Money 536
Invariable Money and the Velocity of Circulation 537
The Contribution of the Concept of Invariable Money to Economic Theory 538
Notes 540
CHAPTER 13. PRODUCTIONISM, SAY’S LAW, AND UNEMPLOYMENT
PART A. PRODUCTIONISM 542

Productionism Versus the Anti-Economics of Consumptionism 543
1. Depressions and Alleged “Overproduction” 544
2. Machinery and Unemployment 546
3. Alleged Inherent Group Conflicts Over Employment 548
4. Make-Work Schemes and Spread-the-Work Schemes 549
5. War and Government Spending 550
6. Population Growth and Demand 553
7. Imperialism and Foreign Trade 553
8. Parasitism as an Alleged Source of Gain to Its Victims 554
9. Advertising as Allegedly Fraudulent but Economically Beneficial 555
10. Misconception of the Value of Technological Progress 556
11. Increases in Production and Alleged Deflation 558
12. Consumptionism and Socialism 559
PART B. SAY’S (JAMES MILL’S) LAW
1. Monetary Demand and Real Demand 559
2. The Referents of Say’s Law and Its Confirmation by Cases Apparently Contradicting It 561
3. Partial, Relative Overproduction 564
Say’s Law and Competition 568
4. Say’s Law and the Average Rate of Profit 569
Production and the Fallacy of Composition 573
5. Falling Prices Caused by Increased Production Are Not Deflation 573

xxiv CAPITALISM
The Anticipation of Falling Prices 574
Economic Progress and the Prospective Advantage of Future Investments Over

Present Investments 576
Falling Prices and Accumulated Stocks 578
Falling Prices Resulting from a Larger Supply of Labor 579
PART C. UNEMPLOYMENT
1. The Free Market Versus the Causes of Mass Unemployment 580
Full Employment, Profitability, and Real Wages 583
Government Interference 588
2. Unemployment and the 1929 Depression 589
3. Unemployment, the New Deal, and World War II 590
Why Inflation Cannot Achieve Full Employment 591
Inflation Plus Price and Wage Controls 592
World War II as the Cause of Impoverishment in the United States 592
Prosperity Based on the Return of Peace 593
A Rational Full-Employment Policy 594
Appendix to Chapter 13: Inventories and Depressions 594
Inventories and Capital 595
“Excess” Inventories, Malinvestment, and the Deficiency of Inventories 597
Inflation and Credit Expansion as the Cause of Malinvestment in Inventories 598
Why “Excess” Inventories and Monetary Contraction Are Associated 598
Notes 599
CHAPTER 14. THE PRODUCTIVITY THEORY OF WAGES
PART A. THE MARXIAN EXPLOITATION THEORY

1. The Influence of the Exploitation Theory 603
2. Marx’s Distortions of the Labor Theory of Value 604
Implications for Value Added and Income Formation 605
3. Marx’s Version of the Iron Law of Wages 607
The Rate of Exploitation Formula 608
4. Implications of the Exploitation Theory 610

CONTENTS xxv
PART B. THE PRODUCTIVITY THEORY OF WAGES

1. The Irrelevance of Worker Need and Employer Greed in the Determination of Wages 613
2. Determination of Real Wages by the Productivity of Labor 618
3. The Foundations of the Productivity of Labor and Real Wages: Capital Accumulation
and Its Causes 622
Saving as a Source of Capital Accumulation 622
Technological Progress as a Source of Capital Accumulation 629
The Reciprocal Relationship Between Capital Accumulation and Technological Progress 631
The Economic Degree of Capitalism, the Wage “Share,” and Real Wages 632
Other Factors, Above All Economic Freedom and Respect for Property Rights, as Sources
of Capital Accumulation 634
The Undermining of Capital Accumulation and Real Wages by Government Intervention 636
The Nonsacrificial Character of Capital Accumulation Under Capitalism 639
Appendix to Section 3: An Analytical Refinement Concerning the Rate of Economic Progress 641
4. The Productivity Theory of Wages and the Interpretation of Modern Economic History 642
The Cause of Low Wages and Poor Working Conditions in the Past 642
How Real Wages Rose and the Standard of Living Improved 644
5. A Rise in the Productivity of Labor as the Only Possible Cause of a Sustained, Significant
Rise in Real Wages 646
The Futility of Raising Money Wage Rates by Means of an Increase in the Quantity of Money
or Decrease in the Supply of Labor 646
The Futility of a Rise in the Demand for Labor Coming at the Expense of the Demand
for Capital Goods 647
The Futility of Raising the Demand for Labor by Means of Taxation 648
The Limited Scope for Raising Real Wages Through a Rise in the Demand for Labor 650
6. Critique of Labor and Social Legislation 653
Redistributionism 653
Labor Unions 655
Minimum-Wage Laws 659
Maximum-Hours Legislation 660
Child-Labor Legislation 661
Forced Improvements in Working Conditions 662

xxvi CAPITALISM
7. The Employment of Women and Minorities 663
8. The Productivity Theory of Wages and the Wages-Fund Doctrine 664
9. The Productivity Theory of Wages Versus the Marginal-Productivity Theory of Wages 666
The Productivity Theory of Wages and the Effect of Diminishing Returns 667
Notes 669
CHAPTER 15. AGGREGATE PRODUCTION, AGGREGATE SPENDING, AND THE ROLE

OF SAVING IN SPENDING
Spending Not a Measure of Output 673
Shortcomings of Price Indexes 674
1. Gross National Product and the Issue of “Double Counting”: A Is A Versus A Is A+ 674
2. The Role of Saving and Productive Expenditure in Aggregate Demand 682
The Demand for A Is the Demand for A 683
The Demand for Consumers’ Goods and the Demand for Factors of Production as
Competing Alternatives 685
Compatibility With the Austrian Theory of Value 689
Application to the Critique of the Keynesian Multiplier Doctrine 690
Saving Versus Hoarding 691
Saving as the Source of Most Spending 694
The “Macroeconomic” Dependence of the Consumers on Business 696
Saving as the Source of Increasing Aggregate Demand, Both Real and Monetary 698
Saving as the Source of Rising Consumption 698
3. Aggregate Economic Accounting on an Aristotelian Base 699
The Consumption Illusion of Contemporary National-Income Accounting 700
Gross National Revenue 706
More on the Critique of the Multiplier 707
4. Importance of Recognizing the Separate Demand for Capital Goods for the Theory of
Capital Accumulation and the Theory of National Income 709
The Inverse Relationship Between National Income and Economic Progress in an Economy
With an Invariable Money 712
Overthrow of the Keynesian Doctrines of the Balanced-Budget Multiplier and the

Conservatives’ Dilemma 714
Notes 716
CONTENTS xxvii
CHAPTER 16. THE NET-CONSUMPTION/NET-INVESTMENT THEORY OF PROFIT AND INTEREST
PART A. THE POSITIVE THEORY

1. The Nature and Problem of Aggregate Profit 719
The Treatment of Interest 720
The Rate of Profit Not Based on Demand and Supply of Capital, but on the Difference
Between the Demand for Products and the Demand for Factors of Production 721
Determinants of the Average Rate of Profit in the Economic System Different from Deter-
minants of the Rate of Profit of the Individual Company or Industry 721
Critique of the Doctrine That the Interest Rate on Government Bonds Expresses the Pure
Rate of Return to Which Risk Premiums Are Added 722
The Path of Explanation: Net Consumption and Net Investment 723
The Problem of Aggregate Profit: Productive Expenditure and the Generation of Equivalent
Sales Revenues and Costs 723
2. Net Consumption and the Generation of an Excess of Sales Revenues Over Productive Expenditure 725
Net Consumption: Its Other Sources, Wider Meaning, and Relationship to the Saving of
Wage Earners 734
Confirming the Critique of the Exploitation Theory 735
3. The Net-Consumption Theory Further Considered 737
Why Businessmen and Capitalists Cannot Arbitrarily Increase the Rate of Net
Consumption and the Rate of Profit 737
The Net-Consumption Rate and the Gravitation of Relative Wealth and Income 737
Accumulated Capital as a Determinant of Net Consumption 739
An Explanation of High Saving Rates Out of High Incomes 741
Net Consumption and Time Preference 743
4. Net Investment as a Determinant of Aggregate Profit and the Average Rate of Profit 744
Net Investment Versus Negative Net Consumption 750
The Prolongation of Net Investment Under an Invariable Money 754
Net Investment as the Result of the Marginal Productivity of Capital Exceeding the Rate of Profit 756
Net Investment as a Self-Limiting Phenomenon 758
Capital Intensification and the Tendency Toward the Disappearance of Net Investment
Under an Invariable Money 758
The Process of Capital Intensification 759
5. The Addition to the Rate of Profit Caused by Increases in the Quantity of Money 762
xxviii CAPITALISM
The Impact of Increases in the Quantity of Money on the Net-Investment and

Net-Consumption Rates 768
Increases in the Quantity of Money and the Perpetuation of Net Investment 768
The Increase in the Quantity of Commodity Money as an Addition to Aggregate Profit 771
Summary Statement of the Determinants of the Rate of Profit 773
6. Increases in the Real Rate of Profit Dependent on Increases in the Production and Supply of Goods 774
Net Investment Without Increasing Capital Intensiveness 775
Capital-Saving Inventions 776
7. The Inherent Springs to Profitability 778
Wage Rate Rigidities and Blockage of the Springs 784
Capital Intensiveness and the Monetary Component in the Rate of Profit 784
Capital Intensiveness Under Rapid Obsolescence 786
PART B. THE NET-CONSUMPTION/NET-INVESTMENT THEORY AND ALTERNATIVE THEORIES

1. Exposition and Critique of the Productivity Theory in Its Traditional Form 787
2. Exposition and Critique of the Time-Preference Theory in Its Traditional Form 792
The Contradiction Between Böhm-Bawerk’s “First Cause” and the Doctrine of the
Purchasing-Power Premiums 794
The Discounting Approach 795
The Disappearance of the Higher Value of Present Goods at the Margin: Böhm-Bawerk’s
Abandonment of the Time-Preference Theory 797
3. The Classical Basis of the Net-Consumption Theory 797
Appendix to Section 3: Critique of Ricardo’s Doctrine of the Falling Rate of Profit 799
4. Other Proponents of the Net-Consumption/Net-Investment Theory 801
Notes 803
CHAPTER 17. APPLICATIONS OF THE INVARIABLE-MONEY/NET-CONSUMPTION ANALYSIS
1. The Analytical Framework 809
2. Why Capital Accumulation and the Falling Prices Caused by Increased Production Do Not
Imply a Falling Rate of Profit 813
Confirmation of Fact That Falling Prices Caused by Increased Production Do Not Constitute
Deflation 817
More on the Relationship Between Technological Progress and the Rate of Profit 818
Ricardo’s Insights on Capital Accumulation 819

CONTENTS xxix
The Rate of Profit and the Demand for Money 820
3. Why Capital Accumulation Does Not Depend on a Continuous Lengthening of

the Average Period of Production 820
The Average Period of Production and the Limits to Technological Progress as a Source
of Capital Accumulation 824
4. Implications for the Doctrine of Price Premiums in the Rate of Interest 825
5. Implications for the Process of Raising Real Wages 826
6. How the Taxation of Profits Raises the Rate of Profit 826
The Influence of the Monetary System 828
7. How Government Budget Deficits Raise the Rate of Profit 829
The Need to Reduce Government Spending 830
The Government’s Responsibility for the Emphasis of Today’s Businessmen on

Short-Term Results 831
8. Profits, the Balance of Trade, and the Need for Laissez Faire in the United States 831
9. Implications for the Theory of Saving 834
Net Saving and Increases in the Quantity of Money 834
Why the Actual Significance of Saving Lies at the Gross Level 835
Net Saving and the Rate of Profit 836
10. More on Saving and “Hoarding”: “Hoarding” as a Long-Run Cause of a Rise in the
Rate of Profit 837
Implications for the Critique of Keynesianism 837
11. Critique of the Investment-Opportunity and Underconsumption/Oversaving Doctrines 838
The Basic Error of Underconsumptionism 841
How the Demand for Capital Goods and Labor Can Radically and Permanently Exceed
the Demand for Consumers’ Goods 843
Consumption as the Purpose of Production and the Progressive Production of Consumers’

Goods Over Time 847
The Ratio of Demands Between Stages 851
More on the Average Period of Production 852
A Rise in the Demand for Capital Goods and Fall in the Demand for Consumers’ Goods:
The Cross-Hatching of Production 854
12. More on Why Savings Cannot Outrun the Uses for Savings 856
Capital Intensiveness and Land Values 856

xxx CAPITALISM
The Housing Outlet and Consumer Interest 857
The Automatic Adjustment of the Rate of Saving to the Need for Capital 858
Notes 859
CHAPTER 18. KEYNESIANISM: A CRITIQUE 863
1. The Essential Claims of Keynesianism 864
Neo-Keynesianism 865
2. The Unemployment Equilibrium Doctrine and Its Basis: The IS Curve and Its Elements 867
The Grounds for the MEC Doctrine 875
The Keynesian Solution: “Fiscal Policy” 876
3. Critique of the IS-LM Analysis 879
The Declining-Marginal-Efficiency-of-Capital Doctrine and the Fallacy of Context Dropping 879
The Marginal-Efficiency-of-Capital Doctrine and the Claim That the Rate of Profit Is Lower
in the Recovery from a Depression Than in the Depression 881
The Unemployment Equilibrium Doctrine and the Claim That Saving and Net Investment Are
at Their Maximum Possible Limits at the Very Time They Are Actually Negative 881
The Marginal-Efficiency-of-Capital Doctrine’s Reversal of the Actual Relationship Between

Net Investment and the Rate of Profit 882
The Contradiction Between the Marginal-Efficiency-of-Capital Doctrine and the

Multiplier Doctrine 883
A Fall in Wage Rates as the Requirement for the Restoration of Net Investment and
Profitability Along With Full Employment 883
Wage Rates, Total Wage Payments, and the Rate of Profit 884
Critique of the “Paradox-of-Thrift” Doctrine 884
Critique of the Saving Function 885
Critique of the “Liquidity-Preference” Doctrine 885
4. The Economic Consequences of Keynesianism 887
The Growth in Government 888
Budget Deficits, Inflation, and Deflation 888
Keynesianism and Economic Destruction 889
Why Keynesianism Is Not a Full Employment Policy 890
Keynesianism Versus the Rate of Profit: “The Euthanasia of the Rentier” and
“The Socialization of Investment” 891
CONTENTS xxxi
Notes 892
CHAPTER 19. GOLD VERSUS INFLATION
PART A. INFLATION OF THE MONEY SUPPLY VERSUS ALTERNATIVE THEORIES OF

RISING PRICES
1. The Analytical Framework of the Quantity Theory of Money 895
The Vital Demand/Supply Test for All Theories of Rising Prices 897
The Elimination of Less Supply as the Cause of an Inflationary Rise in Prices 897
2. Refutation of the “Cost-Push” Doctrine in General 907
3. Critique of the “Wage-Push” Variant 909
4. Critique of the “Profit-Push” Variant 911
5. Critique of the “Crisis-Push” Variant 913
6. Critique of the Wage-Price Spiral Variant 915
7. Critique of the “Velocity” Doctrine 915
8. Critique of the “Inflation-Psychology” Doctrine 916
9. Critique of the Credit-Card Doctrine 917
10. Critique of the Consumer-Installment-Credit Doctrine 919
11. Critique of the Consumer-Greed Doctrine 920
12. The Meaning of Inflation 920
PART B. THE DEEPER ROOTS AND FURTHER EFFECTS OF INFLATION

1. The Connection Between Inflation and Government Budget Deficits 922
Budget Deficits and the Monetary Unit 924
2. The Motives and Rationale for Deficits and Inflation 925
The Welfare State 925
Inflation and War Finance 926
Inflation and the “Easy Money” Doctrine 926
Inflation as the Alleged Cure for Unemployment 926
The Underlying Influence of the Socialist Ideology 926
3. Inflation and Deficits Versus Representative Government and Economic Freedom 927
4. Inflation as the Cause of a Redistribution of Wealth and Income 928
5. Inflation and the Destruction of Capital 930

xxxii CAPITALISM
Reversal of Safety 930
Tax Effects 931
The Prosperity Delusion and Overconsumption 933
Malinvestment 935
The Withdrawal-of-Wealth Effect 936
6. Consequences of the Destruction of Capital 937
Reduction of the Real Rate of Return 937
The Gains of Debtors Less Than the Losses of Creditors 937
The Impoverishment of Wage Earners 937
The Stock Market and Inflationary Depression 938
7. Inflation as the Cause of Depressions and Deflation 938
Gold Clauses and Prospective Inflation of Paper as the Cause of Deflation in Gold 940
8. Inflation as the Cause of Mass Unemployment 941
9. The Inherent Accelerative Tendencies of Inflation 942
The Welfare-State Mentality 943
Inflation to Solve Problems Caused by Inflation 944
Recessions as Inflationary Fueling Periods 945
Indexing and the Wage and Interest Ratchets 945
The Current State of Inflation 946
Inflation and the Potential Destruction of the Division of Labor 949
PART C. GOLD
1. Freedom for Gold as the Guarantee Against the Destruction of Money 951
A Proper Gold Policy for the Government 951
2. The Case For a 100-Percent-Reserve Gold Standard 954
Falling Prices Under the 100-Percent-Reserve Gold Standard Would Not Be Deflationary 954
The 100-Percent-Reserve Gold Standard as the Guarantee Against Deflation 955
Further Virtues of the 100-Percent-Reserve Gold Standard 956
The Moral Virtue of the 100-Percent-Reserve Gold Standard 957
The Monetary Role of Silver 958
3. The 100-Percent-Reserve Gold Standard as the Means of Ending Inflation Without a Depression 959
CONTENTS xxxiii
The 100-Percent-Reserve Gold Standard, Liquidity, and the Dismantling of the Welfare State 962
Notes 963
EPILOGUE
CHAPTER 20. TOWARD THE ESTABLISHMENT OF LAISSEZ-FAIRE CAPITALISM
1. Introduction 969
The Importance of Capitalism as a Conscious Goal 969
The Capitalist Society and a Political Program for Achieving It 971
2. Privatization of Property: Importance of Fighting on Basis of Principles 972
3. The Freedom of Production and Trade 973
Appropriate Compromises 974
The Case for the Immediate Sweeping Abolition of All Violations of the Freedom of
Production and Trade 974
4. Abolition of the Welfare State 976
Elimination of Social Security/Medicare 976
Elimination of Public Welfare 977
Elimination of Public Hospitals 978
Firing Government Employees and Ending Subsidies to Business 978
Escaping from Rent Control With the Support of Tenants 980
5. Abolition of Income and Inheritance Taxes 980
6. Establishment of Gold as Money 982
7. Procapitalist Foreign Policy 982
Freedom of Immigration 984
Friendly Relations With Japan and Western Europe 985
8. Separation of State from Education, Science, and Religion 986
Abolition of Public Education 986
Separation of Government and Science 986
Separation of State and Church 987
9. A General Campaign at the Local Level 988
10. The Outlook for the Future 989
Notes 990
xxxiv CAPITALISM
A BIBLIOGRAPHY OF WRITINGS IN DEFENSE OF CAPITALISM 991
INDEX 999
FIGURES
Figure 5–1 Hypothetical Demand and Supply Curves Based on the Data of Table 5–1 153
Figure 5–2 The Austrian View of Demand and Supply 154
Figure 5–3 The Aggregate Unit Elastic Demand Curve 159

Figure 5–4 Total Demand Curve With Overall Fixed Supply 163
Figure 5–5 Derivation of the Upward Sloping Supply Curve From a Competing Demand Curve 164
Figure 5–6 A Horizontal Supply Curve 167

Figure 5–7 A Downward Sloping Supply Curve 168
Figure 12–1 The Creation of Fiduciary Media 512
Figure 13–1 The Consumptionist View of the Economic World 545

Figure 13–2 The Productionist Aggregate Demand Curve 546
Figure 13–3 Productionism and Say’s Law: Determination of Aggregate Real Demand by Supply 561
Figure 13–4 The Demand For Labor 581
Figure 14–1 Determination of Price by the Competition of the Buyers 615

Figure 14–2 Determination of Wages by the Competition of Employers 615
Figure 14–3 Employer Competition Versus Labor Shortage 616
Figure 14–4 The Relative Production of Capital Goods in a Stationary Economy 624
Figure 14–5 The Relative Production of Capital Goods in a Progressing Economy 625
Figure 15–1 Gross Product and Productive Consumption 675
Figure 15–2 The “Keynesian Cross” 700

Figure 15–3 The Elements of the Balance Sheet 703
Figure 15–4 The Elements of the Income Statement 703
Figure 15–5 Formation of National Income in a Stationary Economy with an Invariable Money 710
Figure 15–6 Formation of National Income in a Progressing Economy with an Invariable Money 711
Figure 16–1 Net Consumption and the Determination of Aggregate Profit 729
Figure 16–2 The Elements Determining the Average Rate of Profit 732
Figure 16–3 Profits in an Economy with an Increasing Quantity of Money 765
Figure 17–1 Profits in a Progressing Economy with an Invariable Money 811
Figure 17–2 The Average Period of Production Under a 50% Relative Production of Capital Goods 821
Figure 17–3 The Average Period of Production Under a 60% Relative Production of Capital Goods 823
Figure 18–1 The Keynesian Aggregate Demand Curve and the “Unemployment Equilibrium” 868
xxxvi CAPITALISM
Figure 18–2 The IS Curve 869

Figure 18–3 The IS Curve Sets the Limit to Aggregate Demand 870
Figure 18–4 The Derivation of the IS Curve 871

Figure 18–5 The MEC Schedule 874
Figure 18–6 Government Budget Deficits as an Outlet for Savings 876
Figure 18–7 How Budget Deficits Are Supposed to Promote Full Employment 877
Figure 19–1 Falling Production and Supply Under an Invariable Money 900
Figure 19–2 The Initial Balance Sheet of a Hypothetical Average Firm Before a Rise in Prices
Resulting from Any Cause 904
Figure 19–3 The Balance Sheet of a Hypothetical Average Firm Following a Rise in Prices Caused
by a Halving of Supply 905
Figure 19–4 The Balance Sheet of a Hypothetical Average Firm Following a Rise in Prices Caused
by a Doubling of Money and Demand 906
TABLES
Table 3–1 Diminishing Returns 68

Table 5–1 Hypothetical Demand and Supply Schedules 152
Table 5–2 Hypothetical Total and Partial Demand Schedules 162

Table 5–3 Derivation of an Upward Sloping Supply Schedule From a Downward Sloping
Demand Schedule 166
Table 9–1 The Absolute Advantage of the United States over Brazil 351
Table 10–1 Marginal Revenue and the Alleged Incentive of a “Monopoly” Firm to
“Restrict” Its Production 409
Table 10–2 The Implications of Price Equal Marginal Cost for the Recovery of Fixed Costs 428
Table 12–1 Money Supply, Consumer Demand (GNP/GDP), and Velocity of Circulation
in the United States, Selected Years, 1914–1993 523
Table 13–1 How an Increase in Aggregate Supply Creates a Precisely Equal Increase in
Aggregate Real Demand 563
Table 13–2 Say’s Law and the Process of Economic Adjustment 565
Table 13–3 Production and Profitability in the Individual Industry and in the Economy as a Whole 571
Table 15–1 How Contemporary Economics Double Counts the Value of a Loaf of Bread (and of
Consumers’ Goods in General) 681
Table 15–2 Productive Expenditure Minus Costs Equals Net Investment 705
Table 15–3 The Optical Illusion of Consumption as the Main Form of Spending 706
Table 15–4 From Gross National Revenue to National Income and Net National Product 707
Table 15–5 The “Multiplier” in the GNR Framework 708

Table 15–6 National Income in Figure 15–5 713
Table 15–7 National Income in Figure 15–6 714
Table 16–1 The Components of the Demand for Factors of Production and Products 726
Table 16–2 The Components of Demand Numerically Illustrated 727
Table 16–3 Productive Expenditure, Costs, and Sales Revenues —the Elements Generating
Profit in Figure 16–1 730
Table 16–4 A Rise in Profits Caused by a Rise in Net Consumption and Fall in Productive Expenditure 736
Table 16–5 The Emergence of Net Investment 745

Table 16–6 Net Investment as a Source of Aggregate Profit 747
Table 16–7 The Relationship Between Profits and Net Investment 749
Table 16–8 Net Investment as the Basis for Aggregate Profit with Sales Revenues Less than Productive
Expenditure Because of Hoarding or Saving to Finance Loans and Securities Purchases 751
xxxviii CAPITALISM
Table 16–9 Net Investment as the Basis for Aggregate Profit with Sales Revenues Less than Productive
Expenditure Because of Secondary Productive Expenditure 752
Table 16–10 The Process of Capital Intensification or How More Capital Is Invested When
the Demand for Consumers’ Goods Falls 760
Table 16–11 The Effect of an Increasing Quantity of Money and Rising Volume of Spending
on the Nominal Rate of Profit 766
Table 16–12 Recalculation of Rate of Profit in Figure 16–2 with Money Excluded from Capital 767
Table 16–13 Recalculation of Rate of Profit in Figure 16–3 with Money Excluded from Capital 768
Table 16–14 The Net Investment Rate Equals the Rate of Increase in the Money Supply 770
Table 16–15 The Effect of an Increasing Quantity of Money and Rising Volume of Spending on the Nominal
Rate of Profit When the Increase in the Quantity of Money is Added to the Amount of Profit 772
Table16–16 Capital Intensive Methods and the Rate of Profit 781
Table 16–17 Capital Intensive Industries and the Rate of Profit 782
Table 17–1 Sales Revenues, Costs, and Profits in the Production of Consumers’ Goods and Capital Goods 844
Table 17–2 The Demand for Factors of Production at Various Degrees of Remove from the Production of
Consumers’ Goods 845
Table 17–3 The Demand for Factors of Production in Year N and Its Cumulative Contribution to the
Production of Consumers’ Goods in the Future 848
Table 17–4 Comparison of the Present, Extreme Case with that of Figure 16–2 853
Table 19–1 Effect of Inflation on the Nominal Rate of Profit and the Taxation of Profits 932
PREFACE
T his book is the product of a labor of love extending

over many years. I conceived of it as an explicit
project at least as far back as the spring of 1977, when I
ety.” Thus, this book is a lasting legacy of the TJS
conferences and seminars.
By 1990, my progress on the book had decisively
made a several-page-long list of the major points it would outstripped my lecture preparations and I was using
contain. Although I was eager to begin writing it at once, material from the manuscript as the substance of my
one thing after another interfered, the most important lectures.2 By this time, I at last had a complete draft of
being finding a publisher for my previous book The the book, which included an updated and expanded ver-
Government Against the Economy, which I had only sion of The Government Against the Economy as Chap-
recently completed. As a result of this and a considerable ters 6–8. Extensive editing, reorganization, and rewriting
variety of less important projects, I was not able actually occupied another five years, with the result that the work
to begin work on the present book until sometime in that is offered now is as well organized, well-written, and
1981. clear as I have been able to make it.
In that year and the next, I completed the first draft of I want to say that a very important element in the
what are now the Introduction and first three chapters. pleasure I have derived from the writing of this book
In 1982, my wife Edith Packer and I, together with our rested on my use of a personal computer. When I wrote
friend Jerry Kirkpatrick, founded what later became The Government Against the Economy and when I began
known as The Jefferson School of Philosophy, Econom- writing this book, I experienced it as me, a fountain pen,
ics, and Psychology (TJS). I agreed to deliver eight and a yellow legal pad against the world. I fully believed,
lectures on the institutions and functioning of a capitalist of course, that the pen is mightier than the sword and that
society for TJS’s first summer conference, which was with my pen I would ultimately prevail. But however
held the following year on the campus of the University mighty is the pen, the personal computer is far mightier.
of California, San Diego. Those lectures, which were And every morning, since the fall of 1983, when I entered
fully written out, constituted the first draft of what are my office and sat down at my desk I would eagerly watch
now Chapters 4 and 9 and the first part of Chapter 5. my computer as it went through its startup routine. My
The writing out of my lectures for succeeding TJS thought was, in effect, “Here is this wonderful, extremely
summer conferences in 1985, 1987, and 1989, which powerful machine that is my ally in the work I am doing
were also held on the UCSD campus, represented drafts and that makes the doing of it so much easier and more
of what are now chapters 11 and 13–17.1 My 1986 TJS enjoyable.” To me, as a writer, the personal computer is
Fall seminar lecture was the first draft of what is now the greatest of all the remarkable goods supplied by
Chapter 20, which bears the same title as the lecture, capitalism, surpassing even the personal automobile in
namely, “Toward the Establishment of a Capitalist Soci- its contribution to the ease and enjoyment of life. Without
21 Thus,
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1990
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10. of the text are available on audio cassette from The Jefferson School at PO Box 2934, Laguna Hills, CA 92654.
xl CAPITALISM
it, the writing of this book would probably not have been behalf. I actually set out to write such a book at the time,
possible. and succeeded in putting together about one or two
On a vacation early in the course of writing this book, paragraphs.
I read a Western novel by the late Louis L’Amour. I don’t It was clear to me that such contemptuous attitudes
remember the story itself, but one brief portion of the and the violations of property rights that they supported
novel has stood out in my mind ever since and was a were contrary to everything that the Declaration of Inde-
significant help to me in the rest of my writing. It was pendence and Constitution of the United States stood for,
about the journey of pioneers traveling west in covered which above all was the right of the individual to the
wagons, and described how on some days they would pursuit of his own happiness, which included his material
make so little progress that after a whole day’s march, prosperity and enjoyment of same. Indeed, my first seri-
they could still see the remains of their campfires of the ous professional ambition, which I held around the age
night before. The important thing to those pioneers, of twelve, was to become a Constitutional lawyer, so that
L’Amour stressed, was that each day they did make some I might best defend that right.
progress—they always finished the day further west than I can trace my admiration for the United States’ Con-
they began it. This became an inspiration to me on all stitution back to about the age of five. I remember early
those days when the end result of many hours of work in World War II, asking my father why the United States
was that I had gotten only a few paragraphs beyond deserved to win all the wars it had ever fought, as well
where I had finished the night before. At those times, I as the one it was now in. He answered that the United
contented myself with the knowledge that at least I was States was the world’s best country. And when I asked
that many paragraphs further ahead and that I was still what made it the world’s best country, he answered “the
moving “west,” so to speak. In retrospect, I think of Constitution.” I don’t know what understanding I could
things somewhat more humorously, and say to myself, have had of such an abstraction at that very young age,
“Even if you average just half a page a day, after five or but I am quite sure that very early, at least implicitly, I
ten years it adds up.” grasped that the Constitution was a body of principles
I said that I conceived of this book as an explicit controlling the behavior of the government of the United
project in 1977. It was an implicit project long before that States and defining the character of that government as
time. It is the culmination of practically a lifetime of good. The Constitution, I came very early to understand,
concern that I have had for the protection of property made the United States the world’s best country because
rights and for the right of individuals personally and it created a government that, totally unlike the govern-
selfishly to enjoy all the prosperity they can peacefully ments of the countries of Europe and the rest of the world,
achieve. I remember identifying as a boy of no more than did not harass its citizens, but instead left them free to
ten or eleven years of age that what the tenants and city pursue their happiness. This, I understood, was why both
government of New York, which is where I then lived, pairs of my grandparents had come to the United States
were doing with the property of the landlords of that city, and why all the immigrants, starting with the Pilgrims,
by means of rent control, was exactly the same in prin- had come to America. I wondered why all other countries
ciple as what schoolyard bullies often did with my base- did not adopt the Constitution of the United States.
ball or football—namely, seize it against the will of its Until the age of eleven or twelve, I took for granted
owner and arbitrarily use it for their own pleasure, with- that practically every American recognized the value of
out a thought for the rights of the owner, mine or the his country because he loved its freedom and supported
landlords’. the principles on which the United States was based.
From that early age, I was very much aware of a Based on my reading of editorials and columnists in the
widespread contempt and hostility toward property rights Hearst Press, then represented in New York by The Daily
and property owners—a contempt and hostility mani- Mirror and the Journal American, I thought that now that
fested in such comments as the one I heard a little later the Nazis had been defeated, the only exceptions were a
from a junior high school teacher that she did not care handful of communist or socialist crackpots.
about the fact that there were people paying ninety I had had an inkling, at the age of ten, that this
percent of their incomes in taxes (which was then the sanguine view of things might not be altogether accurate.
maximum federal surtax rate), “because they still had a This occurred when someone pointed out to me that the
lot left.” When I encountered the same attitude of con- paper currency of the United States had imprinted on it
temptuous philosophic indifference to the violation of a promise to pay the bearer on demand the number of
property rights in one of my own close relatives, I came dollars on the face of the bill, that until 1933 this had
to the conclusion that property rights were very much in meant a promise to pay those dollars in gold coin, which
need of defense, and that I must write a book on their was the money of the country affirmed by the Constitu-
PREFACE xli
tion, but now meant the utter absurdity of paying the they all loved it.
bearer merely the very same kind of paper notes that he There was a flood of leftist arguments against individ-
already possessed. I was astounded that such an obvious ual rights and freedom, and nowhere were there answers
absurdity was tolerated—that it was accepted routinely, being given, at least nowhere that I had found. I reluc-
everyday, by everyone, without protest. tantly came to the conclusion that the principles of indi-
My cheerful confidence in the popularity of individ- vidual rights and freedom enshrined in the Declaration
ual freedom did not begin to erode, however, until I of Independence and Constitution had largely lost their
reached junior high school. There, after a few months’ influence on the American people and that these glorious
attendance, I came to the conclusion that a disproportion- documents themselves were on the way to becoming
ate number of the communist and socialist crackpots I items of merely historical interest, rather than living
had read about were to be found among my teachers. In documents controlling the conduct of our country’s gov-
addition to numerous such remarks by teachers as the one ernment.
I described above, I encountered teachers who openly It quickly became obvious to me, from the arguments
confessed to being socialists, including one who regret- of my teachers and the college students I met, and from
ted that he lived just inside the border of a conservative those even of my own dentist, who favored socialized
Republican’s congressional district because if he lived medicine, that what gave rise to the contempt for prop-
across the street he could have voted for Representative erty rights and property owners, and the readiness to
Vito Marcantonio, then the most far-leftwing member of discard everything that the United States as a country had
Congress. The same man described the Soviet Union as stood for in defending those rights, was a set of economic
a great experiment. He and his colleagues dismissed beliefs. Respect for property rights, it was held, was
questions that challenged any of their interpretations by tantamount to respecting the right of a handful of capi-
referring to the presumed size of the bank account or talist exploiters to impoverish the masses by paying them
stock portfolio of the questioner’s father. I clearly re- starvation wages on the one side while charging them
member this man’s response to what I thought was an outrageous, monopoly prices on the other. Respecting
astonishing fact that all by itself proved the value of the the rights and freedom of businessmen and capitalists, it
United States and what it stood for, a fact which I happily was claimed, was also the cause of terrible depressions
conveyed to my classmates in the seventh grade in an and mass unemployment, as well as the cause of unsafe
oral report, and which I had learned from a motion-pic- food and drugs, child labor, sweat shops, poverty in old
ture documentary shortly before. This was the fact that age, wars, and countless other evils. Again and again, I
with only six percent of the world’s population, the saw, the assault on property rights was based on ideas
United States produced fully forty percent of the world’s about economics. It was ideas about economics that were
annual output of goods and services. The man’s reply was destroying the concepts of individual rights and freedom.
yes, but so what; ten percent of the country’s population And, thus, by the age of thirteen, I gave up my ambition
owned ninety percent of its wealth. to become a Constitutional lawyer and began the study
I soon realized that no one I knew, neither other of economics instead.
students, nor any of the adults I knew, was able to answer I undertook the study of economics for the explicit
the leftwing arguments I was encountering daily at school. purpose of finding economic arguments in defense of
For a time, I thought, the explanation was that this was individual rights, i.e., property rights. In my first year of
New York City. The people here have been intellectually study, with the aid of a dictionary by my side, I read
corrupted. But the rest of the country is still full of people substantial portions of Adam Smith’s The Wealth of Nations
who support the principles of individual rights and free- and David Ricardo’s Principles of Political Economy
dom and know how to defend them. Over the next two and Taxation, as well as the whole of a book on the
summers, I learned that the problem was nationwide. I history of economic thought. I started with Smith and
made this discovery as the result of my experiences at a Ricardo in the belief that their books would provide the
vacation camp in Maine, where I met a wide variety of arguments I was seeking, for they had the reputation of
college students from all over the country who were having been the leading defenders of capitalism in the
working as camp counselors, as well as occasional local system’s heyday. Although my mature evaluation of
citizens. The college students too included a goodly them is that they do in fact have some very important
proportion of self-confessed “social democrats.” I re- things to say in the defense of capitalism, I was greatly
member one of them telling me with obvious contempt disappointed in them at the time, because it seemed to
how ignorant the parents of many of the campers were. me that with their support for the labor theory of value,
They had been to see a local production of a play by George they served merely to prepare the ground for Marx.3
Bernard Shaw that made their type of people its targets, and None of the other authors described in the book I read on
3 Concerning the errors of this view, see below, pp. 473–500.
xlii CAPITALISM
the history of economic thought appeared to offer any a strong, self-assured position in defense of an important
serious arguments in defense of capitalism. and relatively complicated aspect of the functioning of
I turned to browsing the card catalog of the public capitalism, a position that Say and Ricardo had taken in
library for any author who might be a defender of capi- the early nineteenth century, which was that general
talism and from whom I might learn something. In my business depressions could never be caused by any so-
search, I came across Capitalism, Socialism, and Democ- called excess of production. I knew immediately that
racy by Joseph Schumpeter, and Capitalism: The Cre- here was a man I must read further. And, a few months
ator by Carl Snyder, both of which books I quickly gave later, at the age of fourteen, I borrowed his classic So-
up on. I considered Schumpeter valueless as soon as I cialism from the public library.7 Unfortunately, the book
came across his statement that while socialism looked was then beyond me and I was not able to gain very much
better than capitalism on paper, capitalism had proved from the parts I attempted to read. But less than a year
superior to socialism in practice. To me this meant that later, with some of the money I had been given on my
Schumpeter was saying that socialism seemed better as fifteenth birthday, I bought Socialism and over the com-
far as we could think and speak about it, but that some- ing months had one of the very greatest intellectual
how, for reasons that we could not understand or verbal- experiences of my life, before or since. In the intervening
ize, capitalism turned out to be better in the real world. months since my previous attempt, my mental powers
That was not what I was looking for, which was to know must have grown the intellectual equivalent of the sev-
why capitalism was right in theory, and not just in some eral inches that boys of that age are capable of growing
realm of practice that could not be understood in theory. in such a short time, because I was now able to under-
I immediately gave up on Snyder for essentially the same stand a very great deal of what I read. And what I read
reason—namely, his book appeared to be largely de- filled me with a sense of utter enlightenment.
scriptive and statistical and to have little or nothing to Mises argued that real wages were determined by the
say in the essential realm of conceptual understanding, productivity of labor, which in turn depended on capital
i.e., of theory. I experienced great disappointment even accumulation, which was accomplished by the saving
in Thomas Jefferson, when I read that he thought that the and investment of businessmen and capitalists and was
preservation of an agricultural society was essential for undermined by progressive income and inheritance tax-
liberty. I realized that the modern world depended vitally ation. He explained the operations of the price system
on such things as steel mills and all other forms of heavy and showed that the businessmen and capitalists were not
industry, and I wanted authors who would defend indi- a law unto themselves but, in order to make profits and
vidual rights in that context. avoid losses, had to produce the goods the consumers
At the age of fourteen, I discovered William Stanley wanted to buy. He showed how price controls destroyed
Jevons’s The State in Relation to Labour and The Theory the price system and resulted in the establishment of de
of Political Economy.4 While the first of these titles facto socialism, of which Nazi Germany was the leading
began with major concessions on the side of government example. He explained why socialism had to fail eco-
intervention, the substance of the book was a brilliant nomically, because of its lack of markets and consequent
analysis of the destructive consequences of labor unions.5 inability to have a price system and thus to perform
The second was an exposition of the theory of marginal economic calculations. He showed how political free-
utility, which I valued greatly, inasmuch as it seemed to dom depended on economic freedom and thus why so-
provide an essential part of the answer to Marxism— cialism, with its utter lack of economic freedom, was
enough, at least, to convince me that Marx and all of my necessarily a system of dictatorship. He showed how
Marxist high-school teachers were wrong in economic under capitalism, the privately owned means of produc-
theory. tion operated to the benefit of the great mass of nonown-
During this period, I had come to subscribe to a ers of the means of production to almost as great an extent
fortnightly magazine called The Freeman. At that time, as they did to the benefit of the owners and that economic
Henry Hazlitt played a major role in writing the mag- progress, based on the profit motive and saving and
azine’s editorials and in determining its content. So long capital accumulation, brought about a steadily rising
as he continued in that role, I found the magazine so standard of living of the nonowners. He showed how the
valuable that I read every issue from cover to cover. law of comparative advantage made room for virtually
It was in one of the early issues of The Freeman that everyone, however unskilled, to participate in the great
I had my first exposure to the writings of Ludwig von world-embracing system of division of labor and to
Mises. It was his essay “Lord Keynes and Say’s Law.”6 obtain all of its essential benefits. He showed that unem-
From reading the essay, I could see that Mises knew the ployment and the consequent inability of people to par-
history of economic thought and that he was presenting ticipate in the division of labor was the result of government
7654 The
Ludwig
IWilliam
happened
essay
von
Stanley
has
toMises,
been
buy
Jevons,
The
reprinted
Socialism
State
The in
State
in
(New
Relation
Ludwig
inHaven:
Relation
von
to Labour
Yale
Mises,
to Labour
University
asPlanning
the result
(London:
Press,
For
of not
Freedom,
Macmillan
1951);
beingreprint
able
4thand
ed.
toed.
afford
Co.,
enl.
(Indianapolis:
1894);
(South
Jeremy
The
Holland,
Bentham’s
Theory
Liberty
Illinois:
ofClassics,
Political
In Defence
Libertarian
1981).
Economy,
of Usury,
Press,
4th
a1980).
work
ed. (London:
whose title
Macmillan
greatly appealed
and Co.,to
1924).
me, and thus having to choose the substantially less expensive title by Jevons.
PREFACE xliii
interference with the height of wage rates. He showed opment, was to be invited by von Mises to attend his
why the economic interests of all individuals and groups, graduate seminar at New York University. I received this
of all countries, races, and economic classes were funda- invitation shortly after my sixteenth birthday, in the last
mentally harmonious and were made to conflict only by part of my senior year in high school. It came about as
means of the adoption of the irrational ideologies of the result of a meeting, arranged by The Foundation For
nationalism, racism, and Marxism and the policies of Economic Education, between Mises, myself, and Ralph
government intervention based upon them. He demon- Raico, who was then a fellow student of mine at the
strated that the existence of society—a division-of-labor Bronx High School of Science (Raico is now Professor
society—and of all the other people who participated in of History at the State University of New York, Buffalo).
it, was in the material self-interest of every individual, After several hours of conversation, spent mainly an-
and thus that there was a profoundly rational, self-inter- swering our questions, Mises invited us both to come to
ested basis for social cooperation and such ethical norms his seminar—provided (in reference to our extreme youth)
as not killing or injuring other people. that we did “not make noise.” We both eagerly accepted
These essential points were amplified and additional his invitation and began attending the very next week.
major arguments were added to them in his other writings The format of the seminar was that each semester it
then available in English, above all, Human Action and was devoted to some topic of special current interest to
The Theory of Money and Credit, as well as Planning For von Mises, such as inflation or the epistemology of
Freedom, Bureaucracy, and Omnipotent Government, all economics. It met on Thursday evenings from 7:25 to
of which I read over the next three years. In these other 9:05 PM, and, for most of the period in which I attended,
works Mises added vigorous defenses of the gold standard, at the Gallatin House, which was a fine old town house
brilliant analyses of inflation, compelling demonstrations (once the home of the British consul) located at 6 Wash-
that depressions were the result of government-spon- ington Square North, in New York’s Greenwich Village.
sored credit expansion, and much else besides. Reading It would open each evening with Mises himself speaking
Mises on a random day, I would encounter such brilliant from a few notes for about twenty minutes to half an hour,
observations as that even if a chorus of people were followed by a general, cross discussion among the vari-
simultaneously to say “We,” it would still be individuals ous seminar members who wished to participate or who
who were saying it, which served as an illustration of the Mises occasionally called upon. Often, a portion of the
fact that collectives and groups of any kind had no real discussion was devoted to some paper that a seminar
existence apart from the individuals who comprised them; participant had prepared for the occasion.
that high profits provided not only an incentive to stepped- I regularly attended the seminar for about seven and
up investment, but also the means of stepped-up invest- a half years, through the remainder of high school, all
ment, inasmuch as the high profits would themselves be through my college years at Columbia University, and
largely reinvested; that war and division of labor were then as an enrolled student in NYU’s Graduate School of
incompatible, inasmuch as war represented a situation of Business Administration, which was where Mises taught.
the baker fighting the tailor, with the result that both I stopped attending only when I myself began to teach
parties were deprived of vital supplies; that democracy and had a class of my own to conduct on Thursday
was necessary as the means of making possible peaceful evenings.
changes in government, so that a dissatisfied majority At the seminar, I had the opportunity of hearing many
would not have to resort to revolution or civil war to have observations by Mises that were not in his books that I
its way; and so on. Looking back, I do not recall a single had read. Equally important, I had the opportunity of
paragraph of von Mises that did not serve as an inspira- asking him questions. Uncharacteristically, I did not raise
tion to my own thinking, even in the cases (which were any questions until after I had been in attendance for
relatively few) in which I ultimately came to disagree about a year and a half. Thereafter, I became a full-
with him. fledged participant, often being assigned papers to write
Mises was clearly the man whose writings I had been and deliver.
searching for. Here at last was a great, articulate defender My most outstanding memory of the seminar is that
of the economic institutions of capitalism, who wrote of Mises himself. I always experienced a heightened
with all the power that logical argument could provide level of awareness when he entered the room and took
and with the authority of the highest level of scholarship. his seat at the seminar table. What I was acutely aware
(Socialism and Human Action abound with references of was that here, just a few feet away from me, was one
and quotations in German, French, Latin, and Greek.8) of the outstanding thinkers in all of human history.
One of the great good fortunes of my life, that pro- One of the things Mises stressed in his seminar was
foundly contributed to my subsequent intellectual devel- the importance of knowing foreign languages. One of the
8 Happily, these have been translated in the currently available Liberty Classics reprint edition of Socialismcited above. As a major aid to reading HumanAction, see Mises Made Easier A Glossary for Human Action prepared by Percy L. Greaves, Jr. (Dobbs Ferry, New York: Free Market Books, 1974).
xliv CAPITALISM
reasons he gave for this was the frequent inadequacy of and his wife Mary; and Percy Greaves, who later wrote
translation. In this connection, I was very surprised to Understanding the Dollar Crisis,9 and his wife Bettina
learn that he was unhappy with the translation of Social- Bien Greaves, then and now a staff member of the
ism. Foundation for Economic Education. Prominent more or
I accepted his injunction to learn foreign languages less frequent visitors to the seminar were Henry Hazlitt,
and because there were important writings of his own not then a regular columnist for Newsweek as well as the
yet translated, as well as important writings of Menger author of numerous books, the best known of which is
and Böhm-Bawerk, his predecessors in the Austrian school, Economics in One Lesson,10 and Lawrence Fertig, who
I put the opportunity I had of studying German at Colum- at the time was a columnist for the New York World
bia College to very good use. I wholeheartedly plunged Telegram and Sun.) Rothbard was then working on his
into freshman and then sophomore German and memo- Man, Economy, and State on a grant from the Volker
rized every new word I came across, sometimes to the Fund and urged me to apply, assuring me that a proposal
extent of fifty or a hundred words a day. I memorized the to translate Grundprobleme would be considered both
declension of every model noun and the conjugation of seriously and sympathetically.11
every model verb, in every tense, mood, and voice, for By the time I had been in the seminar for about a year,
every person, and every model sentence that I found. The Rothbard, Raico, and I, were joined by Robert Hessen
result was that in the Christmas vacation of my sophomore (now a Senior Fellow at the Hoover Institution in Stan-
year, I dared to translate a chapter of his Grundprobleme ford) and Leonard Liggio (who later became President
der Nationalökonomie (Epistemological Problems of Eco- of the Institute for Humane Studies). About a year after
nomics) and then show it to him. Although he had some that, Ronald Hamowy (now a Professor of History at the
misgivings, he supported my application for a grant from University of Alberta in Edmonton) also joined us. We
the William Volker Fund to translate the remainder of the almost always continued the discussions of the seminar
book over the following summer. I obtained the grant and until past midnight, usually at Rothbard’s apartment, and
the next summer accomplished the translation at Colum- frequently met on weekends. We informally called our-
bia’s Butler Library. I translated four pages a day, Monday selves “The Circle Bastiat,” after the leading nineteenth-
through Friday, and three more on Saturday, for ten century French advocate of capitalism, Frederic Bastiat.
weeks, until the whole book was done. I worked from At one of our gatherings, in the summer of 1954, over
nine in the morning until seven in the evening during the three years before the publication of Atlas Shrugged,
week, and from nine until five on Saturdays. When I Rothbard brought up the name Ayn Rand, whom I had
finished, I typed the manuscript and had copies of it in not previously heard of. He described her as an extremely
the hands of the Volker Fund and Mises well before interesting person and, when he observed the curiosity
Columbia’s fall semester began. I know that both he and of our whole group, asked if we would be interested in
the Volker Fund were very favorably impressed, because meeting her. Everyone in the group was very much
he urged me to translate Heinrich Rickert’s Kulturwissen- interested. He then proceeded to arrange a meeting for
schaft und Naturwissenschaft, which he considered a ma- the second Saturday night in July, at her apartment in
jor answer to logical positivism, over the next summer, midtown Manhattan.
and, when I applied for a grant to do it, I got an immediate That meeting, and the next one a week later, had an
favorable response. Both translations were published a unforgettable effect on me. In the year or more before I
few years later by D. Van Nostrand, the latter under the entered Ayn Rand’s apartment, I held three explicitly
title Science and History. I have to say that translating formulated leading intellectual values: liberalism (in the
Mises, and being well paid to do it at that, was absolutely sense in which Mises used the term, and which actually
the most fabulous thing I could think of doing at the time, meant capitalism); utilitarianism, which was my philos-
and to this day, I count it as a major accomplishment of ophy of ethics and which I had learned largely from
my life. Mises (though not entirely, inasmuch as I had already
Some of the credit for my having had the courage to come to the conclusion on my own that everything a
start the translation belongs to the late Murray Rothbard, person does is selfish insofar as it seeks to achieve his
whom I met when I entered the seminar and became close ends12); and “McCarthyism,” which I was enthusiasti-
friends with over the next five years. (Other members of cally for, because I believed that the country was heavily
the seminar when I arrived on the scene were Hans infested with communists and socialists, whom I detested,
Sennholz, now President of the Foundation for Eco- and to whom Senator McCarthy was causing a major
nomic Education, and his wife Mary; Israel Kirzner, now amount of upset. By the time I left Ayn Rand’s apartment,
a Professor of Economics at New York University; Pro- even after the first meeting, I was seriously shaken in my
fessor William H. Peterson, then of New York University, attachment to utilitarianism.
912
10
11 Percy
This
Henry
Murray
isGreaves,
Hazlitt,
a N.
conclusion
Rothbard,
Economics
Understanding
that
Man,
I now
inEconomy,
One
consider
theLesson,
Dollar
and
toCrisis,
be
new
State,
mistaken,
ed.(Belmont,
2(New
vols.because
(Princeton,
York:
Massachusetts:
Arlington
it attaches
New Jersey:
House
no
Western
objective
Publishers,
D. Van
Islands,
meaning
Nostrand
1973).
1979).
toCompany,
the conceptInc.,
of self.
1962).
PREFACE xlv
Both meetings began at about 8:30 in the evening and dering if somehow she might be right that values really
lasted until about five o’clock the following morning. were objective after all. I was very troubled by the
When I was introduced to her, I had no real idea of her implications of the proposition that all values are ulti-
intellectual caliber. I quickly began to learn her estimate mately arbitrary and subjective, as Mises claimed. It no
of herself, however, when I offered her two tickets to an longer seemed enough that the great majority of people
upcoming dinner in honor of Roy Cohn, Senator McCarthy’s happened to prefer life to death, and health and wealth to
chief aide, at which Senator McCarthy would be present. sickness and poverty. For if they happened not to, there
(I was scheduled to make a brief speech at the event, and would be nothing to say to them that could change their
when I mentioned to one of the event’s organizers that I minds, and if there were enough of them, no way to fight
was going to meet Ayn Rand, she asked me to extend the them, and, worst of all, no way even morally to condemn
invitation.) Miss Rand declined the invitation on the any slaughters they might commit, because if all values
grounds that to get involved as she would need to get really were arbitrary and subjective, a concentration-
involved, she would have to drop her present project camp sadist’s values would be as good and as moral as
(which was the writing of Atlas Shrugged) and do for the values of the world’s greatest creators.
McCarthy what Zola had done for Dreyfus. I had seen The years between my first meetings with Ayn Rand
the Paul Muni movie Zola, and so had a good idea of and the publication of Atlas Shrugged spanned my soph-
Zola’s stature. I don’t quite remember how I experienced omore through senior years in college. In that time, I
the comparison, but it was probably something compa- experienced serious intellectual doubt in connection with
rable to the expression of a silent whistle. (After I came my ability to defend capitalism. What I had learned from
to appreciate the nature of Ayn Rand’s accomplishments, Mises enabled me decisively to answer practically every
a comparison to Zola would seem several orders of argument that had been raised against capitalism prior to
magnitude too modest.) 1930, which was more than enough to answer my high
At both meetings, most of the time was taken up with school teachers. But my college professors presented a
my arguing with Ayn Rand about whether values were different challenge. They were teaching Keynesianism
subjective or objective, while Rothbard, as he himself and the doctrine of pure and perfect competition/im-
later described it, looked on with amusement, watching perfect competition. Mises, I reluctantly had to conclude,
me raise all the same questions and objections he had had not dealt adequately with these doctrines.13 At any
raised on some previous occasion, equally to no avail. rate, these were two major areas in which I found myself
I had a sense of amazement at both meetings. I was unable to turn to his writings for the kind of decisive help
amazed that I was involved in an argument that in the I had come to expect from him.
beginning seemed absolutely open and shut to me, and The doubts I experienced in college were not in re-
yet that I could not win. I was amazed that my opponent sponse to any kind of solid arguments, but more in
was expressing views that I found both utterly naïve and response to phantoms of arguments that could not be
at the same time was incapable of answering without grasped in any clear, precise way and that in fact usually
being driven to support positions that I did not want to bore obvious absurdities. This last was certainly true of
support, and that I was repeatedly being driven into the Keynesian multiplier doctrine and of the claim on the
supporting such positions. part of the pure-and-perfect competition doctrine that
Neither of the evenings was very pleasant. At one competition implied the absence of rivalry. Despite the
point—I don’t know how we got to the subject, nor absurdities, all of the faculty and practically all of my
whether it occurred at our first or second meeting—I fellow students at Columbia seemed perfectly at home
expressed the conviction that a void must exist. Other- with the doctrines and absolutely confident of their truth.
wise, I did not see how the existence of motion was If any one concrete can convey the intellectual dis-
possible, since two objects could not occupy the same honesty of Columbia’s economics department in those
place at the same time. Ayn Rand’s reply to my expres- days, it was this. Namely, while neglecting to provide a
sion of my conviction was that “it was worse than anything single copy of any of the writings of von Mises, or even
a communist could have said.” (In retrospect, recognizing so much as mention the existence of any of them in any
that the starting point of her philosophy is that “existence of the assigned readings or, as far as I was aware, in a
exists,” I realize she took my statement to mean that I classroom, the department saw to it that literally dozens
upheld the existence of “nonexistence” and was thus of copies of Oskar Lange’s attempted refutation of
maintaining the worst possible contradiction.) Mises’s doctrine on the impossibility of economic calcu-
Because of such unpleasantness, I did not desire to see lation under socialism were available on open reserve in
her again until after I read Atlas Shrugged. However, I the library—as an optional, supplementary reading in the
could not forget our meetings and could not help won- introductory economics course.14
13
14 ThisOscar
See conclusion
Lange,may
Onappear
the Economic
somewhat
Theory
ironic
of Socialism,
in view of the
Benjamin
fact thatE.what
Lippencott,
is today accepted
ed. (Minneapolis:
as a new and
Theconvincing
Universitymajor
of Minnesota
critiquePress,
of Keynesianism,
1938). See also,
namely,
below,
the “rational
my critique
expectations
of Lange and
dochis
trine,”
doctrine
is nothing
of the artificial
more than market,
arguments
on pp.made
279–282.
by Mises and Hazlitt in the 1950s, for which they have received no credit. See, for example, Paul Samuelson and William Nordhaus, Economics, 15th ed. (New York: McGraw Hill Book Company, 1995), Figure 31–5 on p. 613 and the surroundingdiscussion. Then see Ludwig von Mises, HumanAction , 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 792–793. See also below, p. 6 and p. 11, n. 15.
xlvi CAPITALISM
Economics was not the only area in college in which course ever delivered on Objectivism. This was before
I experienced revulsion for Columbia’s teachings. I had Objectivism even had the name “Objectivism” and was
the same experience in the so-called contemporary civi- still described simply as “the philosophy of Ayn Rand.”
lization courses I had to take, and in history courses. I Nevertheless, by the summer of that same year, 1958,
know I would have had it in philosophy courses, but I tensions had begun to develop between Rothbard and
wisely dropped the one or two I enrolled in, after the first Ayn Rand, which led to a shattering of relationships,
week. There were, to be sure, things I valued at college, including my friendship with him.15
having greatly gained from them: such as having to read Shortly after that break, I took Rothbard’s place in
the great classics of Western literature, which I would making a presentation in Ayn Rand’s living room of the
probably not have done on my own; the freshman En- case for “competing governments,” i.e., the purchase and
glish-composition course, which gave me the ability to sale even of such government services as police, courts,
write a solid essay; the German courses; and the mathe- and military in a free market. As the result of Ayn Rand’s
matics courses. However, with the exception of three of criticisms, I came to the conclusion that the case was
the mathematics courses, almost all of these were in the untenable, if for no other reason than that it abandoned
first two years. By the time of my senior year, I had the distinction between private action and government
profoundly soured on Columbia University. I remember action and implicitly urged unregulated, uncontrolled
walking the campus and noting the names of the various government action, i.e., the uncontrolled, unregulated
buildings: “School of Mines,” “School of Engineering,” use of physical force. This was the logical implication of
“Philosophy Hall,” and so on. I remember thinking that treating government as a free business enterprise. I had
the first two served honorable purposes, while the third to conclude that government in the form of a highly
served no purpose but the emission of intellectual poison. regulated, tightly controlled legal monopoly on the use
I do not know if my college education could have of force, was necessary after all, in order to provide an
damaged my intellectual development permanently. It essential foundation for unregulated, uncontrolled pri-
did not have the chance. For just a few months after vate markets in all goods and services, which would then
graduation, Atlas Shrugged appeared. function totally free of the threat of physical force. This
I obtained a very early copy and began to read it indeed, represented nothing more than a return to my
almost immediately. Once I started it, I could not put it starting point. It was what the government established by
down, except for such necessary things as eating and the United States’ Constitution had represented, and which
sleeping. I was simply pulled along by what I have I had so much admired.
thought of ever since as the most exciting plot-novel ever At that time, and in later years, I came to be influenced
written. Every two hundred pages or so, the story reached by Ayn Rand’s ideas in numerous ways, thanks in part to
a new level of intensity, making it even more demanding the fact that over the years between 1957 and her death
of resolution than it was before. I stopped only when I in 1982, I had the opportunity of frequently meeting with
finally finished the book, four days after I had started it. her and speaking with her extensively about her writings.
When I finished, the only thing I could find to say in The influence of her philosophy extolling individual
criticism, tongue in cheek, was that the book was too rights and the value of human life and reason appears
short and the villains were not black enough. repeatedly in this book and sets its intellectual tone. To
The first thing I got out of Atlas Shrugged and the be specific, I have found her treatment of the concepts of
philosophical system it presented was a powerful rein- individual rights and freedom to be far superior to that of
forcement of my conviction that my basic ideas were anyone else, and I have taken it over and have applied it
right and a renewal of my confidence that I would be able extensively both in Chapter 1 and as the foundation of
to expose my professors’ errors. my treatment of monopoly as inherently government
Very soon thereafter, the whole Circle Bastiat, myself created in Chapter 10. In Chapter 1, very much in the
included, met again with Ayn Rand. We were all tremen- spirit of Ayn Rand, I have shown how the whole of
dously enthusiastic over Atlas. Rothbard wrote Ayn Rand capitalist development, including the development of the
a letter, in which, I believe, he compared her to the sun, panoply of capitalism’s institutions from private owner-
which one cannot approach too closely. I truly thought ship of land to the division of labor and continuous
that Atlas Shrugged would convert the country—in about economic progress, can be understood as “a self-ex-
six weeks; I could not understand how anyone could read panded power of human reason to serve human life.”16
it without being either convinced by what it had to say In Chapter 2, I have made her views on the role of reason
or else hospitalized by a mental breakdown. in human life, on the objectivity of values, and on the
The following winter, Rothbard, Raico, and I, and, I integration of mind and body essential elements of my
think, Bob Hessen, all enrolled in the very first lecture approach to the foundations of economics, that is, to
15
16 When
See below,
I knew
pp.
Rothbard,
19, 27–28.
he was a staunch pro-McCarthy, anticommunist. Later on, incredible as it may seem, he becamean admirer of the Soviet Union! For evidence of this, see below, p. 11, n. 13.
PREFACE xlvii
man’s objective need both for the constantly growing while the prospect of prices falling at any given rate
supply of wealth that capitalism produces and for the sci- resulted in an equivalent deduction from the rate of
ence of economics itself. Her influence pervades my cri- interest. Thus formulated, an implication of this doctrine,
tique of environmentalism in Chapter 3. It is present in my I concluded, was that rapid increases in production that
discussion of competition in Chapter 9, where I have caused a rapid fall in prices would result in a negative
adopted her principle of the “pyramid of ability” and rate of interest and thus in a lack of all incentive to lend
integrated it with the law of comparative advantage. It or invest, and thus in a depression. This conclusion too
appears in my critique of the doctrine of pure and perfect was unacceptable to me. It implied the overproduction
competition in Chapter 10, much of which was originally doctrine, which Mises himself, of course, totally op-
published in The Objectivist under her editorship. It is posed.17
also to be found in the epistemological aspects of Chap- I compiled a written list of such points, which also
ters 11, 15, and 18, that is, in my approach to definitions, included numerous questions I had come to formulate in
axiomatic concepts, and the epistemological errors of connection with my classes at Columbia and then at
Keynes and his followers. Her influence is probably to NYU, where I was now enrolled in the doctoral program.
be found in some measure in every chapter, at the very By this time, in just a year and two summers, taking
least insofar as it has contributed to an improved ability ten two-credit courses in the fall and ten in the spring, I
on my part to know what is a forceful argument and what had already completed all of the course work for a Ph.D.,
is not. Needless to say, it is very much present in my but I still had the written and oral exams and the disser-
treatment of the philosophical influences that led to the tation in front of me. My original plan had been to go
development of capitalist civilization and the current straight through for the Ph.D., in the shortest possible
philosophical influences that are threatening to destroy time. Now I found the prospect of the obstacles that still
it, and, of course, everywhere insofar as I deal with such remained to be somewhat more daunting, and so I de-
essential matters as egoism versus altruism, individual- cided that it would be worthwhile to take a few months
ism versus collectivism, and reason versus mysticism. out and obtain an MBA degree. For this, all I needed to
Looking back over the past and all that has led to the do was write an MBA thesis.
writing of this book, I cannot help but take the greatest I decided to choose a topic that would require that I
possible pride and satisfaction in the fact that along the read only “good people”—i.e., sound authors. I had come
way, in having been the student of both Ludwig von to the conclusion that because the efforts of proto-Key-
Mises and Ayn Rand, I was able to acquire what by my nesians, such as Malthus and Sismondi, had been deci-
own standards at least is the highest possible “intellectual sively defeated by the classical economists in the early
pedigree” that it is possible for any thinker to have nineteenth century, and because nothing like the pure-
acquired in my lifetime, or, indeed, in any other lifetime. and-perfect-competition doctrine had ever even arisen in
The year and a half or more following my abandon- the nineteenth century, when classical economics was in
ment of the doctrine of competing governments turned vogue, there must have been something in classical eco-
out to be the most intellectually productive of my life, nomics that served to refute or thoroughly preclude such
and to provide most of what is original in this book. The doctrines in the first place, and thus that I should turn to
distinctive intellectual background of that period in- it once again as a source of knowledge. The thesis topic
cluded a long-standing disagreement I had had with I chose was The Classical Economists and the Austrians
Rothbard concerning whether or not the rate of profit on Value and Costs. This topic required that I read
(“originary interest” in the terminology of Mises) had to extensively in Menger, Böhm-Bawerk, and Wieser for
fall in connection with capital accumulation. Rothbard the Austrian views, and not only in Smith and Ricardo,
maintained that it did, as did the overwhelming majority but also in James Mill, Say, McCulloch, Senior, and J.S.
of economists since the time of Adam Smith. To me, such Mill, for the views of classical economics.
a position seemed comparable to implying the gradual This project turned out to be a very good idea, indeed.
extinction of the sun as the necessary accompaniment of I learned much more about the doctrine of diminishing
capital accumulation. For it was only the prospect of marginal utility, including how it subsumes cases in
profit that provided motivational energy to the entire which prices are actually determined in the first instance
economic system. And while Mises’s own position on by cost of production.18 In reading seven different clas-
this subject was unclear, he held another doctrine of sical authors, each one covering essentially the same
similar import. This was his doctrine of purchasing- ground, and doing so at the age of twenty-one and
power price premiums in the rate of interest, according twenty-two, instead of thirteen, I was able to come to a
to which the prospect of prices rising at any given rate genuine understanding of their work. This included see-
added an equivalent percentage to the rate of interest, ing how their views on the labor theory of value and the
17
18 Forthis
On demonstrations
point, see below
of why
thecapital
lengthyaccumulation
quotation from
does
Böhm-Bawerk
not entail a falling
on pp.rate
414–416.
of profit and of why falling prices caused by increased production do not reduce the rate of profit or interest, see below, pp. 569–580, 810–818, and 825–826.
xlviii CAPITALISM
“iron law of wages” greatly differed from those of Marx, over the demand for factors of production by business. It
whose views on these subjects are usually assumed to be was only because the demand for “commodities”—viz.,
the same as theirs, and that Ricardo’s doctrine that “prof- consumers’ goods—was not a demand for labor that the
its rise as wages fall, and fall as wages rise” did not, demand for consumers’ goods could exceed the demand
despite all appearances, actually imply a conflict of for labor, and thus that the demand for the products of
interests between wage earners and capitalists.19 I came business in general could exceed the demand by business
to see, in fact, that very little substantive difference for factors of production in general. This excess of de-
actually existed between the views of Böhm-Bawerk and mand for products over demand for factors of production
those of John Stuart Mill concerning the determination of was an essential cause of an excess of sales revenues over
the prices of reproducible products.20 Very importantly, I costs, and, therefore, of an aggregate profit in the eco-
began to see how the whole contemporary approach of nomic system. I could see at the same time how with a
“imperfect competition” versus “pure and perfect com- given aggregate amount and average rate of profit, based
petition” was a result of the abandonment of the classical on a given excess of the demand for the products of
economists’ recognition of the role of cost of production business over the demand for factors of production by
in the determination of the prices of reproducible goods, business, both capital accumulation and falling prices
a recognition that Böhm-Bawerk and Wieser had re- caused by increased production could take place, with,
tained but all others had apparently lost.21 of course, no effect whatever on the average rate of profit.
What I gained from the extensive reading I had done I could also see other important relationships. In those
in connection with my thesis went far beyond the subject five days, I was able to grasp essential portions of what are
of value and costs. In the months immediately following, now Chapters 11 and 13–18 of this book. Virtually every-
I knew that I had learned a great deal that had not gone thing else that is in these chapters, and much that is in other
into the thesis—knowledge that I could then not yet even chapters, is an elaboration or further implication of the
explicitly formulate. I felt good about my state of mind discoveries I made in those five days, though in many cases,
and I am pretty sure that I described my mental condition the elaboration or further implication did not occur to me
to myself as one of being “intellectually pregnant.” until much later. Indeed, the process of tracing out the
Back in the spring of 1958, I had succeeded in formu- implications continues down to the present.
lating to my own satisfaction a set of conditions in which As I made the new connections I wrote them down,
capital accumulation could take place indefinitely with sometimes jumping out of bed to do so, lest I forget any
no accompanying fall in the rate of profit. I had tried to of them. After the first five days, I had accumulated about
explain it to Rothbard, but without success. That demon- 15 pages of notes, the most important part of which was
stration was one element in the back of my mind, before an elaborate numerical example of the most essential
I even got to the reading for my thesis. My exposure to points in a form consistent with the principles of business
principles of actual business accounting, as the result of accounting. In August, I wrote a hundred-page-plus typed
having taken a number of courses on investments and paper called “The Consumption Theory of Interest,”
corporation finance in the NYU program, provided an- which I showed to Henry Hazlitt, who, as mentioned,
other critical element besides what I had learned from sometimes attended von Mises’s seminar. He was gener-
my reading. ally impressed with it, and, starting with the third printing
In July of 1959, it all came together. The precipitating of The Failure of the “New Economics,” credited me
event was my reading an extensive quotation from John with an important application I had made in the paper
Stuart Mill presenting the proposition that “demand for identifying a simultaneous breakdown of the Keynesian
commodities is not demand for labour.” This was a doctrines on consumption, employment, liquidity pref-
passage I had not read before. It appeared in Henry erence, and the rate of interest, though he did not refer to
Hazlitt’s newly published The Failure of the “New Eco- my manuscript specifically.24
nomics.”22 Not long after I made my discoveries, I decided that
Very soon thereafter, I had a period of five successive they should be the main subject of my doctoral disserta-
days in which I was able to make one connection after tion, which I began to do research for soon after passing
another and to answer one question after another from my oral examination in the spring of 1960. For the sake
my list. In essence, I had put together, and was able to of thoroughness, I wanted to include not only my own
hold in my mind all at the same time, an early version of views, but also a critical analysis of all significant alter-
what now appears in this book as Figures 16–2 and 17–1 native views. I set out to follow the example of Böhm-
and derive a succession of major implications from it.23 Bawerk, who had done just that. Thus, in preparation for
I saw how Mill’s proposition was essential to explain- writing my dissertation, I read virtually all of Böhm-
ing an excess of the demand for the products of business Bawerk that I had not previously read, as well as major
24
19
20
21
22
23 See
Concerning
On
Henry
Figures
this
Henry
below,
Hazlitt,
subject,
16–2
Hazlitt,
p.
these
and
218,
The
see17–1
points,
The
Failure
n.
below,
31.
Failure
aresee
pp.
shown
ofbelow,
the
408–417.
of “New
the
facing
pp.
“New
475–498.
Economics
each
Economics,”
other”on
(New
pp.p.810–811.
York:
196, n.
D.6.
Van Nostrand, 1959), p. 363.
PREFACE il
selections from other authors whose views concerning cases in which I have been unable to improve upon
the rate of profit/interest were prominent, such as Irving formulations I presented in those articles, I have retained
Fisher, Knut Wicksell, and Frank Fetter, as well as Smith, the formulations. Appropriate acknowledgment is made
Ricardo, other classical economists, and Marx and Keynes. to the publications in question in notes to the portions of
I began writing the dissertation in May of 1961 and the text where the formulations appear.
handed in a 625-page typed manuscript in the fall of 1962. Here I wish to express my special thanks to Libertar-
The title was The Theory of Originary Interest. (At this ian Press for its permission to include the very lengthy
time, I still followed Mises in describing what business- quotation from Böhm-Bawerk’s Capital and Interest that
men and accountants normally describe as profit, and appears on pp. 414–416.
which I too now refer to as profit, as “originary interest.”) I have not sought permission from any publisher to
In January of 1963, I learned that one of the members quote passages in cases in which direct quotation is
of my reading committee had rejected the dissertation. necessary to prove to the reader that the author in ques-
In order to gain his approval, it was necessary for me to tion really does hold the views I ascribe to him. Here I
eliminate well over half of the manuscript I had submit- rely on the doctrine of fair use, which I believe provides
ted, and write approximately thirty new pages at the protection against the intellectual hit and run that would
beginning and thirty more new pages at the end. (On my be entailed in allowing authors to propound absurd and
own initiative, I replaced “originary interest” with “profit” vicious ideas and then to hide behind copyright protec-
throughout.) The last time I spoke with this committee tion so that a critic could not prove what they had actually
member, he said he liked the new version much better said and thus be placed at risk of being accused of having
than the original one, except for the first thirty pages; he presented their views unfairly. This applies above all to
also said he had not yet read the last thirty pages. (Some- my numerous quotations from various editions of the
time later, I was told that this individual had left the textbook Economics by Paul Samuelson. It also applies
university to write editorials for The Washington Post.) to my quotations from less well-known textbooks, from
My dissertation, as finally approved, carries the title The The General Theory by Lord Keynes, The New Industrial
Theory of Aggregate Profit and the Average Rate of State by John Kenneth Galbraith, and from sundry envi-
Profit.25 ronmentalists.
This situation constituted the one time in my life when ***
I was seriously disappointed in von Mises. He told me I would like to acknowledge here the very generous
that he found it amusing that I should receive such financial support provided by Mr. Michael Aronstein of
trouble from this particular committee member, whom New York, in making possible the first printing of this
he regarded as a Marxist, when what I was providing was book. Mr. Aronstein is one of the very few businessmen
a modernized, more scientific version of the very ideas and capitalists who understands both the truth of pro-
that were the foundation of the man’s own beliefs. Mises capitalist economic theory and the importance of dissem-
believed that because of my resurrection of the classical inating that truth to the educated public.
economists, I was indirectly resurrecting Marx. (Hap- Above all, however, I want to acknowledge the very
pily, he changed his mind on this subject two years later, great contribution of my wife, Dr. Edith Packer, with
after hearing my lecture “A Ricardian’s Critique of the whom I have now shared most of my adult life. I doubt
Exploitation Theory.”26 But the same essential material very much that I could have undertaken, let alone carried
had been available to him in my original dissertation.) to completion, a project of this size without her. She has
*** provided both the necessary emotional framework and an
As much of the preceding makes clear, this book is extremely helpful intellectual framework. It was she who
very much the product of ideas I first developed over served as the first reader and editor of the manuscript of
thirty-five years ago and have been further developing this book. An important part of the organization and
and elaborating ever since. Over this period, I have much of the readability of my book are due to her
published various portions of my ideas in articles. In suggestions.
26
25 George
The substance
Reisman,
of this
Thelecture
Theorywas
of Aggregate
published many
Profityears
and the
later
Average
as my essay
Rate “Classical
of Profit, Ph.D.
Economics
diss., New
Versus
Yorkthe
University
Exploitation
Graduate
Theory”
School
in Kurt
of Business
Leube and
Administration
Albert Zlabinger,
(1963;
eds.,
repri
The
nted
Political
by University
EconomyMicrofilms,
of Freedom Inc.,
Essays
Ann Arbor,
in Honor
Michigan).
of F. A. Hayek (Munich and Vienna: Philosophia Verlag, 1985). The same analysis, greatly elaborated, appears below, on pp. 473–498.
Laguna Hills, California GEORGE REISMAN

June 1996 and March 1997
Postscript, June 1999. The author’s website www.capi- chapter-by-chapter basis. It also features the book as the
talism.net provides extensive lists of study-review ques- centerpiece of a program of self-education in the economic
tions and supplementary readings for this book, on a theory and political philosophy of a capitalist society.
l CAPITALISM
Notes
1. These were the tape-recorded lecture series that are known Hazlitt in the 1950s, for which they have received no credit.
as An Introduction to Procapitalist ‘Macroeconomics,’ A See, for example, Paul Samuelson and William Nordhaus,
Theory of Productive Activity, Profit, and Saving, and Capital, Economics, 15th ed. (New York: McGraw Hill Book Company,
the Productive Process, and the Rate of Profit. These titles and 1995), Figure 31–5 on p. 613 and the surrounding discussion.
the one described in the next sentence of the text are available Then see Ludwig von Mises, Human Action, 3d ed. rev.
on CDs, in MP3 format, from The Jefferson School at PO Box (Chicago: Henry Regnery Co., 1966), pp. 792–793. See also
2934, Laguna Hills, Calif., 92654. below, p. 6 and p. 11, n. 15.
2. Thus, my 1990 TJS Fall seminar lecture “The Nature and 14. See Oscar Lange, On the Economic Theory of Socialism,
Value of Economics” was a portion of Chapter 1. My 1991 TJS Benjamin E. Lippencott, ed. (Minneapolis: University of Min-
summer conference series Wealth, Natural Resources, and the nesota Press, 1938). See also below, my critique of Lange and
Environment and The Political Concept of Monopoly was drawn his doctrine of the artificial market, on pp. 279–282.
from Chapters 2, 3 and 10. 15. When I knew Rothbard, he was a staunch pro-McCarthy,
3. Concerning the errors of this view, see below, pp. 473–500. anticommunist. Later on, incredible as it may seem, he became
4. William Stanley Jevons, The State in Relation to Labour an admirer of the Soviet Union! For evidence of this, see below,
(London: Macmillan and Co., 1894); The Theory of Political p. 11, n. 13.
Economy, 4th ed. (London: Macmillan and Co., 1924).
16. See below, pp. 19, 27–28.
5. I happened to buy The State in Relation to Labour as the
result of not being able to afford Jeremy Bentham’s In Defence 17. For demonstrations of why capital accumulation does not
of Usury, a work whose title greatly appealed to me, and thus entail a falling rate of profit and of why falling prices caused
having to choose the substantially less expensive title by Jevons. by increased production do not reduce the rate of profit or
6. The essay has been reprinted in Ludwig von Mises, Planning interest, see below, pp. 569–580, 810–818, and 825–826.
For Freedom, 4th ed. enl. (South Holland, Ill.: Libertarian 18. On this point, see below the lengthy quotation from Böhm-
Press, 1980). Bawerk on pp. 414–416.
7. Ludwig von Mises, Socialism (New Haven: Yale University 19. Concerning these points, see below, pp. 475–498.
Press, 1951); reprint ed. (Indianapolis: Liberty Classics, 1981). 20. See below, p. 218, n. 31.
8. Happily, these have been translated in the currently available 21. On this subject, see below, pp. 408–417.
Liberty Classics reprint edition of Socialism cited above. As a 22. Henry Hazlitt, The Failure of the “New Economics” (New
major aid to reading Human Action, see Mises Made Easier A York: D. Van Nostrand, 1959), p. 363.
Glossary for Human Action prepared by Percy L. Greaves, Jr. 23. Figures 16–2 and 17–1 are shown facing each other on pp.
(Dobbs Ferry, N. Y.: Free Market Books, 1974). 810–811.
9. Percy Greaves, Understanding the Dollar Crisis, (Belmont, 24. See Henry Hazlitt, The Failure of the “New Economics,”
Mass.: Western Islands, 1973). 3d prntng. and later, p. 196, n. 6.
10. Henry Hazlitt, Economics in One Lesson, new ed. (New 25. George Reisman, The Theory of Aggregate Profit and the
Rochelle, N. Y.: Arlington House Publishers, 1979). Average Rate of Profit, Ph.D. diss., New York University Graduate
11. Murray N. Rothbard, Man, Economy, and State, 2 vols. School of Business Administration (1963; reprinted by Univer-
(Princeton, N. J.: D. Van Nostrand Company, Inc., 1962). sity Microfilms, Inc., Ann Arbor, Mich.).
12. This is a conclusion that I now consider to be mistaken, 26. The substance of this lecture was published many years
because it attaches no objective meaning to the concept of self. later as my essay “Classical Economics Versus the Exploitation
13. This conclusion may appear somewhat ironic in view of the Theory” in Kurt Leube and Albert Zlabinger, eds., The Political
fact that what is today accepted as a new and convincing major Economy of Freedom Essays in Honor of F. A. Hayek (Munich
critique of Keynesianism, namely, the “rational expectations and Vienna: Philosophia Verlag, 1985). The same analysis,
doctrine,” is nothing more than arguments made by Mises and greatly elaborated, appears below, on pp. 473–498.
INTRODUCTION
T he subject of this book is the principles of econom-

ics. Its theme is that the application of these prin-
ciples to the service of human life and well-being requires
free-trade movement in the mid-nineteenth century, and
the currency school, which included the English econo-
mists Lord Overstone (1796–1883) and Robert Torrens
the existence of a capitalist society. (1780–1864), and the American monetary theorists Wil-
The purpose of this introduction is to enable the reader liam Gouge (1796–1863) and Charles Holt Carroll (1799–
to classify the present book in relation to the wider body of 1890). The classical school incorporated important economic
procapitalist economic thought and of economic thought truths previously identified by Richard Cantillon (1680–
as such. 1734), David Hume (1711–76), and, above all, the French
Physiocrats. The Physiocrats flourished around the mid-
dle of the eighteenth century. The leading members of
1. Procapitalist Economic Thought, Past and Present the school are François Quesnay (1694–1774), Pierre Du
Procapitalist economic thought and economic thought Pont de Nemours (1739–1817), Robert Jacques Turgot
as such are essentially synonymous. The substance of (1727–81), and Mercier de la Rivière (1720–93). The
both is to be found in the same two main sources, namely, great merit of the Physiocrats was to have identified the
the writings of the British (and French) classical econo- existence of natural economic laws (physiocracy means
mists and the Austrian neoclassical economists. All other the rule of nature) and, on the basis of their understanding
schools of economic thought are essentially either just of those laws, to have reached the conclusion that the
prescientific gropings or nothing more than misguided government should follow a policy of laissez faire, a term
criticisms of the positive truths established by the classi- which they originated.1
cal and Austrian schools. The most important members of the Austrian school
Among the classical economists are, above all, Adam are Carl Menger (1840–1921), Eugen von Böhm-Bawerk
Smith (1723–90), David Ricardo (1772–1823), James (1851–1914), and Ludwig von Mises (1881–1973). Other
Mill (1773–1836), and John Stuart Mill (1806–73), and the important members are Friedrich von Wieser (1851–
Frenchmen Jean-Baptiste Say (1767–1832) and Frederic 1926); F. A. Hayek (1899–1992), who was the most
Bastiat (1801–50). The nineteenth-century Englishmen prominent of von Mises’s students and who won the
Nassau W. Senior (1790–1864), John R. McCulloch (1789– Nobel prize for economics in 1974; Henry Hazlitt (1894–
1864), and John Cairnes (1824–75) also deserve mention 1993); Murray Rothbard (1926–95), who was one of von
as important members of this group. Important close Mises’s later students; and, among the later students of
allies of the classical school are the Manchester school, von Mises who are still alive, Hans Sennholz and Israel
led by Richard Cobden (1804–65) and John Bright (1811– Kirzner.2
89), who were the parliamentary leaders of the British Closely allied with the Austrian school on many points
21 For an
The present
excellent
author
account
was also
of the
onedoctrines
of the later
of the
students
Physiocrats,
of von Mises.
see Adam
However,
Smith,because
The Wealth
of the
of Nations
profound(London,
influence
1776),
of thebk.
classical
4, chap.
economists
9; reprint of
onCannan
my thinking,
ed. (Chicago:
it would be
University
more appropriate
of Chicago
to describe
Press, 2 vols.
my views
in 1, 1976),
as “Austro-classical”
2:182–209. Fromrather
nowthan
on,asspecific
“Austrian.”
page references to the University of Chicago Press reprint will be supplied in brackets.
2 CAPITALISM
are the major neoclassical English economists William leading elements of it into a logically consistent whole
Stanley Jevons (1835–82) and Philip Wicksteed (1860– and by incorporating the present author’s own contribu-
1927), the major Swedish economist Knut Wicksell (1851– tions.
1926), and the major mid-nineteenth-century German Because the whole of this book is itself an exposition
economist Hermann Heinrich Gossen (1810–58), who of the ideas of the classical and Austrian economists, it
had anticipated some of its leading doctrines in a book is not necessary (nor would it be possible) to explain at
published in 1854. Other major economists who are more this point precisely what it is that these economists
or less significantly allied with the Austrian school are maintain, beyond a few generalities. They recognize the
the Americans John Bates Clark (1847–1938), Frank gains derived from the division of labor. They explain the
Fetter (1863–1949), Irving Fisher (1867–1947), and Frank nature, origin, and importance of money; the laws gov-
Knight (1885–1972), who were prominent earlier in this erning the determination of prices, wages, profits, and
century. The contemporary Chicago school, led by Mil- interest; and the vital role of saving and capital accumu-
ton Friedman, and its offshoot the Public Choice school, lation in raising the standard of living. They understand
headed by James Buchanan, also fall into the category of the benevolent nature of self-interest and the profit mo-
allies of the Austrian school. (Friedman won the Nobel tive operating under economic freedom, and show how
prize in economics in 1976; Buchanan, in 1986.) Other, government intervention is the cause of inflation, depres-
less well-known but important contemporary or recent sions, economic stagnation, poverty, international eco-
economists who are more or less significantly allied with nomic conflict, and wars. In sum, they support capitalism
the Austrian school and sympathetic to capitalism are and oppose government interference and socialism. To a
Armen Alchian, William Allen, Dominick Armentano, great extent, the views of these authors will become clear
Paul Heyne, Wayne Leeman, John. S. McGee, Mark in the pages that follow. But, because this is not a book
Skousen, Thomas Sowell, Walter Williams, Leland Yea- on the history of economic thought, no systematic effort
ger, and the late W. H. Hutt (1899–1988) and Ludwig is made to explain precisely which individuals held
Lachmann (1906–1990). And there are many more, both which specific positions. The reader who is interested in
here in the United States and abroad. Both the Austrian acquiring that knowledge is advised to consult the bibli-
school and its allies have been heavily influenced in turn ography, which appears at the end of this book, and to
by the writings of the classical economists. undertake the immeasurably valuable task of reading
It should not be surprising that such a large number of through the works listed in it.
those who are recognized as important economists are, A subject which must be dealt with here, however, is
at the same time, leading advocates of capitalism. To the a brief account of the differences between the classical
extent that an economist really understands the princi- and Austrian schools. The leading difference concerns
ples governing economic life, and desires that human the theory of value and price. The classical economists,
beings live and prosper, he can hardly fail to be an with exceptions, assigned an exaggerated role to cost of
advocate of capitalism. production as an explanation of prices, and, as a conse-
The classical and Austrian schools have had important quence, to the quantity of labor required to produce
allies in the field of philosophy. Ayn Rand (1905–82), in goods. They even went so far as frequently to maintain
particular, must be cited as providing a philosophical that wages are determined by “the cost of production of
foundation for the case for capitalism, and as being labor.” Wages, they often held, tend to equal the price of
responsible probably more than anyone else for the cur- the goods necessary to enable a worker to live and to raise
rent spread of procapitalist ideas. The great English replacements for himself and his wife.
philosopher John Locke, who was a leading intellectual Such an exaggerated role assigned to cost of produc-
influence on the Founding Fathers of the United States, tion and quantity of labor made it possible later in the
also deserves an especially prominent mention. And the nineteenth century for Karl Marx to present himself as
English philosophers Jeremy Bentham and Herbert Spen- the logical heir of the classical economists, devoted
cer must be cited as well. merely to developing the implications of their doctrines.
The classical and the Austrian schools and their allies Marx was believed, and the consequence was that when
have developed virtually all of the great positive truths the Austrian and other neoclassical economists appeared
of economic science. Their ideas, especially those of von on the scene around 1870 and propounded the theory of
Mises, Ricardo, Smith, and Böhm-Bawerk—in that or- marginal utility as the explanation of value and price, the
der—together with important elements of the philosophy doctrines of classical economics were abandoned to an
of Ayn Rand—are the intellectual foundation and inspi- extent much greater than necessary, to the great loss of
ration of this book, which seeks to carry the work of these later economic science. Only those doctrines were re-
extraordinary individuals a step further by integrating tained that could be supported either on the basis of the
INTRODUCTION 3
theory of marginal utility or otherwise independently of the desert, will be willing to exchange his diamonds for
the basic classical framework. In terms of what was lost a quart of water to save his life. But if, as is usually the
intellectually, it was a case of the classical economics case, a person already has access to a thousand or ten
baby being thrown out with the Marxist bath water. thousand gallons of water a day, and it is a question of an
Ironically, those who threw out the baby were precisely additional quart more or less—that is, of a marginal
the people who needed it most and to whom it really quart—then both the utility and the exchange value of a
belonged—namely, the later advocates of capitalism. quart of water will be virtually nothing. Diamonds can
Significantly, the abandonment of classical econom- be more valuable than water, consistent with utility,
ics was also brought about by the growing influence of whenever, in effect, it is a question of the utility of the
socialism. And to this extent, it was clearly a case of the first diamond versus that of the ten-thousandth quart of
abandonment being caused by classical economics’ anti- water.
socialist implications. What I refer to was the altogether A fundamental accomplishment of this book, which
unjustified recantation in 1869 of a central pillar of makes possible almost all of its other accomplishments,
classical economics by its then leading spokesman, John is the integration and harmonization of the ideas of the
Stuart Mill. In response to utterly flimsy criticisms, eas- classical and Austrian economists. This has made it
ily capable of being answered, and apparently based on possible for me to modernize and reintroduce into eco-
nothing more than his own growing attachment to social- nomic analysis several of the major doctrines of the
ist ideas, Mill abandoned the so-called wages-fund doc- classical economists which were abandoned unnecessar-
trine, according to which wages are paid out of savings ily, and thereby to add greatly increased strength to the
and capital. In so doing, he cut the ground from under the central ideas of von Mises and the Austrian school. A
entire classical perspective on the role of saving and leading application of the classical doctrines, of which I
capital in the productive process, including his own am especially proud, and which I hasten to name, is a
previous brilliant contributions to that perspective, and radically improved critique of the Marxian exploitation
set the stage for the intellectual success of Keynesianism theory. In my judgment, classical economics makes pos-
in the 1930s.3 sible a far more fundamental and thoroughgoing critique
The theory of marginal utility resolved the paradox of of the exploitation theory than that provided by Böhm-
value which had been propounded by Adam Smith and Bawerk and the Austrian school, despite the prevailing
which had prevented the classical economists from ground- mistaken belief that it implies the Marxian exploitation
ing exchange value in utility. “The things which have the theory.5 It also provides the basis for greatly strengthen-
greatest value in use,” Smith observed, “have frequently ing the refutation of the ideas of Keynes and of the
little or no value in exchange; and on the contrary, those doctrine that big business implies “monopoly power.”
which have the greatest value in exchange have fre- Among the classical doctrines I have reintroduced is
quently little or no value in use. Nothing is more useful the recognition of saving and productive expenditure,
than water: but it will purchase scarce any thing; scarce rather than consumption expenditure, as the source of
any thing can be had in exchange for it. A diamond, on most spending in the economic system. Closely related
the contrary, has scarce any value in use; but a very great to this, I have brought back the wages-fund doctrine and
quantity of other goods may frequently be had in ex- have made clear the meaning of John Stuart Mill’s vital
change for it.”4 corollary proposition that “demand for commodities does
The only explanation, the classical economists con- not constitute demand for labor.” I have reinstated Adam
cluded, is that while things must have utility in order to Smith’s recognition that in a division-of-labor society the
possess exchange value, the actual determinant of ex- concept of productive activity must incorporate the earn-
change value is cost of production. In contrast, the theory ing of money and that because of its failure to earn
of marginal utility made it possible to ground exchange money, government is a consumer. I have reintroduced
value in utility after all—by showing that the exchange Adam Smith’s and James Mill’s conception of the role
value of goods such as water and diamonds is determined of saving in relation to the disposition of “the gross
by their respective marginal utilities. The marginal util- annual produce” between consumers’ goods and capital
ity of a good is the utility of the particular quantity of it goods, and James Mill’s conception of what has unjustly
under consideration, taking into account the quantity of come to be known as Say’s Law.6 Along with this, I have
the good one already possesses or has access to. Thus, if reintroduced Ricardo’s insights that capital can be accu-
all the water one has available in a day is a single quart, mulated not only by saving but also by anything else that
so that one’s very life depends on that water, the value of serves to increase wealth, and that technological progress
water will be greater than that of diamonds. A traveler operates not to raise the general rate of profit but to
carrying a bag of diamonds, who is lost in the middle of reduce prices (and, implicitly, to increase the supply of
6543 On the
Smith,
For
The confirmation
contributions
Wealth
wages-fund
ofNations
of
ofdoctrine
this
James
claim,
, bk.
Mill
and
1,see
chap.
are
thebelow,
among
consequences
4 [1:32–33].
chap.
the least
11,ofrecognized
pt.
itsC,
abandonment,
sec. 2.inSee
thealso
history
seethe
below
of
whole
economic
chap.
of chap.
14,thought.
pt.
14.B, sec.
Their
8; and
bestchap.
statement
18, sec.
appears
1. in his little known work CommerceDefended(London, 1808), chaps. 6 and 7, which are respectively titled “Consumption” and “Of the National Debt.” The complete work is reprinted in James Mill Selected Economic Writings, ed. Donald Winch (Chicago: University of Chicago Press, 1966).
4 CAPITALISM
capital goods). I have also reintroduced Ricardo’s pro- ism and, in part, to those of the Austrian school, which,
found recognition of the distinction between “value and I believe, has overemphasized the role of the consumer.
riches” and of the need for the concept of an invariable The consumers, it is true, have the power, by virtue of
money as a methodological device in developing eco- the pattern in which they spend their incomes, to decide
nomic theories. I have even gone so far as to interpret which investments of the businessmen turn out to be
Ricardo’s proposition that “profits rise as wages fall and profitable and which unprofitable, and thus, in the last
fall as wages rise”—a proposition that on its face appears analysis, to govern the pattern of investment, as business-
to imply class warfare—in the light of the assumption of men compete for their favor. The consumers’ valuations
an invariable money. I have found that when interpreted and the spending patterns that result from them also
in this light, the proposition both serves in the overthrow determine the relative prices of the factors of produc-
of the exploitation theory and points the way to a sound tion—for example, the wages of skilled labor relative to
theory of profits. I have also found it extremely useful to the wages of unskilled labor, the prices of real estate in
revive the classical economists’ conception of demand one location relative to those in other locations, and the
and supply as a ratio of expenditure to quantity sold, and relative prices of capital goods insofar as their production
to employ it no less than the contemporary conception of cannot immediately be varied in response to changes in
demand and supply as schedules of quantities demanded demand. And, of course, they also directly determine the
and supplied at varying prices. relative prices of consumers’ goods, insofar as the supply
I have used the classical economists’ insights to de- of consumers’ goods cannot immediately be varied in
velop a substantially new theory of the rate of profit and response to changes in demand.
interest; a new theory of saving and capital accumula- Nevertheless, the funds of the consumers come from
tion; a radically new theory of aggregate economic ac- business and the whole of their consumption is supported
counting, which features the role of saving and productive by production and the productive process. The individual
expenditure; new definitions of such fundamental eco- business is dependent on the consumers because it is
nomic concepts as capital goods and consumers’ goods; directly or indirectly in competition with all the other
and a theory of wages that is also new in major respects. business firms in the economic system, and it is up to the
The main thing I have discarded in classical econom- consumers to decide which business firms to buy from.
ics is any notion that wages are determined by “the cost But from the point of view of the economic system as a
of production of labor.” On the contrary, I show that the whole, it is the consumers who are dependent on busi-
essential economic function of businessmen and capital- ness. They have the power to consume only by virtue of
ists is to go on raising the productivity of labor and thus making a contribution to production. And whatever funds
to raise the standard of living of the average wage earner they so receive, they will assuredly spend, sooner or later,
by bringing about a reduction in prices relative to wages— in buying from some business or other. For money qua
that is, to bring about a progressive rise in so-called real money is absolutely useless except as a means of obtain-
wages. I have not discarded the role of cost of production ing goods or services.
as a determinant of the prices of products, however. Furthermore, a major finding of this book is that while
Ironically, here I have been inspired by Böhm-Bawerk the consumers determine the relative prices of the factors
and Wieser, who clearly recognized cost of production of production, such as the wages of skilled labor relative
as being usually the direct, immediate determinant of to those of unskilled labor, the consumers do not deter-
prices in the case of manufactured or processed goods mine the absolute height of the prices of the factors of
and who explained how the determination of price by production. The absolute height of the prices of the
cost was fully consistent with the principle of marginal factors of production is determined by the extent of
utility—indeed, was a manifestation of the principle of saving, and is the greater, the greater is the extent of
marginal utility.7 When all is said and done, I believe I saving, and the smaller, the less is the extent of saving.
have succeeded in grounding the work of the Austrian Consumption relative to saving, it is shown, is the major
school in foundations supplied by the classical school— determinant of the extent to which the prices of consum-
foundations, of course, which have been cleared of major ers’ goods (and of capital goods too) exceed the prices
errors. Among the major themes of my book that are of the factors of production used to produce them—that
derived from classical economics, in addition to those is, it is the major determinant of the rate of profit and
already described, are: production, not consumption, is interest.8
the essential economic problem; production throughout These views do not represent any real or fundamental
is supported by capital; and the central economic figure break with the views of the Austrian school but, on the
is the businessman, not the wage earner and not the contrary, in vital respects are supported by them. For
consumer. These views are in opposition both to Marx- example, it will be shown that a rise in saving and fall in
87 Cf. below,
Strictly speaking,
chap. 10,
thesec.
consumption
8, where Böhm-Bawerk
in question is what
is quoted
I termatnet
length
consumption.
on this subject.
See below, chap. 16, pt. A, sec. 2.
INTRODUCTION 5
consumption does not operate to raise the prices of sibility for monopoly, wars, and racism. He developed a
factors of production above the prices of consumers’ social philosophy of capitalism which demonstrates the
goods and thereby plunge the economic system into benevolent operation of all of capitalism’s leading insti-
losses and a depression. What happens is merely what tutions, especially private ownership of the means of
the Austrian school would call “a lengthening of the production, economic competition, and economic in-
structure of production.” Greater saving relative to con- equality. He expounded a procapitalist interpretation of
sumption means that there is not only more spending for modern economic history, and provided a devastating
capital goods and labor to produce consumers’ goods, but critique of socialism and government intervention in all
also, and even primarily, more spending for capital goods of its forms. Above all, he demonstrated that a socialist
and labor to produce capital goods. The productive ex- economic system lacks the ability to engage in rational
penditure of the greater savings is a deduction not merely economic planning because of its lack of a price system
from a diminished consumption expenditure, but from an and thus the ability to perform economic calculation. In
enlarged demand for capital goods, which takes the place making it possible for the more intelligent and honest
of the diminished demand for consumers’ goods. The members of Communist-bloc governments to under-
demand for capital goods is as much a source of business stand the causes of the chaos and misery surrounding
sales revenues as the demand for consumers’ goods. In them, the writings of von Mises have played a major role
the last analysis, what happens is that labor comes to be in the growing worldwide efforts to abandon socialism.
employed in the performance of work that is temporally Nothing could be more deserved than if some of the
more remote from its ultimate results in the form of statues of Lenin, now being removed all across Eastern
consumers’ goods.9 Europe, were replaced with statues of this man, whose
I believe that by the time the reader finishes this book, writings clearly proved the destructive consequences of
he will share my conviction that in fundamental essen- socialism as far back as 1922. Indeed, statues should be
tials, the classical and Austrian schools are not in con- erected to von Mises all across the world for saving it
flict, but represent major, complementary elements of the from socialism, and for his accomplishments in support
same great body of truth. I even believe that he will be of capitalism.
able to read Böhm-Bawerk and John Stuart Mill on the It is to von Mises, more than to any other single
subject of prices and costs and no longer see any funda- source, that this book is indebted. Indeed, the present
mental or essential differences between them.10 book could accurately be described as “Misesianism”
*** reinforced by a modernized, consistently procapitalist
One economist above all others must be singled out version of classical economics—it is the ideas of von
as the leading intellectual defender of capitalism, namely, Mises fused with insights derived from Ricardo and
Ludwig von Mises. When von Mises appeared on the Smith.11
scene, Marxism and the other socialist sects enjoyed a ***
virtual intellectual monopoly. As explained, major flaws Largely thanks to von Mises, there have been other
and inconsistencies in the writings of Smith and Ricardo important recent or contemporary advocates of capital-
and their followers enabled the socialists to claim classi- ism. F. A. Hayek and Milton Friedman are the two
cal economics as their actual ally. The writings of Jevons leading examples. But, in my judgment, neither they nor
and the early Austrian economists—namely, Menger and anyone else begins to compare to von Mises in logical
Böhm-Bawerk—were insufficiently comprehensive to consistency and intellectual breadth and depth in the
provide an effective counter to the socialists. Bastiat had defense of capitalism. Hayek, for example, finds “a
tried to provide one, but died too soon, and probably comprehensive system of social insurance” to be consis-
lacked the necessary theoretical depth in any case. tent with capitalism.12 Friedman believes that fiat money
Thus, when von Mises appeared, there was virtually is consistent with capitalism.
no systematic intellectual opposition to socialism or Other, lesser defenders of capitalism have even more
defense of capitalism. Quite literally, the intellectual serious inconsistencies. The so-called supply-siders—
ramparts of material civilization were undefended. What Robert Mundell, Arthur Laffer, and Jude Wanniski—ap-
von Mises undertook, and which summarizes the essence parently want to achieve capitalism without facing the
of his greatness, was to build a systematic intellectual need to reduce government spending and eliminate the
defense of capitalism and thus of material civilization. welfare state. Much worse, Rothbard, who was widely
Point for point, von Mises developed answers to vir- regarded as the intellectual leader of the younger gener-
tually all of the accusations made against capitalism— ation of the Austrian school and of the Libertarian party
from its alleged exploitation of labor and responsibility as well, was a self-professed anarchist and believed that
for unemployment and depressions to its alleged respon- the United States was the aggressor against Soviet Rus-
12
11
9
10 For aEugen
See Friedrich
below,
relatedvon
chap.
description
A.Böhm-Bawerk,
Hayek,
17, sec.of
The
11.
theRoad
ideas
Capital
toofSerfdom
von
andMises,
Interest
(Chicago:
see
, 3 above,
vols.,
University
trans.
pp. xlvi–xlvii.
George
of Chicago
D.The
Huncke
Press,
ideasand
of
1944),
Böhm-Bawerk
Hans
p. F.
121.
Sennholz
also(South
play anHolland,
important
Ill.:
role.
Libertarian Press, 1959), 2:168–76, 248–56; 3:97–115. See also John Stuart Mill, PrinciplesofPoliticalEconomy, Ashley ed. (1909; r epr int ed., F air field, N. J.: Augustus M. Kelley, 1976), pp. 442–68.
6 CAPITALISM
sia in the so-called cold war.13 depressions were caused by overproduction and excess
By way of contrast, Henry Hazlitt, a brilliant econo- saving and underconsumption. (Malthus was also the
mist and journalist, had the great merit of providing what author of the mistaken doctrine that increases in popula-
are unquestionably the best introductions to the ideas of tion necessarily tend to reduce the productivity of labor
von Mises and the classical economists that exist.14 and the general standard of living—a doctrine that, apart
Hazlitt, incidentally, also shared with von Mises the from Adam Smith and Bastiat, was, regrettably, accepted
honor of having expounded decades ago, as a virtual by most of the classical economists.) In addition, there
intellectual footnote to their major accomplishments, the were the protectionists and the nationalists who, contin-
legitimate substance of what has today become known uing to be committed to mercantilist ideas, attacked the
as “the rational expectations approach”—namely, the classical economists’ doctrine of international free trade.
recognition that economic phenomena such as interest Foremost in this group were Alexander Hamilton (1755–
rates incorporate expectations concerning inflation and 1804), who, of course, was the first American secretary
thus defeat the objectives sought by the government’s of the treasury, and the German Friedrich List (1789–
policy of inflation.15 1848).
Fundamental opposition to classical and Austrian eco-
nomics came from the German historical school, whose
2. Pseudoeconomic Thought members denied the very possibility of a science of
Little or nothing is known about the state of economic economic laws. This group included Wilhelm Roscher
knowledge that may have been achieved by the ancient (1817–94), Gustav Schmoller (1838–1917), Lujo Brentano
Greeks and Romans. Some discussions of economic (1844–1931), and Werner Sombart (1863–1941). (Somb-
matters took place among scholastic philosophers in the art, interestingly, began his career as a Marxist and later
Middle Ages, who appraised economic activity largely became a leading supporter of Nazism.) The essential
from the hostile perspective of the Roman Catholic church approach of the German historical school was propounded
and who, accordingly, denounced as unjust such per- in the United States by Thorstein Veblen (1857–1929),
fectly normal economic activities as the taking of interest John R. Commons (1862–1945), and Wesley Mitchell
on loans, speculation, and, indeed, even the mere chang- (1874–1948), who are known as the American institution-
ing of prices. The scholastics contributed nothing to alist school. The leading characteristic of these schools
sound economics. is a distrust of deductive logic (which is the essential
The first prominent group of writers on economic method used in economics for arriving at knowledge), and
subjects were the mercantilists, who appeared on the thus opposition to economic theory as such. They deny
scene in the sixteenth and seventeenth centuries, follow- the possibility of universally valid economic laws, claim
ing the great intensification of commerce and trade that that each country, in each historical period, has its own eco-
had taken place subsequent to the end of the Dark Ages. nomic laws, and advance historical research, the study
The main concern of the mercantilists was with the of economic institutions, and the gathering and study of
so-called balance of trade and the alleged need of gov- economic statistics as the only legitimate means for
ernments to secure an excess of exports over imports, as arriving at economic knowledge.
the means of increasing the quantity of money in a The socialists, not surprisingly, are entirely opposed
country that lacked its own gold and silver mines.16 The to the fundamental economic truths propounded by the
concern of the mercantilists with increasing the quantity classical and Austrian schools. (This is aside from the
of money led them to anticipate the essential fallacy of labor theory of value and the so-called iron law of wages,
Lord Keynes in this century, namely, that it is necessary which they take over from classical economics and to-
for the government to intervene in the economic system tally distort and twist into a form that the classical econ-
for the purpose of stimulating “demand” and “employ- omists would not support.) The leading socialists, of
ment.” The leading members of the mercantilist school course, were Karl Marx (1818–83) and Friedrich Engels
were Louis Bodin (1530–96), Thomas Mun (1571–1641), (1820–97). Among their most important followers were
William Petty (1623–87), Josiah Child (1630–99), and Rosa Luxemburg (1870–1919) and Rudolf Hilferding
the philosopher John Locke (1622–1704). (1877–1941). Other prominent socialists, prior to or con-
The positive economic truths later demonstrated by temporary with Marx, were Henri de Saint-Simon (1760–
the classical and Austrian schools and their allies have 1825), Robert Owen (1771–1858), Charles Fourier
been opposed from a number of quarters. In the first part (1772–1837), Louis Blanc (1811–82), Pierre Proudhon
of the nineteenth century, there were Malthus (1766– (1809–65), and Karl Rodbertus (1805–75). It should be
1834) and Sismondi (1773–1842) who, in anticipation of noted that the socialists and the other opponents of the
the Marxists and Keynesians, erroneously argued that doctrines of the classical and Austrian schools substan-
13
14
15
16 Cf.
See
members
ForMurray
an
Henry
exposition
ofHazlitt,
N.
theRothbard,
Rational
and
“Is
Economics
critique
Inflation
Expectations
For of
ainNecessary?”
New
the
Onedoctrines
Liberty
Lesson,
school,
(New
Freeman
of
incidentally,
new
theYork:
ed.
Mercantilists,
2,
(New
no.
Macmillan,
are
26
York:
Robert
(September
see
Arlington
1973).
Barro,
Adam22,
In
Robert
Smith,
House,
that
1952),
book,
Wealth
Lucas,
1979);
pp.Rothbard
880–82,
Thomas
ofidem,
Nations,
The
and
wrote:
Sargent,
Great
bk.
Ludwig
“Empirically,
4,and
chaps.
Idea
von
Neil
(1951;
Mises,
1–8
Wallace.
[2:3–209].
the
rev.
Human
most
ed.
(Iwarlike,
wish
published
Action,
Seetoalso
note
most
3d
under
below,
that
ed.
interventionist,
rev.
my
thechap.
references
(Chicago:
title 12,
Timesec.
most
Will
Henry
to4.
Samuelson
imperial
Run
Regnery
Back,
government
and
New
Co.,
Nordhaus
York:
1966),
throughout
Arlington
pp.
throughout
776–77,
the
House,
twentieth
792–93.
this work
1966).
Amazingly,
century
will be to
hasthe
been
as13th
anthe
eloquent
edition
Unitedrather
commentary
States”
than
(p.to287;
the
on the
imore
talics
state
recent
in
oforiginal).
contemporary
14th edition,
In sharpest
economics,
unless
contrast
otherwise
while
to the
stated.
the
United
rational
This
States,
expectations
is because
whichithas
better
approach
supposedly
represents
has come
been
themor
errors
to be
e warlike
regarded
that two
even
as
generations
athan
major
Nazi
and
of
Germany,
profound
students Rothbard
have
school
had
ofto
described
economic
endure atthe
thought,
theSoviets
hands
theof
inoverwhelmi
the
Prof.
following
Samuelson,
ng terms:
merit
who,
of
“Before
von
until
Mises
not
World
many
andWar
the
years
Austrian
II, so
ago,
devoted
was
school
the
was
still
sole
Stalin
goes
author.)
to
largely
peaceunrecognized.
that he failed toThus,
makeSamuelson
adequate provision
andNordhaus,
against
intheir
the Nazi
self-proclaimed
attack. . . . Not
“authoritative”
only was there
andno
“comprehensive”
Russian expansion
textbook
whatever
include
apar“Rational
t from the Expectations
exigencies of Macroeconomics”
def eating Germany,inbut
their
the“Family
Soviet Union
Tree oftime
Economics”
and againand
leaned
devote
over
a full
bacappendix
kward to avoid
to discussing
any cold
it.or
Yethotthey
warmake
with almost
the West”
no mention
( p. 294).of the Austrian school or von Mises; the Austrian school does not even appear in the index. See Paul Samuelson and William Nordhaus,Economics, 13th ed. (New York: McGraw-Hill, 1989, in particular the inside back cover). The leading
INTRODUCTION 7
tially overlap in their criticisms of capitalism. For exam- of the knowledge gained by the classical economists (and
ple, virtually all of them share the belief that depressions recognized by Böhm-Bawerk and Wieser) that prices are
are the result of “overproduction” and excess saving. in fact frequently determined in the first instance directly
For want of a better place to classify him, mention by cost of production. The result was also the inability to
must be made here of Henry George (1839–97), an grasp the contribution of the Austrian school (substan-
American economist who developed certain half-truths tially anticipated by John Stuart Mill) that the prices
of the classical school concerning land and land rent into which constitute the costs of production are themselves
a doctrine calling for the nationalization of land. Surpris- always ultimately determined by supply and demand. It
ing as it may seem, in all other respects, George and most is Marshall’s confusions which underlie the widespread
of his followers claim to be supporters of capitalism.17 belief that economic law does not apply to the pricing of
most manufactured or processed goods—that the prices
Marshallian Neoclassical Economics: The of such goods are “administered prices,” precisely be-
Monopoly Doctrine and Keynesianism cause they are determined directly on the basis of a
In the present-day United States, the leading opposi- consideration of cost of production rather than by the
tion within the economics profession to the ideas of the combination of demand and supply.
classical and Austrian schools, and to capitalism, derives In propounding the doctrine of partial equilibrium,
from the ideas of a late-Victorian British neoclassical Marshall introduced the perverse concept of the “repre-
economist named Alfred Marshall (1842–1924), and two sentative firm”—an alleged average firm, some multiple
other figures associated with Britain’s Cambridge Uni- of which was supposed to constitute an industry. This
versity and heavily influenced by the ideas of Marshall: concept destroyed economic theory’s ability to recognize
John Maynard Keynes (1883–1946) and Mrs. Joan Rob- even the possibility of competition. This was because if
inson (1903–83). Marshall superficially accepted the all firms in an industry were in fact perfectly equal, no
concept of marginal utility while opposing the funda- basis could exist for any of them winning out in compe-
mental approach of the Austrian school. At the same tition, or, therefore, for attempting to compete in the first
time, he abandoned the fundamental ideas of the classical place. Not surprisingly, the acceptance of the concept of
school while wrapping himself in the guise of the de- the representative firm led some decades later to the
fender of classical economics against the criticisms of conclusion (regarded at the time as a revolutionary dis-
the Austrian school. The result of his work, his bequest covery) that no reason existed for a sizable firm ever to
to subsequent generations of economists, was a hodge- cut its price, except in conditions in which it would pay
podge of confusions, which took the place of sound a single-firm “monopoly” to do so. This was because its
economics. competitors, all of whom were supposed to be just as
Both the classical and the Austrian schools study efficient as it was, would immediately match its cut.
economic phenomena from the point of view of their Thus, it would have little or nothing to gain by cutting—
effects on all members of the economic system, not just certainly not the business of its competitors.
on those directly involved. In contrast, Marshall ad- The notion of the representative firm and the inability
vanced the doctrine known as “partial equilibrium,” which to see how cost of production normally acts as the direct
is the attempt to study the behavior of individual consum- determinant of the prices of manufactured or processed
ers, individual firms, and individual industries divorced goods have served as the foundation for the widespread
from the rest of the economic system. His approach was acceptance since the 1930s of the thoroughly malicious
one of disintegration, resulting in the present-day exis- and destructive doctrine of Joan Robinson and Edward
tence of two allegedly separate branches of economics: Chamberlin. That doctrine states that with a few, limited
“microeconomics” and “macroeconomics”—the first study- exceptions, such as wheat farming, the whole of a capi-
ing the actions of individuals apart from their relation- talist economic system is tainted by an element of mo-
ship to the rest of the economic system, and the second nopoly. The solution for this alleged state of affairs is
studying the economic system as a whole, apart from the supposed to be a radical antitrust policy, which would
actions of individuals. fragment all large businesses, or else the nationalization
Marshall and his followers coupled the doctrine of of such businesses and/or government control over their
partial equilibrium with a total confusion between the prices—and further policies that would force firms in the
concepts of cost of production and supply, making it same industry to produce identical, indistinguishable
impossible to distinguish between cases in which prices products. Since the 1930s, this doctrine and its elabora-
are determined by supply and demand and cases in tion have constituted the substance of the theoretical
which, in the first instance, they are determined directly content of most textbooks of “microeconomics.” At the
on the basis of cost of production. The result was the loss same time, little or nothing of the sound price theory
17 In private conversation with the present author, Leonard Peikoff once aptly described the position of the Georgists as advocating the government allowing a person to own a piano and do anything he likes with it, except put it down without its permission.
8 CAPITALISM
developed by the classical and Austrian economists is by means of calculating the loss in the value of an
presented in these textbooks. automobile that would accompany the withdrawal of a
The abandonment of classical economics and Marshall’s unit of any of the factors of production necessary to
concentration on what later came to be called microeco- produce it.
nomics created a temporary intellectual vacuum. In the Such a derivation of value, of course, must encounter
1930s, this vacuum was filled by Keynes, by means of the same difficulty as attempting to derive from the value
the resurrection of the long-refuted fallacies of the Mer- of a pair of shoes a separate value for the right and left
cantilists, and Malthus and Sismondi, alleging that cap- shoes—namely, the fact that the value of the combined
italism causes depressions and mass unemployment through product is capable of being alternatively attributed to any
overproduction and excess saving. On this thoroughly of the elements necessary to its production or enjoyment,
erroneous foundation, Keynes argued for the need for and that on this basis the sum of the derived values of the
inflation and deficit-financed government spending to coun- factors of production must far exceed the value of the
teract or prevent the evils of depressions and mass unem- product. In the case of the shoes, for example, the loss of
ployment. The elaboration of the Keynesian doctrines either shoe destroys the whole value of the pair. If the
has constituted the theoretical substance of the textbooks value of each shoe were derived by calculating the loss
on “macroeconomics.” in value of the pair resulting from its removal, the sum
of the value of the two shoes considered separately would
Mathematical Economics be twice the value of the pair. In the case of the automo-
Another prominent school of economic thought is that bile, the entire value of the automobile would have to be
of mathematical economics, which is characterized by attributed to each of many different components, such as
the use of calculus and simultaneous differential equa- each of the four wheels, the carburetor, the steering
tions to describe economic phenomena. The principal wheel, etc.
founder of mathematical economics was Léon Walras Mathematical economics creates the illusion that this
(1834–1910), a Swiss, who also independently discov- problem can be solved by making believe that what are
ered the law of diminishing marginal utility shortly after withdrawn are not discrete units of the factors of produc-
Menger and Jevons. Vilfredo Pareto (1848–1923), an tion, such as one whole shoe or one whole wheel, but
Italian, succeeded Walras at the University of Lausanne infinitesimally small quantities of them. In this case, the
and elaborated his approach. loss in the value of the product could be regarded as a
Mathematical economics is fundamentally a matter partial derivative of the reduction in the quantity of the
more of method and pedagogy than of particular theoret- factor of production, and the theorem would be applica-
ical content. And although neither the classical nor the ble that the sum of the partial derivatives does not exceed,
Austrian schools is mathematical in the above sense, but is equal to the total derivative.
there are mathematical economists who are allied with The area of a room, which is determined by the
their teachings and their support of capitalism. Walras, product of its length and width, can serve as an illustra-
Jevons, and Gossen are important cases in point. tion. If the length of the room is ten feet and the width is
Regrettably, the use of calculus and differential equa- ten feet, then the entire area of the room is lost if either
tions to describe economic phenomena represents a the length or the width shrinks to zero. If one adopts the
Procrustean bed, into which the discrete, discontinuous phe- procedure of alternatively attributing to the length and
nomena of actual economic life are mentally forced, in the width the area that is lost when it is lost, then one
order to fit the mold of mathematically continuous func- would have to attribute a total of two hundred square feet
tions to which the methods of calculus can be applied. of area lost, despite the fact that the actual area of the
This has consequences which represent a matter of the- room is only one hundred square feet. If, however, one
oretical content, as well as method. assumes that what is lost is not all of the length or,
One major consequence is the aid given to the perpet- alternatively, all of the width, but only a small fraction
uation of a false theory of the determination of the prices of the length or width, then the difference between the
of the factors of production: namely, the theory that the sum of the two separate losses and the actual total loss
prices of the factors of production are directly derivable diminishes. For example, if what is lost is one foot of
from the value of the consumers’ goods they help to length out of ten or, alternatively, one foot of width out
produce. For example, the wages of automobile workers, of ten, the sum of the two separate areas lost is twenty
and the prices of auto-making equipment, steering wheels, square feet. The area lost by the simultaneous loss of a
brakes, spark plugs, and all other factors of production foot of length and width is nineteen square feet. Thus the
necessary to produce an automobile, are regarded as difference between the sum of the two partial losses and
being derivable directly from the price of automobiles, the total loss has sharply diminished. It would approach
INTRODUCTION 9
zero, as the reduction in length and width became smaller. forgotten. Among the principles lost have been recogni-
Unfortunately for this approach, the actual problem in tion of the tendency toward a uniform rate of profit on
the real world is how does one evaluate the effect of the capital invested throughout the economic system, recog-
loss of a whole shoe or wheel, not the tip of the shoelace nition of the tendency toward the establishment of uni-
or the effect of a scratch on the hubcap. form prices for the same goods throughout the world and
The result of such distortion of the actual problem is over time, and recognition of the tendency toward the
that mathematical economics has operated to conceal the establishment of uniform wage rates for labor of the same
true proposition, grasped by Ricardo and endorsed by degree of skill and ability in the same market. These
Böhm-Bawerk and Wieser, that typically it is not the principles have virtually disappeared from contemporary
price of the product that determines the prices of the economics textbooks.20
factors of production used to produce it, but the other way Third, mathematical economics has come to serve as
around. The price of automobiles and virtually all other a mechanism for the erection of a sort of exclusive
manufactured or processed goods is determined on the “Scholars’ Guild,” which, as was the case in the Middle
basis of the wage rates, equipment prices, and parts Ages, seeks to shut out all who do not first translate their
prices that enter into their production. However, wage thoughts into its esoteric language. Higher mathematics
rates, which are the prices that most fundamentally de- is no more necessary to the discussion or clarification of
termine costs of production, since they enter into every economic phenomena than was Latin or Greek to the
stage of production, are themselves determined by the discussion of matters of scientific interest in previous
supply of and demand for labor operating throughout the centuries. One can, for example, say that the amount of
economic system. The same is true of the prices of the bread people will buy at any given price of bread depends
various raw materials whose supply cannot be immed- both on the price of bread and on the prices of all other
iately increased or decreased in response to changes in goods in the economic system. Or one can say that the
demand. The wage rates of the different types of labor quantity demanded of bread is a mathematical function
relative to one another, above all the wages of skilled of all prices in the economic system, and then write out
labor relative to those of unskilled labor, and the relative a nonspecific mathematical function using symbolic ter-
prices of such raw materials, reflect the relative marginal minology.
utilities of these factors of production in the economic If one merely writes such an equation and stops at this
system as a whole. Thus it is mainly in this indirect way point, all that has taken place is an act of intellectual
that marginal utility operates to determine prices.18 pretentiousness and snobbery—a translation into a pres-
A second and even more serious consequence of math- ent-day equivalent of Greek or Latin. If, however, one
ematical economics is that it leads to an undue concen- goes further, and believes one can actually formulate a
tration of attention on states of final equilibrium, which specific equation—that, for example, the quantity de-
are all that its differential equations are capable of demanded of bread equals ten thousand divided by half the
scribing. It thus takes attention away from the real-world square of the price of bread minus the price of butter and
operation of the profit motive and of the market pro- the average age of grocers, then one is led into major
cesses by means of which the economic system contin- errors. This is so because no such equation can possibly
ually tends to move toward a state of full and final hold up in the face of changes in the fundamental eco-
equilibrium without ever actually achieving such a state. nomic data. New goods are introduced. People’s ideas
The economic system never actually achieves such a and valuations change. Their real incomes change. Pop-
state because of continuous changes in the fundamental ulation changes. The belief that an equation could be
economic data. For example, there are changes in the constructed that would take such changes into account is
state of technology, changes in the size of population, totally opposed to reality. It is tantamount to a belief in
changes in the relative valuation of the various con- fatalistic determinism and implies, in effect, that a math-
sumers’ goods, changes in the relative valuation of pres- ematical economist can gain access to a book in which
ent enjoyment versus provision for the future, and numerous all things past, present, and future are written and then
other such changes which occur continuously and which derive from it the corresponding equation. Whatever it
operate to change the final state of equilibrium toward may be, such a view is definitely not within the scientific
which the economic system is tending.19 spirit.
The effect of the dominance of mathematical econom-
ics and of the fact that it ignores market processes has
been that all the major principles which explain how 3. Overview of This Book
prices are actually determined, and which were discov- I have divided the present book into three major parts.
ered by the classical economists, have been virtually Part 1, The Foundations of Economics, explains the
18
19
20 Cf. von
For elaboration
an explanation
Mises, Human
of these
of these
Action,
points,
principles,
pp.
see below,
244–50.
seethe
below,
discussions
chap. 6,of
pt.the
A.relationship between prices and costs in chap. 6, pt. A, sec. 5, and pt. B, sec. 3; and in chap. 10, sec. 8.
10 CAPITALISM
nature of economics and capitalism, including the role of essence, this part shows that beneath the division of labor
a philosophy of reason in economic activity. It then it is capitalism that is the essential framework for eco-
shows that, based on his nature as a rational being, man nomic progress and a rising productivity of labor, and
possesses a limitless need for wealth. This, in turn, is that capitalism is characterized by a harmony of the
shown to give rise to the central problem of economic rational self-interests of all men under freedom. The part
life, which is how steadily to raise the productivity of also includes critiques of all forms of the doctrine that
human labor, that is, the quantity and quality of the goods capitalism results in monopoly. It shows that monopoly,
that can be produced per unit of labor. Next, it is shown properly understood, is not a product of capitalism but is
why the continuing rise in the productivity of labor is not imposed on the economic system by government inter-
prevented by any lack of natural resources, indeed, how vention. In addition, it includes an exhaustive critique of
man is capable of progressively enlarging the supply of the Marxian exploitation theory. It shows that under
useable, accessible natural resources as part of the very capitalism there is no economic exploitation, that capi-
same process by which he increases the production of talists, far from exploiting wage earners and appropriat-
products. The part concludes with a lengthy critique of ing as profits what is rightfully wages, make it possible
the ecology doctrine, which, it shows, represents a direct for people to live as wage earners, and to live ever more
and major assault on the value of economic progress and prosperously. It shows that this is because capitalists create
thus on the very foundations of economics, and has wages and the demand for labor in tandem with reducing
replaced socialism as the leading threat to economic the share of sales proceeds which is profit, and go on
activity and economic progress. steadily increasing the supply of goods that the wage earn-
Part 2, The Division of Labor and Capitalism, opens ers can buy. It shows that socialism is the system both of the
with a demonstration that the existence of a division-of- exploitation of labor and of universal monopoly.
labor society is the essential framework for the ongoing Part 3, The Process of Economic Progress, centers on
solution of the problem of how continually to raise the the explanation of the process of economic progress
productivity of labor. It then goes on to demonstrate that under capitalism. It explains the quantity theory of money
a division-of-labor society is a capitalist society, totally and the essential role of the quantity of money in deter-
dependent on the operation of a price system, which in mining aggregate monetary demand, that is, total spend-
turn totally depends on private ownership of the means ing in the economic system. In full confirmation of Say’s
of production. Private ownership of the means of produc- Law, it shows that in contrast to mere monetary demand,
tion is shown to be the foundation both of the profit real demand—that is, actual purchasing power—is in-
motive and of the freedom of competition, which are creased only by virtue of increases in the production and
respectively the driving force and regulator of the price supply of goods. Along the same lines, it shows that real
system. This part, which incorporates almost all of my wages are increased essentially only by virtue of in-
previously published The Government Against the Econ- creases in the productivity of labor and thus increases in
omy, develops all of the leading principles of price theory the supply of goods relative to the supply of labor. This
and applies them to understanding major events of the part explains the vital role of capital accumulation in
present and recent past.21 It clearly explains the factors raising the productivity of labor and real wages. It ex-
leading to the collapse of socialism around the world and plains the dependence of capital accumulation itself on
the destructive consequences of socialistic government saving, technological progress, and everything else that
intervention here in the United States in the form of price is necessary to economic efficiency, from freedom from
controls. It shows why, necessarily lacking a price sys- government regulation at home to free trade abroad. It
tem, socialism is necessarily chaotic economically and shows that the ultimate foundation of capital accumula-
tyrannical politically. It shows how price controls were tion and economic progress is the existence of a capitalist
responsible for all aspects of the energy crisis of the society and its cardinal values of reason and freedom.
1970s and how they continue to threaten the long-term Part 3 also explains the determinants of the average rate
viability of major industries in the United States, such as of profit and interest and the relationship between the rate
electric power and rental housing. of profit and interest, on the one side, and capital accu-
Very importantly, this part explains the actual, benev- mulation and falling prices caused by increased produc-
olent nature of capitalism, in that it shows how the tion, on the other side. It shows that capital accumulation
existence of the division of labor profoundly influences and such falling prices do not reduce the rate of profit or
the operation of private ownership of the means of pro- interest and thus do not interfere with or retard the
duction, economic competition, and economic inequal- process of economic progress in any way.
ity, in ways that render these institutions thoroughly This part contains refutations of all the leading eco-
benevolent in their effects on the average person. In nomic fallacies concerning alleged overproduction, over-
21 George Reisman, The Government Against the Economy(Ottawa, Illinois: Jameson Books, 1979). A few pages of this book, which demonstrate the limitless potential of natural resources, are incorporated in Chapter 3.
INTRODUCTION 11
saving, and underconsumption. Under this head, it and educational strategy for the achievement of a society
includes a chapter-length refutation of the doctrines of of laissez-faire capitalism.
Keynes and critiques of virtually all other fallacies un- ***
derlying demands for inflation and government spend- This book is useable as a textbook in virtually any
ing. The part makes a consistent case for a full-bodied economics course. Those who must conform to the arbi-
gold standard as the ideal monetary system, which would trary division of economics into microeconomics and
exist under laissez-faire capitalism and which would macroeconomics will find that Chapters 1–10 can easily
operate to prevent inflation, deflation and depression, serve in the micro portion, while Chapters 11–19 can
and mass unemployment. It shows that all of these de- easily serve in the macro portion.22 Chapter 20, although
structive phenomena are caused by government inter- best read after all of the other chapters, is suitable for use
vention in the economic system, not by the nature of the in either portion.
economic system itself—that is, not by capitalism. It Use of this book in any economics course will provide
shows consistently that the establishment of economic the most efficient means both of advancing positive
freedom, of laissez-faire capitalism, is the solution for all economic truth and of refuting the manifold errors in the
such problems. prevailing views of economics, including those in the
Finally, the Epilogue outlines a long-term political present generation of textbooks
22 Logically, Chapter 11 belongs in Part 2, where it is. Nevertheless, from the point of view of the division of economics into “microeconomics” and “macroeconomics,” the chapter is far more essential in a course on the latter than in one on the former.
Notes
1. For an excellent account of the doctrines of the Physiocrats, 12. See Friedrich A. Hayek, The Road to Serfdom (Chicago:
see Adam Smith, The Wealth of Nations (London, 1776), bk. 4, University of Chicago Press, 1944), p. 121.
chap. 9; reprint of Cannan ed. (Chicago: University of Chicago 13. Cf. Murray N. Rothbard, For a New Liberty (New York:
Press, 2 vols. in 1, 1976), 2:182–209. From now on, specific Macmillan, 1973). In that book, Rothbard wrote: “Empirically,
page references to the University of Chicago Press reprint will the most warlike, most interventionist, most imperial govern-
be supplied in brackets. ment throughout the twentieth century has been the United
2. The present author was also one of the later students of von States” (p. 287; italics in original). In sharpest contrast to the
Mises. However, because of the profound influence of the United States, which has supposedly been more warlike even
classical economists on my thinking, it would be more appro- than Nazi Germany, Rothbard described the Soviets in the
priate to describe my views as “Austro-classical” rather than as following terms: “Before World War II, so devoted was Stalin
“Austrian.” to peace that he failed to make adequate provision against the
3. On the wages-fund doctrine and the consequences of its Nazi attack. . . . Not only was there no Russian expansion
abandonment, see below pp. 664–666 and 864–867. whatever apart from the exigencies of defeating Germany, but
4. Smith, Wealth of Nations, bk. 1, chap. 4 [1:32–33]. the Soviet Union time and again leaned over backward to avoid
5. For confirmation of this claim, see below, pp. 475–485. See any cold or hot war with the West” (p. 294).
also the whole of Chapter 14. 14. See Henry Hazlitt, Economics in One Lesson, new ed. (New
6. The contributions of James Mill are among the least recog- Rochelle, N. Y.: Arlington House, 1979); idem, The Great Idea
nized in the history of economic thought. Their best statement (1951; rev. ed. published under the title Time Will Run Back,
appears in his little known work Commerce Defended (London, New Rochelle, N. Y.: Arlington House, 1966).
1808), chaps. 6 and 7, which are respectively titled “Consump- 15. See Henry Hazlitt, “Is Inflation Necessary?” Freeman 2,
tion” and “Of the National Debt.” The complete work is re- no. 26 (September 22, 1952), pp. 880–882, and Ludwig von
printed in James Mill Selected Economic Writings, ed. Donald Mises, Human Action, 3d ed. rev. (Chicago: Henry Regnery
Winch (Chicago: University of Chicago Press, 1966). Co., 1966), pp. 776–777, 792–793. Amazingly, as an eloquent
7. Cf. below, pp. 414–416, where Böhm-Bawerk is quoted at commentary on the state of contemporary economics, while the
length on this subject. rational expectations approach has come to be regarded as a
8. Strictly speaking, the consumption in question is what I term major and profound school of economic thought, the over-
net consumption. See below, pp. 725–736. whelming merit of von Mises and the Austrian school still goes
9. See below, pp. 838–856. largely unrecognized. Thus, Samuelson and Nordhaus, in their
10. See Eugen von Böhm-Bawerk, Capital and Interest, 3 vols., self-proclaimed “authoritative” and “comprehensive” textbook
trans. George D. Huncke and Hans F. Sennholz (South Holland, include “Rational Expectations Macroeconomics” in their “Fam-
Ill.: Libertarian Press, 1959), 2:168–176, 248–256; 3:97–115. ily Tree of Economics” and devote a full appendix to discussing
See also John Stuart Mill, Principles of Political Economy, it. Yet they make almost no mention of the Austrian school or
Ashley ed. (1909; reprint ed., Fairfield, N. J.: Augustus M. von Mises; the Austrian school does not even appear in the
Kelley, 1976), pp. 442–468. index. See Paul Samuelson and William Nordhaus, Economics,
11. For a related description of the ideas of von Mises, see 13th ed. (New York: McGraw-Hill, 1989), in particular the
above, pp. xlii–xliii. The ideas of Böhm-Bawerk also play an inside back cover. The leading members of the Rational Expec-
important role. tations school, incidentally, are Robert Barro, Robert Lucas,
12 CAPITALISM
Thomas Sargent, and Neil Wallace. (I wish to note that my 18. For elaboration of these points, see below, the discussions
references to Samuelson and Nordhaus throughout this work of the relationship between prices and costs on pp. 200–201,
will be to the 13th edition rather than to the more recent 14th 206–209, and 411–417.
edition, unless otherwise stated. This is because it better repre- 19. Cf. von Mises, Human Action, pp. 244–250.
sents the errors that two generations of students have had to 20. For an explanation of these principles, see below, pp.
endure at the hands of Prof. Samuelson, who, until not many 172–201.
years ago, was the sole author.) 21. George Reisman, The Government Against the Economy
16. For an exposition and critique of the doctrines of the (Ottawa, Ill.: Jameson Books, 1979). A few pages of this book,
Mercantilists, see Adam Smith, Wealth of Nations, bk. 4, chaps. which demonstrate the limitless potential of natural resources,
1–8 [2:3–209]. See also below, pp. 526–536. are incorporated in Chapter 3.
17. In private conversation with the present author, Leonard 22. Logically, Chapter 11 belongs in Part 2, where it is. Never-
Peikoff once aptly described the position of the Georgists as theless, from the point of view of the division of economics
advocating the government allowing a person to own a piano into “microeconomics” and “macroeconomics,” the chapter is
and do anything he likes with it, except put it down without its far more essential in a course on the latter than in one on the
permission. former.
PART ONE
CHAPTER 1
ECONOMICS AND CAPITALISM
cally all civilized men and women desire, and that the
PART A greatest part of their waking hours is actually spent in
efforts to acquire it—namely, in efforts to earn a living.
THE NATURE AND IMPORTANCE Yet the importance of wealth, by itself, is not suffi-
OF ECONOMICS cient to establish the importance of economics. Robinson
Crusoe on a desert island would need wealth, and his
ability to produce it would be helped if he somehow
1. Economics, the Division of Labor, and the managed to salvage from his ship books on various
Survival of Material Civilization techniques of production. But it would not be helped by
E conomics has been defined in a variety of ways. In

the nineteenth century it was typically defined as
the science of wealth or of exchangeable wealth. In the
books on economics. All that books on economics could
do for Crusoe would be to describe abstractly the essen-
tial nature of the activities he carries on without any
twentieth century, it has typically been defined as the knowledge of economics, and, beyond that, merely to
science that studies the allocation of scarce means among provide the possible intellectual stimulation he might
competing ends.1 feel as the result of increasing his knowledge of the
I define economics as the science that studies the society from which he was cut off. Something more than
production of wealth under a system of division of labor, the importance of wealth is required to establish the
that is, under a system in which the individual lives by importance of economics.
producing, or helping to produce, just one thing or at As Chapter 4 of this book will show, the production
most a very few things, and is supplied by the labor of of wealth vitally depends on the division of labor. The
others for the far greater part of his needs. The justifica- division of labor is an essential characteristic of every
tion of this definition will become increasingly clear as advanced economic system. It underlies practically all of
the contents of this book unfold.2 the gains we ascribe to technological progress and the
The importance of economics derives from the spe- use of improved tools and machinery; its existence is
cific importance of wealth—of material goods—to human indispensable for a high and rising productivity of labor,
life and well-being. The role of wealth in human life is a that is, output per unit of labor. By the same token, its
subject that will be examined in Chapter 2 of this book, absence is a leading characteristic of every backward
but provisionally its importance can be accepted on a economic system. It is the division of labor which intro-
common-sense basis. Obviously, human life depends on duces a degree of complexity into economic life that
food, clothing, and shelter. Moreover, experience shows makes necessary the existence of a special science of
that there is no limit to the amount of wealth that practi- economics. For the division of labor entails economic
21 IFor
could
an account
also sayof
that
theeconomics
change that
ishas
the taken
science
place
which
in the
studies
definition
the production
of economics,
of wealth
see Israel
underM.
a system
Kirzner,
ofThe
division
Economic
of labor
Point
and monetary
of View (New
exchange,
York: D.
or under
Van Nostrand,
a system of
1960).
division of labor and capitalism. (See below, the fir st two paragraphs of Part B of this chapter.) Both of these statements would be correct, but they would also be redundant, because, as later discussion will show, a system of division of labor presupposes both monetary exchange and all the other essential institutions of a capitalist society. F inally, the expression goods and ser vices could be substituted for the word wealth. This too would yield a tr ue statement about what economics studies. But, as will be shown, a certain priority and emphasis must be given to wealth as opposed to services.
16 CAPITALISM
phenomena existing on a scale in space and time that decline, with all that that implies about the conditions of
makes it impossible to comprehend them by means of human life.
personal observation and experience alone. Economic In the absence of a widespread, serious understanding
life under a system of division of labor can be compre- of the principles of economics, the citizens of an ad-
hended only by means of an organized body of knowledge vanced, division-of-labor society, such as our own, are
that proceeds by deductive reasoning from ele- in a position analogous to that of a crowd wandering
mentary principles. This, of course, is the work of the among banks of computers or other highly complex
science of economics. The division of labor is thus the machinery, with no understanding of the functioning or
essential fact that necessitates the existence of the subject maintenance or safety requirements of the equipment,
of economics.3 and randomly pushing buttons and pulling levers. This is
Despite its vital importance, the division of labor, as a no exaggeration. In the absence of a knowledge of eco-
country’s dominant form of productive organization—that nomics, our contemporaries feel perfectly free to enact
is, a division-of-labor society—is a relatively recent phe- measures such as currency depreciation and price con-
nomenon in history. It goes back no further than eigh- trols. They feel free casually to experiment with the
teenth-century Britain. Even today it is limited to little destruction of such fundamental economic institutions as
more than the United States, the former British domin- the freedom of contract, inheritance, and private owner-
ions, the countries of Western Europe, and Japan. The ship of the means of production itself. In the absence of
dominant form of productive organization in most of the a knowledge of economics, our civilization is perfectly
world—in the vast interiors of Asia, Africa, and most of capable of destroying itself, and, in the view of some
Latin America—and everywhere for most of history, has observers, is actually in the process of doing so.
been the largely self-sufficient production of farm fami- Thus, the importance of economics consists in the
lies and, before that, of tribes of nomads or hunters. fact that ultimately our entire modern material civi-
What makes the science of economics necessary and lization depends on its being understood. What rests
important is the fact that while human life and well-being on modern material civilization is not only the well-
depend on the production of wealth, and the production being but also the very lives of the great majority of
of wealth depends on the division of labor, the division people now living. In the absence of the extensive
of labor does not exist or function automatically. Its division of labor we now possess, the production of
functioning crucially depends on the laws and institu- modern medicines and vaccines, the provision of mod-
tions countries adopt. A country can adopt laws and ern sanitation and hygiene, and the production even of
institutions that make it possible for the division of labor adequate food supplies for our present numbers, would
to grow and flourish, as the United States did in the late simply be impossible. The territory of the continental
eighteenth century. Or it can adopt laws and institutions United States, for example, counting the deserts, moun-
that prevent the division of labor from growing and tains, rivers, and lakes, amounts to less than nine acres
flourishing, as is the case in most of the world today, and per person with its present population—not enough to
as was the case everywhere for most of history. Indeed, enable that population to survive as primitive farmers.
a country can adopt laws and institutions that cause the In Western Europe and Japan, the problem of over-
division of labor to decline and practically cease to exist. population would, of course, be far more severe. Need-
The leading historical example of this occurred under the less to say, the present vast populations of Asia, Africa,
Roman Empire in the third and fourth centuries of the and Latin America would be unable to survive in the
Christian era. The result was that the relatively advanced absence of Western food and medical supplies.
economic system of the ancient world, which had achieved
a significant degree of division of labor, was replaced by
feudalism, an economic system characterized by the 2. Further Major Applications of Economics
self-sufficiency of small territories.4
Solving Politico-Economic Problems
In order for a country to act intelligently in adopting
laws and institutions that bear upon economic life, it is Apart from the very survival of a division-of-labor
clearly necessary that its citizens understand the princi- society, and all that depends on it, the most important
ples that govern the development and functioning of the application of economics is to provide the knowledge
division of labor, that is, understand the principles of necessary for the adoption of government policies
economics. If they do not, then it is only a question of conducive to the smooth and efficient functioning of
time before that country will adopt more and more de- such a society.5 On the basis of the knowledge it
structive laws and institutions, ultimately stopping all provides, economics offers logically demonstrable so-
further economic progress and causing actual economic lutions for politico-economic problems. For example,
345 Secondarily
In
Because
the second
of itsand
century
primary
peripherally
A.D.,
application
thetoRoman
itsto
study
government
Empire
of the production
extended
policy, it
from
of
is understandable
wealth
Syria under
in the southeast
a system
why theof
tosubject
division
the northern
was
of originally
labor,
border
economics
ofknown
present-day
also
as political
studies
England
economy,
thein
production
the northwest.
whichofwas
wealth
Itits
circled
name
under
the
from
the
Mediterranean
absence
the timeof
ofdivision
Adam
Sea,Smith
embracing
of labor.
to the
ItEgypt
does
last quarter
so
and
insofar
allofofthe
as
North
nineteenth
by soAfrica,
doingcentury,
itand
canincluded
develop
when all
the
itsof
theorems
change
Europe
tounder
west
“economics”
of
simplifying
the Rhine,
tookassumptions
as
place.
well as present-day
that will enable
Romania
it toand
shedTurkey
light onand
theall
operations
of Eastern
ofEurope
a division-of-labor
south of the Danube.
society, and
Goods
insofar
produced
as by so
indoing
the various
it canregions
place the
ofvalue
the Empire
of a division-of-labor
were consumed society
throughout
in itsthe
proper
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light,For
byexample,
contrasting
pottery
itwithmade
non-division-of-labor
in Syria was consumed
societies.
as far away as England, and tin mined in England was consumed as far away as Syria.
ECONOMICS AND CAPITALISM 17
it explains very clearly how to stop such major pres- Implications for Ethics and Personal Understanding
ent-day problems as inflation, shortages, depressions, Economics has powerful implications for ethics. It
and mass unemployment, and how to turn capital de- demonstrates exhaustively that in a division-of-labor, cap-
cumulation into capital accumulation and a declining italist society, one man’s gain is not another man’s loss, that,
productivity of labor into a rising productivity of labor. indeed, it is actually other men’s gain—especially in the
In addition, economics can very clearly show how to case of the building of great fortunes. In sum, economics
achieve economic progress all across the world, and is demonstrates that the rational self-interests of all men are
potentially capable of playing an enormous role in harmonious. In so doing, economics raises a leading
eliminating the intellectual and economic causes both voice against the traditional ethics of altruism and self-
of domestic strife and of international conflict and war. sacrifice. It presents society—a division-of-labor, capitalist
As I will show, the essential nature of the policies society—not as an entity over and above the individual,
economics demonstrates to be necessary to solve all to which he must sacrifice his interests, but as an indis-
such problems is respect for property rights and eco- pensable means within which the individual can fulfill
nomic freedom. the ultimate ends of his own personal life and happiness.8
A knowledge of economics is indispensable for anyone
Understanding History
who seeks to understand his own place in the modern world
Because it explains what promotes and what impairs and that of others. It is a powerful antidote to unfounded
the functioning of the division of labor, economics is an feelings of being the victim or perpetrator of “exploitation”
essential tool for understanding the world’s history—the and to all feelings of “alienation” based on the belief that the
broad sweep of its periods of progress and its periods of economic world is immoral, purposeless, or chaotic. Such
decline—and the journalistic events of any given time. unfounded feelings rest on an ignorance of economics.
Its applications include a grasp of the causes of the The feelings pertaining to alleged exploitation rest on
decline of ancient civilization and of the rise of the ignorance of the productive role of various economic
modern, industrial world, both of which can be under- functions, such as those of businessman and capitalist,
stood in terms of the rise or fall of the division of labor. retailing and wholesaling, and advertising and specula-
Economics brings to the understanding of history and tion, and on the underlying conviction that essentially
journalism a foundation of scientific knowledge which only manual labor is productive and is therefore the only
can serve historians and journalists in much the same legitimate form of economic activity.9 Feelings pertain-
way as a knowledge of natural science and mathematics. ing to the alleged purposelessness of much of economic
Namely, it can give to historians and journalists a knowl- activity rest on ignorance of the role of wealth in human
edge of what is and is not possible, and therefore a life beyond the immediate necessities of food, clothing,
knowledge of what can and cannot qualify as an expla- and shelter. This ignorance leads to the conviction that
nation of economic phenomena. For example, a knowl- economic activity beyond the provision of these neces-
edge of modern natural science precludes any historical sities serves no legitimate purpose.10 Feelings pertaining
or journalistic explanation of events based on Ptolemaic to the alleged chaos of economic activity rest on igno-
astronomy or the phlogiston theory of chemistry, not to rance of the knowledge economics provides of the be-
mention beliefs in such notions as witchcraft, astrology, nevolent role of such institutions as the division of labor,
or any form of supernaturalism. In exactly the same way, private ownership of the means of production, exchange
it will be shown in this book that a knowledge of eco- and money, economic competition, and the price system.
nomics precludes any historical or journalistic explana- In opposition to feelings of alienation, economic sci-
tion of events based on such doctrines as the Marxian ence makes the economic world fully intelligible. It
theory of exploitation and class warfare, or on the belief explains the foundations of the enormous economic prog-
that machinery causes unemployment or that depressions ress which has taken place in the “Western” world over
are caused by “overproduction.”6 the last two centuries. (This includes the rapid economic
Economics can also serve historians and journalists as progress that has been made in recent decades by several
a guide to what further facts to look for in the explanation countries in the Far East, which have largely become
of economic events. For example, whenever shortages “Westernized.”) And in providing demonstrable solu-
exist, it tells them to look for government controls limit- tions for all of the world’s major economic problems, it
ing the rise in prices; whenever unemployment exists, it points the way for intelligent action to make possible
tells them to look for government interference limiting radical and progressive improvement in the material
the fall in money wage rates; and whenever a depression conditions of human beings everywhere. As a result,
exists, it tells them to look for a preceding expansion of knowledge of the subject cannot help but support the
money and credit.7 conviction that the fundamental nature of the world is
810
976 Cf.
On
For
ISee
amthis
Ludwig
below,
eindebted
laboration,
subject,
chap.
von
to see
se
von
Mises,
11,
e below,
Mises
pt.Socialism
C; for
Chapter
chap.
chathis
p. 2,
(New
13,
view
sec
11,
pt..Haven:
Parts
of
3,
A,what
and
secs.
Bchap.
and
Yale
economics
1 and
C.
University
13,
2; pt.
ibid.,
has
A. pt.
to
Press,
offer
B; chap.
1951),
historians
14.p. 402;
andreprint
journalists.
ed. (Indianapolis:
Cf. Ludwig von
Liberty
Mises,
Classics,
Epistemological
1981). Page
Problems
references
ofEconomics,
are to the Yale
trans.
University
George Reisman
Press edition;
(Princeton,
pagination
N. J.:from
D. Van
thisNostrand,
edition is retained
1960), pp.
in the
27–30,
reprint
99–102.
edition.
18 CAPITALISM
benevolent and thus that there is no rational basis for Economics and the Defense of Individual Rights
feelings of fundamental estrangement from the Knowledge of economics is indispensable to the
world.11 defense of individual rights. The philosophy of indi-
The above discussion, of course, is totally in opposi- vidual rights, as set forth in the writings of John Locke
tion to the widely believed claims of Marx and Engels and the Declaration of Independence and Constitution
and their followers, such as Erich Fromm, that the eco- of the United States, has been thoroughly undermined
nomic system of the modern world—capitalism—is the as the result of the influence of wrong economic theo-
basis of alienation. Indeed, it is consistent with the above ries, above all, the theories of Karl Marx and the other
discussion that the actual basis of “alienation” resides socialists. The essential conclusion of such theories is
within the psychological makeup of those who experi- that in the economic sphere the exercise of individual
ence the problem. Ignorance of economics reinforces rights as understood by Locke and the Founding Fa-
feelings of alienation and allows the alleged deficiencies thers of the United States serves merely to enable the
of the economic system to serve as a convenient ratio- capitalists to exploit the workers and consumers, or is
nalization for the existence of the problem.12 otherwise comparably destructive to the interests of
the great majority of people. Precisely as a result of
Economics and Business
the influence of these vicious ideas, culminating in the
Despite popular beliefs, economics is not a science of victory of the New Deal, the Supreme Court of the
quantitative predictions. It does not provide reliable infor- United States has, since 1937, simply abandoned the
mation on such matters as what the price of a common stock defense of economic freedom. Since that time it has
or commodity will be in the future, or what the “gross allowed Congress and the state legislatures, and even
national product” will be in the next year or quarter.13 unelected regulatory agencies, to do practically any-
However, a knowledge of economics does provide an thing they wish in this area, the Constitution and Bill
important intellectual framework for making business of Rights and all prior American legal precedent not-
and personal financial decisions. For example, a busi- withstanding.14
nessman who understands economics is in a far better A thorough knowledge of economics is essential to
position to appreciate what the demand for his firm’s understanding why the exercise of individual rights in
products depends on than a businessman who does not. the economic sphere not only is not harmful to the
Similarly, an individual investor who understands eco- interests of others, but is in the foremost interest of
nomics is in a vastly better position to protect himself everyone. It is essential if the American people are
from the consequences of such things as inflation or ever to reclaim the safeguards to economic freedom
deflation than one who does not. provided by their Constitution, or if people anywhere
But the most important application of economics to are to be able to establish and maintain systems of
business and investment is that only a widespread government based on meaningful respect for individ-
knowledge of economics can assure the continued ual rights. Indeed, in demonstrating the harmony of the
existence of the very activities of business and invest- rational self-interests of all men under freedom, this
ment. These activities are prohibited under socialism. entire book has no greater or more urgent purpose than
In a socialist society, such as that of the former Soviet that of helping to uphold the philosophy of individual
Union, which is governed by the belief that profits and rights.
interest are incomes derived from “exploitation,” in- ***
dividuals who attempt to engage in business or invest- The nature and importance of economics imply that
ment activity have been sent to concentration camps study of the subject should be an important part of the
or executed. Business activities can endure and flour- general education of every intelligent person. Eco-
ish only in a society which understands economics and nomics belongs alongside mathematics, natural sci-
which is therefore capable of appreciating their value. ence, history, philosophy, and the humanities as an
The value of economics to businessmen should be integral part of a liberal education. It deserves an
thought of not as teaching them how to make money especially prominent place in the education of law-
(which is a talent that they possess to an incalculably yers, businessmen, journalists, historians, the writers
greater degree than economists), but as explaining of literary works, and university, college, and second-
why it is to the self-interest of everyone that business- ary-school teachers of the humanities and social sci-
men should be free to make money. This is something ences. These are the groups that play the dominant role
which businessmen do not know, which is vital to them in forming people’s attitudes concerning legislation
(and to everyone else), and which economics is uniquely and social institutions and whose work can most profit
qualified to explain. from an understanding of economics.
11
12
13
14 For above,
See Bernard
the
a discussion
writings
the
Siegan,
discussion
of
ofAyn
the
Economic
ide
Rand
of
asmathematical
of
forLiberties
Marx
a consistent
andand
Eeconomics
nge
the
elaboration
lsConstitution
on “ain
lienation,”
the
of Introduction,
the
(Chicago:
“benevolent
see below,
University
sec.
universe
chap.
2. See4,of
also
sec.
premise”
Chicago
chap.
3. Press,
across
5, pt. B,
1980).
the
sec
entire
. 2, the
range
subsection
of human
“T activity.
he Concept of E lasticity of Demand.”
institutions represent, in effect, a self-expanded power of

PART B human reason to serve human life.17 The growing abun-
dance of goods that results is the material means by
CAPITALISM which people further, fulfill, and enjoy their lives. The
philosophical requirements of capitalism are identical
This book shows that the laws and social institutions with the philosophical requirements of the recognition
necessary to the successful functioning, indeed, to the and implementation of man’s right to life.
very existence, of the division of labor are those of It was no accident that the gradual development of
capitalism. Capitalism is a social system based on private capitalist institutions in Western Europe that began in the
ownership of the means of production. It is characterized late Middle Ages paralleled the growing influence of
by the pursuit of material self-interest under freedom and prosecular, proreason trends in philosophy and religion,
it rests on a foundation of the cultural influence of reason. which had been set in motion by the reintroduction into
Based on its foundations and essential nature, capitalism the Western world of the writings of Aristotle. It is no
is further characterized by saving and capital accumula- accident that the greatest era of capitalist development—
tion, exchange and money, financial self-interest and the the last two centuries—has taken place under the ongoing
profit motive, the freedoms of economic competition and cultural influence of the philosophy of the Enlightenment.
economic inequality, the price system, economic prog- Philosophical convictions pertaining to the reality and
ress, and a harmony of the material self-interests of all primacy of the material world of sensory experience
the individuals who participate in it. determine the extent to which people are concerned with
As succeeding chapters of this book will demonstrate, this world and with improving their lives in it. When, for
almost every essential feature of capitalism underlies the example, people’s lives were dominated by the idea that
division of labor and several of them are profoundly the material world is superseded by another, higher
influenced by it in their own operation. When the con- world, for which their life in this world is merely a test
nections between capitalism and the division of labor and a preparation, and in which they will spend eternity,
have been understood, it will be clear that economics, as they had little motive to devote much thought and energy
the science which studies the production of wealth under to material improvement. It was only when the philo-
a system of division of labor, is actually the science sophical conviction grew that the senses are valid and
which studies the production of wealth under capitalism. that sensory perception is the only legitimate basis of
Economics’ study of the consequences of government knowledge, that they could turn their full thought and
intervention and of socialism will be shown to be merely attention to this world. This change was an indispensable
study of the impairment or outright destruction of capi- precondition of the development of the pursuit of mate-
talism and the division of labor. rial self-interest as a leading force in people’s lives.
The cultural acceptance of the closely related philo-
sophical conviction that the world operates according to
1. The Philosophical Foundations of Capitalism definite and knowable principles of cause and effect is
and Economic Activity equally important to economic development. This con-
Economic activity and the development of economic viction, largely absent in the Dark Ages, is the indispens-
institutions do not take place in a vacuum. They are able foundation of science and technology. It tells
profoundly influenced by the fundamental philosophical scientists and inventors that answers exist and can be
convictions people hold.15 Specifically, the development found, if only they will keep on looking for them. With-
of capitalist institutions and the elevation of the level of out this conviction, science and technology could not be
production to the standard it has reached over the last two pursued. There could be no quest for answers if people
centuries presuppose the acceptance of a this-worldly, were not first convinced that answers can be found.
proreason philosophy. Indeed, in their essential develop- In addition to the emphasis on this-worldly concerns
ment, the institutions of capitalism and the economic and the grasp of the principle of cause and effect, the
progress that results represent the implementation of influence of reason shows up in the development of the
man’s right to life, as that right has been described by Ayn individual’s conceptual ability to give a sense of present
Rand—namely, as the right “to take all the actions re- reality to his life in decades to come, and in his identifi-
quired by the nature of a rational being for the support, cation of himself as a self-responsible causal agent with
the furtherance, the fulfillment and the enjoyment of his the power to improve his life. This combination of ideas
own life.”16 Capitalism is the economic system that is what produced in people such attitudes as the realiza-
develops insofar as people are free to exercise their right tion that hard work pays and that they must accept
to life and choose to exercise it. As will be shown, its responsibility for their future by means of saving. The
15
16
17 Thisbelow,
Ayn
See Rand,
section“Man’s
sec.
was3inspired
ofRights,”
this part.
by inand
Ayn
draws
Rand,
heavily
The Virtue
on theofcontent
Selfishness
of a lecture
(New York:
delivered
NewbyAmerican
Dr. Leonard
Library,
Peikoff
1964),
in Chicago,
pp. 124–25.
in May 1980, under the title “The Philosophic Basis of Capitalism,” before the Inflation and Gold Seminar of the US Paper Exchange/Tempor Corporation.
20 CAPITALISM
same combination of ideas helped to provide the intel- an end in himself—and as fully competent to run his own
lectual foundation for the establishment and extension of life. The application, in turn, of this view of the individ-
private property rights as incentives to production and ual to society and politics was the doctrine of inalienable
saving. Private property rights rest on the recognition of individual rights, and of government as existing for no
the principle of causality in the form that those who are other purpose than to secure those rights, in order to leave
to implement the causes must be motivated by being able the individual free to pursue his own happiness. This, of
to benefit from the effects they create. They also rest on course, was the foundation of the freedom of capitalism.
a foundation of secularism—of the recognition of the The same view of man and the human individual, when
rightness of being concerned with material improve- accepted as a personal standard to be lived up to, was the
ment. inspiration for individuals to undertake large-scale ac-
Thus, insofar as production depends on people’s de- complishments and to persevere against hardship and
sire to improve their material conditions, and on science, failure in order to succeed. It inspired them when they
technology, hard work, saving, and private property, it set out to explore the world, discover laws of nature,
fundamentally depends on the influence of a this-worldly, establish a proper form of government, invent new prod-
proreason philosophy. ucts and methods of production, and build vast new
And to the extent that production depends on peace businesses and brand new industries. It was the inspira-
and tranquility, on respect for individual rights, on lim- tion for the pioneering spirit and sense of self-reliance
ited government, economic and political freedom, and and self-responsibility which once pervaded American
even on personal self-esteem, it again fundamentally society at all levels of ability, and a leading manifestation
depends on the influence of a this-worldly, proreason of which is the spirit of great entrepreneurship.
philosophy. Finally, the ability of economic science itself to influ-
From the dawn of the Renaissance to the end of the ence people’s thinking so that they will favor capitalism
nineteenth century, the growing conviction that reason is and sound economic policy is also totally dependent on
a reliable tool of knowledge and means of solving prob- the influence of a proreason philosophy. Economics is a
lems led to a decline in violence and the frequency of science that seeks to explain the complexities of eco-
warfare in Western society, as people and governments nomic life through a process of abstraction and simplifi-
became increasingly willing to settle disputes by discus- cation. The method of economics is the construction of
sion and persuasion, based on logic and facts. This was deliberately simplified cases, which highlight specific
a necessary precondition of the development of the in- economic phenomena and make possible a conceptual
centive and the means for the stepped-up capital accu- analysis of their effects. For example, in analyzing the
mulation required by a modern economic system. For if effects of improvements in machinery, an economist
people are confronted with the chronic threat of losing imagines a hypothetical case in which no change of any
what they save, and again and again do lose it—whether kind takes place in the world except the introduction of
to local robbers or to marauding invaders—they cannot an improved machine. The truths established deductively
have either the incentive or the means to accumulate in the analysis of such cases are then applied as principles
capital. to the real economic world. Consequently, the ability of
During the same period of time, as part of the same economics to affect people’s attitudes depends on their
process, a growing confidence in the reliability and power willingness to follow and feel bound by the results of
of human reason led to the elevation of people’s view of abstract reasoning. If economics is to have cultural influ-
man, as the being distinguished by the possession of ence, it is indispensable that people have full confidence
reason. Because he was held to possess incomparably the in logic and reason as tools of cognition.
highest and best means of knowledge, man came to be ***
regarded, on philosophical grounds, as incomparably the Not only are economic activity and economics as a
highest and best creature in the natural order, capable of science dependent on a proreason philosophy in all the
action on a grand and magnificent scale, with unlimited ways I have described, but also it should be realized that
potential for improvement. In conjunction with the fur- economics itself is a highly philosophical subject, poten-
ther philosophical conviction that what actually exist are tially capable of exerting an extremely important prorea-
always individual concretes, not abstractions as such, son influence on philosophy. As the subject that studies
and thus not collectives or groups of any kind, the ele- the production of wealth under a system of division of
vated view of man meant an elevated view of the indi- labor, economics deals both with essential aspects of
vidual human being and his individual potential. man’s relationship to the physical world and with essen-
In their logically consistent form, these ideas led to a tial aspects of his relationship to other men. Indeed, the
view of the individual as both supremely valuable—as subject matter of economics can be understood as noth-
ing less than the fundamental nature of human society An effective government, in minimizing the threat of
and the ability of human beings living in society progres- aggression, establishes the existence of the individual’s
sively to enlarge the benefits they derive from the phys- freedom in relation to all other private individuals. But
ical world. For this is what one understands when one this is far from sufficient to establish freedom as a general
grasps the nature and ramifications of the division of social condition. For one overwhelming threat to free-
labor and its effects on the ability to produce. In this dom remains: namely, aggression by the government
capacity, economics overturns such irrationalist philo- itself.
sophical doctrines as the notion that one man’s gain is Everything a government does rests on the use of
another man’s loss, and the consequent belief in the exis- force. No law actually is a law unless it is backed by the
tence of an inherent conflict of interests among human threat of force. So long as what the government makes
beings. In their place it sets the doctrine of continuous eco- illegal are merely acts representing the initiation of force,
nomic progress and the harmony of the rational self-inter- it is the friend and guarantor of freedom. But to whatever
ests of all human beings under capitalism, which doctrine extent the government makes illegal acts that do not
it conclusively proves on the basis of economic law. represent the initiation of force, it is the enemy and
violator of freedom. In making such acts illegal, it be-
comes the initiator of force.
2. Capitalism and Freedom Thus, while the existence of freedom requires the
Freedom means the absence of the initiation of phys- existence of government, it requires the existence of a
ical force. Physical force means injuring, damaging, or very specific kind of government: namely, a limited
otherwise physically doing something to or with the government, a government limited exclusively to the
person or property of another against his will. The initi- functions of defense and retaliation against the initiation
ation of physical force means starting the process—that of force—that is, to the provision of police, courts, and
is, being the first to use physical force. When one has national defense.19
freedom, what one is free of or free from is the initiation In a fully capitalist society, government does not go
of physical force by other people. An individual is free beyond these functions. It does not, for example, dictate
when, for example, he is free from the threat of being prices, wages, or working conditions. It does not pre-
murdered, robbed, assaulted, kidnapped, or defrauded. scribe methods of production or the kinds of products
(Fraud represents force, because it means taking away that can be produced. It does not engage in any form of
property against the will of its owner; it is a species of “economic regulation.” It neither builds houses nor pro-
theft. For example, if a bogus repairman takes away a vides education, medical care, old-age pensions, or any
washing machine to sell it, while saying that he is taking other form of subsidy. All economic needs are met pri-
it to repair it, he is guilty of force. In taking it to sell, he vately, including the need for charitable assistance when
takes it against the will of the owner. The owner gives it arises. The government’s expenditures are accordingly
him no more authorization to sell it than he gives to a strictly limited; they do not go beyond the payment of
burglar.) the cost of the defense functions. And thus taxation is
strictly limited; it does not go beyond the cost of the
Freedom and Government defense functions.20
The existence of freedom requires the existence of In short, in its logically consistent form, capitalism is
government. Government is the social institution whose characterized by laissez faire. The government of such a
proper function is to protect the individual from the society is, in effect, merely a night watchman, with
initiation of force. Properly, it acts as the individual’s whom the honest, peaceful citizen has very little contact
agent, to which he delegates his right of self-defense. It and from whom he has nothing to fear. The regulations
exists to make possible an organized, effective defense and controls that exist in such a society are not regula-
and deterrent against the initiation of force. Also, by tions and controls on the activities of the peaceful citizen,
placing the use of defensive force under the control of but on the activities of common criminals and on the
objective laws and rules of procedure, it prevents efforts activities of government officials—on the activities of
at self-defense from turning into aggression. If, for ex- the two classes of men who use physical force. Under
ample, individuals could decide that their self-defense capitalism, while the government controls the criminals,
required that they drive tanks down the street, they would it itself is controlled (as it was for most of the history of
actually be engaged in aggression, because they would the United States) by a Constitution, Bill of Rights, and
put everyone else in a state of terror. Control over all use system of checks and balances achieved through a divi-
of force, even in self-defense, is necessary for people to sion of powers. And thus the freedom of the individual
be secure against aggression.18 is secured.21
21
18
19
20 Again,
Onaibid.
Cf.
In these
fullycf.consistent
points,
Ayn Rand,
cf. capitalist
Ayn
“The
Rand,
Nature
society,
“TheofNature
taxation
Government,”
ofitself
Government,”
would
in Virtue
be of
of
inaSelfishness.
Ayn
voluntary
Rand,nature.
Virtueof
OnSelfishness.
this subject see Ayn Rand, “Government Financing in a Free Society,” in Ayn Rand, VirtueofSelfishness.
22 CAPITALISM
Given the existence of government and its power to uals can consider their circumstances and then choose
restrain the private use of force, the concept of freedom the course of action that they judge to be most conducive
must be defined in a way that places special stress on the to their economic well-being and thus to their economic
relationship of the citizen to his government. This is security. In addition, they can benefit from the like choices
because the government’s capacity for violating freedom of those with whom they deal.
is incomparably greater than that of any private individ- Under freedom, everyone can choose to do whatever
ual or gang whose aggression it fights. One has only to he judges to be most in his own interest, without fear of
compare the Gestapo or the KGB with the Mafia, to being stopped by the physical force of anyone else, so
realize how much greater is the potential danger to long as he himself does not initiate the use of physical
freedom that comes from government than from private force. This means, for example, that he can take the
individuals. The government operates through open lines highest paying job he can find and buy from the most
of communication and has at its disposal entire armies competitive suppliers he can find; at the same time, he
that in modern times are equipped with artillery, tanks, can keep all the income he earns and save as much of it
planes, rockets, and atomic weapons. Private gangs num- as he likes, investing his savings in the most profitable
ber comparative handfuls of individuals, operating clan- ways he can. The only thing he cannot do is use force
destinely and equipped at most perhaps with submachine himself. With the use of force prohibited, the way an
guns. Thus, freedom must be defined not merely as the individual increases the money he earns is by using his
absence of the initiation of physical force, but, in addi- reason to figure out how to offer other people more or
tion, in order to highlight its most crucial aspect, the better goods and services for the same money, since this
absence of the initiation of physical force by, or with the is the means of inducing them voluntarily to spend more
sanction of, the government. The very existence of gov- of their funds in buying from him rather than from
ernment can easily secure the freedom of the individual competitors. Thus, freedom is the basis of everyone
in relation to all other private citizens. The crucial matter being as secure as the exercise of his own reason and the
is the individual’s freedom in relation to the government. reason of his suppliers can make him.
The detailed demonstration of the fact that economic
Freedom as the Foundation of Security freedom is the foundation of economic security is a major
It is important to realize that freedom is the foundation theme of this book. This book will show, for example,
of both personal and economic security. that free competition is actually a leading source of
The existence of freedom directly and immediately economic security, rather than any kind of threat to it,
establishes personal security in the sense of safety from and that such phenomena as inflation, depressions, and
the initiation of physical force. When one is free, one is mass unemployment—the leading causes of economic
safe—secure—from common crime, because what one insecurity—are results of violations of economic free-
is free of or free from is precisely the initiation of dom by the government, and not at all, as is usually
physical force. believed, of economic freedom itself.22
The fact that freedom is the absence of the initiation of ***
physical force also means that peace is a corollary of free- The harmony between freedom and security that this
dom. Where there is freedom, there is peace, because there book upholds is, of course, in direct opposition to the
is no use of force: insofar as force is not initiated, the use of prevailing view that in order to achieve economic secu-
force in defense or retaliation need not take place. Peace rity, one must violate economic freedom and establish a
in this sense is one of the most desirable features of welfare state. The existence of the social security system,
freedom. Nothing could be more valuable or honorable. in the United States and other countries, both represents
There is, however, a different sense in which peace of a leading consequence of this mistaken belief and pro-
some sort can exist. Here, one person or group threatens vides essential evidence about what is wrong with it.
another with the initiation of force and the other offers In the name of economic security, the freedom of
no resistance, but simply obeys. This is the peace of individuals to dispose of their own incomes has been
slaves and cowards. It is the kind of peace corrupt intel- violated as they have been forced to contribute to the
lectuals long urged on the relatively free people of the social security system. A major consequence of this has
Western world in relation to the aggression of the Com- been that an enormous amount of savings has been
munist world. diverted from private individuals into the hands of the
Freedom is the precondition of economic security, government. Had these savings remained in the posses-
along with personal safety, because it is an essential sion of the individuals, they would have been invested
requirement for individuals being able to act on their and would thus have helped to finance the construction
rational judgment. When they possess freedom, individ- and purchase of new housing, new factories, and more
22 See below, Chapters 9, 12, 13, and 19.
and better machinery. In the hands of the government, Property rights also include the right to build meeting
these savings have been dissipated in current consump- halls and radio and television stations and to use them to
tion. This has resulted from the fact that the government propound whatever ideas one likes. Freedom of speech
has an overwhelmingly greater interest in its own im- is fully contained in the economic freedom of the owners
mediate financial needs than in the future economic of property of the kind that facilitates speech to use their
security of any private individuals and thus has spent the property as they see fit. By the same token, the freedom
funds in financing its current expenditures. This has of speech of those who do not own such property is
meant the dissipation of these savings and thus the seri- implied in their right and freedom to buy the use of such
ous undermining of the wealth and productive ability of property from those who do own it and are willing to rent it
the entire economic system.23 to them. Government interference with any such speech
These results have proceeded from the essential na- is simultaneously an interference with the property rights
ture of the case, which is that while private individuals of the owners of meeting halls or radio or television
have an interest in their long-run future economic secu- stations to use or rent their facilities as they see fit.
rity, and will provide for it if they are left free to do so, In the same way, freedom of the press is fully con-
the government does not have such an interest. The tained in the freedom of an individual to set his type to
interest of government officials is to get by in their term form the words he wants to form, and then to use his
of office and leave the problems of the future to their presses, paper, and ink to reproduce those words, and to
successors. Thus the violation of economic freedom nec- sell the resulting product to buyers of his choice. Free-
essarily results in making individuals less economically dom of travel is contained in the property right to build
secure. Indeed, having been deprived of the existence of railroads and highways, automobiles and airplanes, to
actual savings to provide for their future economic secu- drive one’s automobile where one likes, or buy a bus,
rity, individuals are now in the position of having to train, or plane ticket from any willing seller. It is con-
depend on the largesse of future legislators, who will tained in the freedom to use one’s shoes to walk across
have to turn to future taxpayers for the necessary funds. the frontier.
This arrangement has much more in common with the In prohibiting the freedom of speech, press, or travel,
gross insecurity of living as a beggar than it has with any one prohibits property owners from using their property
actual economic security.24 as they wish. By the same token, in respecting property
In opposition to all such delusions, this book shows rights, one respects these freedoms. On this basis, one
that to achieve economic security, the essential require- should observe the irony of alleged conservative defenders
ment is precisely economic freedom. of property rights advocating such things as antipornog-
raphy legislation—a violation of the property rights of
The Indivisibility of Economic press owners—and of alleged liberal defenders of civil
and Political Freedom liberties advocating the violation of property rights.25
Although the emphasis of this book is necessarily on
the importance of economic freedom, this fact should not The Rational Versus the Anarchic
be taken in any way to mean a lack of concern for Concept of Freedom
political freedom. Economic freedom and political free- The concept of freedom when employed rationally,
dom are indivisible. They are, in fact, merely different presupposes the existence of reality, and with it the laws
aspects of the same thing. The alleged dichotomy be- of nature, the necessity of choice among alternatives, and
tween economic freedom and political freedom, between the fact that if one resorts to force, one must expect to be
property rights and human rights, is groundless. Virtually met by force. Of particular importance is the fact that it
every human activity employs wealth—property. To re- presupposes the necessity of having the voluntary coop-
spect the right and freedom to use property is to respect eration of everyone who is to aid in an activity—includ-
the right and freedom to carry on the activities in which ing the owners of any property that may be involved.
property is used. To deny the right and freedom to carry After taking for granted the presence of all this, the
on such activities is to deny the right and freedom to use rational concept of freedom then focuses on the absence
the property involved. of one particular thing: the initiation of physical force—
For example, the freedom of speech is implied in a in particular, by the government.26
farmer’s right to use his pasture as he sees fit. The In sharpest contrast to the rational concept of freedom
farmer’s property rights include his right to invite people is the anarchic concept. The anarchic concept of freedom
onto his land to deliver and or hear a speech. Any effort evades and seeks to obliterate the fundamental and rad-
by the government to stop or prevent such a speech is an ical distinction that exists between two sorts of obstacles
obvious interference with the farmer’s property rights. to the achievement of a goal or desire: “obstacles” con-
24
23
25
26 The
It should
problem
following
go
be realized
without
ofdiscussion
the economic
saying
that even
isthat
essentially
insecurity
ifthe
muchcontext
ofan
of
the
application
prospective
taken
savings
forindividuals
granted
of
social
principles
in
security
the
presently
reference
setrecipients
forthpay
by
toAyn
into
antipornography
(and
the
Rand
ofsocial
everyone
in criticizing
security
legislation
else)system
is
thecompounded
use
iswere
one
of the
in
invested
which
word
by the
censorship
all
infact
the
housing,
that
parties
an
inas
reference
inevitable
involved
they likely
are
toaccompaniment
the
would
freely
actions
be,
consenting
those
of private
ofsavings
the
adults.
welfare
individuals.
wouldstate
i ndirectly
Cf.
is fiat
Ayn money,
still
Rand, contribute
which
“Man’smakes
Rights,”
to investment
all contractual
in Ayn
in factories
Rand,
obligations
Virtue
and machinery.
ofSelfishness,
stated in fixed
This
especially
sums
is because
of money
pp.
savi
131–34.
ngs
essentially
would thenmeaningless.
not have toOn
be withdrawn
these points,
from
see below,
financing
thefactories
subsections
and“The
machinery
Welfare
toState”
financing
and housing,
“ReversalasofisSpresently
af ety” in the
chap.
case
19,
because
pt. B, sec
ofs.
the2vast
andsiphoning
5, respective
offly.of personal savings caused by the social security system.
24 CAPITALISM
stituted by the ordinary facts of reality, including other The anarchic concept of freedom, of course, is present
people’s voluntary choices, and obstacles constituted by in the assertions of Communists and socialists that their
the government’s threat to use physical force. For exam- freedom of speech is violated because they are threatened
ple, by the nature of things, it is impossible for me to with arrest for attempting to disrupt the speech of an
square circles, walk through walls, or be in two places at invited speaker by shouting him down or by speaking at
the same time. It is also not possible for me, in the actual the same time. This assertion by the Communists and
circumstances of my life, to win the Nobel prize in socialists neglects the fact that their action constitutes the
chemistry or the Academy Award for best actor of the use of someone else’s property against his will—namely,
year, or to enter the automobile or steel business. There the use of the meeting room against the will of the owner
are all kinds of such things I simply cannot do. And or lessee, who wants the invited speaker to speak, not the
among the things I could do, there are many I choose not disrupters. It is thus the action of the Communists and
to do, because I judge the consequences to myself to be socialists which is a violation of freedom in this in-
highly undesirable. For example, I cannot arbitrarily stance—a genuine violation of the freedom of speech.
decide to walk off my job in the middle of winter to take It follows from this discussion of the erroneous claims
a vacation in the sun, without the very strong likelihood of the Communists and socialists that a prohibition on
of being fired. I cannot drive down a city street at ninety arbitrarily shouting “fire” in a crowded theater should not
miles an hour, nor can I strike or kill another, without be construed as any kind of limitation on the freedom of
running the risk of paying the penalty for violating the speech. Arbitrarily shouting “fire” constitutes a violation
law. And then, there are things that are possible for me of the property rights of the theater owner and of the other
to do, and that I would very much like to do, but that ticketholders, whom it prevents from using their property
would require the consent of other people, which consent as they wish. When one holds the context of the rational
they are unwilling to give. In this category, are such concept of freedom, it becomes clear that it is no more a
things as having my views published in The New York violation of freedom of speech to prohibit such speech,
Times or having this book assigned in courses at leading than it is to prohibit the speech of disruptive hecklers, or
“liberal” universities. the speech of an uninvited guest who might choose to
Absolutely none of these facts constitutes a violation deliver a harangue in one’s living room. Violations of
of freedom, a denial of rights, or anything of the kind. In freedom of speech occur only when the speaker has the
order for a violation of freedom to exist, it is not sufficient consent of the property owners involved and then is
merely that someone be unable to achieve what he de- prohibited from speaking by means of the initiation of
sires. What is necessary is that the specific thing stopping physical force—in particular, by the government or by
him be the initiation of physical force; in particular, the private individuals acting with the sanction of the gov-
government’s threat to use force against him in response ernment.
to an action of his that does not represent the use of force. Because of the confusions that have been introduced
The stock-in-trade of the anarchic concept of free- into the concept of freedom, it is necessary to set matters
dom, however, is to construe precisely such facts as a right in a number of important concrete instances. Thus,
violation of freedom and rights. On the basis of the freedom of speech is violated not when an individual
anarchic concept of freedom, it is claimed that freedom does not receive an invitation to speak somewhere, but
is violated any time there is anything that, for whatever when he does receive it and is stopped by the government
reason, a person cannot do, from flying to the moon, to (or by private individuals acting with the sanction of the
being able to afford a house or a college education that government) from accepting the invitation or exercising
is beyond his reach, to committing murder.27 it. It is violated precisely by Communist and socialist
Ironically, the anarchic concept of freedom is im- disrupters whom the police refuse to remove. Ironically,
plicitly accepted by conservatives and fascists, as well as in the case of a live theatrical performance, it is violated
by anarchists and hippies. This is evident in the argu- precisely when someone arbitrarily shouts “fire.” Such a
ments they advance when they seek to establish the person violates the freedom of speech of the actors on
principle that it is necessary and proper to violate free- stage.
dom. For example, they argue that we do not allow a man The freedom of the press is violated and censorship
the “freedom” to murder his mother-in-law or to speed exists not when a newspaper refuses to publish a story or
through red lights and thereby threaten the lives of others. a column that, for any reason, it regards as unworthy of
In propounding such arguments, the conservatives and publication, but when it is prepared to publish a piece and
fascists casually neglect the fact that such acts constitute the is stopped from doing so by the government. Thus, if I
initiation of force, and are so far from representing freedom want to print my views in The New York Times, but can
that their prohibition is what actually constitutes freedom. neither afford the advertising rates nor persuade the
27 Cf. ibid., pp. 128–130.
publisher to give me space, my freedom of the press is sion of capitalists—indeed, of slave owners.30 Similarly,
not violated; I am not a victim of “censorship.” But if, as the anarchic concept of freedom claims, freedom
suppose I do have the money to pay the advertising rates of travel or movement requires the ability to be able to
or could persuade the publisher to print my views, and afford to travel or move, then a state’s requirement of a
the government disallows it—that would be a violation year’s residency, say, as the condition of receiving wel-
of the freedom of the press; that would be censorship. It fare payments, can be construed as a violation of the
is a violation of my freedom of the press if the govern- freedom of travel or movement. Maintenance of such
ment stops me from mimeographing leaflets, if that is all alleged freedom of travel or movement then requires the
I can afford to do to spread my ideas. Again, censorship continued corresponding enslavement of the taxpayers,
exists not when the sponsor of a television program who must pay to finance it under threat of being im-
refuses to pay for the broadcast of ideas he considers false prisoned if they do not.
and vicious, but when he does approve of the ideas he is What is essential always to keep in mind is that since
asked to sponsor and yet is stopped from sponsoring freedom—real freedom—is the absence of the initiation
them—for example, by an implicit threat of the govern- of physical force, every attempt to justify any form of
ment not to renew the license of the television station, or restriction or limitation on freedom is actually an at-
arbitrarily to deny him some permission he requires in tempt, knowingly or unknowingly, to unleash the initia-
some important aspect of his business.28 tion of physical force. As such, it is an attempt to unleash
In the same way, if I ask a woman to marry me, and the destruction of human life and property, and for this
she says no, my freedom is not violated. It is only violated reason should be regarded as monstrously evil.
if she says yes, and the government then stops me from What makes the anarchic concept of freedom so de-
marrying her—say, by virtue of a law concerning mar- structive is the fact that in divorcing freedom from the
riages among people of different races, religions, or context of rationality, it not only seeks to establish a
blood types. Or, finally, if I want to travel somewhere, freedom to initiate physical force, as in the cases of
but lack the ability to pay the cost of doing so, my “wage slavery” and the anarchic concept of the freedom
freedom of travel is in no way violated. But suppose I do of travel, but also, on the basis of the consequences of
have the ability to pay the cost, and want to pay it, but such a perverted concept of freedom, provides seeming
the government stops me—say, with a wall around my justification for the violation of freedom as a matter of
city (as existed until recently in East Berlin), a passport rational principle. For example, the anarchic concept of
restriction, or a price control on oil and oil products that freedom of speech, which claims that hecklers can speak
creates a shortage of gasoline and aviation fuel and thus at the same time as a lecturer and thus prevent him from
stops me from driving and the airlines from flying—then communicating his thoughts, not only serves to legiti-
my freedom of travel is violated. mize the violation of the lecturer’s freedom of speech but
What is essential in all these cases is not the fact that also, if accepted as being a valid concept of freedom of
there is something I cannot do for one reason or another, speech, must ultimately doom the freedom of speech as
but what it is, specifically, that stops me. Only if what a matter of rational principle. For if freedom of speech
stops me is the initiation of physical force—by the gov- actually entailed the impossibility of communicating
ernment in particular—is my freedom violated. thought by speech, because hecklers could continually
Subsequent discussions in this book will unmask the interrupt the speaker, respect for rationality—for the
influence of the anarchic concept of freedom in the value of communicating thought—would then require
distortions that have taken place in connection with the the denial of the freedom of speech.
antitrust laws—in the concepts of freedom of competi- Such a vicious absurdity arises only on the basis of the
tion and freedom of entry, and in the related notions of anarchic concept of freedom. It does not arise on the basis
private monopoly and private price control. They will of the rational concept of freedom. Freedom of speech
also deal with the distortions to be found in the present- rationally means that the lecturer or invited speaker has
day notion of the “right to medical care.”29 the right to speak and that hecklers and disrupters are
Here it must be pointed out that application of the violating the freedom of speech. The rational concept of
anarchic concept of freedom operates as a cover for the freedom establishes freedom of speech precisely as the
violation of genuine freedom. If, for example, having to safeguard of the communication of thought, not its enemy.
work for a capitalist, as a condition of earning wages and It is vital to keep this principle in mind today in an
being able to live, is a violation of freedom and represents environment in which many university campuses have
the existence of “wage slavery,” as the Marxists call it, been transformed into virtual zoos, in which cowardly
then it appears that when the Communists murder the and ignorant administrators regularly tolerate disrup-
capitalists, they are merely retaliating against the aggres- tions of speech by gangs of delinquents masquerading as
28
29
30 Ibid.further
See
For below,discussion
chap. 10, secs.
of the
1 distortions
and 2; chap.introduced
7, pt. A, sec.
into
4,the
theconcept
subsection
of freedom
“Rebuttal
of labor
of theand
Charge
present
thein
Private
the notion
Firmsof‘Control’
“wage slavery,”
Prices.”see
Thebelow,
contrasting
the critique
meanings
of Galbraith
of the right
on to
this
medical
subject,care
in chap.
are discussed
9, pt. B, sec.
in chap.
2. 10, sec. 2, the subsection “Licensing Law Monopoly.” See also, George Reisman,The Real Right to Medical Care Versus Socialized Medicine, a pamphlet (Laguna Hills, California: The Jefferson School of Philosophy, Economics, and Psychology, 1994).
26 CAPITALISM
students. Such university administrators thereby aban- cities, to income tax audits and the ever growing array of
don their responsibility to maintain their universities as government regulations.
the centers of teaching and learning that in their nature All of the major problems now being experienced in
they are supposed to be. In tolerating anarchic violations the United States have as an essential element the inconsis-
of freedom of speech in the name of freedom of speech, tent application or outright abandonment of the country’s
they pave the way for the outright fascistic destruction own magnificent original principle of a government up-
of freedom of speech in the name of rationality. holding individual freedom. Every violation of that prin-
ciple—every act of government intervention into the
The Decline of Freedom in the United States economic system—represents the use of physical force
In the twentieth century, freedom in the United States either to prevent individuals from acting for their self-in-
has been in decline. A twofold measure of this decline is terest or to compel them to act against their self-interest.
the fact that, with little if any exaggeration, it is now the It is no wonder that as the violations of freedom multiply,
case that the average mugger has less to fear from the people are less and less able to serve their self-interests
police and courts than the average successful business- and thus suffer more and more. In order for the American
man or professional has to fear from the Internal Revenue people once again to succeed and prosper, it is essential
Service. In allowing common crime to go increasingly for the United States to return to its founding principle
unchecked, the government has increasingly failed in its of individual freedom.
function of securing the individual’s freedom in relation
to other private individuals. At the same time, as the The Growth of Corruption as the Result
limits on its powers have been removed, it has itself of the Decline of Freedom
increasingly violated the freedom of the individual. The Closely and necessarily accompanying the destruc-
government’s energies and efforts have more and more tion of freedom in the United States has been the growing
been diverted from the protection of the individual’s corruption both of government officials and of business-
freedom to the violation of it. men, who are increasingly under the power of the offi-
To some extent, the process of the destruction of cials. The ability to violate the freedom of businessmen
freedom has taken place under the code words of combat- gives to the government officials the power to deprive
ting “white-collar crime” instead of “blue-collar crime.” businessmen of opportunities to earn wealth or to retain
The latter type of crime is genuine crime, entailing the wealth they have already earned. The power of the offi-
initiation of physical force. The former type of crime cials is fundamentally discretionary, that is, it may or
incorporates some elements of genuine crime, such as may not be used, as they decide. This is always the case
fraud and embezzlement, but consists mainly of fictitious with legislators contemplating the enactment of new
crimes—that is, perfectly proper activities of business- laws. It is often the case with officials charged with the
men and capitalists which are viewed as crimes from the execution of a law—if they have the power to decide
perverted perspective of Marxism and other varieties of whether or not to enact this or that new regulation in the
socialism, such as charging prices that are allegedly “too course of its execution, and whether or not to apply the
high” or paying wages that are allegedly “too low.” regulation in any given case, or to what extent.
A profreedom political party would have as the es- This situation inevitably creates an incentive on the
sence of its platform the replacement of the government’s part of businessmen to bribe the officials, in order to
suppression of the activities of businessmen and other avoid the passage of such laws or the enactment or
peaceful private individuals with the rightful suppression application of such regulations and thus to go on with the
of the activities of common criminals, such as muggers, earning of wealth or to keep the wealth they have already
robbers, and murderers. Its essential goal would be the earned. It is a situation in which businessmen are made
total redirection of the energies of the government away to pay the officials for permissions to act when properly
from interference with the peaceful, productive activities they should be able to act by right—by the right to the
of the citizens to forcibly and effectively combatting the pursuit of happiness, which includes the right to the
destructive activities of common criminals. pursuit of profit.
The extent to which this can happen, and thus the At the same time, the government’s ability to violate
future of freedom in the United States, depends first of freedom gives it the power to provide businessmen with
all on the concept of freedom being properly understood, subsidies and to damage their competitors. This creates
and then on its being upheld without compromise in corruption of a much worse character, one in which
every instance in which freedom is violated or threat- businessmen are led to offer bribes not to defend what is
ened, from the police turning their backs on campus theirs by right, but as part of an act of depriving others
disruptions and even open rioting and looting in major of what belongs to those others by right. Few business-
men are moral philosophers, and those who may have sources own the products that result from them, includ-
begun their practice of bribing government officials in ing those which they use as means of further production.
order simply to avoid harm to themselves cannot be In addition, of course, they can exchange their products
counted upon always to keep in mind the distinction with others for services. These others then also own
between an act of self-defense and an act of aggression, products, including capital goods, and can, of course,
especially when they must operate increasingly in the obtain land and natural resources from their original
conditions of a virtual jungle, in which competitors are owners by means of purchase or, in primitive conditions,
prepared to use the government against them and in barter exchange.
which large and growing numbers of other businessmen Being secure in their possession of property from
are all too willing to gain subsidies at their expense. The violent appropriation by others, and rational enough to
result is a powerful tendency toward the destruction of act on the basis of long-run considerations, individuals
the whole moral fabric of business. save and accumulate capital, which increases their ability
The obvious solution for this problem of corruption to produce and consume in the future (for example,
is, of course, the restoration of the businessman’s free- following the appropriation of land, they clear trees,
dom and his security from the destructive actions of the remove rocks, drain, irrigate, build, and do whatever else
government officials. When the businessman can once is necessary to establish and improve farms and mines
again act for his profit by right rather than permission, and, later on, commercial and industrial enterprises).
when the government has lost the power both to harm They also perceive the advantages of establishing
him and to harm others for his benefit, the problem of such division of labor and performing exchanges with others.
bribery and corruption will shrivel to insignificance.31 They perceive that some individuals are more efficient
than others in the production of certain goods, whether
by reason of personal ability or because of the circum-
3. Capitalism and the Origin of Economic Institutions stances of the territory in which they live, and that an
To the degree that they exist, freedom and the pursuit advantage is to be gained by individuals concentrating
of material self-interest, operating in a rational cultural on their areas of greater efficiency and exchanging the
environment, are the foundation of all the other institu- results.32
tions of capitalism. And the study of these institutions They perceive the advantages of indirect exchange—
and their functioning is the substance of the science of that is, of accepting goods not because they want them
economics. themselves, but because others want them and the goods
If individuals both possess freedom and, at the same can thus be used as means of further exchanges. Out of
time, rationally desire to improve their lives and well- indirect exchange money develops, with the result that the
being, then they have only to use their minds to look at division of labor is enabled radically to intensify—to the
reality, consider the various opportunities that nature and point where each individual finds it to his interest to produce
the existence of other people offer them for serving their or help to produce just one or at most a very few things, for
self-interest, and choose to pursue whichever of the which he is paid money, which he in turn uses to buy
opportunities confronting them they judge best. They can from others virtually all that he himself consumes.33
do whatever they judge is most in their self-interest to In the context of a division-of-labor, monetary econ-
do, provided only that they do not initiate the use of force omy, the individual’s pursuit of his material self-interest
against others. gives rise to the narrower principle of financial self-in-
What people do in these circumstances is spontane- terest—that is, of preferring, other things being equal, to
ously to set about establishing, or extending and reinforc- buy at lower prices rather than higher prices and to sell
ing, all the other institutions, in addition to freedom and at higher prices rather than lower prices. These are the
limited government, that constitute a capitalist economic ways to increase the goods one can obtain by the earning
system, such as private ownership of the means of pro- and spending of money. In combination they represent
duction, saving and capital accumulation, exchange and the profit motive—the principle of “buying cheap and
money, division of labor, and the price system. selling dear.”
Thus, in pursuing their rational self-interest under The individual’s pursuit of self-interest also gives rise
freedom, they appropriate previously unowned land and to economic inequality, as those who are more intelligent
natural resources from nature and make them into private and ambitious outstrip those who are less intelligent and
property and thus privately owned means of production. ambitious; and to economic competition, as different sellers
Private property in products, including capital goods, seek to sell to the same customers, and as different buyers
then follows on the basis of private property in land and seek to buy one and the same supply of a good or service.
natural resources: the owners of land and natural re- The combination of the profit motive and the freedom
32
33
31 I amthe
Concerning
On indebted
fact that
the
tomoney
fact
vonthat
Mises
originates
thefor
division
theinsubstance
the
of self-interested
labor originates
of this discussion.
actions
on the of
basis
See
individuals,
of
Ludwig
differences
von
see Mises,
Carl
in human
Menger,
Human
abilities
Principles
Action,
and3d
in
ofed.
the
Economics
rev.
conditions
(Chicago:
(Glencoe,
of people’s
Henry
Ill.:
Regnery
natural
The Free
surroundings,
Co.,
Press,
1966),
1950),
pp.see
734–36.
pp.
von
257–62.
Mises,See
Socialism
also below,
, pp. 292–93.
chap. 12, sec. 2.
28 CAPITALISM
of competition, in turn, constitutes the basis of the price

system and all of its laws of price determination. 4. Capitalism and the Economic History of the
Thus, rational self-interest and the individual’s free- United States
dom to act on the basis of it underlie private property and The development of all the institutional features of
private ownership of the means of production, saving and capitalism is well illustrated by the economic history of
capital accumulation, the division of labor, exchange and the United States. Of course, the United States was by no
money, financial self-interest and the profit motive, eco- means the perfect model of a capitalist country. Negro
nomic inequality, economic competition, and the price slavery existed, which denied all freedom to blacks and
system—in a word, the whole range of capitalism’s prevented them from pursuing their material self-inter-
economic institutions. ests. This was in total contradiction of the principles of
The combined effect of these institutions is economic capitalism. And other important contradictions existed as
progress—that is, the increase in the productive power well, such as a policy of protective tariffs, public canal
of human labor and the consequent enjoyment of rising and turnpike building, the government’s claim to owner-
standards of living. Economic progress is the natural ship of the western lands and its consequent ability to use
accompaniment of rationality and the freedom to act on land grants to subsidize uneconomic railroad building,
it. This is so because the continued exercise of rationality and, very important, the government’s promotion of the
creates a growing sum of scientific and technological use of debt as backing for paper money, which repeatedly
knowledge from generation to generation. This, together resulted in financial panics and depressions when sub-
with the profit motive, the freedom of competition, the stantial debtors failed, as, in the nature of the case, they
incentive to save and accumulate capital, and the exis- had to.37
tence of a division-of-labor society, is the essential basis Nevertheless, the history of the United States shows
of continuous economic progress.34 a government committed in principle to upholding the
Economic progress is the leading manifestation of yet freedom of the individual and, for the white population,
another major institutional feature of capitalism: the doing so in fact to a degree never achieved before or
harmony of the rational self-interests of all men, in which since. And thus, following the establishment of the United
the success of each promotes the well-being of all. The States, we observe a century-long process of the appro-
basis of capitalism’s harmony of interests is the combi- priation of land and establishment of private property and
nation of freedom and rational self-interest operating in private ownership of the means of production, as people
the context of the division of labor, which is itself their were made free to appropriate previously ownerless ter-
institutional creation. Under freedom, no one may use ritory and moved west to do so. This period represents
force to obtain the cooperation of others. He must obtain the most important historical example of the process of
their cooperation voluntarily. To do this, he must show establishing private property and private ownership of
them how cooperation with him is to their self-interest the means of production described in the preceding sec-
as well as his own, and, indeed, is more to their self-in- tion. By and large, the settlers simply moved into what
terest than pursuing any of the other alternatives that are was virtually an empty continent and made major por-
open to them. To find customers or workers and suppli- tions of it into private property by direct appropriation
ers, he must show how dealing with him benefits them from nature. The private property that exists today in the
as well as him, and benefits them more than buying from United States can generally be traced back, through
others or selling to others. As will be shown, the gains intervening purchases and sales, to such original appro-
from the division of labor make the existence of situa- priations from nature.38
tions of mutual benefit omnipresent under capitalism.35 The history of the United States was also character-
The division of labor, in combination with the rest of cap- ized by the rapid development of the division of labor
italism, represents a regular, institutionalized arrange- and the growth of a monetary economy. The largely
ment whereby the mind of each in serving its individual self-sufficient pioneers of colonial times were succeeded
possessor, serves the well-being of a multitude of others, by farmers producing more and more for the market and
and is motivated and enabled to serve their well-being buying goods in the market, including all manner of
better and better. equipment and other aids that greatly increased their
In sum, capitalism, with its economic progress and ability to produce. The result of the rising productivity
prosperity, is the economic system of a free society. It is of labor in agriculture was a steady shift in population
the economic system people achieve if they have free- away from farming and toward towns and cities, which
dom and are rational enough to use it to benefit them- sprang up in the wilderness and grew rapidly as centers
selves. As I have said, it represents a self-expanded of an ever more prosperous commerce and industry.
power of human reason to serve human life.36 The growing concentration of farmers on producing
34
35
36
37
38 These
See
In most
above,
below,
factors
of the
the
chap.
also
world,
present
4.
19,
operate
unfortunately,
pt.
chapter,
B,tosec.
create
pt.
7. B,
athe
steadily
thehistory
opening
growing
of paragraph
private
supply
property
of
ofsec.
useable,
is1.not so
accessible
simple. Again
naturaland
resources.
again, owners
See below,
were forcibly
chap. 3, dispossessed
pt. A, sec. 1. by foreign invaders, by civil wars and revolutions, and by other expropriations carried out by governments. Nevertheless, one of the things that later discussion will show is that even where holdings of private property can be traced back to acts of force, the operations of a capitalist society steadily wash away these stains. Once a few generations have gone by, during which private property no longer passes by force, but by purchase, the result is virtually the same as if it had never passed by force. For a discussion of this point and also of the alleged injustices committed specifically against the American Indians in the process of appropriating land in North America, see below, the subsection “The Violent Appropriation Doctrine and the Demand for ‘Land Reform’” in chap. 9, pt. A, sec. 5. See also Ludwig von Mises, Socialism, p. 504.
for the market and the movement of more and more of cerning the production of goods and services. Because
their sons and daughters to the towns and cities to find of the freedom of competition, those business firms
employment constituted the actual building of a division- succeeded which found ways to reduce their costs of
of-labor society. This was a process that was dictated by production and offer better goods at lower prices—earn-
considerations of self-interest on the part of millions of ing high profits by virtue of low costs and large volume.
individual people. Each individual farmer who devoted The economic history of the United States can be
his labor to producing crops for the market did so because understood on the basis of a single fundamental princi-
he judged that he would be better off with the products ple: people were free and they used their freedom to
he could buy with the money he earned than he would be benefit themselves. Each individual was free to benefit
with the products he could produce for himself with the himself, and the necessity of respecting the freedom of
same labor. Each individual son or daughter of a farmer others necessitated that he benefit them as well if he was
who moved to a town or city to find employment did so to have them as workers, suppliers, or customers. Be-
because he judged that he would be better off by doing cause people had the freedom and the desire to benefit
so—that the income to be earned in a town or city themselves, they went ahead and virtually all of them
exceeded the income to be made as a farmer and any actually succeeded in benefitting themselves.
allowance for the self-produced goods and other benefits In 1776 the present territory of the United States was
associated with living on a farm. Thus, the self-interested an almost empty continent, whose cities either did not
actions of millions of individuals is what created a divi- exist or were little more than coastal villages. Its popu-
sion-of-labor society in the United States and every- lation consisted of approximately half a million Indians,
where else that it exists. who lived on the edge of starvation, and three million
The security of property made the American people settlers, most of whom were semi-self-sufficient farmers
both industrious and provident, because they knew that living in extreme poverty. In less than two centuries, it
they could keep all that they earned and be able to benefit was transformed into a continent containing the two
from all that they saved. (There was no income tax prior hundred million richest people in the history of the
to 1913.) Not surprisingly, they were considered to be the world; a continent crisscrossed with highways, railways,
hardest-working people in the world. And their conse- telephone and telegraph lines; a continent filled with
quent high rate of saving ensured that each year a sub- prosperous farms and dotted with innumerable towns and
stantial proportion of their production took the form of cities that were the sites of factories using methods of
new and additional capital goods, which had the effect production and producing all manner of goods that prob-
of increasing their ability to produce and consume in ably could not even have been imagined in 1776.
succeeding years. One should ask how the United States’ economy got
The freedom of production in the United States led to an from where it was then to where it is even now. One
unprecedented outpouring of innovations—to the steady should ask how Pittsburgh, Cleveland, Detroit, Chicago,
introduction of new and previously unheard of products St. Louis, San Francisco, Los Angeles, Houston, and
and to the constant improvement of methods of produc- Dallas came to be the great cities they all were, not very
tion. This, along with the constant availability of an long ago, and, for the most part, still are. One should ask
adequate supply of savings to implement the advances, how New York City grew from a population of twenty
produced the most rapid and sustained rate of economic thousand to eight million, and how Boston and Philadel-
progress in the history of the world.39 phia could increase in size thirty-five and one hundred
In the process, some individuals achieved enormous times over. One should ask where all the means of
personal wealth and distinction. But their success was transportation and communication, all the farms and
not the cause of anyone else’s impoverishment. It was, factories, houses and stores, and all the incredible goods
on the contrary, precisely the means whereby the general that fill them came from.
standard of living was raised and all were progressively The answer, as I say, is astoundingly simple. What was
enriched. For these individuals made the innovations and achieved in the United States was the cumulative, aggre-
built the industries that were the source of the growing gate result of tens of millions of people, generation after
volume of goods enjoyed by all. generation, each pursuing his individual self-interest—
And, overall, guiding the entire process of production in the process, necessarily helping others to achieve their
in the American economy were the profit motive and the self-interests. And what made this possible was individ-
price system. The “dollar-chasing Americans,” as they ual freedom.
were called, were vitally concerned with earning money. Thus, eastern farmers realized that the land in the
Calculations of profit and loss governed every business Midwest and West was better for many purposes than the
decision and, therefore, practically every decision con- land in the East, and that a higher income was to be made
39 In the last generation, Japan, Taiwan, and South Korea have achieved even more rapid rates of economic progress than the United States did in its era of greatest progress. But the rapidity of their advance is largely the result of being able to take advantage of the enormous heritage of innovations pioneered by and bequeathed to them by the United States.
30 CAPITALISM
by moving there. And so they moved. Merchants realized and growing portions of it are becoming uninhabited.
that these farmers needed supplies and that money was The housing stock, industry, and downtown shopping
to be made in supplying them. And so they opened districts of many other large cities are also in a state of
clusters of stores and built their houses at supply points profound decay. For some years, homeownership has
in proximity to the farmers, thus laying the base of towns been beyond the reach of most people, and a sharp rise
and cities. They made money and expanded their opera- in the price of electricity, heating oil, and gasoline has
tions. Others perceived the growing trade and the money made the operation of homes and automobiles far more
to be made in improving transportation to the new re- costly and has undercut people’s ability to afford other
gions. They built barge lines and stagecoach lines, then goods. The supply of power plants is becoming inade-
steamship companies and railroads, and made money. quate. A growing number of bridges, highways, and
Businessmen and inventors, often one and the same, commercial aircraft are in need of major overhaul or
were constantly on the lookout for the new and the better. replacement. Large-scale unemployment persists.
They discovered and introduced thousands upon thou- This book makes clear that the cause of such problems
sands of improvements both in products and in methods is the progressive abandonment of capitalism and the
of production, with each new advance serving as the base undermining of its institutions over a period of several
for something still newer and still better. These business- generations. This is a process that has finally assumed
men and inventors built the factories and the industries dimensions so great as to jeopardize the continued func-
that made the cities and towns. The rest of the population, tioning of the economic system.
always on the lookout for better jobs, recognized the There has been a steady increase in government spend-
advantages of employment in the new industries and the ing for alleged social welfare, which has been financed
new cities and so took the ever improving, ever better- by a system of progressive income and inheritance taxa-
paying jobs they offered. tion and by budget deficits and inflation of the money
All this happened because it was to the rational self- supply. These policies, in turn, destroy incentives to
interest of individuals to make it happen and because no produce and the ability to save and accumulate capital.
one could use force to stop them from making it happen. They have been coupled with a steadily increasing bur-
The British had tried to prevent the development of the den of government regulations restricting or prohibiting
territory west of the Appalachian Mountains—to set it economically necessary activities and encouraging or
aside as a kind of gigantic wildlife preserve, so to speak— compelling unnecessary, wasteful, and even absurd ac-
but the American Revolution overthrew their rule and tivities. For example, the production of fuel has been
cleared the way for the unprecedented economic prog- restricted or even prohibited by price controls and so-
ress I have described. called environmental legislation, while the hiring and
The rising prosperity of each generation brought about promotion of unqualified employees has been encour-
a continual doubling and redoubling of the population, as a aged and even compelled under systems of government
higher and higher proportion of children survived to adult- imposed racial and sexual quotas.
hood, and as an ever growing flood of immigrants bought, The consequence of all of this has been growing
borrowed, and sometimes stole their way to the shores of economic stagnation, if not outright economic decline, a
what—in their awe and admiration for the United States situation punctuated by rapidly rising prices, growing
and its freedom—they called “God’s country.” unemployment, and sporadic shortages.
*** In recent years, it appears that there has been some
In recent years, it is true, the economic glow of the recognition of the nature of our problems. Unfortunately,
United States has lost much of its luster. While advances the recognition does not yet go deep enough nor is it yet
continue in some fields, such as computerization, major nearly widespread enough. Thus its benefits are likely to
areas of economic life, and the economic conditions prove elusive or at least extremely short-lived. For ex-
confronting large numbers of people, have clearly fallen ample, a major undermining of the OPEC cartel and
into a state of decline. Major industries, such as automo- partial retracement of the price of oil took place in the
biles and steel, and entire industrial regions—the North- 1980s, mainly as a result of the repeal of price controls
east and the Midwest, once the backbone of the American on oil and the easing of “environmental” regulations
economy—are in decline. What was once the industrial early in the decade. But now this improvement is in the
heartland of the United States is now known as the rust process of being reversed, through the reimposition and
belt—a dreadful, but accurate description of its condi- further extension of “environmental” regulations. At the
tion. Detroit, once the home of the American automobile same time, other forms of government interference and
industry and the leading industrial city in the world is government spending continue to grow, and federal bud-
now on the verge of losing its last automobile factory, get deficits continue at an alarming level, which makes
it likely that the government will turn either to destruc- but that of adding “markups” to the prices charged by
tive tax increases or to a no less destructive acceleration farmers and manufacturers; and advertisers, as inher-
of inflation. Even the sudden collapse of socialism in ently guilty of fraud—the fraud of attempting to induce
Eastern Europe and the former Soviet Union provide people to desire the goods that capitalism showers on
little cause for long-term optimism about the economic them, but that they allegedly have no natural or legiti-
system of the United States. This is because, as will be mate basis for desiring.
explained later, all the essentials of socialism live on in Despite the obvious self-contradictions, capitalism is
the ecology movement, and are enjoying growing influ- simultaneously denounced for impoverishing the masses
ence in the United States even while socialism in the and for providing them with “affluence,” for being a rigid
form of Marxism is in decline in most of the world.40 class society and for being dominated by the upstart
nouveau riche, for its competition and for its lack of
competition, for its militarism and for its pacifism, for its
5. Why Economics and Capitalism Are Controversial atheism and for its support of religion, for its oppression
In propounding sound economic theory and thus in of women and for its destruction of the family by making
presenting the case for capitalism, this book cannot avoid women financially independent.
being highly controversial. It is necessary to explain the Overall, capitalism is denounced as “an anarchy of
reasons. production,” a chaos ruled by “exploiters,” “robber bar-
ons,” and “profiteers,” who “coldly,” “calculatingly,”
The Assault on Economic Activity and Capitalism “heartlessly,” and “greedily” consume the efforts and
Virtually every aspect of capitalism and thus of eco- destroy the lives of the broad masses of average, innocent
nomic activity is savagely denounced by large segments people.
of public opinion. The pursuit of self-interest is con- On the basis of all these mistaken beliefs, people turn
demned as evil, and of material self-interest as “vulgar” to the government: for “social justice”; for protection and
besides. Freedom under capitalism is ridiculed as “the aid, in the form of labor and social legislation; for reason
freedom to starve” and as “wage slavery.” Private prop- and order, in the form of government “planning.” They
erty is condemned as theft—from a patrimony allegedly demand and for the most part have long ago obtained:
given by God or Nature to the human race as a whole. progressive income and inheritance taxation; minimum-
Money is denounced as the “root of all evil”; and the wage and maximum-hours laws; laws giving special
division of labor, as the cause of one-sided development, privileges and immunities to labor unions; antitrust leg-
narrowness, and “alienation.” islation; social security legislation; public education;
The profit motive is attacked as the cause of starvation public housing; socialized medicine; nationalized or mu-
wages, exhausting hours, sweatshops, and child labor; nicipalized post offices, utilities, railroads, subways, and
and of monopolies, inflation, depressions, wars, imperial- bus lines; subsidies for farmers, shippers, manufacturers,
ism, and racism. It is also blamed for poisoned foods, borrowers, lenders, the unemployed, students, tenants,
dangerous drugs and automobiles, unsafe buildings and and the needy and allegedly needy of every description.
work places, “planned obsolescence,” pornography, prosti- They have demanded and obtained food and drug regu-
tution, alcoholism, narcotics abuse, and crime. Saving is lations, building codes and zoning laws, occupational
condemned as hoarding; competition, as “the law of the health and safety legislation, and more. They have de-
jungle”; and economic inequality, as the basis of “class manded and obtained the creation of additional money,
warfare.” The price system and the harmony of interests and the abolition of every vestige of the gold standard—
are almost completely unheard of, while economic prog- to make possible the inflation of the money supply with-
ress is held to be a “ravaging of the planet,” and, in the out limit. They have demanded this last in the belief that
form of improvements in efficiency, a cause of unem- the additional spending the additional money makes
ployment and depressions. At the same time, by the same possible is the means of maintaining or achieving full
logic, wars and destruction are regarded as necessary to employment, and in the belief that creating money is a
prevent unemployment under capitalism. means of creating capital for lending and thus of reducing
Virtually all economic activity beyond that of manual interest rates. The ability to create money has also been
labor employed in the direct production of goods is demanded because it is vital in enabling additional gov-
widely perceived as parasitical. Thus businessmen and ernment expenditures to be financed by means of budget
capitalists are denounced as recipients of “unearned in- deficits and thus in fostering the delusion that the gov-
come,” and as “exploiters.” The stock and commodity ernment can provide benefits for which the citizens do
markets are denounced as “gambling casinos”; retailers not pay. And when, as is inevitable, the policy of inflation
and wholesalers, as “middlemen,” having no function results in rising prices, capital decumulation, and the
40 See below, chap. 3, pt. B, sec. 5.
32 CAPITALISM
destruction of credit, people demand price and wage resulted from the exercise of arbitrary power by evil
controls, and then, in response to the shortages and chaos forces and that their security depended on obtaining the
that result, the government’s total control over the eco- aid of a greater, stronger arbitrary power who would act
nomic system, in the form of rationing and allocations. on their behalf.
In the face of such ideas and demands, which have As the preceding discussion of the assault on eco-
swept over the country with the force of a great flood, nomic activity and capitalism should make clear, this is
traditional American values of individual rights and lim- precisely the worldview people continue to apply in the
ited government have appeared trivial and antiquated— present day in the realm of economics. Again and again
appropriate perhaps to an age of independent farmers, they view their economic harm as caused by the ill will
but by no means to be permitted to stand in the way of of an arbitrary power—above all, “big business.” And
what a frightened and angry mass of people perceive as they believe that their protection depends on the good
the requirements virtually of their self-preservation. In- will of a bigger, tougher, stronger arbitrary power—
deed, so complete has been the destruction of traditional namely, the government—which will act on their behalf.
American values, that the concept of individual rights If, for example, the level of wages or prices or the
has itself been made over into a vehicle serving demands quantity or quality of housing, medical care, education,
for government subsidies and extensions of government or anything else is not to people’s satisfaction, the expla-
power—in such forms as the assertion of “rights” to jobs, nation, they believe, is that evil businessmen are respon-
housing, education, pensions, medical care, and so on. sible. The solution, they believe, is for the government,
This book flies in the face of all such anticapitalistic which is more powerful than the businessmen, to use its
ideas and demands. Its thesis implies that never have so greater power on behalf of the people.41
many people been so ignorant and confused about a In contrast, the view of the economic world imparted by
subject so important, as most people now are about economic science is as far removed from that of the prim-
economics and capitalism. It shows that in its logically itive mentality as is the view of the physical world that
consistent form of laissez-faire capitalism—that is, with is imparted by the sciences of physics and chemistry. The
the powers of government limited to those of national worldview imparted by economics is, like that of physics
defense and the administration of justice—capitalism is and chemistry, one of operation according to natural laws
a system of economic progress and prosperity for all, and which can be grasped by human intelligence. The do-
is a precondition of world peace. main of the natural laws of economics is, of course, that
of the rationally self-interested actions of individuals
The Prevailing Prescientific Worldview insofar as they take place under freedom and center on
in the Realm of Economics the production of wealth under a division of labor.
There are a number of mutually reinforcing reasons This scientific view of economic phenomena, even
for the prevailing mass of errors about economics and though in existence since the late eighteenth century in
capitalism. the writings of the Physiocrats and the early British
First, even though this is the late twentieth century, it classical economists, has been prevented from replacing
is no exaggeration to say that in the realm of economics, the primitive worldview. It has been prevented by the
the thought of most people continues to bear the essential combined operation of the factors explained in the re-
characteristics of the mentality of the Dark Ages or of mainder of this section.
primitive peoples in general. What I mean by this is that
prior to the development of a scientific worldview in the Economics Versus Unscientific
Renaissance, it was common for people even in Western Personal Observations
Europe to interpret natural phenomena as the result of the Everyone is a participant in economic activity and as
operation of good or evil spirits. Thus, if a flood came such develops or accepts opinions about economic life
and washed away their huts, or if their animals died of that seem consistent with his own observations of it. Yet
disease, polytheistic primitive peoples would think the those opinions are often mistaken, because they rest on
explanation lay in the anger of a river god or some other too narrow a range of experience, which renders them
deity. Similarly, the supposedly monotheistic Europeans inconsistent with other aspects of experience of the same
of the Dark Ages would believe the explanation lay in subject. Examples of this phenomenon in the everyday
the curse of some witch or other evil spirit. Both believed world of physical reality are such naive beliefs as that
that their protection from such harm lay in securing the sticks bend in water, that the earth is flat, and that the sun
aid of a more powerful benevolent spirit, whether an- revolves around the earth. In contrast with such naïveté,
other deity or an angel, or simply the one and only deity. a scientific process of thought seeks to develop the theory
What was essential was that they believed that their harm of a subject based on logical consistency with all the
41 The leading manifestation of this worldview is the Marxian exploitation theory and the “liberal” political agenda that rests on it. See below, chap. 14, pt. A, sec. 1.
valid observations pertaining to it. Thus, the visual ap- a more rapid rate of increase in the production of wealth
pearance of sticks being bent in water is reconciled with and improvement in human well-being than does a higher
the fact that they continue to feel straight when subjected “national income” or “gross national product.”44
to touch; the reconciliation being by knowledge of the
refraction of light caused by water. The earth’s appear- Economics Versus Altruism
ance of flatness is reconciled with such observations as If economics merely contradicted people’s unscien-
the masts of ships first becoming visible on the horizon tific conclusions based on their personal observations, its
by knowledge of the very gradual curvature of the earth. path would be difficult enough. Its problems are enor-
The appearance of the sun’s revolution about the earth is mously compounded, however, by the fact that its teach-
reconciled with knowledge of the sun’s relationship to ings also contradict some of the most deeply cherished
other observable heavenly bodies through knowledge of moral and ethical doctrines, above all, the doctrine that
the earth’s rotation about its axis. the pursuit of self-interest by the individual is harmful to
Economics suffers from an apparent conflict between the interests of others and thus that it is the individual’s
personal observation and scientific truth probably to a obligation to practice altruism and self-sacrifice.
greater extent than most other sciences. This is because Economics as a science studies the rational pursuit of
of the very nature of the system of division of labor and material self-interest, to which it traces the existence of
monetary exchange. Every participant in the economic all vital economic institutions and thus of material civi-
system is a specialist, aware of the effect of things on his lization itself, and from which it derives an entire body
own specialization. As a rule, he does not stop to consider of economic laws. It cannot help concluding that rational
their effect on other specializations as well; nor, as a rule, self-interest and the profit motive are profoundly benev-
does he consider what their longer-run effect on him olent forces, serving human life and well-being in every
might be were he to change his specialization. As a result respect, and that they should be given perfect freedom in
of this, people have come to believe such things as that which to operate. Nevertheless, traditional morality re-
improvements in production, which can in fact necessi- gards self-interest as amoral at best, and, indeed, as
tate the shrinkage or total disappearance of employment in positively immoral. It considers love of others and self-
any particular branch of the division of labor, are eco- sacrifice for the sake of others to be man’s highest
nomically harmful. By the same token, they have come virtues, around which he should build his life.
to believe that acts of destruction, which can in fact result Thus, the teachings of economics are widely per-
in an expansion of employment in particular branches ceived as a threat to morality. And, by the same token,
of the division of labor, are economically beneficial.42 the anticapitalistic slogans described earlier in this sec-
Closely related to the failure to look beyond one’s own tion are perceived as expressions of justified moral out-
current specialization is the widespread confusion be- rage. As a result, economics must make its way not
tween money and wealth. In a division-of-labor economy merely against ignorance, but against ignorance sup-
everyone is naturally interested in earning money and ported by moral fervor and self-righteousness. Without
comes to measure his economic well-being by the amount the issue being named, economists are in a similar posi-
of money he earns. Thus, it is extremely easy for people tion to the old astronomers, whose knowledge that the
to conclude that anything that enables the average person earth revolved about the sun not only appeared to con-
to earn more money is desirable, while anything that tradict what everyone could see for himself but also stood
results in the average person’s earning less money is as a challenge to the entire theological view of the
undesirable. It takes a scientific analysis to show that universe. Economics and capitalism are a comparable
while each individual is always economically best off challenge to the morality of altruism.
earning as much money as the freedom of competition ***
allows him to earn, people are not economically better It is almost certain that economics and capitalism will
off when average earnings increase as the result of gov- be unable to gain sufficient cultural acceptance to ensure
ernment policies of creating money, or because the gov- the influence of the one and the survival of the other until
ernment violates the freedom of competition. Indeed, there is a radical change in people’s ideas concerning
economics shows that lower monetary earnings without morality and ethics, and that this change will have to be
money creation and without violations of the freedom of effected in fields other than economics—notably, philos-
competition represent a higher actual standard of living ophy and psychology. But even so, economics itself has
than do higher monetary earnings with them.43 Along an enormous contribution to make in changing people’s
these lines, there are important cases in which, even in ideas on these subjects, which every advocate of rational
the absence of money creation, it turns out that a lower self-interest would be well advised to utilize.
“national income” or “gross national product” signifies A major reason for the condemnation of self-interest
42
43
44 Thethis
See
On below,
nature
subject
of
chap.
these
see14,
below,
fallacies,
pt. B,chap.
secs.
along
15,
2–6,
with
sec.
andmost
4, chap.
theof
subsection
their
19, pt.
leading
B,“The
sec.manifestations,
5.
Inverse Relationship
has been
Between
brilliantly
National
dissected
Income
by Henry
and Economic
Hazlitt,Economics
Progress in One
an Economy
Lesson, new
Withed.
an(New
Invariable
York:Money.”
Arlington House Publishers, 1979), and by Frederic Bastiat in his EconomicSophisms, trans. Arthur Goddard (New York: D. Van Nostrand, 1964).
34 CAPITALISM
is, certainly, beliefs about its economic consequences. If For example, what farmers gain in subsidies they lose
people did not believe, for example, that one man’s gain in tariffs, higher prices because of monopoly labor unions,
is another’s loss, but, on the contrary, that in a capitalist higher taxes for welfare-type spending, and so on. In-
society one man’s gain is actually other men’s gain, their deed, the gains of each type of farmer are even canceled
fear and hatred of self-interest could probably not be in part by the gains of other types of farmers—for exam-
maintained. Yet precisely this is what economics proves. ple, the gains of wheat farmers are lost in part in paying
It proves what is actually the simplest thing in the world. higher prices for other subsidized farm products, like
Namely, that if individuals rationally seek to do good for cotton, tobacco, milk, and butter. In the same way, the
themselves, each of them can in fact achieve his good. It benefit of the higher wages secured by a labor union is
proves that in a division-of-labor, capitalist society, in the lost in the payment of higher prices for products pro-
very nature of the process, in seeking his own good, the duced by the members of all other unions, as well as in
individual promotes the good of others, whose self-inter- the payment of higher prices caused by subsidies, tariffs,
ested actions likewise promote the achievement of his and so on. The net effect works out to be that less of
good. Economics proves the existence of a harmony of virtually everything is produced, because such policies
the rational self-interests of all participants in the eco- both reduce the efficiency of production and prevent
nomic system—a harmony which permeates the institu- people from being employed. Virtually everyone is made
tions of private ownership of the means of production, worse off—those who become unemployed and those
economic inequality, and economic competition. At the who continue to work. Because of the inefficiencies
same time, it shows that the fear of self-interest and the introduced, the latter must pay prices that are increased
consequent prohibition of its pursuit is the one great to a greater degree than their incomes, and they must also
cause of paralysis and stagnation—that if individuals are use part of their incomes to support the unemployed.
prohibited from doing good for themselves, their good The pressure-group members may subjectively be-
simply cannot be achieved. lieve that they are pursuing their self-interests. The sup-
porters of altruism and socialism may believe that the
Economics Versus Irrational Self-Interest absurd process of mutual plunder carried on by such
The teachings of economics encounter opposition not groups represents capitalism and the profit motive. But
only from the supporters of altruism, but also from the the fact is that self-interest is not achieved by pressure-
practitioners of an irrational, short-sighted, self-defeat- group warfare. Nor is the activity of pressure groups a
ing form of self-interest, as well. These are, above all, the characteristic of capitalism. On the contrary, it is the
businessmen and wage earners whose short-run interests product of the “mixed economy”—an economy which
would be harmed by the free competition of capitalism remains capitalistic in its basic structure, but in which the
and are protected or positively promoted by policies of government stands ready to intervene by bestowing fa-
government intervention, and who do not scruple to seek vors on some groups and imposing penalties on others.
government intervention. For example, the businessmen (As used in this book, the term “mixed economy” is
and wage earners who seek government subsidies, price to be understood as what von Mises called a “hampered
supports, tariffs, licensing laws, exclusive government market economy.” As he explains, an economic system
franchises, labor-union privileges, immigration quotas, is either a market economy, in which case its operations
and the like. are determined by the initiative of private individuals
Such businessmen and wage earners form themselves motivated to make profits and avoid losses, or a socialist
into pressure groups and lobbies, and seek to profit at the economy, in which case its operations are determined by
expense of the rest of the public. They and their spokesmen the government. These two alternatives cannot be com-
unscrupulously exploit the economic ignorance of the bined into an economy that would somehow be a mix-
majority of people by appealing to popular misconcep- ture of mutually exclusive possibilities. Thus, the term
tions and using them in support of destructive policies. “mixed economy” is to be understood in this book as
Their action is self-defeating in that the success of each denoting a hampered market economy.45)
group in achieving the privileges it wants imposes losses In contrast, under genuine capitalism—laissez-faire
on other groups that are greater than its gains; at the same capitalism—the government has no favors to give and no
time, its gains are canceled by the success of other groups arbitrary penalties to impose. It thus has nothing to offer
in obtaining the special privileges they want. The net pressure groups and creates no basis for pressure groups
effect is losses for virtually everyone. For not only does being formed out of considerations of self-defense.
each group plunder others and in turn is plundered by The absurdity of the pressure-group mentality mani-
them, but, in the process, the overall total of what is fests itself in the further fact that it provides powerful
produced is more and more diminished, as well. support for the fear and hatred of self-interest emanating
45 See von Mises, HumanAction, pp. 258–59. Also, see below, chap. 7, pt. C, sec. 4, the discussion of which countries are and w hich are not actually socialist countries.
from altruism, and thus leads to the suppression of the not often to be found in today’s society. Under the
pursuit of self-interest. The practitioners of pressure- influence of irrationalist philosophy, people doubt their
group warfare are in the contradictory position of want- ability to achieve understanding of fundamental and
ing to serve their own particular interests and yet, with broad significance. They are unwilling to pursue matters
good reason, simultaneously having to fear and oppose to first causes and to rely on logic to explain effects not
the pursuit of self-interest by others, since under pres- immediately evident.
sure-group warfare, one man’s gain actually is another’s In large part, people’s reluctance to think has been the
loss. The result is that while people strive to achieve their result of a two-centuries-long attack on the reliability of
self-interest in their capacity as members of pressure human reason by a series of philosophers from Immanuel
groups, yet, in their capacity as citizens, they strive to Kant to Bertrand Russell—an attack which began soon
create social conditions in which the pursuit of self-in- after the birth of economic science. More than any other
terest of any kind becomes more and more impossible. factor, this attack on the reliability of reason has been
Because, given their mentality, they cannot help but responsible for the perpetuation of the mentality of prim-
regard the pursuit of self-interest as antisocial and thus itive man in the realm of economics.47
must oppose it for everyone else. A leading consequence and manifestation of this at-
In these ways, the irrational pursuit of self-interest tack has been the appearance of a series of irrationalist
represented by pressure group warfare actually repre- writers, who have come to the fore in field after field, and
sents people actively and powerfully working against who have taken a positive delight in establishing the
their self-interest. appearance of paradox and in seeming to overturn all that
*** reason and logic had previously been thought to prove
The practitioners of pressure group-warfare condemn true beyond doubt. The most prominent figure of this
economics because they do not understand it—indeed, type in economics is Keynes, who held that “Pyramid-
may have made themselves incapable of understanding building, earthquakes, even wars may serve to increase
it. Their mental horizon is so narrow and confined that it wealth, if the education of our statesmen on the principles
does not extend beyond what promotes or impairs their of the classical economics stands in the way of anything
immediate self-interest in their present investments and better.”48 In other fields, renowned authorities proclaim
lines of work. They perceive the doctrines of economics that parallel lines meet, that electrons can cross from one
entirely from that perspective. Thus, a shoe manufacturer orbit of an atom to another without traversing the interval
of this type, who could not withstand foreign competi- in between, that an empty canvas or smears made by
tion, hears economics’ doctrine of free trade from no monkeys is a work of art, and that the clatter of falling
other perspective than that, if implemented, it would put garbage pails or a moment of silence is a work of music.
him out of the shoe business. And thus he concludes that And lest we should forget our recurrent example of the
he has a self-interest in opposing the doctrine of free motion of the earth around the sun, contemporary philos-
trade. And, for similar reasons, virtually every other ophers assert that one cannot even be certain that the sun
doctrine of economics is opposed by the pressure groups will rise tomorrow—that such a thing has no necessity,
concerned. To use the analogy to astronomy once more, and will just “probably” occur.
it is as though people mistakenly concluded not only that The ability of such views to gain prominence already
the sun circled the earth and that morality itself sup- reflects an advanced state of philosophical corruption.
ported the proposition, but also that their personal Once established, they give the realm of ideas the aura
well-being required them to oppose any alternative of a dishonest game, a game that serious people are
explanation. unwilling to play or to concern themselves with. At the
same time, they open the floodgates to the dishonest. In
Economics Versus Irrationalism the realm of economics, the establishment of such views
The preceding discussion points to the most funda- has enormously encouraged the pressure groups and
mental and serious difficulty economics encounters, which advocates of socialism, who have been enabled to pro-
is a growing antipathy to reason and logic as such. pound their opposition to the teachings of economics
Economics presupposes a willingness of the individual under the sanction of an allegedly higher, more advanced
to open his mind to a view of the entire economic system “non-Euclidean economics.” In addition, by depriving
extending over a long period of time, and to follow chains the intellect of credibility and substituting sophistry for
of deductive reasoning explaining the effects of things science, their establishment has allowed demagogues to
on all individuals and groups within the system, both in flourish as never before. The demagogues can count both
the long run and in the short run.46 This broadness of on few serious opponents and on audiences not willing
outlook that economics presupposes is, unfortunately, or able to understand such opponents. Thus, they have an
46
47
48 Cf.
Among
J. M.
Henry
Keynes,
theHazlitt,
most
Theimportant
General
Economics
and
Theory
in
comprehensive
One
of Lesson,
Employment,
pp.
writings
15–19.
Interest,
on theand
subject
Moneyof (New
irrationalism
York: Harcourt,
and its destructive
Brace, 1936),
influence
p. 129.
are those of Ayn Rand, virtually all of whose works shed profound light on it. See, for example, AtlasShrugged (New York: Random House, 1957) and the title essay in For the New Intellectual (New York: Random House, 1961). See also the book of her leading intellectual disciple Leonard Peikoff, The Ominous Parallels: The End of Freedom in America (New York: Stein and Day, 1982). The works of von Mises also stress the destructive influence of irrationalism in all matters pertaining to economics and capitalism and are extremely valuable in this regard. See in particular, HumanAction and Socialism.
36 CAPITALISM
open season in propounding all the absurd charges against

capitalism that I described earlier. 6. Economics and Capitalism: Science and Value
Economics by itself certainly cannot reverse this epis- This is not a book on philosophy. It is not its purpose
temological current. Even more than in the case of ethics, to validate the philosophy of the Enlightenment with
that must come mainly from within philosophy. But respect to the fundamental questions of metaphysics,
economics, or any other special science, can certainly epistemology, or ethics. It simply takes for granted the
make an important contribution to that reversal by refut- reliability of reason as a tool of knowledge and the
ing the irrationalists within its own domain and by estab- consequent value of man and the human individual. It
lishing the principle that within its domain intelligible leaves to philosophers the job of convincing those who
natural law is, indeed, operative. In refuting the theories do not share these convictions. Its domain is merely the
of Keynes and similar authors, it can show that in eco- principles of economics and the demonstration that cap-
nomics there is no basis for the advocacy of irrational italism is the system required for prosperity, progress,
theories and that reason prevails. This perhaps may help and peace.
to set a pattern for the same kind of demonstration in Nevertheless, one philosophical question that must be
other fields. briefly addressed here is the assertion that science and
Economics, moreover, is uniquely qualified to demol- value should be kept separate and distinct—an assertion
ish the apparent conflict between theory and practice that is often made by advocates of socialism and inter-
which today’s intellectuals experience in connection with ventionism when they are confronted with the advocacy
the undeniable failure of socialism and success of capi- of capitalism. This book obviously flies in the face of that
talism. The overwhelming majority of today’s intellectu- demand, for it consistently seeks to forge a union between
als, it must be kept in mind, believe virtually every point the science of economics and the value of capitalism.
of the indictment of capitalism described earlier in this Despite the prevailing view, this procedure is per-
section. Thus, from their perspective, socialism should fectly sound. The notion that science and value should
have succeeded and capitalism have failed. They had to be divorced is utterly contradictory. It itself expresses a
expect that Soviet Russia, with its alleged rational eco- value judgment in its very utterance. And it is not only
nomic planning and concentration on the building up of self-contradictory, but contradictory of the most cher-
heavy industry, should have achieved the kind of eco- ished principles of science as well. Science itself is built
nomic eminence that Japan has achieved under capital- on a foundation of values that all scientists are logically
ism, and have done so long ago. At the same time, they obliged to defend: values such as reason, observation,
had to expect that the United States and Western Europe truth, honesty, integrity, and the freedom of inquiry. In
should have fallen into greater and greater chaos and the absence of such values, there could be no science.
poverty. The leading historical illustration of the truth of these
Yet, despite everything they believe, and think they propositions is the case of Galileo and the moral outrage
understand, socialism has failed, while capitalism has which all lovers of science and truth must feel against
succeeded. Being unwilling to admit that they have those who sought to silence him.
been wrong in their beliefs—thoroughly, devastatingly It is nonsense to argue that science should be divorced
wrong—they choose to interpret the failure of social- from values. No one who makes this demand has ever
ism and success of capitalism as proof of the impot- been able consistently to practice it. What it is proper to
ence of the mind to grasp reality, and now turn en say is that science should be divorced from mere emo-
masse to supporting the ecology movement and its tion—that it must always be solidly grounded in obser-
assault on science and technology.49 In this way, iron- vation and deduction. Irrational emotion should not be
ically, the failure of socialism and success of capital- confused with dedication to values, however.
ism have played an important role in accelerating the The basis of the value of capitalism is ultimately the
growth of irrationalism. same as the basis of the value of science, namely, human
In presenting a correct theory of capitalism and social- life and human reason. Capitalism is the social system
ism—that is, in explaining why in reason capitalism must necessary to the well-being and survival of human beings
result in a rising productivity of labor and improving and to their life as rational beings. It is also necessary to
standards of living, while socialism must culminate in the pursuit of science—to the pursuit of truth without fear
economic chaos and a totalitarian dictatorship—eco- of the initiation of physical force. These are all demon-
nomics reunites theory and practice in this vital area. It strable propositions. The advocacy of capitalism by econ-
thereby reaffirms the power of the human mind and omists, therefore, should be no more remarkable, and no
removes the failure of socialism and success of capital- more grounds for objection, than the advocacy of health
ism as any kind of pretext for irrationalism. by medical doctors.50
49
50 See abelow,
For philosophic
chap. 3,
demonstration
pt. B, sec. 5. of the wider union of fact and value, see the excellent essay “Fact and Value” by Leonard Peikoff in TheIntellectualActivist 5, no. 1 (May 18, 1989).
Notes
1. For an account of the change that has taken place in the ation,” see below, pp. 129–130.
definition of economics, see Israel M. Kirzner, The Economic 13. See above, the discussion of mathematical economics on
Point of View (New York: D. Van Nostrand, 1960). pp. 8–9. See also below, pp. 158–161.
2. I could also say that economics is the science which studies 14. See Bernard Siegan, Economic Liberties and the Constitu-
the production of wealth under a system of division of labor tion (Chicago: University of Chicago Press, 1980).
and monetary exchange, or under a system of division of labor 15. This section was inspired by and draws heavily on the
and capitalism. (See below, p. 19, the first two paragraphs of content of a lecture delivered by Dr. Leonard Peikoff in Chi-
Part B of this chapter.) Both of these statements would be cago, in May 1980, under the title “The Philosophic Basis of
correct, but they would also be redundant, because, as later Capitalism,” before the Inflation and Gold Seminar of the US
discussion will show, a system of division of labor presupposes Paper Exchange/Tempor Corporation.
both monetary exchange and all the other essential institutions 16. Ayn Rand, “Man’s Rights,” in Ayn Rand, The Virtue of
of a capitalist society. Finally, the expression goods and ser- Selfishness (New York: New American Library, 1964), pp.
vices could be substituted for the word wealth. This too would 124–125.
yield a true statement about what economics studies. But, as 17. See below, pp. 27–28.
will be shown, a certain priority and emphasis must be given 18. On these points, cf. Ayn Rand, “The Nature of Govern-
to wealth as opposed to services. ment,” in Ayn Rand, Virtue of Selfishness.
3. Secondarily and peripherally to its study of the production 19. Cf. ibid.
of wealth under a system of division of labor, economics also 20. In a fully consistent capitalist society, taxation itself would
studies the production of wealth under the absence of division be of a voluntary nature. On this subject see Ayn Rand, “Gov-
of labor. It does so insofar as by so doing it can develop its ernment Financing in a Free Society,” in Ayn Rand, Virtue of
theorems under simplifying assumptions that will enable it to Selfishness.
shed light on the operations of a division-of-labor society, and 21. Again, cf. Ayn Rand, “The Nature of Government,” in
insofar as by so doing it can place the value of a division-of- Virtue of Selfishness.
labor society in its proper light, by contrasting it with non-di- 22. See below, pp. 343–371, 513–514, 542–594 passim, and
vision-of-labor societies. 938–942.
4. In the second century A.D., the Roman Empire extended 23. It should be realized that even if much of the savings
from Syria in the southeast to the northern border of present-day individuals presently pay into the social security system were
England in the northwest. It circled the Mediterranean Sea, invested in housing, as they likely would be, those savings
embracing Egypt and all of North Africa, and included all of would indirectly still contribute to investment in factories and
Europe west of the Rhine, as well as present-day Romania and machinery. This is because savings would then not have to be
Turkey and all of Eastern Europe south of the Danube. Goods withdrawn from financing factories and machinery to financing
produced in the various regions of the Empire were consumed housing, as is presently the case because of the vast siphoning
throughout the Empire. For example, pottery made in Syria was off of personal savings caused by the social security system.
consumed as far away as England, and tin mined in England 24. The problem of the economic insecurity of prospective
was consumed as far away as Syria. social security recipients (and of everyone else) is compounded
5. Because of its primary application to government policy, it by the fact that an inevitable accompaniment of the welfare state
is understandable why the subject was originally known as is fiat money, which makes all contractual obligations stated in
political economy, which was its name from the time of Adam fixed sums of money essentially meaningless. On these points,
Smith to the last quarter of the nineteenth century, when the see below, pp. 925–926 and 930–931.
change to “economics” took place. 25. It should go without saying that the context taken for
6. See below, pp. 473–498, 544–548, 559–580, and pp. 603– granted in the reference to antipornography legislation is one
668. in which all the parties involved are freely consenting adults.
7. I am indebted to von Mises for this view of what economics 26. The following discussion is essentially an application of
has to offer historians and journalists. Cf. Ludwig von Mises, principles set forth by Ayn Rand in criticizing the use of the
Epistemological Problems of Economics, trans. George Reis- word censorship in reference to the actions of private individ-
man (Princeton, N. J.: D. Van Nostrand, 1960), pp. 27–30, uals. Cf. Ayn Rand, “Man’s Rights,” in Ayn Rand, Virtue of
99–102. Selfishness, especially pp. 131–134.
8. Cf. Ludwig von Mises, Socialism (New Haven: Yale Univer- 27. Cf. ibid., pp. 128–130.
sity Press, 1951), p. 402; reprint ed. (Indianapolis: Liberty 28. Ibid.
Classics, 1981). Page references are to the Yale University Press 29. See below, pp. 375–387 and 238. The contrasting meanings
edition; pagination from this edition is retained in the reprint of the right to medical care are discussed on p. 380. Concerning
edition. this last subject, see also George Reisman, The Real Right to
9. On this subject, see below, pp. 462–498. Medical Care Versus Socialized Medicine, a pamphlet (Laguna
10. For elaboration, see below, pp. 42–49 and 542–559. Hills, Calif.: The Jefferson School of Philosophy, Economics,
11. See the writings of Ayn Rand for a consistent elaboration and Psychology, 1994).
of the “benevolent universe premise” across the entire range of 30. For further discussion of the distortions introduced into the
human activity. concept of freedom of labor and present in the notion of “wage
12. For a discussion of the ideas of Marx and Engels on “alien- slavery,” see below, pp. 330–332.
38 CAPITALISM
31. I am indebted to von Mises for the substance of this discus- of their advance is largely the result of being able to take
sion. See Ludwig von Mises, Human Action, 3d ed. rev. (Chi- advantage of the enormous heritage of innovations pioneered
cago: Henry Regnery Co., 1966), pp. 734–736. by and bequeathed to them by the United States.
32. Concerning the fact that the division of labor originates on 40. See below, pp. 99–106.
the basis of differences in human abilities and in the conditions 41. The leading manifestation of this worldview is the Marxian
of people’s natural surroundings, see von Mises, Socialism, pp. exploitation theory and the “liberal” political agenda that rests
292–293. on it. See below, pp. 603–604.
33. On the fact that money originates in the self-interested 42. The nature of these fallacies, along with most of their
actions of individuals, see Carl Menger, Principles of Econom- leading manifestations, has been brilliantly dissected by Henry
ics (Glencoe, Ill.: The Free Press, 1950), pp. 257–262. See also Hazlitt, Economics in One Lesson, new ed. (New Rochelle, N.
below, pp. 506–517. Y.: Arlington House Publishers, 1979), and by Frederic Bastiat
34. These factors also operate to create a steadily growing in his Economic Sophisms, trans. Arthur Goddard (New York:
supply of useable, accessible natural resources. See below, pp. D. Van Nostrand, 1964).
63–67. 43. See below, pp. 618–663, 930–937.
35. See below, pp. 123–133. 44. On this subject see below, pp. 712–714.
36. See above, p. 19, the opening paragraph of Section 1 of Part 45. See von Mises, Human Action, pp. 258–259. Also, see
B, of the present chapter. below, pp. 263–264.
37. See below, pp. 938–941. 46. Cf. Henry Hazlitt, Economics in One Lesson, pp. 15–19.
38. In most of the world, unfortunately, the history of private 47. Among the most important and comprehensive writings on
property is not so simple. Again and again, owners were forci- the subject of irrationalism and its destructive influence are
bly dispossessed by foreign invaders, by civil wars and revolu- those of Ayn Rand, virtually all of whose works shed profound
tions, and by other expropriations carried out by governments. light on it. See, for example, Atlas Shrugged (New York:
Nevertheless, one of the things that later discussion will show Random House, 1957) and the title essay in For the New
is that even where holdings of private property can be traced Intellectual (New York: Random House, 1961). See also the
back to acts of force, the operations of a capitalist society book of her leading intellectual disciple Leonard Peikoff, The
steadily wash away these stains. Once a few generations have Ominous Parallels: The End of Freedom in America (New
gone by, during which private property no longer passes by York: Stein and Day, 1982). The works of von Mises also stress
force, but by purchase, the result is virtually the same as if it the destructive influence of irrationalism in all matters pertain-
had never passed by force. For a discussion of this point and ing to economics and capitalism and are extremely valuable in
also of the alleged injustices committed specifically against the this regard. See in particular, Human Action and Socialism.
American Indians in the process of appropriating land in North 48. J. M. Keynes, The General Theory of Employment, Interest,
America, see below, pp. 317–319. See also Ludwig von Mises, and Money (New York: Harcourt, Brace, 1936), p. 129.
Socialism, p. 504. 49. See below, pp. 99–106.
39. In the last generation, Japan, Taiwan, and South Korea have 50. For a philosophic demonstration of the wider union of fact
achieved even more rapid rates of economic progress than the and value, see the excellent essay “Fact and Value” by Leonard
United States did in its era of greatest progress. But the rapidity Peikoff in The Intellectual Activist 5, no. 1 (May 18, 1989).
CHAPTER 2
WEALTH AND ITS ROLE IN HUMAN LIFE
the other. More wealth can exist totally apart from more
1. Wealth and Goods money. More wealth produced in the form of ordinary
W ealth is material goods made by man. It is

houses and automobiles, piles of lumber and
bars of copper, steel mills and pipelines, foodstuffs and
commodities, like steel, sugar, automobiles, and so on,
without any increase in the supply of money, is nonethe-
less more wealth; but in such circumstances it results in
clothing. It is also land and natural resources in the correspondingly lower prices, and no increase in the total
ground insofar as man has made them useable and acces- monetary value of commodities. By the same token,
sible. Man, of course, does not make the material stuff more money and more monetary value can exist totally
of land and natural resources, but he certainly does create apart from more wealth. This happens almost every day
their character as wealth.1 under a system of fiat paper money, where the supply of
Air, sunlight, rainfall, and wind are also material money is determined by the wishes of the government,
goods. But insofar as they come to us automatically, irrespective of the supply of goods. In such circum-
without any need for labor or effort on our part to cause stances, the effect of the additional money is simply to
their existence or our benefit from them, they are outside raise prices.
the province of economic activity and of economics. A connection between the quantity of money and the
They are nature-given conditions that automatically ben- amount of wealth would exist only if money consisted of
efit us; historically, they have been described as free gold or silver. Even then, it would be a highly imperfect
goods. Economics deals only with those goods which are connection. Under such circumstances, an increase in the
the object of economic activity, that is, which man needs supply of gold or silver would constitute both an increase
to produce in some sense—goods whose existence or in the supply of money and an increase in the supply of
beneficial relationship to his well-being he needs to wealth insofar as more gold and silver in their capacity
cause in his capacity as a thinking being, that is, on whose as industrial materials meant more wealth. A further
behalf he must expend labor or effort. Such goods are connection would exist insofar as increases in the supply
economic goods.2 In saying that wealth is goods, we refer of money under such circumstances tended to exist as the
only to economic goods; we exclude free goods. by-product of general improvements in the ability to
Some implications of the fact that wealth consists of produce, that is, insofar as a larger supply of gold or silver
goods must be named. was the result of improvements in machinery, transpor-
Wealth is not at all synonymous with money or mon- tation, and so forth, having wider application than merely
etary value. The wealth produced in an economic system to the mining of the precious metals. In reality, all the
and the total monetary value of that wealth are separate popular measures of the production of wealth expressed
and distinct phenomena. The one can increase without in terms of totals of money, such as Gross Domestic
21 SeeLudwig
Cf. below, sec.
von8Mises,
of thisPlanning
chapter. For Freedom, 4th ed. enl. (South Holland, Illinois: Libertarian Press, 1980), p. 65.
40 CAPITALISM
Product (GDP) (formerly Gross National Product or tion of wealth, such as government licenses and patents
GNP) and National Income, are nothing but indicators of and copyrights. Property that is not wealth—that, indeed,
the quantity of money, not the physical volume of goods is the destroyer of wealth—but that nonetheless pos-
produced.3 sesses market value is what exists in the case of slavery.
Stocks, bonds, and bank deposits are also not wealth. The meaning of wealth depends on the meaning of
They are claims to wealth—to the plant and equipment goods. More or less following Menger, the founder of the
and inventories of firms issuing the stocks or bonds or Austrian school of economics, we can define goods—
borrowing from the banks; to the houses or automobiles economic goods—as things which are recognized as
of the consumers who have borrowed; or, in the case of capable of satisfying human needs, requiring the expen-
unsecured loans, to the equivalent of the goods that diture of labor or effort in order to be produced or
would otherwise be purchasable by the borrowers with enjoyed, and over which one has sufficient command
their incomes. gainfully to direct them to the satisfaction of one’s needs.7
Nor is the market value of licenses, or legal rights in In other words, goods are things actually capable of
any form, wealth; this includes the market value of benefiting us, that is, of doing us personal good, provided
perfectly proper legal rights such as patents and copy- that we make the necessary effort to secure their benefit.
rights. Government licenses, such as liquor licenses, Our wealth is the collection of material goods which we
derive their market value from the privilege they confer possess or against which we hold enforceable claims.8
on their holders to restrict the production of wealth and Things which have the power to satisfy our needs but
thereby artificially to increase the incomes of the license which we do not recognize as possessing that power are
holders.4 While patents on new inventions and copy- not goods and do not form part of our wealth. For
rights on other new intellectual creations greatly contrib- example, before the second half of the nineteenth cen-
ute to the production of wealth by providing incentives tury, petroleum was not a good; before the twentieth
to the development of new ideas underlying the produc- century, uranium was not a good. People did not know
tion of wealth, neither the ideas themselves nor the the beneficial properties of petroleum or uranium and
patents and copyrights which protect and promote them thus did not know how to use them for anything. Thus,
are wealth. The ideas are preconditions to the production at the time, such things could do them no actual good and
of wealth, but not wealth itself. And the patents and were therefore not goods and not a part of wealth. (The
copyrights derive their market value from the fact that only circumstance in which a thing could do us good
they make it possible for the intellectual creators of new without our being aware of its beneficial properties, and
and additional wealth to benefit from their contributions thus without our having to take action based on such
by temporarily limiting the increase in wealth that their awareness, would be if its benefit came to us automati-
intellectual contributions bring about. When patents and cally, that is, if it were a free good. For a thing to be an
copyrights expire, the supply of wealth further increases economic good, it is essential that we possess awareness
at the same time that the market value of the patents and of its beneficial properties.)
copyrights vanishes.5 In the same way, even if technological knowledge
Finally, the labor of people, and their persons, while exists concerning the usefulness of a given type of min-
also indispensable preconditions to the production of eral, all of the specific deposits of the mineral which are
wealth are never themselves wealth, but merely precon- as yet undiscovered are not goods and do not constitute
ditions to the production of wealth. This is true even in a wealth. They too can do us no actual good in such a case.
society in which slavery exists. In such a society, the fact Further, things are not goods and do not constitute wealth
that slaves possess market value no more qualifies them whose useful properties and specific locations are known,
as wealth than the fact that government licenses restrict- but over which we lack sufficient command to direct
ing production possess market value qualifies them as them to the satisfaction of our needs. For example, iron
wealth. Indeed, slavery reduces the production of wealth on Mars, or even fifty miles down in the Earth, is not a
far more than do restrictive government licenses: it at- good and not wealth, even if we are aware of its specific
tacks production at its very root by depriving people of location, given our present inability to gain access to it.
the incentive to produce.6 By the same token, water in the United States is not a
Thus, wealth must be distinguished from the wider good to someone wandering in the Sahara. Manufactured
concept of property possessing market value. Property products too are not goods to those who have no knowl-
possessing market value that is not itself wealth exists, edge of their existence or cannot gain access to them.
as we have seen, in such forms as various legal rights to Finally, things are not goods and do not constitute
wealth, such as stocks and bonds, and in various legal wealth even if their useful properties and specific loca-
rights, proper or improper, to restrict or limit the produc- tions are known and even if we have sufficient command
754386 Menger
Exactly
For
See
Slavery
Stocks,
elaboration
below,
bonds,
also
the
would
chap.
same
undermines
and
have
of10,
principles
these
bank
disputed
sec.points,
deposits
the
2, the
apply
production
the
discussion
see
need
are
tobelow,
the
such
tomarket
of
include
claims.
“Licensing
wealth
the discussion
value
the
byqualification
undermining
of
Lawtrade
“Spending
Monopoly.”
secrets.
concerning
theNot
accumulation
ForaaMeasure
discussion
the expenditure
of capital.
of
GDP”
why,in
ofunlike
On
chap.
labor
thisgovernment
or
15,
point,
effort
sec.see
in
1. below,
the
licenses,
definition
chap.
patents
11,
of economic
pt.
andA,copyrights
sec. goods.
4, the discussion
do
Nor
notdid
constitute
he“Human
thinkaitcase
necessary
Capital
of monopoly,
IstoNot
include
Casee
pital.”
the
below,
qualification
chap. 10,“gainfully”
sec. 3, the subsection
in his discussion
“Patents
of “sufficient
and Copyrights,
command”
Trademarks
over things.
and Brandnames,
Cf. Carl Menger,
Not Monopolies.”
Principles of Economics,
For discussion
trans.
of and
the status
ed. James
of rights
Dingwall
and relationships
and Bert F. Hozelitz
in general(Glencoe,
in relationIll.:
to the
Theconcepts
Free Press,
of goods
1950),and
pp.wealth,
100–101,see51–54.
Eugen von Böhm-Bawerk, Whether Legal Rights and Relationships Are Economic Goods in Shorter Classics of Böhm-Bawerk(South Holland, Illinois: Libertarian Press, 1962).
WEALTH AND ITS ROLE IN HUMAN LIFE 41
over them to direct them to the satisfaction of our needs, nology is that it highlights the fact that the source of the
if we cannot gainfully direct them to the satisfaction of goods-character of things is ultimately within us. Goods
our needs. For example, vast stretches of land in the derive their character as goods by virtue of their ability
United States which could be used to grow crops if to benefit human beings. Goods-character radiates out-
someone decided to do so, are not actually goods and not ward from people to things and touches first those goods
wealth, because their potential could be exploited only which we categorize as goods of the first order, second,
by withdrawing capital and labor from other employ- those which we categorize as goods of the second order,
ments where the product of the capital and labor is and so on.9
greater. (These other employments could be more pro-
ductive farmland, or nonagricultural employments whose
product is more important than an addition to the supply 2. Economics and Wealth
of farm products.) The use of such land to grow crops The fact that economics is a science of wealth was
would thus not achieve our actual good, all things con- taken for granted by the classical economists in the
sidered, but would inflict a loss in comparison with what nineteenth century. Economics’ focus on wealth has been
could be produced without its use. Thus, such land does challenged in the twentieth century, however, and a large
not constitute a good and is not part of wealth. (It is majority of economists now downplays its special im-
possible, of course, that such things, presently not goods, portance in the subject.
could someday become goods and thus wealth—if, for One challenge is constituted by the frequent assertion
example, the costs of exploiting them could be reduced, that our economy has become a “service economy”
or if a growing population provided labor and capital that rather than an economy which concentrates on the pro-
had no better alternatives to which to be applied. To some duction of goods. The basis of this assertion is the fact
extent, such things may be valued as goods and count as that more than half of the working population is now
wealth in the present, in anticipation of their being able employed in rendering services rather than producing
to accomplish actual good in the future.) goods.
Just as the beneficial properties of things can fail to This service-economy argument against the focus on
be recognized, it sometimes happens that beneficial prop- wealth is superficial, for the following reason. Not only
erties are ascribed to things which do not in fact possess are agriculture, mining, construction, and manufacturing
them, such as the beneficial properties some people all engaged in the production of goods, but also all of the
ascribe to rabbit’s feet, tarot cards, and so on. We can join so-called service industries center on goods. Retailing
with Menger in characterizing such things as “imaginary and wholesaling—service industries—are the retailing
goods.” It is not necessary, however, for economics to and wholesaling of goods. Cleaning, repair, and mainte-
devote any special consideration to such goods beyond nance services are the cleaning, repair, and maintenance
acknowledging the fact of their existence. This is both of goods. Transportation and communications are largely
because they constitute unimportant exceptions and be- transportation of, and communications concerning, goods.
cause the economic principles that apply to such goods, Banking, finance, insurance, and advertising are services
such as the laws of price determination, are the same as performed overwhelmingly in connection with facilitat-
that apply to genuine goods. ing the production, distribution, or ownership of goods.
Again following Menger, we can divide goods into Those services that are performed not as auxiliaries to
various orders, corresponding to their closeness to, or the production, distribution, or ownership of goods—ser-
remoteness from, the satisfaction of our needs and wants. vices such as passenger airline travel for vacationers,
Goods that stand in a direct causal relationship to the personal communications, personal medical, legal, or
satisfaction of our needs and wants can be described as grooming services—vitally depend on the use of goods
goods of the first order. These are the things that benefit in their rendition. There could be no passenger airline
us directly and that are, therefore, directly good. For travel without airplanes and airports; no telephone ser-
example, the food we eat, the clothes we wear. Those vice without telephones and telephone exchanges; no
goods, in turn, that are necessary to the production of mail service without post offices and delivery trucks;
goods of the first order can be described as goods of the precious few medical services without drugs, hospitals,
second order. For example, the ingredients and imple- laboratories, and all manner of equipment; precious few
ments required to prepare a meal; the cloth, sewing legal services without courthouses, law offices, law books,
machines, and thread required to produce clothes. Simi- law schools, memo pads, and so on; and precious few
larly, those goods that are necessary to the production of grooming services without scissors, razors, hair dryers,
goods of the second order can be described as goods of and the like. The rendition of personal services falls
the third order, and so on. The advantage of this termi- within the sphere of economics insofar as the providers
9 Cf. Menger, Principles of Economics, pp. 55–58.
42 CAPITALISM
of such services render them for the purpose of acquiring the issue of choices for no other reason than that it is
wealth. As will be seen, in a division-of-labor society this necessary to do so as part of its study of the production
refers to the rendition of such services for the purpose of of wealth under a system of division of labor.
earning money. Thus, the services of personal physi- To claim that economics is on this account a science
cians, personal attorneys, barbers, and the like come of human choices rather than of wealth is to confuse an
within the sphere of economics insofar as they are per- aspect of the science with its totality. To adopt this view
formed for money, which is the means by which these is to be led to ignore all the really crucial matters that
parties obtain wealth. economics deals with and to seek esoteric extensions of
It is true, of course, that there could be no wealth the subject that have nothing whatever to do with its
without the rendition of services—above all, the perfor- actual nature. Fortunately, those who adopt this view are
mance of labor. But this does not give services an equal highly inconsistent in its application and generally con-
position with wealth in economics. Although economics tinue to devote most of their attention to the serious
is concerned with services, it is so only insofar as they business of economics and leave the alleged necessity of
are necessary to the production, enjoyment, or acquisi- extending the subject beyond the domain of wealth as a
tion of wealth, or depend on the use of wealth. Econom- task to be carried out in the indefinite future.12
ics is not at all concerned with the rendition of services
apart from their connection with wealth. For example,
when two people hold an interesting conversation, they 3. The Limitless Need and Desire for Wealth
are rendering a service to each other. But economics is The leading propositions laid down in Chapter 1 were
not concerned with activities of this nature except insofar that economics is the science that studies the production
as they can be connected with wealth. of wealth under a system of division of labor and that
It could be argued that the direct exchange of services capitalism is the essential requirement for the successful
for services also sometimes falls within the sphere of functioning of a division-of-labor society, indeed, ulti-
economics—for example, an exchange of French lessons mately for its very existence. It is implicit in these
for mathematics lessons, in which the rendition of each propositions that the ultimate source of the importance
service is performed as the conscious, explicitly agreed- of the division of labor and capitalism, and of the science
upon requirement of receiving the other. Even in such of economics, is wealth. This is because, in the last
cases, what brings the rendition of the service within the analysis, the division of labor, capitalism, and the science
purview of economics is ultimately a connection to wealth. of economics are all merely means to the production of
This is so because what makes exchange itself a vital wealth.
economic phenomenon, central to the studies of econom- Nevertheless, many philosophers and religious think-
ics, is the fact that in a division-of-labor society the ers have held that the production of wealth serves only a
production and enjoyment of wealth requires it, as the low order of needs of secondary importance and that
means of bringing goods from their producers to their concern with its production beyond the minimum neces-
consumers.10 sities required for the sustenance of human life is evil,
The second challenge to economics’ focus on wealth immoral, and sinful by virtue of elevating low material
is the mistaken claim that economics is a science of values to the place properly reserved only for the pursuit
choices rather than a science of wealth—a science which of noble spiritual values. If these beliefs were correct,
studies the “allocation of scarce means among compet- then economics would at best be a science of secondary
ing ends.”11 importance and preoccupation with it by serious thinkers
This contention rests on a logical fallacy. It does not would be a mark of perversity.
see that what gives rise to economics’ study of choices In the face of such attitudes, it is incumbent upon
and its concern with the allocation of scarce means economics to justify itself by providing philosophical
among competing ends is the fact that people have a validation for the production of wealth being a central,
virtually limitless need for wealth but only a limited continuing concern of human existence. In other words,
capability of satisfying that need at any given time. Thus, economics must explain the role of wealth in human life
people must choose which aspects of their need for beyond that of the food, clothing, and shelter required for
wealth are to be satisfied and which are not. Economics immediate sustenance. It is necessary to show how the
studies the determinants of human choice only insofar as continuing rise in the productivity of human labor made
they concern choices of how to spend incomes that are possible by the division of labor and capitalism serves
of necessity limited, and only insofar as they affect the objectively demonstrable human needs—to show, in-
attraction of capital and labor to the production of some deed, why there is no limit to man’s need for wealth. Only
goods rather than other goods. In other words, it studies on the basis of an objectively demonstrable need for
10
11
12 See Israel
Regrettably,
below,M.
chap.
this
Kirzner,
criticism
5, pt.The
A, sec.
applies
Economic
3. to the
Point
greatofvon
View
Mises
(Newand
York:
his efforts
D. VantoNostrand,
portray economics
1960), pp.as22–29,
merely108–185,
the “hitherto
for an
best
exposition
developed
ofpart”
this belief.
of an allegedly wider science of human action known as praxeology. See Ludwig von Mises, HumanAction, 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 1–10, passim. I wish to note, indeed to stress, however, that even when I have ultimately come to disagree with some position of von Mises, as in this case, I do not recall ever having read so much as a single paragraph of his writings that did not serve as the most powerful stimulus to my own thinking. Therefore, I urge everyone to give the most serious consideration to every portion of his writings.
wealth without limit is there a full and secure foundation and coal industries, the transportation and communica-
for the need for the division of labor and capitalism and tions equipment industries, and so on. All such wealth is
the continuous economic progress they bring, and for the necessary to an adequate quantity and sufficient variety
science of economics. of food to meet man’s nutritional needs. Likewise, man’s
need for health further implies a need not only for med-
Human Reason and the Scope and Perfectibility icines, hospitals, and all manner of diagnostic and ther-
of Need Satisfactions apeutic equipment and everything necessary to their
Man’s need for wealth is limitless because he pos- existence, but extends even to such seemingly unrelated
sesses the faculty of reason. The possession of this fac- things as automobiles and space travel: the former made
ulty both radically enlarges the scope of man’s needs and possible the ability of people to live in the fresh air of the
capacities in comparison with those of any other living suburbs and also the modern ambulance; the latter holds
entity and, at the same time, makes possible continuous out the possibility of such things as recuperation from
improvement in the satisfaction of his needs and in the heart disease in an environment of reduced gravity.
exercise of his capacities. Considered abstractly, man’s Reason gives to man the ability to use wealth progres-
possession of reason gives him the potential for a limit- sively to enhance the exercise of the capacities he shares
less range of knowledge and awareness and thus for a in common with lesser species. For example, man shares
limitless range of action and experience. Man’s mind can with animals the capacity for locomotion. Animals can
grasp the existence both of subatomic particles and of do no better than rely on their unaided legs. Man domes-
galaxies, and of everything in between. It observes all ticates the horse, the elephant, and the camel. He pro-
manner of patterns and similarities and differences, of duces shoes and builds roads, rafts, and sailing vessels.
which no other form of consciousness is capable. Thus, He goes further and invents the railroad, the steamship,
the potential is created for man to act over a range and the automobile; and then the airplane and the rocket-
extending from the subatomic level to the remotest reaches ship. Similarly, man shares with the animals the capacity
of outer space, and to experience all that his mind enables to see and hear. Animals can do no more than rely on their
him to discern and enjoy in the totality of the universe. unaided eyes and ears, but man produces telescopes,
Material goods—wealth—are the physical means both microscopes, and stethoscopes; television sets and ra-
of acting in the world (for example, automobiles and dios; eyeglasses and hearing aids; X-ray machines and
airplanes, tools and machines of all kinds) and of enjoy- computers; motion pictures and VCRs; and phonographs,
ing the experiences of which man is capable (for exam- compact-disk players, and tape recorders.
ple—in addition to many of the goods in the preceding As noted, the fact that man is the rational being also
category—works of art and sculpture, landscaped grounds gives him a wider range of capacities than is possessed
and gardens, beautiful homes and furniture). They are the by any of the lesser species. Because man is the rational
instrumentalities of man’s action and objects of his con- being, he is able to pursue such activities as music, art,
templation. The potential of a limitless range of action science, and athletics. He is able to form relationships
and experience implies a limitless need for wealth as the with others which are maintained even though the parties
means of achieving this potential. Man needs wealth may be separated by great distances and for long inter-
without limit if he is to fulfill his limitless potential as a vals of time. It is the nature of man’s brain that enables
rational being in physical reality. him to integrate separate sounds into harmonies and
This abstract principle can be illustrated in a wide melodies, to grasp representations and thus the meaning
variety of forms, starting with the contribution of addi- of a painting, to pursue science, to follow the system of
tional wealth to the improved satisfaction of man’s ele- rules of a game of sport, and to maintain an awareness of
mentary needs for nutrition and health. Because man others from whom he is separated by time and distance.
possesses reason, and is thus able to abstract, form con- These are feats of which an animal’s brain is incapable.
cepts, and think conceptually, his mind is able to grasp In the pursuit of all of these additional activities made
connections spanning generations and continents be- possible by the possession of reason, wealth either is
tween his material well-being and the physical state of absolutely indispensable or, at a minimum, enormously
the world. Thus, for man, functioning on the conceptual contributes to the performance and enjoyment of the
level, the satisfaction just of the needs for nutrition and activity.
health implies a practically limitless need and desire for Wealth contributes to music when it takes the form of
wealth: in the form of canning and freezing facilities, a musical instruments, music books and scores, concert
modern transportation and communications system, a halls and conservatories, radios, phonographs, and tape
farm-equipment industry, and everything that is neces- recorders. If music were deprived of the existence of
sary to the existence of these things, such as the steel, oil, these forms of wealth, the activity would be reduced to
44 CAPITALISM
the unaided, untrained, and largely unheard singing of style and beauty. It leads him to desire not just “transpor-
the human voice. In the absence of wealth in the form of tation,” but automobiles with chrome trim and whitewall
brushes, paints, and canvases, of museums, schools, and tires. Matters of design and appearance feature promi-
books of art, art would be reduced to primitive drawings nently in all consumers’ goods where men are free to
on the walls of caves. In the absence of wealth in the form choose.
of scientific equipment, laboratories, universities, and Closely related to man’s need for aesthetic satisfaction
libraries, science could not be pursued. In the absence of is his need for novelty and variety, which need also
wealth in the form of playing fields, athletic equipment, emanates from the rational nature of his consciousness.
stadiums, and radio and television sets, athletic events The lower animals do not become bored with the repeti-
and the enjoyment derived from them would suffer a tion of the same routine. Man does. The nature of man’s
radical decline. In the absence of wealth in the form of consciousness enables him to appreciate differences of a
pens and paper, post offices, telephones, automobiles, kind of which animals show no apparent awareness, and
railroads, ships, and planes, friendships and other human seems to require that he periodically experience such
relationships could not be maintained over long dis- differences. Thus, whereas animals are content to eat the
tances. same food day in and day out, man requires a variety of
On the basis of these observations, it is obvious that food. Man experiences a sense of intellectual refresh-
the ancient prejudice that man’s desire for wealth serves ment when he breaks his routine and takes a vacation or
his “lower” needs is absurd. Wealth is the material means a weekend off. He also experiences a sense of intellectual
of carrying on virtually every human activity and of refreshment in the introduction and possession of new
serving virtually all of man’s needs. It is man’s means of goods, and with the coming of style changes.
acting in accordance with his human potential. Thus, the appearance of almost every new “gadget” is
Moreover, even the wealth that does serve man’s an occasion for a kind of excitement: it is a thrill for a
“lower” needs, such as, presumably, his needs for nutri- rational consciousness to see such new products appear
tion and elimination, also reflects his nature as a rational (each in its day) as automobiles, airplanes, refrigerators,
being, in ways beyond those already described. When radios, television sets, pocket calculators, computers,
man serves his “lower” needs, he does so in a manner and so on. The purchase of such goods is almost always
that is unique to him—in a manner that reflects the an occasion for special pleasure, because it provides
distinctive nature of his consciousness. For example, something new and valuable to experience. Even the
when man eats, he does not do so in the manner of an replacement purchases of such goods are usually a source
animal, indifferent to his surroundings. On the contrary, of pleasure, because further improvements have usually
he desires such things as tables and chairs, table linen, been made in them, and because of style changes. Changes
china, silverware, and so on. He is also highly sensitive in style, whether in automobiles, clothing, or furniture,
to the preparation of his food and to the combinations in are a source of intellectual refreshment and pleasure,
which it is served. When man eliminates, he desires the because they provide a sense of the new and different.
existence of such things as indoor plumbing and privacy. It must be stressed that man’s desire for novelty and
In such activities, the nature of man’s consciousness variety stands in the service of his life. The principle is
requires the incorporation of psychological and aesthetic very similar to that of the pursuit of scientific knowledge,
elements into the satisfaction of what in animals are where the motive is curiosity and the effect is all manner
merely physical needs. For man, at least in his waking of practical applications that could not have been fore-
hours, there is probably no such thing as a purely physical seen in advance. In just this way people originally desired
need. Man’s physical needs are intimately connected automobiles not as a practical means of transportation,
with his psychology as a rational being—as a being but as an object of amusement. Yet this desire led to the
aware of such things as patterns and harmonies and growth of the automobile industry and to the transforma-
dissonances in shapes, sounds, and colors, and possess- tion of the economic system. A similar course of devel-
ing the need to organize his activities and control the opment occurred in the case of electric light and power,
functions of his body. In everything he does, man can be and telephones and television sets, and now seems to be
aware of his own emotional responses and can distin- under way in the case of home and personal computers.
guish between aesthetic elements which enable him to Even if no practical applications ever result directly
have a more enjoyable or a less enjoyable emotional from the things desired, their being desired produces
response. practical results. For example, a great industrialist’s mo-
Thus, the aesthetic element enters into the satisfaction tive in earning additional millions on top of those he
of virtually all of man’s needs. It leads him to desire not already has may be merely to add to his collection of fine
just clothing and shelter, but clothing and shelter with paintings and statues. But in pursuing this motive, the
industrialist is led to introduce products and methods of need and desire for additional wealth to fail to result in
production that enable the average person to obtain such the production of additional wealth, let alone in contin-
things as more and better food, clothing, and transporta- uous economic progress. Indeed, history and most of the
tion. world around us are characterized by stagnation and
Man’s life gains incalculably from the fact that his poverty. The mere possession of a need or desire is never
activities are not limited to the “practical,” but are under- sufficient to ensure that the need or desire will be satis-
taken largely for the sheer pleasure of experiencing the fied. In the absence of the influence of a rational philosophy
new and different and the corresponding expansion of his establishing limited government and economic freedom
own powers required to accomplish it. For this leads him and inculcating such convictions as that the material
to do things that have practical results which would world has both reality and primacy, that it is intelligible,
otherwise be impossible for him to obtain. In effect, and that hard work pays, man is not able to devote
reason serves man’s life in being free to serve itself. himself sufficiently to the production of wealth.14
Although man’s life may not need every particular object In such conditions, man desires more wealth than he
of his desire for novelty and variety, it very much does possesses, but his desire is not strong enough or consis-
need the existence of his desire for novelty and variety. tent enough to enable him actually to go and produce
On the basis of the existence of an objectively limit- additional wealth. And if it is strong enough to induce
less need for wealth, there is no limit to man’s desire for him to increase his production, he is again and again
wealth. The occasional cases that exist of individuals in stopped from doing so because of the initiation of phys-
whom the desire for additional wealth is totally repressed ical force by others. Even when the barrier of physical
are comparable in their frequency and significance to the force temporarily relaxes and some individuals are able
cases of individuals in whom sexual desire is totally to make some improvements, the absence of a rational
repressed. These cases are rare indeed. Even medieval philosophy precludes the development of science. It also
monks, for example, thoroughly committed to the doc- precludes the establishment of sufficient freedom to make
trine of asceticism, were torn by the temptation for possible the development of the division of labor and the
material things. The truth lies with Adam Smith, who other capitalistic institutions necessary to the continuous
observed that “the desire of food is limited in every man increase in wealth.
by the narrow capacity of the human stomach; but the As a result, despite the existence of both a need and a
desire of the conveniences and ornaments of building, desire for additional wealth on the part of those affected,
dress, equipage, and household furniture seems to have we witness such phenomena as masses of people dying
no limit or certain boundary.”13 of starvation, yet unable—indeed, sometimes even un-
To translate Smith’s observation into contemporary willing to expend the effort—to produce additional food.
terms, we can observe as the overwhelming norm such We witness primitive people delighted with the gift of
things as that the man who has no automobile would like mirrors and trinkets of all kinds, not to mention transistor
to be able to afford one. The man who has an automobile radios and bicycles, yet continuing to live under essen-
would like to be able to afford a newer, better one. The tially the same conditions as their remotest ancestors.
man who has several new automobiles of the highest
quality would like to be able to afford a yacht or a plane. Progress and Happiness
If he is rich enough to afford both a yacht and a plane, The fact that the need and desire for wealth are limit-
then he would like to be able to afford a yacht on which less does not mean that when people devote themselves
the plane can land, and so on. Similarly, the man who has to satisfying that need and desire, as in the nations of
a small house or apartment would like to be able to afford modern capitalism, they go through life with a sense of
a larger one. If he has a large house or apartment, then he endless frustration, seeking more than they can ever hope
would like a more luxurious one—perhaps with a swim- to obtain. The normal man, if he lacks an automobile,
ming pool or tennis court, or both; and with finely does not actively desire a yacht. He actively desires
landscaped grounds. And he would probably like to have merely an automobile. His desire for a yacht lies dormant
more than one house or apartment—perhaps a hunting until such time as he already has acquired one or more
lodge in Maine, a winter home in Palm Beach, an apart- high-quality automobiles. The limitless desire for wealth,
ment in Paris, or, indeed, all three of them. The more one in other words, becomes active only step by step. It
has, the more one wants. manifests itself in an active desire for things that are
The fact that both the need and the desire for addi- merely one or two steps beyond our reach at the moment.
tional wealth are limitless for all practical purposes does It leads us to exert ourselves and extend our reach. And
not mean, however, that people automatically act to then, as we succeed, desires previously dormant become
satisfy that need and desire. It is certainly possible for the active, or totally new desires are formed, and we are led
13
14 Adam
For a discussion
Smith, TheofWealth
the essential
of Nations
elements
(London,
of a rational
1776), bk.
philosophy
1, chap. 11,
which
pt. 2;
pertain
reprint
to of
economic
Cannan activity,
ed. (Chicago:
see above,
University
chap. 1,
ofpt.
Chicago
B, sec.Press,
1. 2 vols. in 1, 1976), 1:183.
46 CAPITALISM
to exert ourselves and extend our reach still further. Thus, on the possession of a sound, active mind, progress
the limitless desire for wealth impels us steadily to ad- fosters happiness.
vance. A further aspect of the connection between progress,
Oriental philosophy and some schools of thought in reason, and happiness must be mentioned. As rational
the contemporary Western world claim that the fact that beings, we are able to be aware of the future: the future
our desires will always be a step ahead of our possessions has reality for us in the present. To be able to look forward
shows the futility of our efforts—that, instead, we should to a better future enables us to bear considerable hardship
seek to rid ourselves of our desires and be content forever in the present without complaint, even cheerfully. But to
with some minimum of wealth. Such teachings are ut- look to a future of unrelieved hardship, or, worse, a future
terly mistaken, and their influence helps to account for that holds out the prospect of even greater hardship,
the stagnation and poverty that exist in the world. They makes hardship in the present more difficult, if not im-
view the excess of our desires over our possessions as a possible, to bear. Indeed, the prospect of impoverishment
source of discontent and unhappiness. Actually, this ex- in the future deprives one of the ability to derive pleasure
cess is the root of our ambitiousness and our rising to even from the possession of substantial wealth in the
meet challenges. It is what impels us to progress, and, as present, for the shadow of such a future must hang over
such, is an essential element of our happiness. whatever enjoyment one might have in the present. Thus,
It should be realized that as rational beings we are also the prospect of progress, as well as the process of achiev-
progressive beings. Progress is the corollary of the con- ing it, contributes to our happiness.
tinuous application of reason. Any individual who con-
tinues to use reason—who continues to think—necessarily The Objectivity of Economic Progress: A Critique
comes to know more and more, and thus to be capable of of the Doctrines of Cultural Relativism and
accomplishing more and more. If a society is character- Conspicuous Consumption
ized by continuous thinking from generation to genera- According to the widely held doctrines of cultural
tion, and if its educational system works—that is, if it relativism and conspicuous consumption, the concept of
succeeds in transmitting to the rising generation the economic progress can have no objective meaning.15
essentials of the knowledge discovered by all the preced- These doctrines hold, for example, that our preference
ing generations—then the general body of knowledge in for automobiles over horses, or for radios and television
the society is progressive, and thus the society as a whole sets over jungle tom-toms, is a matter of social and
is capable of accomplishing more and more. Progress is cultural conditioning. It is allegedly the result only of the
the natural result of the use of reason as a constant. fact that in this particular culture it happens to have been
If our happiness depends on living in accordance with instilled in people—for no really good reason—that it is
our nature as rational beings, then our happiness and desirable to own such goods as automobiles and televi-
progress are inseparably connected. The fact that our sion sets. Accordingly, people supposedly want to own
desires will always be ahead of our ability to satisfy them such goods not because it really is desirable to own them
is not a cause of unhappiness. It is the inducement to the in any objective sense, but merely that they may conform
steady exercise of our reason, to our living in accordance to what is expected of them in this culture. They allegedly
with our nature, which is indispensable to our happiness. want to own them as a source of prestige in the eyes of
Our happiness does not come from the existence of others.
desires satisfied, but from the steady upward climb it- The essential meaning of these doctrines can be grasped
self—from the process of continuing to think and solve by realizing that what they imply is that people want to
problems and to become capable of accomplishing more own television sets not because they want to watch the
and more. In other words, progress is a source of happi- television sets, but because they want to be seen watch-
ness. In the lives of scientists, inventors, businessmen, ing them—or because they were told to do so by the
engineers, and managers, progress is the obvious focal advertisers. Not the actual consumption of goods is im-
point of thinking, planning, and problem solving. It is portant, we are told, but the “conspicuousness” of their
also what necessitates that the average worker make consumption. Thus, the only real significance of televi-
himself capable of continuing to think and learn through- sion sets or any of the other “gadgets” of capitalist
out his life, so that he can acquire the new skills necessary society is supposed to be their significance in the eyes of
to adapt to the changing requirements of production. others. In a different culture people allegedly derive
Thus, progress is what helps to elevate even the average equal satisfaction from appearing before others with a
man of modern Western civilization into a thinking, ring through their nose, and in the society of the future
literate being possessing an intellectual life incompara- (or at least as many people conceived the future until very
bly superior to that of previous eras. If happiness depends recently) they will allegedly do so by wearing a chest full
15 For a presentation of the doctrine of cultural relativism by one of its leading advocates, see Melville J. Herskovits,CulturalRelativismPerspectivesinCulturalPluralism (New York: Random House, 1972). For a presentation of the doctrine of conspicuous consumption by one of its leading advocates, see Thorstein Veblen, The Theory of the Leisure Class(New York: Modern Library, 1934), chap. 4.
of medals proclaiming them as heroes of socialist labor. we value normal vision over being colorblind.
Thus, according to these doctrines, there is no reason The advances in our goods represent extensions of our
to believe that people’s preferences in a modern, capital- power to use our limbs, senses, and minds to accomplish
ist society are any better grounded than those of people results. In effect, they magnify the power of these vital
in any other type of society, or that a modern, capitalist attributes of our persons. They are advances by the
society is in any objective sense superior to any other standard of the value of these attributes, and thus by the
society. There is thus allegedly no basis for believing that standard of the value of our persons.16
what has been accomplished in a modern, capitalist It may be that there are cultures in which people
society is in any objective sense progress. regularly grow up incapable of appreciating the value of
Now what is wrong with these doctrines is that they economic advances. It may be that in this culture there
omit any consideration of man in relation to the physical are some people who really do not understand what our
world. For them, the most important thing in human life advances are all about and who see no better reason for
is the mere approval or disapproval of other people, valuing them than that of conforming to the expectations
which is thought to constitute an ultimate standard, inca- of others. The existence of such people and of such
pable of being subjected to further evaluation. But the cultures proves not that our advances are not advances,
truth is, of course, that the primary issue in human life is but only that there are people with a gross deficiency of
man’s relation to the physical world. It is there and there understanding, and cultures that are highly destructive of
alone that man must live or die, irrespective of the culture the capacity for understanding.
in which he lives. And how man succeeds in relation to This discussion has major bearing on the fact that in
the physical world provides an objective standard by American society, the earning of wealth has traditionally
which to judge the value of cultures. The examples of been the leading source of prestige. The objective fact
automobiles and television sets can serve to illustrate this underlying such prestige is that the earning of wealth
point. benefits one’s life by enabling one to do more. Thus, it
It is not true that our preference for the automobile deserves to bring prestige, by the standard of human life
over the horse is arbitrary, based on nothing more than as a value. It is a great tribute to the culture of the United
social and cultural conditioning. It is based on our nature States that it is to such activity that it has accorded
both as animate beings possessing the capacity of loco- prestige.
motion, and as rational beings capable of enlarging all of It must also be pointed out that the attempt to reverse
our physical capacities. We call the automobile an ad- cause and effect, and to take prestige as the starting point,
vance over the horse by the same standard by which we must backfire. For example, the attempt of a socialist
call the domestication of the horse an advance over society to induce work by the offer of prestige, rather
possessing merely our unaided legs, and by the same than material incentives, not only cannot succeed, but
standard by which we value the possession of our legs must bring the opposite of prestige to those who would
themselves. Namely, it extends our range and power of be willing to work for it. To mine coal, drive a truck,
locomotion. If the automobile were not an advance over harvest a field, work in a factory—to do virtually any of
the horse, then the horse would not be an advance over the run-of-the-mill jobs that occupy the bulk of the labor
our unaided legs. And, on the basis of such reasoning, the force—for the sake of prestige, would be to mark a
very possession of legs themselves could not be consid- person as nothing but a fool. He would have to be a fool
ered better than not possessing them. The automobile is to drive himself day in and day out, sweating and strain-
an advance over the horse, therefore, for the same reason ing, all for the sake of nothing more than, in effect, being
that it is better to have legs than not to have them. called a good boy.
Similarly, we call the telegraph an advance over the The objective superiority of the goods of modern
tom-tom, and radio an advance over the telegraph, be- capitalism is not called into question by the fact that in
cause they increase the efficacy of our sense of hearing. our culture many people want to own such goods as
The one enables us to hear sounds coming from a greater horses, canoes, bows and arrows, and so on, and in some
distance; the other, sounds from a greater distance as well cases prefer units of these goods to units of more ad-
as a greater range of sound. Thus, we value the radio over vanced goods serving the same needs. Such choices do
the telegraph, and the telegraph over the tom-tom, by the not by any means necessarily mark these people as
same standard as we value our sense of hearing itself. We primitivists. There are conditions in which the horse is
call television an advance over radio for the same reason superior to the automobile—for example, where there
that we value the possession of eyes and ears together are no roads. Similarly, canoes can navigate shallow
over the possession of ears alone. We call color television waters that a motorized craft cannot. Also, the physical
an advance over black and white, for the same reason that experience that a horse or canoe affords is different from
16 I am indebted to Ayn Rand both for the general concept of an objective code of values based on man’s life as the standard and for the special application of that concept in the form of some goods being classified as being of greater “philosophically objective value” than others. See Ayn Rand, AtlasShrugged (New York: Random House, 1957), pp. 1012–23; Capitalism: The Unknown Ideal (New York: New American Library, 1966), pp. 16–17.
48 CAPITALISM
that provided by an automobile or motorboat: they enable Indeed, the same principle that establishes the objec-
one to observe things more closely and more leisurely, tivity of the economic advances of modern capitalism
for example. directly establishes the objectivity of the superiority of
The desire to own such goods, even though one lives modern capitalist civilization as such, in comparison to
in the conditions of modern civilization, is actually noth- any other form of civilization. Here the attribute that
ing more than a manifestation of our limitless need for serves as the standard is the ability to acquire and apply
wealth: a person wants one or more automobiles as his knowledge. Modern capitalist civilization—modern “West-
normal means of transportation, and a horse as a further ern” civilization—possesses this ability in greater meas-
refinement, as it were, of his ability to locomote. Thus, ure than any previous civilization. In addition to knowledge
he loads his horse into a horse trailer, hitches it to his car, of the laws of logic and the principle of causality, which
or, better, motor home, and drives to the edge of terrain were known to the Greeks and Romans and which en-
where only horses can go. Or he simply goes for a ride abled them to surpass all previous civilizations in the
on a nearby trail to experience the motion of a gallop and ability to acquire knowledge, modern Western civiliza-
the wind on his face. To be able to enjoy the widest tion possesses not only a much more highly developed
possible range of pleasurable and beneficial experiences knowledge of the laws of mathematics and science but
is precisely why an individual desires to obtain the great- also a division-of-labor economy and, above all in its
est possible amount of wealth. But to obtain it, and have Anglo-Saxon variant, the freedoms of speech and press.
the time to enjoy it, he must be able to accomplish As I will show in Chapter 4, a division-of-labor economy
everything that is not itself pleasure, or otherwise valued makes possible an enormous and progressive increase in
for its own sake, in the shortest possible time. If, for the amount of knowledge that a society possesses and in
example, what a person wants is the experience of lei- the application of knowledge to production. The free-
surely riding along a beautiful mountain stream, then he doms of speech and press also play an essential role in
doesn’t want to waste that time using a horse to cross the the increase in knowledge by guaranteeing the individual’s
country to get to the mountains. For that, he wants a right to disseminate knowledge without being stopped by
motor vehicle. It (together with roads) is objectively the coercive power of the state operating in support of
superior to the horse as a normal means of transportation. the ignorance, fears, or superstitions of any individual or
As a direct source of enjoyment, however, there is still a group. Thus, capitalist civilization deserves to be upheld
need for horses, even in the conditions of a modern in the name of the value of knowledge.
economy. In effect, the limitless need for wealth em- It should go without saying that capitalist civilization
braces a kind of recapitulation of the goods that were is open to men of all races, as the brilliant success of
prominent in less advanced conditions. Japan and several other Oriental nations dramatically
illustrates. It is not the civilization of the white man, but
The Objective Value of a Division-of-Labor, of all men who wish to prosper and are prepared to adopt
Capitalist Society reason as their fundamental means of doing so. Those
I have shown that economic progress is not a matter who view it, whether with pride or with hatred, as the
of arbitrary preference, but is objectively desirable—de- civilization of the white man only, are implicitly racists,
sirable on the basis of our nature as rational beings. The in that they view civilization and culture as being racially
goods that result are objectively improvements, and the determined. The fact is, of course, that civilization and
process of acquiring them—the continuous thinking that culture, above all, modern capitalist civilization, is a
must be done—is called for by our nature as rational body of knowledge and values that is accessible to all of
beings. mankind.17
The objective value of economic progress implies that ***
the cultural values that make economic progress possible While extolling the values of capitalism, it must be
are likewise objectively better than those that stand in its stressed that nothing that has been said or that will be
way. These values, of course, are the values that underlie said in this book should be taken to imply a belief on my
the division of labor and capitalism—above all, reason, part that contemporary Western or American culture is
science, technology, individual rights, limited govern- perfect. Far from it. Obviously some very serious flaws
ment and economic freedom, and private ownership of mar our culture. And they have been growing.
the means of production. In the name of being able to see, Our culture’s basic flaw is its philosophic contradic-
hear, move, or do anything that our senses, limbs, and tions.18 These contradictions, in the form of irrationalist
minds enable us to do—in short, in the name of being doctrines, such as that of cultural relativism, lead it to
able to live as human beings—these values deserve to be attack its virtues. Thus, we witness the spectacle of our
upheld. culture flagellating itself for its successes in science,
18
17 The
All
Seethis
my
flagrant
pamphlet
they contradiction
couldEducation
accept, and
ofand
upholding
dothe
accept
Racist
individual
in Road
the case
torights
Barbarism
of other
in the
cultures,
midst
, 3d and
of
such
subsequent
Negro
as that
slavery
ofprintings
primitive
has alr(Laguna
eady
tribes,
beenancient
Hills,
noteCalifornia:
dEgypt,
in chap.
the1,The
civilization
pt.Jefferson
B, sec. of
4.School
the Aztecs
of Philosophy,
and Incas, the
Economics,
Middle Ages,
and Psychology,
and Soviet Russia.
1992),What
pp. 4–5.
theyAs
hold
I wrote
to bein
the
that
evil
pamphlet,
of Nazism
“Reference
was its assertion
to anobjective
that Nazisuperiority
culture wasofsuperior
one civilization
to otheror
cultures.
culture over
Needless
another,
to say,
encounters
of course,
theitopposition
is only on the
of abasis
profound,
of the recognition
self-righteous
of objective
hatred of the
values
verythat
idea.
one
Thus,
can seriously
cultures may
condemn
practice
Nazism—not
ritualsacrifice,
for its
cannibalism,
absurd claims
mass
ofexpropriation,
superiority, but
slavery,
as a primitive,
torture,and
barbaric
wholesale
culture
slaugh
of the
ter—all
type one
of this
would
is accepted
expect toasfind
somehow
amonglegitimate
savages.” within
(Ibid., the
pp. context
7–8.) of the culture concerned. The only alleged sin, the only alleged act of immorality in the world is to display contempt for such cultures, and to uphold as superior the values of Western culture. Then one is denounced as an imperialist, racist, and virtual Nazi. It should be realized that those who take this view do not regard as the essential evil of Nazism its avowed irrationalism, its love of force and violence, and its acts of destruction and slaughter.
technology, and the creation of wealth. We see the specif he lost one of his two sacks, it would be his health and
tacle of its intellectuals holding the most primitive and strength, not his life, that would be threatened. In the
barbaric cultures as superior to their own, as they declare same way, if he should possess three sacks of grain, he
that all cultures are of equal value except their own, will value one sack only as highly as the remaining
which is to be despised. satisfaction of his hunger. With the possession of a fourth
The spectacle is particularly gross in regard to the sack, the value he attaches to any one sack falls to the
culture of the United States, which is the foremost capi- importance he attaches to having brandy; with a fifth
talist country. The United States is denounced by its sack, it falls to the importance he attaches to feeding the
enemies as the leader of the evil, reactionary forces—the parrots. Thus, the marginal utility of a good can be
champion of monopoly capital and imperialism. Many thought of as the utility of the last unit of a supply, giving
of its own intellectuals join the denunciations and find all due allowance to the more important want satisfac-
nothing but evil in the history of their country and in its tions provided by the earlier units of the supply, and thus
current policies. Yet all the flaws of the United States falling as the number of such earlier units increases.19
were flaws of being inconsistent with its own magnifi- The law of diminishing marginal utility rests on two
cent principles. Its flaw today, which is potentially dead- closely related foundations. First, because goods have
ly, is that many of its intellectual leaders have been the power to satisfy wants, successive units of a good that
corrupted to the point of despising those principles, are used to satisfy a want necessarily encounter wants
above all, the principles of limited government and eco- that are more and more satisfied. For example, if I am
nomic freedom, and, more recently, the values of science very thirsty, the first glass of water I drink meets a very
and technology, as well. intense need. But that glass of water helps to satisfy the
need. The second glass of water I drink, therefore, goes
to serve a need that is less urgent precisely because it is
4. The Law of Diminishing Marginal Utility and already partly satisfied by virtue of the first glass of
the Limitless Need for Wealth water. The same, of course, is true of the frontiersman’s
The principle that man’s desire for wealth is limitless grain, insofar as he consumes it.
is fully consistent with the law of diminishing marginal The second foundation of the law of diminishing
utility, one of the most important and well-known prin- marginal utility is that insofar as we must choose which
ciples of economics. The law of diminishing marginal of our wants to satisfy, and act rationally in doing so, we
utility states that the utility or, equivalently, the impor- choose to satisfy our more important wants in preference
tance or personal value that an individual attaches to a to our less important wants. Our frontiersman, for exam-
unit of any good diminishes as the quantity of the good ple, chooses to feed himself ahead of the parrots. Indeed,
in his possession increases. as far as we are able, we devote our goods to the satis-
An example drawn from Böhm-Bawerk, the leading faction of the most important of our wants that they are
theorist of marginal utility, will illustrate the principle. capable of satisfying. Diminishing marginal utility fol-
Imagine that an isolated frontiersman, say, of the old lows from this because, with the units of the initial supply
American West, requires five sacks of grain, which must devoted to serving the most important of the wants they
last him until his next harvest. He needs one sack to meet can serve, the only wants that remain to be served by an
his minimum need for nutrition. Without it, he would die addition to the supply are necessarily wants that are less
of starvation. He needs a second sack to be sure of having important than those already being served.
enough food to keep up his health and strength. A third The concept “most important of our wants that a good
sack enables him to raise some poultry and satisfy his is capable of satisfying” must be understood as a variable
hunger completely. With a fourth sack he can distill some range, whose extent depends on the quantity of the good
brandy. With a fifth sack he can feed some parrots, from we possess. Our frontiersman, for example, devotes his
which he derives amusement. supply of grain to its most important uses even when he
If our frontiersman in fact possesses only one sack of feeds parrots. In the context of possessing five sacks of
grain, he will value it as highly as his very life. This is grain, feeding parrots is the most important use to which
because, in this context, the possession of a sack of grain he can devote his fifth sack. While it is certainly not as
is a necessary condition of his survival; if he loses his important as devoting any of his first three sacks of grain
one and only sack of grain, he will die. If, however, he to feeding himself, it is certainly more important than
possesses two sacks of grain, he will not value one sack devoting a fourth sack of grain to feeding himself (which
as highly as his life, but only as highly as the maintenance might be unhealthy and make him feel ill) and more
of his health and strength. Because now, in this context, important than any other use to which he can devote that
this is what depends on the possession of a sack of grain; fifth sack, given the existence of the other four.
19 Cf. Eugen von Böhm-Bawerk, Capital and Interest, 3 vols., trans. George D. Huncke and Hans F. Sennholz (South Holland, Ill.: Libertarian Press, 1959), 2:143–45.
50 CAPITALISM
We satisfy our most important wants in descending supply. This would be the case, for example, if the
order of importance. The larger the number of units of a additional units either had to be eaten by people who
good at our disposal, the further down in the scale of already had all they wanted or else would simply rot and
importance we are able to carry the satisfaction of our impose costs of removal and cleanup. But, for reasons
wants. The marginal unit of a supply is devoted to the explained earlier in this section, it could certainly never
most important wants that it can serve, but these wants be the case that all or most goods, or, therefore, wealth
are necessarily less important than the wants being serv- in general, could fall into this category.
ed by the “earlier” units of the supply. The marginal Furthermore, it should be realized that the very pro-
wants that a good serves should be thought of not as being cess of increasing the amount of wealth that is available
unimportant, but as being the least important of the most to the average member of any society entails the opening
important wants that its supply suffices to serve. The up of new uses for additional wealth, which has the effect
marginal wants are always more important than any of of increasing the marginal utility of additional units of
the submarginal wants, that is, wants whose satisfaction wealth. The opening up of new uses for wealth occurs
would require a still larger supply of the good. because essential to the ability to increase the supply of
It should be realized, of course, that the utility of the wealth is scientific and technological progress, which
marginal unit of a supply determines the utility of any of makes possible not only improved methods of producing
the units of that supply at that moment. If, for example, goods of the kind that already exist, but also brand new
our frontiersman were to attach a tag to one of his five kinds of goods. Thus, for example, the invention of the
sacks of grain, and label it specifically as the sack nec- electric motor and the internal combustion engine, which
essary to his survival, the utility of that particular sack radically increased our ability to produce and enjoy
would still be no greater than the utility of a sack specif- wealth, did not result in our sating ourselves with a vastly
ically labeled as necessary to the feeding of his parrots. increased production of such goods as candles and ox-
This is because irrespective of any such labeling, it is still carts. On the contrary, as part of the same process of
only a question of one sack out of a supply of five. If the improvement, these inventions were accompanied by the
particular sack labeled necessary to survival were lost, invention of the electric light and all the electrical appli-
the sack previously designated as reserved for the feed- ances and, of course, the automobile. In this way, in-
ing of the parrots could take its place. By virtue of creases in the ability to produce raise the marginal utility
making this substitution, the actual loss would fall on of additional wealth along with providing it.
feeding of the parrots, and that utility, therefore, would Thus, an automobile represents perhaps a hundred or
be the marginal utility of the sack in question. a thousand times the wealth represented by an oxcart,
As previously stated, the law of diminishing marginal and, at the same time, is probably of correspondingly
utility is perfectly consistent with the fact that man’s need greater marginal utility than an oxcart. Certainly, the
for wealth is limitless. It is necessary to stress this point marginal utility of a second automobile does not repre-
in view of the misconception spread by Galbraith that sent a drop in the marginal utility of wealth to the point
increasing wealth, and the consequent fall in the mar- that would correspond to the possession of a second
ginal utility of a unit of wealth, makes the pursuit of hundred or thousand oxcarts. Along the same lines, one
wealth progressively less important.20 might think of a two-hundred horsepower automobile as
One reason for the consistency between the law of representing the material equivalent of two hundred horses.
diminishing marginal utility and the limitless need for Wealth representing a two-hundredth part of an automo-
wealth is the elementary fact that the total utility of a bile has a higher marginal utility to the owner of an
person’s supply of wealth must go on increasing so long automobile than would the wealth representing a two-
as wealth has any positive marginal utility to him what- hundredth horse. Thus, the effect of a growing ability to
ever. For example, the fact that the fifth sack of grain has produce is not only more wealth, but also a higher
a lower marginal utility to the frontiersman than the marginal utility of the additional wealth in comparison
fourth does not contradict the fact that five sacks of grain with what it would otherwise have been (if somehow the
have a greater total utility to him than four and thus that additional wealth had been able to come into existence
it is better for him to own five sacks than four. So long without such technological advances). And, as these
as additional wealth has any marginal utility whatever, examples imply, the effect of a growing ability to pro-
there is a need for more wealth. duce is a tendency toward an increase in the size of the
Of course, if one considers a very narrow type of good, marginal unit of wealth, as well.
such as bread, say, it is possible to imagine additional This last point requires elaboration. The size of the
units beyond a point being of negative utility, and, there- marginal unit is never something fixed and immutable.
fore, a larger supply being of less utility than a smaller It is always a matter of context, and the context is always
20 Cf. John Kenneth Galbraith, The Affluent Society(Boston: Houghton Mifflin, 1958), chap. 10. See also, in opposition, George Reisman, “Galbraith’s Modern Brand of Prussian Feudalism,” Human Events18, no. 6, sec. 5 (February 3, 1961), pp. 77–80.
the circumstances and conditions with which the individ- sively larger size, and to be less and less concerned with
ual is confronted. If, for example, our frontiersman had units of wealth of any given size. In the spirit of the
two of his five sacks of grain stored in the same place, welcoming party allegedly once given by American mil-
and that place was threatened by a fire, what would be at lionaires to the famous nineteenth-century English de-
stake for him would be the importance of satisfying the fender of capitalism Herbert Spencer, the symbolic ideal
wants dependent on the two sacks together. The two is to be able to afford to use hundred-dollar bills to light
sacks together would have to be evaluated, and they one’s cigar—while dealing with mansions, yachts, and
together would constitute the marginal unit. As von private railway cars as the significant marginal units of
Mises once said in a discussion with the present author, one’s life.
the marginal unit is whatever is the amount under con-
sideration.
As people grow richer, the size of the marginal unit 5. Applications of the Law of Diminishing
tends to increase. Not only do they deal with things like Marginal Utility
automobiles instead of oxcarts, but richer people deal The law of diminishing marginal utility has important
with Cadillac- or Mercedes-level automobiles rather than applications. It is appropriate to consider several of them
Chevrolet- or Toyota-level automobiles. When differ- here, both because they shed light on the rationality of
ences in quality are considered, a house, a suit or a dress, economic activity and because, in one case at least, they
a restaurant meal, practically everything, tends to be a provide positive confirmation of the fact that man’s need
larger-sized unit of wealth for a richer person than for a for wealth is limitless.
poorer person. When this is taken into account, it be-
comes clear that it is a great mistake to assume that as Resolution of the Value Paradox
wealth increases, the utility of the marginal units actually As explained in the Introduction, the law of diminish-
dealt with diminishes. On the contrary, the utility of these ing marginal utility makes possible a resolution of the
units actually increases! Unit for unit, a Cadillac has a classical economists’ paradox of value—the seeming
higher marginal utility than a Chevrolet; a large, luxuri- paradox constituted by the fact that goods of apparently
ous house has a higher marginal utility than a small, the lowest utility, such as diamonds, are normally more
modest house; and so on. valuable in exchange than goods of apparently the high-
Furthermore, the fact that the utility of a marginal unit est utility, such as water. This apparent paradox was, of
of wealth of given size diminishes as the quantity of course what prevented the classical economists from
wealth available to us increases is actually an important being able to ground their theory of exchange value and
aspect of the desirability of increasing our wealth. What prices in utility.
we rationally want is to be in a position in which the When people regard water as more useful than dia-
marginal utility of a unit of wealth of any given size more monds, what they have in mind is that if one had to
and more approaches zero, while what we deal with more choose between having no water or no diamonds, one
and more is progressively larger-sized units of wealth. would obviously choose to have no diamonds. Up to a
We want to be in a position in which the loss of the wealth considerable point, units of water are vastly more import-
represented by $10, say, is absolutely unimportant to us; ant than units of diamonds. But because of the operation
better still, in which the loss of the wealth represented by of the law of diminishing marginal utility, a point is
$100, $1,000, or $10,000 is absolutely unimportant to us. reached at which the utility of the marginal unit of water
The loss of wealth represented by $10 will be unimport- falls below the utility of the marginal unit of diamonds.
ant to us when we are rich enough to afford spending $50 The first gallon of water, the hundred and first, or prob-
or $100 for a single fine meal rather than $10 for a whole ably even the thousand and first gallon of water, is more
day’s food—when, in other words, $50 or $100 replaces important than the first carat of diamonds or even the first
$10 as the representative of a marginal unit of food. The ten or a hundred carats of diamonds taken together. But
loss of $1,000 will be unimportant to us when we can at some point, after one has all the water necessary for
afford to spend $50,000 for a second automobile, per- drinking, cooking, washing, irrigating, and so forth, the
haps, rather than just $1,000 for our one and only ancient marginal utility of water falls below the marginal utility
used car. The loss of $10,000 will be unimportant to us of diamonds. The extremity of the abundance with which
when we can afford to spend $1,000,000 for our second nature provides water and the extremity of the scarcity
or third home rather than just $10,000 for our one and with which it provides diamonds jointly operate to estab-
only small used trailer. lish a far higher marginal utility of diamonds than of
Thus, we rationally want more wealth in order to be water in normal circumstances.
able to deal with marginal units of wealth of progres- Thus the fact that in the normal circumstances of
52 CAPITALISM
civilized life people value diamonds above water is not are determined by cost of production actually represent
at all paradoxical or irrational. It is perfectly consistent a special application of the law of diminishing marginal
with considerations of genuine utility, provided the latter utility. Namely, the value of all the products of the same
are properly understood—that is, in the light of the factors of production, however high their own, direct
principle of diminishing marginal utility. marginal utility, is reduced to the marginal utility and
By the same token, the fact that people nowadays value of the marginal product of those factors of produc-
desire to possess such things as power windows on their tion.21
automobiles, and are willing to pay substantial sums for Böhm-Bawerk’s example of the frontiersman with
what many may regard as relatively modest improve- five sacks of grain, originally used to illustrate the prin-
ments in fashion or style, is also perfectly consistent with ciple of diminishing marginal utility itself can serve, in
rational principles of behavior. It is a question of the a slightly modified form, to illustrate the present point.
context of how much wealth or income one has available Thus, instead of imagining a sack of grain labeled “sack
and thus of the marginal utility to the individual of a unit required for survival,” let us imagine a quantity of bis-
of wealth or income. If one has sufficient wealth or cuits, baked from flour made from this sack of grain, and
income so that one is already able to provide for a very labeled “biscuits required for survival.” As before, the
full satisfaction of such needs as those for food, clothing, frontiersman possesses four additional sacks of grain,
and shelter, then, indeed, the most important use for the which are sufficient for satisfying his needs down to the
price of power windows or the price of a relatively point of feeding parrots. If now this supply of biscuits is
modest improvement in fashion or style may well be the destroyed, the frontiersman’s life is not threatened any
purchase of the power windows or the improvement in more than it was before, when his sack of grain labeled
fashion or style. One must always consider what the sack required for survival was lost.
individual’s choices are in the context confronting him. Just as he could previously replace that sack of grain,
If the choice is, for example, the power windows or an so now he can replace the biscuits by withdrawing grain
improvement in his hi-fi equipment, because all wants of from the feeding of parrots. Thus, even though the direct
greater importance are already provided for, then the marginal utility of the biscuits, like the sack of grain
purchase of the power windows may very well be the before them, is as high as that of his life itself, the ability
most important use for the money in question. to replace them, by withdrawing supplies from the feed-
ing of parrots, reduces their actual, effective marginal
Determination of Value by Cost of Production utility to the much lesser marginal utility of feeding the
The law of diminishing marginal utility also makes it parrots.
possible for the first time to understand the actual role of What is present here is that the value of the biscuits is
cost of production in the determination of prices. Al- reduced to the value of the grain which makes possible
though the classical economists mistakenly believed that their replacement, and which in turn is determined by its
cost of production provided an explanation of prices that marginal utility. Thus, the value of the biscuits, like the
was a logical alternative to an explanation on the basis value of the sack of grain before it, labeled sack required
of utility, an understanding of marginal utility makes it for survival, comes to be determined by marginal utility
possible to grasp the determination of price by cost as a at a point corresponding to the much lesser importance
major instance of the operation of the law of diminishing of feeding parrots. In this way, determination of the value
marginal utility. of a product on the basis of the lesser value of the means
As Böhm-Bawerk and Wieser explained, there are required for producing it, represents the operation of the
numerous cases in which cost of production is in fact the principle of marginal utility.
immediate determinant of the price of a good. These are
cases in which a good of relatively high direct marginal Determination of Consumer Spending Patterns
utility is produced by factors of production whose supply In addition, and very important, the law of diminish-
is abundant enough to permit their employment in the ing marginal utility helps to explain the pattern of de-
production of other goods of relatively low marginal mand that prevails in the economic system at any given
utility. In such cases, the marginal utility of the factors set of prices of goods. People can buy goods in many
of production is determined by the utility of the least different combinations. They can buy more of some
valuable of the products for whose production their goods by curtailing their purchases of other goods. The
supply is sufficient. The value of the factors of produc- law of diminishing marginal utility implies, however,
tion, determined in this way, then reduces the value of that as people increase their purchases of any good,
the products of higher direct marginal utility to the utility successive additional units of it are accompanied by
of their least valued product. Thus, cases in which prices diminishing marginal utility. By the same token, as they
21 Again, see below, chap. 10, sec. 8, for a lengthy quotation from Böhm-Bawerk on this subject.
restrict their purchase of other goods, to make additional wherever the equal proportionality of marginal utility to
funds available for the purchase of this particular good, price does not exist, it pays to spend less for the goods of
the remaining units they purchase of these other goods relatively lower marginal utility and more for the goods
acquire greater marginal utility. of relatively higher marginal utility, which raises the
From these facts, a principle of equilibrium in spend- marginal utility of the former category and reduces that
ing patterns emerges, which is that beyond a point, of the latter category relative to their respective prices
additional units of any good are not purchased at the until equal proportionality does prevail.22
expense of further reductions in the purchase of other What the use of the above mathematical formula
goods because the marginal utility gained would be less overlooks is the fact that marginal utility often undergoes
than the alternative marginal utility forgone. Purchases major discontinuities. For example, the marginal utility
in every line are carried only to the point at which the of a steering wheel in an automobile relative to the price
marginal utility derived is greater than the alternative of the steering wheel is enormous, for it is as great as the
marginal utility that could be derived by devoting the marginal utility of the entire automobile. On the other
price of the good to the purchase of other goods. The hand, the marginal utility of a mere second headlight on
equilibrium that emerges is defined by the condition that the automobile relative to its price is comparatively quite
the marginal utility of each good purchased in each line modest. In such circumstances, the above described math-
is greater than the marginal utility of any other good or ematical doctrine implies that one should forgo the pur-
combination of goods that could alternatively be purchase of the second headlight in order to purchase a
chased with its price in any other line. At the same time, second steering wheel. This, of course, is obviously
the marginal utility of an additional unit in any line is less nonsensical. Equilibrium in such cases cannot be de-
than the marginal utility that would have to be forgone scribed in terms of a uniform proportionality of price to
in other lines to make possible its purchase. marginal utility, but only in terms of the utility of the last
For example, consumers carry their purchases of food, units purchased in any line being greater than that of any
clothing, shelter, and entertainment only up to the point alternative additional units that might be purchased with
at which the marginal utility of a unit of each of these the same money in other lines. In effect, the condition of
goods exceeds the marginal utility of any alternative equilibrium is that the marginal utility of good A exceeds
good or combination of goods that they might purchase the utility of any additional units of goods B, C, etc.,
with the same money. They limit their purchases in each which might be purchased with its price, while, at the
line at the point at which the marginal utility gained by same time, the marginal utility of good B exceeds the
the purchase of an additional unit would be at the expense utility of any additional units of goods A, C, etc., which
of a greater loss in marginal utility by virtue of having to might be purchased with its price, and so on for all goods.
restrict unduly the purchase of one or more other such
goods. People wish to achieve a certain balance in the Say’s Law
different areas of their consumption. Normally, they do Finally, and what is most relevant to the fact that the
not want to live in penthouses if it means having to eat need for wealth is limitless, the principle of diminishing
beans and wear rags. Nor, by the same token, do they marginal utility helps to explain the phenomenon of
usually want to drink champagne and eat caviar if that partial, relative overproduction and underproduction de-
means having to live in a hovel. They tend to achieve an scribed by Say’s Law. It thus helps to explain why any
equilibrium that is characterized by the utility of the last alleged general or absolute overproduction, with the
units purchased in each line being greater than the utility supply of wealth allegedly surpassing man’s need for
of any additional units that might be purchased in other wealth, is never actually present.23 In so doing, it pro-
lines. vides important confirmation of the fact that man’s need
*** for wealth has no practical limit.
In an overzealousness for the use of mathematics, To understand this point, it must be realized that
economics textbooks often describe the equilibrium of increases in the ability to produce always take place in
spending patterns by claiming that the marginal utility of particular industries. Very often, devoting the whole or
each good comes to stand in a uniform proportion to its even the greater part of such increased ability to produce
price. Thus, it is said, the to an expanded production of the particular products of
those industries would result in the marginal utility of the
Marginal Utility of Good A Marginal Utility of Good B
= products in question falling below the marginal utility of
Price of Good A Price of Good B
additional quantities of other products. These other prod-
and so on for all goods and all prices. It is claimed that ucts are products whose supply could be increased by a
this mathematical equilibrium results from the fact that withdrawal of capital and labor from the industries in
22
23 See,afor
For fullexample,
discussion
Paul
ofSamuelson
Say’s Law,and
seeWilliam
below, chap.
Nordhaus,
13, pt.Economics,
B. 13th ed. (New York: McGraw-Hill, 1989), p. 450. See also above, the Introduction, n. 15, for an explanation of why my references are typically to the 13th edition of Samuelson and Nordhaus rather than to the more recent 14th edition.
54 CAPITALISM
which the improvements in the ability to produce have tion engine did not result in our sating ourselves with a
taken place. To the extent that the increased ability to vastly increased production of candles and oxcarts, but,
produce is unduly concentrated in the particular indus- as part of the same process of improvement, was accom-
tries in which it originates, the products of such industries panied by the invention of the electric light and all the
may be said to be in a state of partial and relative electrical appliances and by the invention of the automo-
overproduction, while the products of other industries bile. Thus, the desire for goods grew with the ability to
are in a corresponding state of partial and relative under- produce them. It will continue to grow with further
production. improvements in the ability to produce. If, to take an
For example, devoting a doubled ability to produce extreme example, the day should ever come when radical
potatoes with the same labor to an actual doubling of the advances in technology make it physically possible for
supply of potatoes, would result in a partial and relative us to be sated with things like automobiles, the same
overproduction of potatoes. At the same time, there would radical advances in technology will open up the possibil-
be an equivalent partial and relative underproduction of ity of producing things like rocketships accessible to the
other goods, additional quantities of which possess a general public and vacation homes on the moon. Thus,
higher marginal utility than the additional potatoes and the desire for goods will always remain far greater than
which could be produced with capital and labor used to the ability to produce them.
produce the additional potatoes. The problem in such a Economists almost universally describe the condition
case is not any actually excessive ability to produce, but in which the desire for wealth exceeds the amount of
merely the misapplication of an increased ability to wealth available as one of “scarcity.” Scarcity, they hold,
produce in an undue concentration on the production of means any limitation of wealth relative to the need or
a particular good. The solution is thus simply a better desire for wealth, irrespective of whether the limitation
balance in the production of additional goods.24 proceeds from the lack of wealth or the abundance of
Further major applications of the law of diminishing desires.
marginal utility will be developed in Chapter 5, in con- If one wishes to retain this terminology, one must say
nection with the discussions of the concept of demand that capitalism radically transforms the nature of scar-
and of price determination. city. For the people of precapitalistic societies, scarcity
means a deficiency of wealth relative to urgent biological
needs; it means supplies of food insufficient to still
6. “Scarcity” and the Transformation of Its hunger; supplies of shelter and clothing insufficient to
Nature Under Capitalism provide protection from the elements. Under capitalism,
Man’s limitless need for wealth, combined with the on the other hand, scarcity does not mean any such
respective natures of desires and goods, is responsible for deficiency of wealth, but a vast and growing supply of
the fact that the desire to consume always far outstrips wealth that lags behind the desire for wealth—a desire
the ability to produce. Desires are mental phenomena, that always exceeds it, always grows as it grows, and that
based on thoughts and concepts. Goods are physical provides the impetus for its further growth. Scarcity
phenomena, requiring for their existence the performance under capitalism actually means economic ambitious-
of human labor. For all practical purposes, the referents ness, and is the cause of the progressive elimination of
of concepts are limitless; and to desire, one need do scarcity in the urgent biological sense.
hardly more than imagine. But goods are always specific For example, under capitalism, the scarcity of food
concretes, and each must be produced, requiring labor quickly ceases to mean starvation. Instead it is a situation
and effort. In essence, our desires outstrip our ability to in which grain supplies have become abundant, but the
produce by virtue of the limitless range of the mental in point has not yet been reached where people can have all
comparison with the physical and thus by virtue of the the meat they want. And then it ceases to mean even a
fact that the range of our imaginations is always incom- deficiency of meat, but the fact that not enough of the
parably greater than the power of our arms. meat supply is in the form of sirloin steak, and so on.
This relationship remains true no matter how much Similarly, a scarcity of housing quickly comes to mean
we may augment the power of our arms by means of tools not a scarcity of dwelling space as such, but only a
and machinery. For at the same time, as part of the same scarcity of ever more improved, more solidly construct-
process, we augment the power of our imaginations, in ed, and more luxurious dwelling space.
that the new knowledge required to provide the tools and At each stage, the desire to advance to a higher stage
machines also opens up new vistas in terms of what can makes the threat to urgent biological needs more remote.
be produced. For example, as already mentioned, the In a country in which the scarcity of food is merely a
invention of the electric motor and the internal combus- scarcity of meat, a year of bad crops does not threaten
24 See below, chap. 13, pt. B, secs. 2 and 3.
famine. It just means that less grain will be devoted to further in the future than January. In this case, other
feeding meat animals, and people will end up with less things are not equal. Much more benefit can be obtained
meat. In a country in which the scarcity of food means a from a bathing suit in the heat of July than in the cold of
scarcity of sirloin steak, a year of bad crops means merely January. The appropriate application of the principle of
that people will have to switch to somewhat poorer cuts time preference in this case is the fact that if I want to go
of meat, as they utilize a smaller but still abundant supply swimming, I value the possession of a bathing suit for
of meat animals more fully for human consumption. And this coming July more highly than for the following July.
as a general principle, cutting across all branches of Similarly, the prospective marginal utility of a unit of
production, the growing abundance of supplies in a cap- a good in the future can be higher than its marginal utility
italist society steadily prolongs and enriches human life in the present, if one expects to have fewer units in the
at the same time that it further and further removes such future. For example, instead of eating two sandwiches
direct threats to human life as famine and plague. Evi- now, a person can very well save one for later, because
dence for the truth of this proposition can be found in the the marginal utility of a first sandwich later is greater than
fact that hardly anyone dies from hurricanes, tornadoes, the marginal utility of a second sandwich now. Here the
volcanoes, earthquakes, or contagious diseases in the appropriate application of the principle of time prefer-
United States, while large numbers do so in the poor and ence is that a person attaches greater importance to
backward countries. Our better record is the result of our consuming his first unit of a good today than to consum-
greater progress in wealth—in the form of such things as ing his first unit tomorrow, and to consuming his second
better constructed buildings, better means of transporta- unit today than to consuming his second unit tomorrow.
tion, and better medical facilities, as well as a more The fact that future units in a less abundant supply can
abundant and varied food supply.25 There is no fixed have a greater marginal utility than present units in a
limit to the process by which the increasing production more abundant supply does not contradict the principle
of wealth can further enhance and extend human life and of time preference, since that principle refers to the
its enjoyment.26 valuation of present and future units of equal supplies.
Finally, the principle of time preference is not con-
tradicted by the fact that the prices of commodity futures
7. Time Preference and the Scarcity of Capital are usually higher than the prices of the corresponding
In addition to the law of diminishing marginal utility, “cash” commodities available for immediate delivery.
there is a second major economic principle of valuation For example, in the month of September, the price of corn
that closely bears on the subject of scarcity, namely, that for delivery in December is always higher than the price
of time preference. Time preference operates to maintain of corn for immediate delivery, while the price of corn
the specific scarcity of savings and capital.27 for delivery in the following March is still higher than
According to the principle of time preference, an that for delivery in December. Such a price structure does
individual values goods available to him in the present not mean that, other things being equal, people prefer
more highly than goods available to him in the future, commodities in the future to commodities in the present.
and goods available to him in the nearer future more On the contrary, month by month they are consuming the
highly than goods available to him in the more remote stocks of commodities, demonstrating that they prefer
future. For example, he values having a house, a car, or present consumption to future consumption. The ascend-
a television set now, more highly than having it a year ing price structure of commodity futures is the reflection
from now, and more highly having it a year from now of the prospectively increasing scarcity of commodities
than two years from now. between harvests, and/or of the need to compensate those
The principle of time preference holds that the pro- who store supplies of commodities for future sale for the
spective location of goods in time has a similar effect on costs they incur in so doing and for tying up their capital
our valuation of them as the location of things in space in such investments. In the absence of such an ascending
has on our visual perception of them. The further away price structure, time preference would result in the un-
from us things are in space, the smaller do they appear duly rapid consumption of stocks of commodities.
to us in our field of vision. The temporally more remote
goods are in our field of valuation, so to speak, the The Foundations of Time Preference
smaller is the value we attach to them.28 Time preference is implied in the very nature of valua-
Like any principle, that of time preference must be tion, and, indeed, of human life itself. All other things
understood as applying other things being equal. For being equal, to want something is to want it sooner rather
example, I would probably prefer to have a bathing suit than later. If all other things are equal in two succeeding
in July rather than in January, even though July may lie periods of time and a good exists which could be con-
26
27
28
25 For
Capital
See
An illustration
Böhm-Bawerk,
further
is wealth
discussion
ofemployed
thisCapital
principle
of thein
and
role
the
isInterest,
of
the
production
wealth
devastating
2:268–73.
in the
of wealth.
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Bangladesh
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1992.
see
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Had
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Civilization.”
could
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concrete
whichhouses
have been
instead
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and in of
which
producing
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sea or
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Forthe
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rather than
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thousand.see
See
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“Evenchap.
in Bangladesh’s
11, pt. A, sec.
Storms,
4. Poverty is Underlying Killer,” New York Times , May 11, 1991, p. 1, p. 5. Unless otherwise noted, throughout this book all references to this publication are to the national edition.
56 CAPITALISM
sumed in either period, then the very fact of the good’s investing $100 this year, one can have and consume $105
being valued implies that it must be consumed in the first worth of goods next year. The reason that people do not
period. If it is not consumed in the first period, then the all rush to save as much as possible, despite the fact that
identity of conditions implies that it also cannot be con- doing so would enable them to consume more in the
sumed in the second period. Hence, the good simply future, is that they have time preference. Time preference
would not be consumed and, by implication, its con- results in people preferring an additional $100 of con-
sumption would be demonstrated not to be valued. If, sumption today to an additional $105 (or whatever the
however, the good is consumed in the first period, its figure may be) of consumption a year from now. It thus
nonconsumption in the second period does not contradict acts to limit the extent of saving and capital accumulation
its being wanted just as much in the second period; it is and to contribute to the scarcity of capital.
simply unavailable in the second period. Time preference manifests itself in the extent to which
The nature of human life implies time preference, individuals make provision for the future relative to their
because life cannot be interrupted. To be alive two years current consumption. An individual with an extremely
from now, one must be alive one year from now. To be high time preference will have no savings. He will con-
alive tomorrow, one must be alive today. Whatever value sume his entire income and not use any of it to provide
or importance one attaches to being alive in the future, for his future consumption. By the same token, an indi-
one must attach to being alive in the present, because vidual with a very low time preference will seek to
being alive in the present is the indispensable precondi- accumulate savings to a substantial multiple of his cur-
tion to being alive in the future. The value of life in the rent income and consumption.
present thus carries with it whatever value one attaches There are two dimensions to the scarcity of capital and
to life in the future, of which it is the precondition, plus capital goods. In one respect, capital goods are simply as
whatever value one attaches to life in the present for its scarce as our labor and ability to produce consumers’
own sake. In the nature of being alive, it is thus more goods. To whatever extent our desire for consumers’
important to be alive now than at any other, succeeding goods, such as houses and cars, exceeds our ability to
time, and more important to be alive in each moment of produce them, our implicit, indirect desire for things like
the nearer future than in each moment of the more remote bricks and lumber, steel sheet and tires, and the appro-
future. If, for example, a person can project being alive priate kinds of equipment used in making houses and
for the next thirty years, say, then the value he attaches cars, exceeds our ability to produce them. This kind of
to being alive in the coming year carries with it whatever scarcity can be thought of as a horizontal scarcity of
value he attaches to being alive in the following twenty- capital, in the sense that as wide as is our desire for
nine years, plus whatever value he attaches to being alive consumers’ goods relative to our ability to produce them,
in the coming year for its own sake. This is necessarily a equally wide is our desire for the corresponding capital
greater value than he attaches to being alive in the year goods relative to our ability to produce them. Such
starting next year. Similarly, the value he attaches to scarcity of capital is obviously as ineradicable as the
being alive from next year on is greater than the value he scarcity of wealth.
attaches to being alive starting two years from now, for The second dimension of the scarcity of capital refers
it subsumes the latter value and represents that of an to the fact that goods can be produced with varying
additional year besides. amounts of capital per unit, that is, with varying degrees
The greater importance of life in the nearer future is of capital intensiveness. For example, a railroad can be
what underlies the greater importance of goods in the constructed to go from point A to point B directly, or with
nearer future and the perspective-like diminution in the various detours to avoid obstacles like lakes and moun-
value we attach to goods available in successively more tains in between. Usually, constructing the bridges and
remote periods of the future. tunnels required for the more direct route requires a
greater capital investment than the longer, indirect route.
The Scarcity of Capital In deciding which route to adopt, a railroad company
Later discussion will show that time preference has an must weigh the disadvantage of the larger capital invest-
important bearing on the determination of the rate of ment required against the advantage of lower fuel and
profit and interest.29 What must be stressed here is that labor costs and reduced wear and tear on equipment in
time preference prevents the existence of profit and every year thereafter.
interest from always resulting in saving and the accumu- The choice of whether to employ more or less ma-
lation of additional capital. For example, assuming a chinery in a manufacturing process is of the same nature:
constant buying power of money, if the rate of profit and one must weigh the disadvantage of a larger initial outlay
interest is 5 percent, the implication is that by saving and for the machinery against the advantage of lower labor
29 See below chap. 16, pt. A, sec. 3, the subsection “Net Consumption and Time Preference.”
costs in each year of the machinery’s use. Whether or not by relatively low time preference—that is, by a willing-
it pays to improve a piece of farmland through irrigation ness to forgo present consumption to the point of making
or drainage, or to improve a mine by widening or deep- substantial provision for the future—the methods of pro-
ening its shafts, is also similar in nature. duction will tend to be relatively capital intensive: rela-
The extent to which our products are aged, as in the tively capital-intensive industries, such as railroads and
case of whiskey, beef, and woods of different growing electric utilities, can exist, and will be larger in relation
time, is also a matter of differences in the amount of to less capital intensive industries; the railroads will be
capital employed per unit of output. For example, in more able to build bridges and tunnels, and the factories
order for the whiskey companies to turn out a unit of to adopt labor-saving machinery; the farms and mines
eight-year-old scotch every year, they need to have cap- will be more improved; a wide variety of products will
ital representing units of scotch of each of eight different enjoy the benefit of the use of better-quality materials
years of age on hand in the pipeline, so to speak. In order and of greater aging.
to turn out the same quantity of twelve-year-old scotch Our discussion of the causes of capital accumulation,
each year, they need correspondingly more capital— later in this book, will show how the lower is the degree
more units of partially aged scotch for every one that is of time preference in a society, and thus the greater is its
fully aged. In the same way, lumber companies harvest- overall degree of capital intensiveness, the greater is its
ing trees with a twenty-five-year growth cycle need ability to adopt technological advances and to enjoy a
growing stands of trees representing years one through cumulative process of capital accumulation.30 What must
twenty-four for every stand of trees they harvest today, be emphasized here, however, is that the existence of
and lumber companies harvesting trees with a fifty-year time preference prevents the scarcity of capital in its
growth cycle need a correspondingly larger number of vertical dimension from ever being overcome.
stands of trees at various stages of growth for every one Before the scarcity of capital in its vertical dimension
they harvest today. could be overcome, capital would have to be accumu-
A similar principle applies to the use of more valuable lated sufficient to enable the 85 percent of the world that
materials in preference to less valuable materials. Any is not presently industrialized to come up to the degree
use of more valuable materials at any given stage of of capital intensiveness of the 15 percent of the world
production is likely to reflect the performance of corre- that is industrialized. Within the industrialized countries,
spondingly more labor, or more skilled labor, prior to that capital would have to be accumulated sufficient to enable
stage of production, and thus a higher degree of capital every factory, farm, mine, and store to increase its degree
intensiveness. Thus, for example, a house made of bricks of capital intensiveness to the point presently enjoyed
requires the use of more capital than a house made of only by the most capital-intensive establishments, and,
wood, insofar as more previously performed labor is at the same time, to enable all establishments to raise the
required to produce bricks for a house of a given size than standard of capital intensiveness still further, to the point
lumber for a house of the same size. The same applies to where no further reduction in costs of production or
the extent to which products contain various previously improvement in the quality of products could be achiev-
produced components and accessories. For example, other ed by any greater availability of capital in its vertical
things being equal, an automobile with automatic trans- dimension.
mission, an air conditioner, power windows, and the like, This would mean the maximum possible use of ma-
requires a larger quantity of capital in its production than chinery and automation. It would mean going so far that,
one without these things or equipped with fewer of them. for example, canals would frequently be built without
Different industries have very different degrees of locks, because capital would be available simply to re-
capital intensiveness. A far larger amount of capital move all the interfering higher elevations. By the same
investment stands behind the average dollar that is re- token, every curve and grade would have to be elimi-
ceived in the form of house rent or a mortgage payment nated from railroads and highways, all the whiskey and
than stands behind the average dollar received as pay- wines produced would have to be aged to the point where
ment for restaurant meals or haircuts. Similarly, it takes no additional aging could improve them further, and even
more capital investment to earn a dollar of sales in the the enormous growing time of redwoods would cease to
electric utility industry than it does in the motion picture be an obstacle to their planting. Capital would also have
business, and more in the motion picture business than it to be accumulated to the point where no further gain
does in the grocery business. attached to the expansion of the more capital-intensive
The extent to which capital is scarce in this second industries relative to the less capital-intensive industries.
sense—in what we can call its vertical dimension—is This would entail a growth in industries such as housing,
determined by time preference. In a society characterized the electric utilities, and bridge, tunnel, and canal build-
30 See below chap. 17, in particular sec. 3, the subsection “The Average Period of Production and the Limits to Technological Progress as a Source of Capital Accumulation.” See also chap. 14, pt. B, sec. 3, the subsection “The Reciprocal Relationship Between Capital AccumulationandTechnologicalProgress.”
58 CAPITALISM
ing up to their maximum possible limits relative to less of production that would not otherwise be economically
capital-intensive industries. feasible. It will show that the adoption of the more
Capital would have to be accumulated to the point advanced methods of production made possible by a
where absolutely no project representing an economic lower degree of time preference is itself a further source
improvement was left undone for a lack of capital, how- of capital accumulation, with the result that capital accu-
ever enormous the amount of capital required. This in- mulation does not require steadily repeated reductions in
cludes projects that today belong in the realm of science time preference, but is perfectly consistent with an un-
fiction because of the vast amounts of capital that would changed state of time preference, provided it is suffi-
be required for their execution: for example, digging ciently low. A still lower time preference will be shown
tunnels not only under the English Channel, but under to result in an acceleration of the rate of capital accumu-
the various seas and even oceans of the world; making lation.32
inland cities like Phoenix, Arizona, into seaports through Furthermore, the fact that a lower degree of time
the construction of massive canals, and thereby achiev- preference accelerates the rate of economic progress will
ing substantial reductions in transportation costs for all be shown to result in a positive addition both to the real
time to come; virtually eliminating freight costs between and to the nominal (viz., monetary) rate of profit and
cities, such as New York and Chicago, say, by construct- interest. Thus, the almost universally held opinion among
ing straight-line tunnels between them that would con- economists that capital accumulation must be associated
stitute secants relative to the earth’s circumference, with with a falling rate of return on capital will be challenged.
the result that objects would simply be pulled by the force Capital accumulation will be shown not only not to
of gravity to the center of the tunnels and, in a frictionless require a falling rate of return, but, as I say, to the extent
vacuum, hurled to the opposite surface by the force of that it results in a more rapid increase in the supply of
inertia. Indeed, it may be that some of these projects goods and money, to result in an addition to the real and
would even achieve such great cost savings as to yield a nominal rate of return.33
substantial rate of return on the capital that would have
to be invested, but cannot be undertaken at present be- Time Preference, Rationality, and Freedom
cause, in the actual state of capital accumulation, they Our previous discussion of the philosophical founda-
would strip the rest of the economic system of too much tions of capitalism and economic activity implies that
of its capital. time preference is the lower the more rational and the
The accumulation of capital in its vertical dimension freer a society is.34 The more rational people are, the
can never remotely begin to exhaust the uses for such more are they aware of the future: the more they can
capital. Its accumulation always ceases far short of that mentally project it and the greater is the reality for them
point. It is always necessary to leave undone an incalcu- of such projections; in addition, the more are they aware
lable range of potential improvements whose execution of themselves as self-responsible causal agents, capable
would require a more abundant accumulation of capital of affecting the course of future events to their own
in its vertical dimension than exists. Thus, capital in its advantage by means of saving. Similarly, to the degree
vertical dimension, as well as in its horizontal dimension, that people are free and enjoy the security of property,
remains permanently scarce.31 they know that they can benefit from whatever provision
Such capital accumulation comes to an end because for the future they decide to make in the present. Thus,
of time preference. Once people succeed in accumulating to the degree that a society is dominated by the values of
a certain amount of capital relative to their incomes, they reason and freedom, the more conducive it is psycholog-
feel that they have done their duty by the future and can ically and politically to saving and providing for the
now turn more heavily toward enjoying life in the pres- future, which is only another way of saying that it is more
ent. Thus, they stop accumulating capital relative to their conducive to a low time preference and to all that that
incomes, even though the accumulation of still more implies about capital accumulation and economic prog-
capital relative to their incomes would provide them with ress.
still higher incomes in the future.
A Word on Capital Accumulation 8. Wealth and Labor

and the Rate of Return Wealth is the result of human labor. Labor is the means
As stated, later discussion in this book will show that by which man’s mind transmits his designs and purposes
the gains from a lower time preference are both pro- to matter. It is man’s application of his bodily and mental
foundly important and cumulative in their significance, faculties for the purpose of altering matter in form or
in that they permit the adoption of technological methods location and thereby making the matter thus altered serve
32
33
34
31 See
Later
below,
above,
discussion
ibid.,
chap.will
secs.
secs.
1, pt.
show
2–4.
2B,and
sec.
that
3.1.
the capitalized value of land also contributes to the ineradicable scarcity of capital. See below, chap. 17, sec. 12, the subsection “Capital Intensiveness and Land Values.”
a further purpose. Matter thus altered by man’s labor is can be indefinitely expanded and therefore does not
a product. Production is the process of thus altering constitute a long-run limitation on the ability to produce
matter. A producer is one who effects such alterations.35 that is independent of the supply of labor. Indeed, as the
The matter which is altered in production, that is, next chapter will show, even within very short periods of
which is the subject of man’s labor, can be nature-given, time—weeks or months—the supply of raw materials
such as a piece of land or ore in the ground, or itself a can almost always be increased through the application
previously produced product, such as cotton cloth or of more labor.37
steel sheet. Always, the performance of human labor is The fundamental scarcity of labor is manifest in the
essential to production. fact that virtually everyone would like to enjoy an in-
It is important to realize that in a division-of-labor come many times greater than the income he is presently
society, the labor applied in production is not limited to capable of earning. For example, today an average work-
manual labor, that is, to labor applied to materials or er may earn on the order of $20,000 per year for working
otherwise in physical operations. In such a society, it forty hours a week. If such a worker had it in his power
embraces much more, such as the labor entailed in found- to earn $100,000 per year, he would have no difficulty in
ing, organizing, and directing business firms and in pro- finding ways to live up to such an income. Unfortunately,
viding them with capital. Such labor achieves its effects to earn such an income at his present rate of pay, he would
by operating through the manual labor of others, which have to work more hours than there are in the week. His
it renders more efficient.36 maximum actual ability to work is obviously vastly less
The concept of wealth embraces not only products but than corresponds to the income he would like to have.
also natural resources, such as land, and mineral deposits But this is only another way of saying that the utmost
in the ground. The physical matter of which natural goods and services he is capable of producing are far less
resources are composed is, of course, not made by man— than the goods and services he would like to consume.
it is nature-given. Nevertheless, the wealth-character of Taken collectively, our desire to be able to spend five or
natural resources is man-made: it is the result of human ten times more than we now can afford to spend is an
labor. It is the result of the labor that discovers the uses indication that we would like five or ten times more work
to which the natural resources can be put, and of the labor performed than is now performed. In the present state of
that enables them to be become accessible in ways in technology and productivity of labor (output per unit of
which they can be used gainfully. Thus, it is labor that labor), this is how much additional labor would need to
establishes the character of natural resources as goods be performed to produce the larger volume of output we
and thus as wealth. As the leading historical example of would like to be able to buy.
this fact, one need only consider that all of the land and Consider. It would be very easy for the government of
mineral deposits of North America were present at the the United States to arrange things so that the average
time of the American Indians. Nevertheless, hardly any worker could earn and spend $100,000 a year instead of
of that land and mineral deposits then constituted wealth. $20,000 a year. Indeed, the governments of many coun-
The land and mineral deposits did not constitute wealth, tries have long ago made it possible for all of their
because the necessary labor—mainly of an intellectual citizens to be millionaires! To accomplish such results,
character—had not yet been performed to render them all the government would have to do is print enough new
wealth. and additional paper money. But there is nothing to be
gained from such a procedure. It is accompanied by
The Scarcity of Labor and Its Ineradicability rising prices, which prevent the higher incomes from
Wealth not only is the product of human labor, but also having any greater buying power than the smaller in-
could be produced in larger quantity if more labor were comes did before. The only way that earning and spend-
devoted to its production. Indeed, the application of more ing $100,000 a year instead of $20,000 a year can represent
labor is the only fundamental requirement for increasing the ability to buy five times more goods is if five times
the supply of wealth. This is because more labor is the more goods are produced. Only then would prices not
source of additional equipment and materials, including rise in the face of five times more spending to buy goods.
additional agricultural commodities and mineral sup- But in a given state of technology and productivity of
plies extracted from the ground. Thus, the scarcity of labor, this would be possible only if five times as much
wealth implies a more fundamental scarcity of labor. labor could be performed, which, of course, is itself
As has already been shown, and will be fully con- impossible. People can work themselves to the point of
firmed in the next chapter, the fact that the wealth-char- utter exhaustion, and still they cannot produce more than
acter of natural resources is the result of labor indicates a small fraction of all that it would be useful and desirable
that in a capitalist society, the supply of natural resources for them to produce. Thus, the supply of labor that people
35
36
37 Depending
For
See elaboration
below, chap.
on the
of3,extent
this
pt. A,
very
of
secs.
the
important
alteration
1 and 2 subject,
forof
extensive
thesee
matter,
below,
elaboration
thechap.
product
11,
ofmay
these
pt. B,
beimportant
sec.
described
1, andpoints.
ibid.,
eitherpt.
as C,
a new
sec.good
2. or merely as the alteration of an existing good. On this point, see below, chap.4, sec. 4.
60 CAPITALISM
can provide falls radically short of the supply whose of a fundamental scarcity of labor. The scarcity of labor
products they would like to have. Labor is scarce. is not only fundamental, however. It is also ineradicable.
(It should be obvious that the scarcity of labor implies I have already shown earlier in this chapter how
there is never any metaphysical reason for the existence increases in the ability to produce are accompanied by
of unemployment—that is to say, there is never any new and additional desires for wealth, which grow out of
reason for it by virtue of the necessary, inescapable the very same technological advances that make possible
nature of things. Unemployment belongs strictly in the the increases in the ability to produce. The effect of this
category of the man-made. Either it is voluntary and is that the scarcity of labor is not reduced by increases in
chosen by the individuals concerned, because they prefer the productivity of labor. The scarcity of labor is also not
to wait to find better terms of employment or because reduced by any increase in the size of the population and
they simply prefer leisure; or, where it is involuntary and thus the number of people able and willing to work,
unchosen by the individuals concerned, it is forcibly because the additional members of that population bring
imposed on them. Unemployment is forcibly imposed with them their own needs and desires for goods and
through the imposition of too high a level of money wage services that are in excess of their ability to add to the
rates by the government or by coercive labor unions supply of goods and services. Furthermore, as the pro-
operating with the sanction of the government. These ductivity of labor rises and increases the workers’ stan-
policies, of course, could be done away with. The causes dard of living, the workers tend to acquire a growing
of unemployment will be fully clear once we understand desire for leisure. As a result, not only does the desire for
the principles governing money and spending, and the wealth grow as the ability to produce it increases, but also
fact that under the freedom of competition, purchasing the amount of labor the individual is willing to perform
power sufficient to buy all the goods and services that decreases. This represents an additional cause of the
can be produced in the economic system at the point of continuing scarcity of labor.
full employment is automatically generated by the pro- Thus, the fundamental and essential nature of eco-
cess of production itself. The discussion of these import- nomic life is this: the need and desire for additional
ant matters is reserved for later chapters.38) wealth are there and the nature-given means of producing
The scarcity of labor, of course, is also the result of a it are there; all that is lacking is the ability of human labor
scarcity of personal services. Virtually everyone, if he to transform the nature-given means of production into
could afford it, would like to be able to be served by additional wealth.
maids, cooks, gardeners, personal secretaries, and so on. On this foundation, the fundamental economic need
Each individual could probably find worthwhile uses for of rational beings emerges as the overcoming of the
the labor of half a dozen or more full-time servants, limitations on production imposed by the scarcity of
without even giving the matter more than a moment’s labor. Always, what stands between man and his need for
thought. greater wealth is his limited ability to produce wealth—
The labor that we implicitly desire to have at our his limited ability and also willingness to perform labor.
disposal, whether to produce goods for us or to provide There is only one solution to this problem. And that is
us with personal services, is, as I have said, limited only continuously to raise the productivity of labor—that is,
by our imaginations. And yet while nature has provided continuously to increase the quantity and quality of the
each of us with an imagination capable of forming de- goods that can be produced per unit of labor, including
sires on a grand scale, it has simultaneously equipped the variety of goods. An ineradicable scarcity of labor
each of us with only two arms to provide for the satisfac- resulting from a need and desire for labor that are always
tion of those desires. Each of us is easily capable of vastly greater than the supply of labor requires that the
forming desires whose fulfillment requires the labor of productivity of labor be rendered greater and greater. The
multitudes, and yet by the laws of arithmetic, the average rise in the productivity of labor is the only conceivable
member of any society can never obtain more than the way in which man can obtain the progressively greater
labor, or products of the labor, of just one person. This is amounts of wealth that his rational and progressive na-
so because for each person who exists to consume, there ture requires.
can be no more than one person present to produce. The problem of precisely how continuously to raise
Indeed, when the very young and the sick and infirm are the productivity of labor, to make possible an ever in-
allowed for, who can only be supported by the labor of creasing production and enjoyment of goods per capita,
others, it turns out that for each person who consumes is what I call the economic problem.
there is, on average, substantially less than the labor of (Associated with the economic problem is an import-
one person available to produce. ant but subsidiary problem, which is often mistakenly
The preceding discussion demonstrates the existence presented as the central economic problem, namely, how
38 See below, Chapters 12–19.
to allocate an existing limited ability to produce in accor- man’s nature as a rational being. It will be shown to
dance with the choices of individuals to satisfy their more represent in its inner nature the form of society required for
important wants ahead of their less important wants. The the efficient and progressively improving use of man’s
necessity of this choice is implied by the existence of mind, body, and nature-given environment in production.
needs and wants that have no limit, in the face of a As previously indicated, subsequent chapters will then
productivity of labor that at any given time is always show the dependence of the division of labor on the
strictly limited. Regrettably, it is this subsidiary problem leading institutions of a capitalist society, above all,
that most economists have in mind when they describe private ownership of the means of production and the
economics as focusing on “the allocation of scarce means price system. They will also show the reciprocating and
among competing ends.” Closely associated with this thoroughly benevolent influence of the division of labor
mistaken view of the economic problem is the formula- on private ownership of the means of production and
tion of the fundamental problem of economic life in other essential institutions of capitalism, namely, eco-
terms of a scarcity of goods. The actual fundamental nomic inequality and economic competition. Still later
problem, of course, is a scarcity of labor and thus how chapters will show how, within the framework of the
to raise the productivity of labor.) division of labor and capitalism, the productivity of labor
The next chapter provides a conclusive demonstration is continuously increased on the basis of capital accumu-
of the limitless potential of natural resources and con- lation—which entails the employment of ever increasing
tains a necessary critique of the objections of the ecology amounts of wealth as means of further production—and
movement to economic progress. Following it, Chapter the absolute dependency of this process too on the insti-
4 will explain why the focal point of the ongoing solution tutions of capitalism.
to the economic problem is the division of labor. The In effect, the remainder of this book can be summa-
division of labor will be shown to constitute the indis- rized as demonstrating a single proposition: in every
pensable social-organizational framework for the pro- possible way, with no valid objection, the solution for the
gressive increase in the productivity of labor required by economic problem is capitalism.
Notes
1. See below, p. 59. exposition of this belief.
2. Cf. Ludwig von Mises, Planning For Freedom, 4th ed. enl. 12. Regrettably, this criticism applies to the great von Mises
(South Holland, Ill.: Libertarian Press, 1980), p. 65. and his efforts to portray economics as merely the “hitherto best
3. For elaboration of these points, see below, pp. 673–674. developed part” of an allegedly wider science of human action
4. See below, pp. 378–380. known as praxeology. See Ludwig von Mises, Human Action,
5. Exactly the same principles apply to the market value of 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 1–10
trade secrets. For a discussion of why, unlike government passim. I wish to note, indeed to stress, however, that even when
licenses, patents and copyrights do not constitute a case of I have ultimately come to disagree with some position of von
monopoly, see below, pp. 388–389. For discussion of the status Mises, as in this case, I do not recall ever having read so much
of rights and relationships in general in relation to the concepts as a single paragraph of his writings that did not serve as the
of goods and wealth, see Eugen von Böhm-Bawerk, Whether most powerful stimulus to my own thinking. Therefore, I urge
Legal Rights and Relationships Are Economic Goods in Shorter everyone to give the most serious consideration to every portion
Classics of Böhm-Bawerk (South Holland, Ill.: Libertarian of his writings.
Press, 1962). 13. Adam Smith, The Wealth of Nations (London, 1776), bk. 1,
6. Slavery also undermines the production of wealth by under- chap. 11, pt. 2; reprint of Cannan ed. (Chicago: University of
mining the accumulation of capital. On this point, see below, Chicago Press, 2 vols. in 1, 1976), 1:183.
pp. 455–456. 14. For a discussion of the essential elements of a rational
7. Menger would have disputed the need to include the quali- philosophy which pertain to economic activity, see above, pp.
fication concerning the expenditure of labor or effort in the 19–21.
definition of economic goods. Nor did he think it necessary to 15. For a presentation of the doctrine of cultural relativism by
include the qualification “gainfully” in his discussion of “suf- one of its leading advocates, see Melville J. Herskovits, Cul-
ficient command” over things. Cf. Carl Menger, Principles of tural Relativism Perspectives in Cultural Pluralism (New York:
Economics, trans. and ed. James Dingwall and Bert F. Hozelitz Random House, 1972). For a presentation of the doctrine of
(Glencoe, Ill.: The Free Press, 1950), pp. 51–54, 100–101. conspicuous consumption by one of its leading advocates, see
8. Stocks, bonds, and bank deposits are such claims. Thorstein Veblen, The Theory of the Leisure Class (New York:
9. Cf. Menger, Principles of Economics, pp. 55–58. Modern Library, 1934), chap. 4.
10. See below, pp. 141–144. 16. I am indebted to Ayn Rand both for the general concept of
11. See Israel M. Kirzner, The Economic Point of View (New an objective code of values based on man’s life as the standard
York: D. Van Nostrand, 1960), pp. 22–29, 108–185, for an and for the special application of that concept in the form of
62 CAPITALISM
some goods being classified as being of greater “philosophi- 22. See, for example, Paul Samuelson and William Nordhaus,
cally objective value” than others. See Ayn Rand, Atlas Shrugged Economics, 13th ed. (New York: McGraw-Hill, 1989), p. 450.
(New York: Random House, 1957), pp. 1012–1023; Capital- See also above, the Introduction, n. 15, for an explanation of
ism: The Unknown Ideal (New York: New American Library, why my references are typically to the 13th edition of Samuel-
1966), pp. 16–17. son and Nordhaus rather than to the more recent 14th edition.
17. See my pamphlet Education and the Racist Road to Barba- 23. For a full discussion of Say’s Law, see below, pp. 559–580.
rism, 3d and subsequent printings (Laguna Hills, Calif.: The 24. See below, pp. 561–569.
Jefferson School of Philosophy, Economics, and Psychology, 25. An illustration of this principle is the devastating storms
1992), pp. 4–5. As I wrote in that pamphlet, “Reference to an which occurred in Bangladesh in 1992. Had the same storms
objective superiority of one civilization or culture over another occurred in a more prosperous country, in which people could
encounters the opposition of a profound, self-righteous hatred afford concrete houses instead of thatched huts, and in which
of the very idea. Thus, cultures may practice ritual sacrifice, adequate sea walls could be built, the death toll would have
cannibalism, mass expropriation, slavery, torture, and whole- been in the hundreds, rather than over one hundred thousand.
sale slaughter—all of this is accepted as somehow legitimate See “Even in Bangladesh’s Storms, Poverty Is Underlying
within the context of the culture concerned. The only alleged Killer,” New York Times, May 11, 1991, p. 1, p. 5. Unless
sin, the only alleged act of immorality in the world is to display otherwise noted, throughout this book all references to this
contempt for such cultures, and to uphold as superior the values publication are to the national edition.
of Western culture. Then one is denounced as an imperialist, 26. For further discussion of the role of wealth in the lengthen-
racist, and virtual Nazi. It should be realized that those who ing and enrichment of human life, see below, pp. 76–78.
take this view do not regard as the essential evil of Nazism 27. Capital is wealth employed in the production of wealth. In
its avowed irrationalism, its love of force and violence, and the context of a division-of-labor, monetary economy, it is the
its acts of destruction and slaughter. All this they could wealth employed by business enterprises, that is, means of
accept, and do accept in the case of other cultures, such as production which have been purchased for the purpose of
that of primitive tribes, ancient Egypt, the civilization of the producing goods or rendering services which are intended to
Aztecs and Incas, the Middle Ages, and Soviet Russia. What be sold. For further elaboration on the meaning of the concept,
they hold to be the evil of Nazism was its assertion that Nazi see below, pp. 445–456.
culture was superior to other cultures. Needless to say, of 28. See Böhm-Bawerk, Capital and Interest, 2:268–273.
course, it is only on the basis of the recognition of objective 29. See below, pp. 743–744.
values that one can seriously condemn Nazism—not for its 30. See below Chapter 17, in particular pp. 824. See also pp.
absurd claims of superiority, but as a primitive, barbaric 629–631.
culture of the type one would expect to find among savages.” 31. Later discussion will show that the capitalized value of land
(Ibid., pp. 7–8.) also contributes to the ineradicable scarcity of capital. See
18. The flagrant contradiction of upholding individual rights in below, pp. 856–857.
the midst of Negro slavery has already been noted. See above, 32. See below, pp. 813–824.
p. 28. 33. See below, pp. 813–826.
19. Cf. Eugen von Böhm-Bawerk, Capital and Interest, 3 vols., 34. See above, pp. 19–21.
trans. George D. Huncke and Hans F. Sennholz (South Holland, 35. Depending on the extent of the alteration of the matter, the
Ill.: Libertarian Press, 1959), 2:143–145. product may be described either as a new good or merely as the
20. Cf. John Kenneth Galbraith, The Affluent Society (Boston: alteration of an existing good. On this point, see below, p. 130.
Houghton Mifflin, 1958), chap. 10. See also, in opposition, 36. For elaboration of this very important subject, see below,
George Reisman, “Galbraith’s Modern Brand of Feudalism,” pp. 462–464 and 475–485.
Human Events 18, no. 6, sec. 5 (February 3, 1961), pp. 77–80. 37. See below, pp. 63–71.
21. Again, see below, pp. 414–416. 38. See below, Chapters 12–19.
CHAPTER 3
NATURAL RESOURCES AND THE ENVIRONMENT
such as gold and platinum, to be found floating in trace

PART A amounts throughout the oceans, for example.
What is true of the earth is equally true of every other
NATURAL RESOURCES planetary body in the universe. Insofar as the universe
consists of matter, it consists of nothing but chemical
elements, and thus of nothing but natural resources.
1. The Limitless Potential of Natural Resources Nor is there any fundamental scarcity of energy in the
T he potential for economic progress is in no way

limited by any fundamental lack of natural re-
sources. Despite the claims so often made that we are in
world. More energy is discharged in a single hurricane
than mankind produces in an entire year. Nor is the
supply of energy in the world reduced in any way by
danger of running out of natural resources, the fact is that virtue of the energy man captures from nature. Heat from
the world is made out of natural resources—out of the sun provides a constantly renewed supply that is
solidly packed natural resources, extending from the many millions of times greater than the energy consumed
upper limits of its atmosphere to its very center, four by man. The total quantity of energy in the world remains
thousand miles down. This is so because the entire mass a constant, for all practical purposes incalculably in
of the earth is made of nothing but chemical elements, excess of what mankind consumes, and will remain so
all of which are natural resources. For example, the until the sun begins to cool.
earth’s core is composed mainly of iron and nickel—mil- The problem of natural resources is in no sense one of
lions of cubic miles of iron and nickel. Its oceans and intrinsic scarcity. From a strictly physical-chemical point
atmosphere are composed of millions of cubic miles of of view, natural resources are one and the same with the
oxygen, hydrogen, nitrogen, and carbon, and of lesser, supply of matter and energy that exists in the world and,
but still enormous, quantities of practically every other indeed, in the universe. Technically, this supply may be
element. Even the sands of the Sahara desert are com- described as finite, but for all practical purposes it is
posed of nothing but various compounds of silicon, infinite. It does not constitute the slightest obstacle to
carbon, oxygen, hydrogen, aluminum, iron, and so on, economic activity—there is nothing we are prevented
all of them having who knows what potential uses that from doing because the earth (let alone the universe) is
science may someday unlock. Nor is there a single ele- in danger of running out of some chemical element or
ment that does not exist in the earth in millions of times other, or of energy.
larger quantities than has ever been mined. Aluminum is The problem of natural resources is strictly one of
found in some quantity practically everywhere. There are useability, accessibility, and economy. That is, man needs
immense quantities even of the very rarest elements, to know what the different elements and combinations of
64 CAPITALISM
elements nature provides are good for, and then to be able least too costly to work with. Improvements in shipping,
actually to get at them and direct them to the satisfaction railroad building, and highway construction have made
of his needs without having to expend an inordinate possible low-cost access to high-grade mineral deposits
amount of labor to do so. Clearly, the only effective limit in regions previously inaccessible or too costly to ex-
on the supply of such economically useable natural re- ploit.
sources—that is, natural resources in the sense in which In the light of such facts, one should consider how
they constitute wealth—is the state of scientific and foolish it is to complain, for example, that today copper
technological knowledge and the quantity and quality of ores are being mined which contain only 1 percent pure
capital equipment available. copper, whereas at the beginning of the twentieth century
Because the supply of resources provided by nature is the ores mined often contained 10 percent pure copper.
one and the same with the supply of matter and energy, With a worker in the cab of a steam shovel able to move
the supply of economically useable natural resources is hundreds or thousands of times more earth in the same
capable of virtually limitless increase. It increases as time as a worker with a hand shovel, the volume of pure
man expands his knowledge of and physical power over copper moved in the same time is now enormously
the world and universe. greater, even with ores only one-tenth as pure. The resort
For example, petroleum, which had been present in to such ores is evidence not that we are running out of
the ground for millions of years, did not become an supplies, but that we have been able to create vastly
economically useable natural resource until the second greater sources of supply than ever before. The very fact
half of the nineteenth century, when uses for it were that we exploit such deposits is evidence of the advances
discovered. Aluminum, radium, and uranium also be- that have been made. For we would not exploit them in
came economically useable natural resources only within the absence of vast improvements in the productivity of
the last century or so. The economic useability of coal labor.
and, more recently, silicon, has been enormously in- Similarly, the development of chemical fertilizers and
creased by the discovery of new and additional uses for low-cost methods of irrigation have enabled man not
them. only radically to improve the productivity of arable land,
The supply of economically useable natural resources but actually to make more arable land. Today, land
is increased not only by the discovery of uses for things previously desert or semidesert has been made vastly
previously thought to have no uses, or new and additional more productive than the very best lands available to
uses for things already known to have uses, but also by previous generations. Israel and California provide lead-
advances that enable man to improve his access to things— ing examples.
for example, to mine at greater depths with less effort, to There is no limit to the further advances that are
move greater masses of earth with less effort, to break possible. Hydrogen, the most abundant element in the
down compounds previously beyond his power, or to do universe, may turn out to be an economical source of fuel
so with less effort, to gain access to regions of the earth in the future. Atomic and hydrogen explosives, lasers,
previously inaccessible or to improve his access to re- satellite detection systems, and, indeed, even space travel
gions already accessible. All of these increase the supply itself, open up limitless new possibilities for increasing
of economically useable natural resources. All of them, the supply of economically useable mineral supplies.
of course, at the same time bestow the character of goods Advances in mining technology that would make it pos-
and wealth on what had before been mere things.1 sible to mine economically at a depth of, say, ten thou-
Today, as the result of such advances, the supply of sand feet, instead of the present much more limited
economically useable natural resources is enormously depths, or to mine beneath the oceans, would so increase
greater than it was at the beginning of the Industrial the portion of the earth’s mass accessible to man that all
Revolution, or even just one or two generations ago. previous supplies of accessible minerals would appear
Today, man can more easily mine at a depth of a thousand insignificant in comparison. And even at ten thousand
feet than he could in the past at a depth of ten feet, thanks feet, man would still, quite literally, just be scratching the
to such advances as mechanical-powered drilling equip- surface, because the radius of the earth extends to a depth
ment, high explosives, steel structural supports for mine of four thousand miles.
shafts, and modern pumps and engines. Today, a single As just indicated, equally dramatic advances are pos-
worker operating a bulldozer or steam shovel can move sible in the field of energy. These may occur through the
far more earth than hundreds of workers in the past using use of atomic energy, hydrogen fusion, solar power, tidal
hand shovels. Advances in reduction methods have made power, or thermal power from the earth’s core, or still
it possible to obtain pure ores from compounds pre- other processes as yet unknown. Reductions in the cost
viously either altogether impossible to work with or at of extracting petroleum from shale and tar sands have the
1 See above, chap. 2, sec. 1. Most of this section previously appeared in my book The Government Against the Economy (Ottawa, Illinois: Jameson Books, 1979), pp. 15–19.
NATURAL RESOURCES AND THE ENVIRONMENT 65
potential for expanding the supply of economically use- bers of the most intelligent people devote their lives to
able petroleum by a vast multiple of what it is today. The science, technology, and business. All are highly moti-
physical volume of petroleum present in such formations vated to increase the supply of economically useable
in our own Rocky Mountain states and in Canada far natural resources by the prospect of earning a personal
exceeds the liquid petroleum deposits of the Arab coun- fortune for every significant success they achieve in this
tries. All that is required is ways to reduce the costs of regard. No greater guarantee of mankind’s ability to
extraction.2 Similarly, there are also vast known coal enjoy a growing supply of natural resources could be
fields in the United States containing enough coal to found.
supply present rates of coal consumption for many cen- The essential principles pertaining to natural resources
turies, and already capable of doing so economically. can be summarized as follows. What nature provides is
Since most petroleum products can be made from coal, a supply of matter and energy that for all practical pur-
reductions in the cost of using coal for this purpose would poses is infinite. Yet at the same time, nature does not
represent the equivalent of a further enormous increase provide a single particle of natural resources in the form
in the supply of economically useable petroleum depos- of wealth. The bestowal of the character of economic
its. goods and wealth on what nature provides is the work of
Because the earth is literally nothing but an immense human intelligence. An essential economic task of man
solid ball of chemical elements and because man’s intel- is progressively to apply his intelligence to achieve a
ligence and initiative in the last two centuries were growing understanding of nature and to build progres-
relatively free to operate and had the incentive to operate, sively more powerful forms of capital equipment that
it should not be surprising that the supply of useable, give him growing physical mastery over nature.
accessible minerals today vastly exceeds the supply that In this process, advances both in knowledge and in
man is economically capable of exploiting. In virtually capital equipment themselves set the stage for further
every case, there are vast known deposits of minerals advances in knowledge and in capital equipment, thereby
which are not worked, because it is not necessary to work operating to give man both ever greater understanding
them. Indeed, if they were worked, there would be a and ever greater physical power over nature—provided,
relative overproduction of minerals and a relative under- of course, that he continues to be rational, that is, contin-
production of other goods—that is, a waste of capital and ues to think and to act long range. For example, learning
labor. In virtually every case, it is necessary to choose arithmetic sets the stage for learning algebra, which in
which deposits to exploit—namely, those which, by vir- turn sets the stage for learning calculus, and so on. Being
tue of their location, the amount of digging required, the able to build the first primitive railroads and steel mills
degree of concentration and purity of the ore, and so provides the physical capacity for being able to build
forth, can be exploited at the lowest costs. Today, enor- more and better railroads and steel mills later on. Devel-
mous mineral deposits lie untouched which could be oping a metallurgical industry sets the stage for develop-
exploited with far less labor per unit of output than was ing an electrical industry and appliance industry, which
true of the very best deposits exploited as recently as a sets the stage for developing an electronics and computer
few decades ago—thanks to advances in the state of industry, which in turn sets the stage for developing a
mining technology and in the quantity and quality of capacity to launch spaceships, and so on. The combina-
mining equipment available. tion of increasing knowledge and increasing physical
So long as men preserve a division-of-labor, capitalist capacities brings a growing fraction of the physical mass
society and are free and motivated to think and to build of the earth and, indeed, the universe more and more
for the future, the body of scientific and technological within man’s power to serve his ends and thus continu-
knowledge at the disposal of mankind will grow from ally enlarges the fraction of nature that represents eco-
generation to generation, as will the supply of capital nomically useable natural resources and thus wealth.
equipment.3 On this basis, man can steadily expand his Thus the portion of nature that represents wealth
physical power over the world and thus enjoy an ever should be understood as a tiny fraction that began as
greater supply of economically useable natural resources. virtually zero and even though it has since been multi-
There is no reason why, under the continued existence of plied by several hundredfold, is still virtually zero when
a free and rational society, the supply of such natural one considers how small is the portion of the mass of the
resources should not go on growing as rapidly as in the earth, let alone of the universe, that is subject to man’s
past or even more rapidly. control, and how far man is from understanding all
The ultimate key to the economic availability of nat- aspects and potential uses of what has become subject to
ural resources is motivated human intelligence, which his control. To borrow and expand upon Ayn Rand’s
means: a capitalist society. In such a society, large num- statement that the good is an aspect of reality in relation
32 In recent
See below,
years,
chap.considerable
4, sec. 1, forprogress
an explanation
has been
ofmade
how the
in reducing
divisionthe
of labor
costs provides
of extracting
the framework
oil from tar for
sands,
continuous
to the point
economic
where such
progress.
oil now
Seeaccounts
also, below,
for approximately
chap. 6, sec. 1,one-fourth
the subsection
of Canada’s
“The Impetus
annual
toproduction
ContinuousofEconomic
crude oil. The
Progress,”
recoverable
for anoil
explanation
from the deposits
of how within
in Alberta
the framework
alone is estimated
of a division-of-labor
to be 300 billion
society,
barrels,
theversus
profit motive
265 billion
achieves
barrels
continuous
estimatedeconomic
for Saudi Arabia.
progress,See
a nd
New
chap.
York
14,Times,
pt. B, sec.
December
3, for an28,
explanation
1994, p. C5.
of the process of capital accumulation.
66 CAPITALISM
to man: For all practical purposes, nature in its infinity continue the progress of the last two centuries and gain
will forever remain something far more of whose good economical access to more and more of nature’s virtually
in relation to man remains to be discovered and achieved infinite supply of energy.
than ever has been discovered and achieved, with the Even if liquid petroleum deposits were to run out in
essential requirements of the ongoing process being rea- the next fifty years or so, there is no reason why, before
son and capitalism.4 Reason and capitalism achieve a they did, men should not be able to produce petroleum
progressive enlargement of the goods- and wealth-char- products from shale, tar sands, or coal with less labor than
acter of nature and thus a continually increasing supply they presently produce them from liquid petroleum—
of economically useable natural resources. Not only can just as they presently produce iron and copper from
no greater guarantee of mankind’s ability to enjoy a relatively low-grade ores with far less labor than they
growing supply of natural resources be found, but the used to produce them from higher-grade ores. Indeed,
underlying metaphysics of a virtually infinite nature that petroleum products today can already be produced from
is confronted by motivated human intelligence, which these sources with far less labor than they could be
steadily expands both man’s knowledge and his physical produced from liquid petroleum deposits in the past. The
capacities, ensures that no greater guarantee of mankind’s power of man’s mind, operating in the context of a
success is necessary. division-of-labor, capitalist society is clearly such as to
*** leave no doubt that comparable beneficial results could
The growing threat to the supply of natural resources be accomplished with respect to petroleum products in
that people are beginning to complain of is not the result the years ahead.
of anything physical—no more than it was when these The energy crisis of the 1970s was purely political. In
terrible words of despair were written: essence, it was the result of making it largely illegal to
You must know that the world has grown old, and does produce energy. In almost every foreign country, the
not remain in its former vigour. It bears witness to its own ownership of oil and natural gas deposits, and thus the
decline. The rainfall and the sun’s warmth are both dimin- production of oil and natural gas, has been made a
ishing; the metals are nearly exhausted; the husbandman is monopoly of the government. It is simply illegal for
failing in the fields, the sailor on the seas, the soldier in the
private citizens to produce these goods and thus their
camp, honesty in the market, justice in the courts, concord
in friendships, skill in the arts, discipline in morals. This is production has been restricted by all the inefficiencies of
the sentence passed upon the world, that everything which government ownership.6 In the United States, the federal
has a beginning should perish, that things which have government claims ownership of the continental shelf
reached maturity should grow old, the strong weak, the and the majority of the land area of the Western states.
great small, and that after weakness and shrinkage should On the basis of these claims, and under the guise of
come dissolution.5 “concern for the environment,” it has closed off many of
That passage is not a quotation from some contempo- the most promising areas for oil and gas discoveries. It
rary ecologist or conservationist. It was written in the has set them aside as “wildlife preserves” and “wilder-
third century—long before the first chunk of coal, drop ness areas,” and thus prohibited their development. In
of oil, ounce of aluminum, or any significant quantity of these ways and others, to be explained later in this book,
any mineral whatever had been taken from the earth. the government made it illegal to produce energy. This
Then as now, the problem was not physical, but philo- is the only reason that there was an energy crisis.7 The
sophical and political. Then as now, men were turning substantial reduction in government interference that
away from reason and toward mysticism. Then as now, took place in the early 1980s, above all, the repeal of
they were growing less free and falling ever more under price controls on oil, made the energy crisis disappear.
the rule of physical force. That is why they believed, and The achievement of a fully free market in energy would
that is why people in our culture are beginning to believe, ensure a resumption of the growing abundance and de-
that man is helpless before physical nature. There is no clining real cost of energy that characterized the Western
helplessness in fact. To men who use reason and are free world in the two hundred years prior to the 1970s.
to act, nature gives more and more. To those who turn Regrettably, however, the government’s policy of re-
away from reason or are not free, it gives less and less. stricting the supply of energy continues. It continues to
Nothing else is involved. withdraw ever more territory from exploration and de-
velopment: virtually the entire continental shelf of the
The Energy Crisis United States is now closed to new oil drilling and further
There has been much talk about an energy shortage. development of Alaskan fields is in doubt. The govern-
There is obviously no shortage of energy in nature and ment even prohibits the use of already existing facilities
no inherent reason why mankind should not be able to for producing energy, the two best-known cases being
7654 See
In W.
below,
below
Ayn
T. Jones,
Rand,
chap.
the discussion
Capitalism:
The
7, pt.
Medieval
A, sec.
“Destructive
The
4,
Mind,
the
Unknown
subsection
vol.Consequences
2 Ideal
of A“How
History
(Newthe
York:
of
ofGovernment
U.S.
Western
New
Government,
Philosophy,
American
Ownership”
Not
Library,
2dthe
ed.
inOil
(New
chap.
1966),
Companies,
9,
York:
p.
pt.14.
A,Harcourt,
sec.
Caused
2, forBrace,
the
theOil
reasons
and
Shortage.”
World,
why government
1969), p. 6.ownership of an industry causes inefficiency.
the Shoreham atomic power plant on Long Island, in applied to a given piece of land must soon result in less
New York State, and the Gaviota Oil and Gas Plant near than double the output being obtained from that piece of
Santa Barbara, California. The Shoreham plant, com- land.
pleted in 1984 at a cost of $5.5 billion, had the capacity If such were not the case, then the entire world’s
to supply one-third of the power needs of the 900,000- supply of food could be grown on this one piece of
plus homes on Long Island. Nevertheless, it was never ground. Similarly, the entire world’s supply of any given
allowed to operate beyond the test level, and as of Octo- good could be produced within a single factory building.
ber 1994, its nuclear reactor was actually dismantled.8 The fact that sooner or later more land and more factory
The Gaviota plant, completed in 1987 at a cost of $2.5 buildings, more of all the necessary factors of produc-
billion, has the capacity to refine 100,000 barrels of oil tion, are required for the production of more of anything,
per day. But it too has never been allowed to operate, is evidence of the existence of diminishing returns. The
because of environmentalist policies on the part of the point is reached where the application merely of more of
State of California and the County of Santa Barbara.9 the factors of production initially allowed to increase—
the so-called variable factors of production—results in
an amount of additional output that is less than propor-
2. The Law of Diminishing Returns tional to the additional quantity of the variable factors of
The production of any product requires the use of at production, and, ultimately, in no additional output what-
least two factors of production, for example, labor and ever. Sooner or later, to increase output in the same
land, or labor, a land site, a factory building, and ma- proportion as the increase in the variable factors of
chinery and material.10 The combinations of factors of production, or, indeed, to increase it at all, it becomes
production, of course, can be far more complex, entailing necessary to increase the quantity of the factors of pro-
such things as a variety of machines, materials, means of duction that were initially held fixed (the so-called fixed
transportation, and fuels both to power the means of factors of production).
transportation and to provide power and light to the This necessity results from the existence of what von
factories involved. Mises has called ”quantitative definiteness.” Everything
Now if all of the factors necessary to the production physical has only a definite, delimited capacity to pro-
of a product are increased in the same proportion, such duce effects. That capacity may be exhausted at one fell
as all of them being doubled, then it is to be expected that swoop, or it may be approached more or less gradually.
the quantity of product produced will also be increased For example, the capacity of a given quantity of flour of
in that proportion, that is, in the present instance, dou- a definite quality to produce bread is thoroughly ex-
bled. Usually, however, it is also possible to increase the hausted in the production of a definite quantity of bread
production of a product by means of increasing the of a definite type. It is not possible to produce more such
quantity just of some of the necessary factors of produc- bread without the availability of more such flour. The
tion. For example, the quantity of output produced on a application of additional labor alone in this case would
farm might be increased by increasing only the quantity not result in any additional product.
of labor, or labor and equipment together, without in- In other cases, such as loading a flatbed truck higher
creasing the quantity of land employed. In manufactur- and higher, it is possible to increase the quantity of labor
ing, it is almost always possible to increase production expended disproportionally and succeed in producing
within existing factories, simply by increasing the quan- more of the product, in this case more cargo loaded onto
tity of labor, materials, and fuel employed, and thus a given truck. But again, sooner or later, the carrying of
without increasing either the number or size of the fac- more cargo requires another truck, and before another
tory buildings or even the quantity of machinery em- truck becomes absolutely essential, the carrying of more
ployed. cargo relative to the employment of a given amount of
All such cases constitute the domain of the law of labor requires another truck. This last reflects the fact
diminishing returns, or, as it sometimes called, the law that disproportionate increases in the quantity of labor
of nonproportional returns. The law of diminishing re- are required to accomplish additional increases in the
turns states that under a given state of technological amount of cargo loaded onto a given truck. In both cases,
knowledge, the use of successively larger quantities of that of the flour and that of the truck, the capacity of the
any factor of production or combination of factors of fixed factor of production to render service is limited and
production in conjunction with a fixed quantity of any sooner or later more of the fixed factor is required for the
other necessary factor or factors of production eventually production of more of the product and/or to maintain the
results in less than proportionate increases in output. For productivity of the variable factor(s) of production.11
example, a repeated doubling of the labor and capital Table 3-1 provides a quantitative illustration of the
11
98
10 Cf.
See
The
offer,
“Dismantling
Ludwig
“Mideast
expression
whichvon
would
Crisis
of“factors
Mises,
theentail
Shoreham
PutsHuman
ofNew
aproduction”
purchase
Spotlight
Nuclear
Action,
price
Plant
can
3d
Onof
ed.
be
anIs
Lilco’s
rev.
understood
Idle
Completed,”
(Chicago:
Oil
stock
Plant
as
atsynonymous
New
in
$21.50
Henry
California,”
York
Regnery
a share,
Times
with
New
the
Co.,
, October
the
firm’s
York
1966),
expressions
Times,
stock
13,
pp.
1994,
rose
127–31.
September
“means
25
p. B6.
cents
ofSee
1,
production”
to1990,
also
$17.375
“New
p. 1.aor
share
Chapter
“physical
on for
theelements
Shoreham:
New YorkofStock
New
production.”
York
Exchange.
Files
Asto
will
(Wall
Take
beStreet
seen,
Plant,”
in
Journal,
the
ibid.,
context
June
Western
29,
of a1990,
division-of-labor
ed., October
p. B3. Remarkably,
28, 1994,
economy,
p.the
A9.)
in
environmentalist
which all productive
destroyers
activity
ofis
the
vitally
Shoreham
dependent
planton
attack
the earning
its owner,
of money,
the Long
useIsland
of theLighting
expressions
company
implicitly
(Lilco),
requires
for having
that the
high
physical
powergoods
rates,oasr though
servicestheir
representing
policies had
thenothing
factors of
toproduction
do with those
berates.
purchased
It appears,
for themoreover,
sake of making
that Lilco’s
subsequent
acquiescence
sales. Oninthis
its own
point,
total
seeelimination
below, chap.
has11,
been
pt.obtained
A, secs. 2–4.
by a $9-billion-takeover offer from New York State, which is to be financed by the sale of municipal bonds in that amount. If this offer is consummated, it will repeat the pattern previously evident in the government’s takeover of the American railroad industry, namely, first, the government’s destruction of an industry’s or company’s profitability, followed by the comparative relief of socialization at a price that at least provides some measure of compensation. Following an official statement of the takeover
68 CAPITALISM
Table 3–1
Diminishing Returns
Quantity of Labor
Average Output
Employed on a Farm of 100 Output (in bushels) Increase in Output
per Worker
Acres (in man-years)
1 100 100 100
2 190 90 95
3 270 80 90
4 340 70 85
operation of diminishing returns in the context of the mineral deposits available to them. In comparison with
application of varying amounts of labor to a farm of a land of the first quality, land of the second quality will
given number of acres. It makes clear how more of the tend to be farther away from the market it serves, to be
fixed factor of production is required to maintain the higher up on the hillsides, and to have rockier soil; mines
productivity of the variable factor(s) of production long of the second quality will also tend to lie farther away
before it is absolutely required for the production of any from the market they serve, and to have less pure ores
more of the product whatever. Thus, in Table 3-1, while and require deeper digging.
more output can be produced simply by employing more Further increases in population and the bringing into
labor, the use of more land is necessary to stop the production of more and more of the land and mineral
productivity of labor from falling. For example, the table deposits of the second quality ultimately results in the
shows 85 units as the average output per worker resulting need to exploit land and mineral deposits of the third
from the employment of 4 man-years of labor on a farm quality, which at that point are rendered the most produc-
of 100 acres. At the same time, the table implies that with tive still available, and, after that, land and mineral
four such 100-acre farms, the average output per worker deposits of the fourth, and still lower qualities. Thus, a
would be 100 units rather than only 85 units. man-year of labor performed on land of the first quality
The only context in which the law of diminishing may result in an output of 100 units, while an identical
returns does not apply is that of technological formulas man-year of labor performed on land of the second
or recipes, that is, ideas. The same identical idea can be quality results in an output of 90 units, and on land of the
applied over and over, ad infinitum, with absolutely no third quality, 80 units, and, finally, on land of the fourth
loss in its ability to render service and thus no decline in quality, only 70 units.13
the productivity of the other factors of production.12 The necessity of progressively resorting to land of
*** inferior degrees of productivity operates in just the same
Closely related to the law of diminishing returns is a way as the diminution of returns accompanying the
parallel phenomenon which was identified by the great employment of more and more labor on any given piece
classical economist David Ricardo, and which operates of land. Indeed, the two processes go on side by side. In
on the basis of the pursuit of rational self-interest. This the examples presented here, when it became necessary
is the fact that as far as people have knowledge and the to cultivate land of the second quality, land of the first
power of choice, they will choose to exploit land and quality would be cultivated more intensively, and the addi-
mineral deposits where the productivity of their labor is tional output gained by the employment of the second
greatest. As Ricardo put it, they will begin by cultivating man-year on land of the first quality would equal the output
land of the first quality and by exploiting mineral depos- produced by the first man-year on land of the second
its of the first quality. Only when population reaches the quality, namely, 90. Similarly, when it became necessary
point where all the land and mineral deposits of the first to cultivate land of the third quality, land of the second
quality have been brought into production, will they quality would be cultivated more intensively, and the culti-
resort to land and mineral deposits of the second quality, vation of land of the first quality would be further in-
which now represents the most productive land and tensified. In our examples, the output of the first man-year
12
13 SeeDavid
Cf. ibid. Ricardo, Principles of Political Economy and Taxation, 3d. ed. (London, 1821), chaps. 2 and 3; reprinted as vol. 1 of The Works and Correspondence of David Ricardo, ed. Piero Sraffa (Cambridge: Cambridge University Press, 1962).
on land of the third quality is equal to that of the second intensive or more extensive use of land encounters di-
man-year on land of the second quality and to that of the minishing returns whether in 1894 or in 1994. But in such
third man-year on land of the first quality, that is, 80. a society, by 1994 economic progress has so improved
the powers of human labor that the very poorest lands
The Law of Diminishing Returns and the Limitless and mines currently in use are a hundred times more
Potential of Natural Resources productive than the very best lands and mines in use in
The law of diminishing returns in no way contradicts 1894, and the point to which the productivity of labor
the previously established proposition that there is no diminishes in agriculture and mining in 1994 is more
practical limit to the potential supply of economically than a hundred times higher than the point to which it
useable natural resources. This is because the law of diminished in 1894. Indeed, thanks to economic prog-
diminishing returns in application to agriculture and ress, it is possible today to take even extremely submar-
mining applies only at any given time, in the context of ginal land—actual desert—and by piping in water and
a given state of technology and capital equipment. Over adding various chemicals to the soil, make such land
time, economic progress can occur. Indeed, in a division- vastly more productive than were the very best lands of
of-labor, capitalist society, with its rationality and its a few generations ago, as has been accomplished in Israel
incentives both monetary and cultural for the continuous and in the Imperial Valley in California. Similar exam-
application of reason to the problems of human life, ples can be found in the case of mining. Indeed, so great
economic progress is the norm.14 has been the access to better lands and the increase in
The advancing technology and improving capital equip- yields per acre on all grades of land, that extensive
ment which such a society makes possible can easily acreages farmed in the past have been thrown out of
offset the effects of the law of diminishing returns, and cultivation and returned to forest or pasture. This was the
by a wide margin. Quantitative definiteness continues to case in large portions of the eastern United States as
exist and it continues to be true that, for example, one better lands opened up in the Midwest, and in Great
can bake just so much bread of a given quality from a Britain, as American lands became a source of supply.
given quantity of flour, or generate just so much heat With still further economic progress, such results will
from a pound of coal. However, ways are found for the continue to be achieved in the future. For example, in
same quantity of human labor, using improved machinery recent years, it has been demonstrated that it is even
and equipment, to produce and process larger quantities possible to grow many crops in scientifically controlled
of flour, coal, and all other goods. Similarly, ways are soils and solutions in multistory buildings, in virtual
found for the same quantity of human labor to farm or factory conditions. This, of course, is a development
mine larger quantities of land, and to render larger quan- potentially equivalent to a practically limitless increase
tities of land suitable for farming or mining. In farming, in the supply of agricultural land. The art of genetic
this occurs through such means as the use of tractors and engineering, presently in its infancy, also holds out enor-
harvesters and the development of improved methods of mous potential. In the case of mining, it will probably
irrigation. In mining, it occurs through such means as the one day be possible with the aid of controlled atomic and
use of steam shovels, bulldozers, improved drills, and hydrogen explosions to move the most enormous masses
high explosives. In addition, as scientific and technolog- of earth at a minimum of cost. And it will probably come
ical knowledge increases, ways are found radically to within man’s power someday to conduct mining and
increase the productive power of each acre of farmland even farming operations not only under the sea, but
or mineral deposit. In farming, this occurs by such means elsewhere in the solar system, and beyond.
as improving the chemical composition of the soil, the Thus, the leading principle continues to be that as man
use of insecticides and herbicides, developing improved increases his knowledge of and physical power over the
strains of seed, and, of course, once again, irrigation. In world—indeed, the universe—the supply of accessible
mining, it occurs by such means as finding ways to and economically useable natural resources continues to
process ores previously impossible to process or too increase, and to increase per unit of labor expended.
costly to process—for example, acquiring the ability to ***
move multiton loads of ore with less effort than was The discussion of the law of diminishing returns con-
previously required to move a single shovelful of ore, firms the fact that the only limiting factor in production—
and learning to break elements out of different com- the only fundamentally scarce agent of production—is
pounds or to do so at a lower cost, such as learning to human labor, never land or natural resources. There is
break iron out of sulfide compounds as well as oxide always uncultivated land that could be cultivated, or
compounds and to do so at a lower cost. already cultivated land that could be cultivated more
Thus, in a division-of-labor, capitalist society, a more intensively, and mineral deposits that are known but
14 See above, note 3 of this chapter. See also above, chap. 2, sec. 3, the subsection “Progress and Happiness” and, below, this chap., pt. B, sec. 6, the subsection “The Loss of the Concept of EconomicProgress.”
70 CAPITALISM
presently unexploited, or that are exploited, but which in the supply of raw materials of all types, but also a
could be exploited more intensively. For example, there radical decrease in the proportion of labor devoted to
is all the land left as natural forest or pasture, which could agriculture and mining, and a corresponding increase in
easily be used to grow crops, and the enormous quantities the proportion of labor devoted to manufacturing and the
of desert-type land which potentially could also be used various service industries. These results can be under-
for crops. As an example from the case of minerals, there stood simply by imagining a hundredfold increase in the
are, as previously mentioned, enormous deposits of oil productivity of labor in the production of raw materials,
in the form of shale and tar sands that have never been accompanied by a willingness to consume only a ten-
touched. And roughly two-thirds of the oil in conven- times greater quantity of raw materials before giving
tional oil fields has typically been left in the ground. preference to larger quantities of more highly processed
The reason for leaving such useable land and mineral goods and to larger quantities of services. In such circum-
deposits alone is that the labor that would be required to stances, instead of using 100 workers in agriculture and
work them would have to be withdrawn either from mining to produce 100 times the output of raw materials,
better land and mineral deposits, where its productivity 10 such workers will now be used to produce 10 times
is higher, or from the production of other goods that are the output of such goods, and 90 workers previously used
more important than the production of additional agri- to produce such goods will be released to produce more
cultural commodities or minerals. For example, to farm of other things.
land that we now leave alone, we would have to with-
draw labor either from better farmland, where its produc- Diminishing Returns and the Need for
tivity is higher, or from the production of other goods Economic Progress
having greater importance to buyers than the additional The existence of the law of diminishing returns im-
agricultural commodities. plies that economic progress is necessary not only for
For exactly the same reasons, we do not exploit each improvement in the standard of living, but also to main-
piece of land or mine to the maximum possible extent. tain the standard of living at any given level. In the
The additional labor that would be required would have absence of economic progress, a rising population would
to come either from other land or mines where the result in diminishing returns in both agriculture and
operation of diminishing returns had not been carried as mining, because the larger supply of foodstuffs and min-
far, and thus where the productivity of labor is greater, erals that would be required for the larger population
or from the production of other goods having a greater would necessitate resorting to land and mines too poor
importance to buyers than additional agricultural com- to have been exploited before, and to the more intensive
modities or minerals. For example, to get all the remain- exploitation of the land and mines already in use. Even
ing two-thirds of the oil out of a conventional oil field, if the population did not grow, diminishing returns would
we might have to give up the one-third normally ex- still be encountered in mining, as the ores closest to the
tracted from a dozen other oil fields, because we would surface and otherwise easiest to work gave out. (In the
need so much additional labor. Or we would have to give case of mining, diminishing returns actually accompany
up other goods in quantities that we judged to be more the repetition of the same amount of labor over time, not
important than the additional oil. just the application of additional labor at the same time.)
Nevertheless, it should be clear that if we do need Thus, even with a constant population, in the absence
more agricultural commodities or minerals, we can ob- of economic progress, the standard of living falls rather
tain them by withdrawing labor from other lines and than remains stationary. When it does remain stationary,
applying it to existing farms or mines, or to land or it does so as the result of at least enough economic
mineral deposits which we know to be capable of pro- progress taking place to offset the operation of the law
duction but which we have up to now left idle because of diminishing returns in mining.
their exploitation did not pay. Thus, even in the short run, These facts should be of significance in judging the
that is, without waiting for any new technological ad- proposals of those who desire an end to economic prog-
vances or discoveries, production need never be re- ress, notably the ever increasing numbers within the
stricted by a lack of raw materials. environmental or ecology movement who subscribe to
Of course, with economic progress, which is to be the goal of zero economic growth. What they are asking
expected under capitalism, we can have more and more for is not the maintenance of our present level of well-
raw materials, not only without withdrawing labor from being, but growing impoverishment.15 Furthermore, it
other lines, but along with actually making labor avail- should be realized that such impoverishment cannot be
able for other lines. The economic history of the last two made gradual and gentle, as year-to-year diminishing
centuries, for example, shows not only a radical increase returns in mining might suggest. Nor is it possible some-
15 For elaboration of this point, see below, chap. 9, pt. A, sec. 5, the subsection “How Private Ownership of Land Reduces Land Rent.”
how to arrange for just enough economic progress to of economically useable natural resources. It does not see
offset diminishing returns in mining. that the supply of economically useable natural resources
Economic progress is not something that can be con- increases as man gains understanding of the world and
trolled or regulated in amount. If the conditions are right the universe and correspondingly improves his means of
for it, there is no fixed limit to how much of it there can production, thereby progressively enlarging the fraction
be at any time. If the conditions are wrong for it, there of nature over which he holds physical power. It does not
will be not only no economic progress, but radical eco- see that as the fraction of nature within man’s knowledge
nomic decline. and control grows, so too does his supply of economi-
The essential precondition of economic progress is the cally useable natural resources. In a word, conservation-
existence of individuals who are motivated to think and ism does not see that the increase in the supply of
to apply the results of their thinking to the economic economically useable natural resources is part of the very
world. But this is also an essential precondition of the same process by which the ability to produce as such and
maintenance of any modern economic system as well. in general is increased.
To maintain such a system, new problems must con- Having no conception of the role of human intelli-
stantly be solved. Even if essentially the same problems gence in the creation of economically useable natural
have been solved before, in previous generations, they resources, and confusing the present supply with all the
are new to those who must solve them in the present natural resources present in nature, the conservationists
generation. And almost always, they will differ in at least naïvely believe that every act of production that con-
some important respects from the problems solved in the sumes natural resources is an act of impoverishment,
past. All machinery and equipment eventually wear out using up an allegedly priceless, irreplaceable treasure of
and must be replaced. All buildings, roads, bridges, and nature. On this basis, they conclude that the pursuit of
tunnels sooner or later need total replacement or such self-interest by individuals under economic freedom leads
extensive maintenance and repair as to be tantamount to to the wanton consumption of mankind’s irreplaceable
total replacement. All of this requires a fresh process of natural heritage, with no regard for the needs of future
thought. And this requires the existence of a large body generations.
of individuals willing and able to think. Once having arrived at the existence of this altogether
The attempt to stifle the fresh thinking that results in illusory problem, the product of nothing more than their
economic progress must, if successful, also stop the fresh own ignorance of the productive process, the conserva-
thinking that is necessary to maintain the economic tionists further conclude that what is necessary to solve
system at its present level. This is because it must operate this alleged problem is government intervention designed
against fresh thinking as such. One cannot tell a self-ac- to “conserve” natural resources by restricting or prohib-
tivating intelligence that it can be driven by its curiosity iting in various ways mankind’s use of them.
up to the point of repeating what happens to be the old, Ironically, the consequence of all such restrictions and
but must not undertake the new. If the attempt is made to prohibitions is waste—the waste of the one truly scarce
stifle the curiosity and discovery associated with the new, factor of production, namely, human labor. It is our labor
it must serve to stifle the curiosity and discovery required and our time that are fundamentally scarce, not land or
to replicate the old. The effect of prohibiting economic natural resources. It is our labor and our time that we
progress must be to make eager intelligence give way to fundamentally need to save, not land or natural resources.
passive stupidity throughout the economic system, and For the most part, we need to economize on land and
thus radically to undermine the economic system, not natural resources only insofar as doing so represents a
merely prevent its improvement. saving of our labor or time. We need to be concerned with
those land sites and mineral deposits whose existence
saves us labor as compared with having to produce by
3. Conservationism: A Critique using inferior land or mineral deposits. For example, we
The preceding discussions imply that the doctrine of value farmland in the Midwest and an oil field because
conservationism is incorrect. Conservationism regards their existence saves us labor in producing food and oil.
the existing supply of economically useable natural re- Without that midwestern farmland, we would have to
sources as nature-given, rather than as the product of produce to a greater extent on less productive East Coast
human intelligence and its corollary, capital accumula- farmland, or cultivate other midwestern land more inten-
tion. It does not see that what nature provides is, for all sively and thus produce with a lower productivity of
practical purposes, an infinite supply of matter and en- labor. Similarly, without that oil field, we would have to
ergy, which human intelligence can progressively mas- resort to more intensive, less efficient methods of extract-
ter, in the process creating a steadily increasing supply ing oil from other such fields or perhaps bring into
72 CAPITALISM
production a less productive source of oil, such as tar unuseable for other purposes for tens of thousands of
sands, or even shale deposits. In both cases, the effect years. Similarly, it is argued that the strip mining of coal
would be that it would take more labor to produce the should not be undertaken because once the coal is re-
same amount of goods. The existence of the midwestern moved, the land will no longer be useable for farming or
land and of the oil field saves us that labor, and that is ranching, unless, at great expense, the soil layer is re-
why we value both. stored.
Sometimes, it is true, particular land sites are unique The supporters of these arguments simply do not
in what they enable us to produce. Their product cannot realize that we do not need every last piece of land that
be perfectly duplicated by using a larger quantity of labor we possess. In the United States, we have hundreds of
elsewhere. For example, real estate in downtown Man- thousands of square miles of land—deserts and moun-
hattan, sturgeon beds providing fine caviar, vineyards tains, for example—that as far as their contribution to
serving in the production of grapes, and thus wines, of a human life and well-being is concerned might as well be
unique flavor. At other times, no amount of labor can covered with sea water. The marginal utility or import-
provide more of a good—for example, agricultural com- ance of such land is simply zero. Even if some of it were
modities between harvests. In these categories of cases, totally lost to use forever, it would make absolutely no
we may speak of a problem of conservation apart from difference to human life and well-being. In insisting on
the saving of labor. the sacredness of every square mile of land, we place
But even in these cases, conservationism is thor- ourselves in the position of a kind of irrational miser—
oughly mistaken in thinking that some kind of political not a miser of money, but, if it is possible to imagine it,
action is required to avoid misuse of the goods in ques- a miser of water in a country that is filled with lakes,
tion. This is because the market price of such goods rivers, and streams. It is as though we were a farmer
reserves them to their most important uses and limits the needing, say, a thousand gallons of water a day for every
rate of their consumption in conformity with the limited purpose that water can serve, and having ten thousand
supply of them available. The free-market price of real gallons a day available, and yet losing sleep at night over
estate regularly ensures that it is devoted to its most the loss of a cupful somewhere.
important uses. The free-market price of every agricul- Even if, out of the 3.5 million square miles of territory
tural commodity acts to conserve an adequate supply of of the United States, atomic dump sites and surface coal
it until the next harvest comes in. In exactly the same mines totally and forever destroyed the usefulness of a
way, the free-market price of minerals operates to limit few hundred or even a few thousand square miles for
their rate of consumption between the discovery of new other purposes, there would be no loss to us. Even if some
deposits or improved methods of extraction, to whatever of the land to be used for these purposes presently has
extent that may be necessary. In such cases, the prospect other uses, like serving as farmland or ranch land, these
of higher prices in the future operates to bring about uses would be given up only because of the land’s greater
higher prices immediately, which higher prices automat- value as a dump site or mine. And its loss as farm or ranch
ically limit the rate of consumption.16 No limitation of land would be made good either by bringing other, pres-
the rate of consumption by the government is required. ently unused land into production or by producing more
All the necessary limitation is effected by the free-market intensively on other land. The net effect would simply be
price, which makes all due allowance for the needs of the that we could have some of the additional energy that we
future. Any limitation of the rate of consumption over so urgently need.
and above that accomplished by the free-market price To make all this concrete and as clear as possible, let
merely serves needlessly to sacrifice the present to the us assume that a coal-mining company wants to buy land
future, which does not require such sacrifice, and thus in Wyoming that is presently a cattle ranch. It is willing
simply to render human labor less productive. to pay a price that is far higher than corresponds to the
The mistaken philosophy of conservationism currently income its present owner can make from ranching. Nei-
plays a major role in the opposition to atomic power, the ther the coal-mining company nor the rancher nor the
strip mining of coal, and the opening of new landfill areas great majority of other people may realize it, but this
for garbage disposal. It also underlies the many proposals higher offer reflects the fact that this piece of land is more
for “recycling” and even the fifty-five mile an hour speed urgently needed for coal mining than for cattle ranching.
limit. The buyers of coal are willing to allow more in the price
It is argued, for example, that the disposal of radioac- of coal for the use of this piece of land than the buyers
tive material from atomic power plants constitutes a of cattle products are willing to allow for it in the price
major problem because the dump sites in which the of cattle products. That is why it is worth more to the coal
material is placed will remain radioactive and therefore mining company than it is to the cattle rancher. Even if
16 For elaboration of these propositions, see below, chap. 6, pt. A, sec. 3, and pt. B, sec. 3.
the piece of land is lost forever to cattle ranching or any convenience and even the comfort and health of their
other use thereafter, the effect is that we can obtain infants by giving up the use of disposable diapers and
urgently needed coal and energy, while the cattle the land going back to the use of diaper services. In addition,
previously supported can be fed on other land. Further- homeowners and apartment dwellers are urged to turn a
more, because of the greater availability and therefore portion of their dwelling space into minirecycling cen-
lower price of energy that would result from allowing the ters, carefully separating newspapers, metal cans, and
all-out development of energy sources, it is almost cer- glass containers from ordinary refuse, to make possible
tain that the cattle would soon be able to be raised at a the convenient collection and recycling of these items.
lower cost on other land than they could be if they As the shortage of landfill space has developed, such
continued to remain on the coal-bearing land. facts as the government’s restrictions on the opening of
The same principles, of course, apply to atomic dump new landfill areas have been conveniently ignored in the
sites. It should go without saying that, in a capitalist press, which has led the public to believe that the problem
society, the owner of such a dump site would not be able is one of an actual lack of space for garbage disposal.
to expose the property of his neighbors to harmful doses Also ignored is the fact that the average American, with
of radiation. He would have to own a large enough site his modern, prosperous lifestyle actually generates sub-
to ensure that radiation levels at its perimeter were well stantially less garbage today than in the past, and less
within the zone of safety. (It should also go without than the average contemporary Mexican with his much
saying that a landowner’s neighbors, let alone people less advanced and highly impoverished lifestyle.19 This
living at the opposite end of the country, have no right to is the result of such facts as that in modern society the
the preservation of any special aesthetic qualities of a twelve hundred pounds or more of coal ash that the
piece of land. Even if it were true, for example, that strip average American family used to generate is no longer
mining left the land horrendously ugly, rather than be- generated, thanks to the use of electricity, natural gas,
stowing its own kind of grandeur, no one could legiti- and heating oil to heat homes; nor, thanks to such things
mately claim that he is thereby denied the use and enjoyment as canning and freezing and modern meat packing, is
of his own property, or, therefore, that he has a right to there nearly as much garbage for the average family to
interfere.17) dispose of in the form of animal and vegetable matter,
Of course, it is probably the case that in the future such as chicken feathers, fish scales, and potato peels.
technology will find ways of eliminating radioactivity And of the garbage that is generated, it turns out that the
and restoring land at far less cost than is presently possi- contribution made by disposable diapers is on the order
ble. Whether it does or not, however, is irrelevant. For of a mere 1 percent, while that of fast-food containers
nothing of significance depends on our having the land (another leading target of today’s conservationists and
in question. “environmentalists”) is closer to a tenth of 1 percent and
As matters now stand, the kind of mistaken ideas that of all plastics combined (yet another leading target)
about the waste of land that have been discussed are is less than 5 percent.20
threatening us with an enormous waste of our labor. This Confusions about waste are present in much of the
is because the only alternative to the energy that man- concern expressed about the need for “recycling.” When
made fuels such as atomic power and strip-mined coal it is possible for a comparative handful of workers using
can provide is the minuscule amounts that human mus- giant steam shovels and other such machinery to move
cles can provide. Thus if we prevent the development of and process ores in multiton loads and thus to produce
such man-made fuels, our ability to produce is corre- things like new tin cans and glass jars easily and cheaply,
spondingly impaired. it makes little sense for the average person to spend his
As indicated, a further consequence of the conserva- time ferreting through his garbage to find a few cans or
tion mentality has been a sharp reduction in the number jars to bring to his neighborhood “recycling center” or to
of government permits issued for the opening of landfill set aside for pickup by a special garbage truck. It is not
areas for garbage disposal.18 The conservationists’ ratio- his throwing away the cans or jars that is wasteful, but
nale is that the use of land for this purpose represents a his spending time to retrieve and deliver them, or the
“waste” of the land. The effect has been that as the garbage disposal company’s having to make a separate
existing landfill areas approach their planned capacity, a collection of them. For he certainly has better things to
shortage of space for garbage disposal has begun to do with that time, and the garbage company should not
develop. In response to this shortage, citizens are de- be put to the needless expense of having a second truck
nounced for a profligate lifestyle, which allegedly gen- and crew to collect items of insignificant value.
erates an excessive amount of garbage, and as part of the Of course, not all recycling is wasteful. Whether it is
solution, parents are urged to sacrifice both their own or not is indicated by the relationship between the market
17
18
19
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74 CAPITALISM
price of the recycled material and the cost of recycling law to comply with such peculiar values.
it. If the market price of the recycled material is high Not surprisingly, the attempt to force people to accept
enough to allow compensation for the labor involved and such irrational values has begun to introduce what must
for a competitive rate of profit on the capital that must be be described as a measure of totalitarian interference into
invested, then the recycled material is important enough to their lives. Where recycling has become mandatory, as
justify the recycling. For example, the price of gold and in New York City, there are now garbage police, whose
silver is high enough to make it pay dentists to retrieve job is to snoop into people’s garbage to make sure that
the shavings drilled from fillings, which would otherwise they are complying with the recycling requirements.
simply be washed down the drain. On the other hand, it Such coercion and spying are unavoidable when people
normally would not pay people to save their steel or are required to do something nonsensical and which they
aluminum cans, because the productivity of labor in would thus not do voluntarily. It can be expected that
mining and processing fresh iron and aluminum ore is so school children indoctrinated with environmentalism will
high, and the price of steel and aluminum cans accord- be encouraged to report neighbors and even their own
ingly so low, as to make their efforts in this regard highly parents to the garbage police.
inefficient and unnecessary. The fifty-five mile-an-hour speed limit is also inspired
In this connection, it should be realized that there is by conservationism. It is supposed to avoid the waste of
nothing “wasteful” or uneconomic in the fact that we use oil. As a conservation measure, the fifty-five mile an hour
so many cans or so many paper wrappings. As pointed speed limit turns out to be wasteful in the same way that
out a few paragraphs back, they actually serve consider- the compulsory recycling measures are wasteful. Namely,
ably to reduce the volume of the more unpleasant forms in a misguided effort to save oil, it wastes labor, equip-
of garbage.21 Furthermore, as I wrote elsewhere, if we ment, and people’s time, the loss of which is more
consider how little labor it costs us—in terms of the time important than the oil it saves.
it takes us to earn the money we spend for it—to have The proof of this wastefulness is that all the trucking
things brought to us clean and fresh and new, in new companies and most automobile owners know that by
containers and new packaging, and what the alternatives driving at fifty-five miles an hour, rather than at seventy
are for the spending of that money or the use of that time, miles an hour, say, they can reduce the amount of fuel
it becomes clear that the expenditure is well made.22 consumed per mile and thus reduce their fuel costs.
For consider the alternatives. We could have our food Nevertheless, despite this cost saving, they do not volun-
and other goods wrapped in old newspapers and put in tarily choose to drive at the lower speed. The reason the
jars, bags, or boxes that we would have to carry along trucking companies do not is that the value of the fuel
with us whenever we went shopping, or which we would saved is less than the additional wages that must be paid
have to make a special trip to go and fetch whenever we to truck drivers, who must spend more hours driving at
came on something unexpectedly that we wanted to buy. the lower speed to haul the same amount of freight the
We could then use the money we saved in that way to same distance; in addition, a larger number of trucks may
buy a handful of other goods. Conceivably, we could use be required to haul the same amount of freight within the
the money we saved to work a few minutes less at our same period of time. The owners of automobiles do not
jobs each day, and earn correspondingly less. But these voluntarily drive at the lower speed, because the import-
alternatives would simply be bizarre, because neither a ance they attach to the money they would save by doing
handful of extra goods nor working a few minutes less at so is less than the importance they attach to the time they
our jobs each day would compensate us for the loss of save by driving faster.
cleanliness, convenience, aesthetic satisfaction, and also The comparison of the money saved with the money
time saved in shopping that is provided by modern pack- lost, or of the importance of the money saved with the
aging. importance of the personal time lost, is the only rational
Of course, people are free to adopt a poverty-stricken criterion of waste, because it weighs all the relevant
personal lifestyle if they choose. They may go about like factors involved (such as the truckers’ labor as well as
old Russian grandmothers in Moscow, with an ever the fuel), not just one factor in isolation. Furthermore, if
present shopping bag and herring jar, if that is what they it is kept in mind that additional oil can always be
like. They may pick through garbage pails while pretend- produced if necessary, by withdrawing labor from the
ing that they live in a spaceship—“spaceship Earth,” they production of other things, then it should come as no
call it—rather than in the richest country of the planet surprise that the use of this criterion leads to goods being
Earth. But there is absolutely no sane reason why anyone produced with the lowest overall amount of labor, or with
should, or needs to, live this way, and certainly not in labor of the least value.
modern America. Above all, no one should be forced by The fact, for example, that the fuel trucking compa-
21
22 Today’s
The last sentence
conservationists
of this paragraph
and environmentalists,
and the next two
of course,
paragraphs
haveare
a preference
taken, with
fora“biodegradable”
few minor changes,
garbage,
from The
suchGovernment
as decaying animal
Againstand
thevegetable
Economy,matter,
pp. 19–20.
which rots and smells.They prefer this to the inert kind, such as aluminum or styrofoam, which appears to remain in its original condition for an indefinitely long time. The basis of their preference appears to be that they object to the existence of permanent evidence of modern technology and concomitantmassconsumption.
nies can save by driving more slowly is less valuable than claimed ownership of most of the territory of the Western
the extra truck drivers’ labor they need at the lower states, including, of course, forests and mineral deposits,
speeds is an indication that the labor needed to produce and refused to allow this territory to become private
the additional fuel is less than the labor needed to save property.
fuel by driving more slowly. For example, saving five When, in contrast, forests are privately owned, self-
dollars’ worth of fuel by virtue of having to pay ten interest does not normally lead their owners to cut them
dollars more in wages to truck drivers is an indication down without bothering to replant, which is what the
that at least twice as much labor is required to make logging companies were denounced for in the late nine-
possible the saving of the fuel than is required to produce teenth and early twentieth centuries. Indeed, a self-inter-
an equivalent amount of the fuel. Indeed, since the wages ested owner does not normally cut trees down without
paid in the production of fuel worth five dollars are less bothering to replant, any more than he cuts down wheat
than five dollars, the saving of labor through the use of or corn without bothering to replant. Trees are simply a
the fuel in question turns out to be even greater. The fact longer-term crop than wheat or corn. They are commer-
that a given amount of fuel can be made available by less cially grown wherever land is private property and the
labor if we produce more fuel than if we consume less prospective price of trees covers the costs of planting and
fuel means that conservationism’s forcing us to consume an allowance for a compound competitive rate of return
less fuel simply makes us waste our labor.23 over their growing life.
*** However, the fact that the western forests of the
Ironically, in previous decades, mistaken ideas about United States were owned by the government meant that
waste led to demands for government-sponsored devel- the logging companies which worked them could not
opment of natural resources, above all, irrigation and expect to receive the benefits of replanting. As a result,
flood control projects. At that time, it was naïvely as- they had no incentive to go to the trouble and expense of
sumed that the mere fact that a piece of land was capable replanting. Had the government owned the farmland, and
of being used productively meant that it should be used deprived farmers of the prospect of owning the next crop
productively; otherwise, it was held, the land was “wast- of wheat or corn, no incentive would have existed for
ed.” It was not realized that in view of the fundamental replanting those crops either. The obvious solution was
scarcity of labor, it is simply not possible to use all the to make forest lands private property. Private owners,
land that is potentially useable. It was not seen that the whether logging companies or others, would have had
effect of compelling the development of land that the the incentive to replant.
market judges to be submarginal is to cause the waste of The near extermination of the buffalo resulted from
labor and capital—that is, the withdrawal of labor and the fact that their value to man was simply not great
capital from better, more productive land or from the enough to justify the expense of the labor of preserving
production of other goods more urgently desired. On the them. The buffalo certainly could have been raised com-
basis of such ignorance, the U.S. government, under the mercially, on ranches, just as cattle are raised. But no one
New Deal, squandered billions of dollars on such profound it profitable to do so, because the consumers were
jects as the Tennessee Valley Authority. simply unwilling to allow prices for buffalo meat and
*** buffalo hides high enough to cover the costs of such
Conservationism has spawned the popular miscon- operations. They much preferred beef and cowhides
ception, now taken up by the ecology movement, that the instead. Buffalo were valuable to man only so long as
individual’s freedom to pursue his self-interest is respon- they were free for the taking on the open range.
sible for such phenomena as senseless deforestation and In the light of such facts, their near extermination was
the wanton destruction of species. The improper, un- not an act of wanton destruction, but perfectly reason-
economic deforestation practiced in various portions of able. The only alternative would have been to compel the
the United States in the late nineteenth and early twenti- domestication of the buffalo and, to that extent, to force
eth centuries, and the near disappearance of the buffalo, the consuming public to accept buffalo meat and buffalo
which once roamed the Great Plains of the United States hides in preference to beef and cowhides. Or else the
in large numbers, are presented as leading examples. alternative would have been to close the Great Plains, or
These examples do not prove what the conservation- some large part of them, to settlement, in order to main-
ists believe they prove. It was not the pursuit of self-interest tain the open range for the sake of the buffalo. Either way,
under freedom that was responsible for such deforesta- the preservation of the buffalo as a significant species
tion, but the government’s violation of the individual’s would have entailed enormous waste: the waste of ranch
freedom to establish private property. Since the second land, labor, and capital in supporting buffalo herds in-
half of the nineteenth century, the U.S. government has stead of cattle herds, or the waste of the whole Great
23 Of course, the essential objection to the policy of conservationism is not strictly that it compels us to perform more labor, though that is almost always certainly true, but that it compels us to expend means of production of greater value to achieve a saving of lesser value. Thereare cases in which we must expend two or more hours of low-paid labor to save one hour or less of high-paid labor, or many hours of labor to save a quantity of extremely valuable material. The comparative market prices involved determine which is the appropriate course of action. See below, chap. 6, pt. B, secs. 3 and 5, for further explanation of this principle.
76 CAPITALISM
Plains or some huge portion of them in being closed to Such a threat cannot be ignored. Indeed, there is no
development altogether. Either way, there would have point in explaining how the division of labor makes
been an enormous loss in terms of the ability of the Great possible economic progress, and the dependency of the
Plains to contribute to human life and well-being. division of labor on capitalism, when the value of eco-
nomic progress itself has been called into question in this
way. Thus, even though it is in the nature of a digression,
PART B the doctrines of the environmental movement, and their
refutation, must be the subject of the remainder of this
THE ECOLOGICAL ASSAULT ON chapter.
ECONOMIC PROGRESS
2. The Claims of the Environmental Movement
and Its Pathology of Fear and Hatred
1. The Hostility to Economic Progress The essential, all-encompassing doctrine of the envi-
A long-standing hostility has existed to economic ronmental movement is that the continuation of econom-
progress. Prior to the 1960s, this hostility was based on ic progress is both impossible and dangerous. Insofar as
the doctrines of asceticism, conspicuous consumption, it claims the impossibility of the continuation of eco-
cultural relativism, and on a cluster of economic fallacies nomic progress, the movement offers nothing more than
to which I have given the name consumptionism. (This a repetition of the claims of conservationism. Indeed, it
last is represented by such beliefs as that machinery can be considered as having fully absorbed the conser-
causes unemployment and that war and destruction cause vation movement, with conservationism now standing
prosperity. According to consumptionism, the funda- merely as an aspect of environmentalism.
mental problem of economic life is not the creation of The argument against the possibility of economic
wealth but of the need or desire for wealth, which is progress continuing is, of course, based on the failure to
thought to be naturally limited, and which allegedly has grasp the physical nature of the world and the progressive
been or is about to be surpassed by the production of nature of man. It should not be necessary to dwell further
wealth, thereby resulting in a problem of “overproduc- on this aspect of the ecology doctrine, because it has
tion,” depression, and unemployment.) already been thoroughly refuted in Part A of this chapter.
The doctrines of conspicuous consumption and cul- There it was shown that the problem of natural resources
tural relativism have already been dealt with in Chapter is strictly one of making a greater fraction of nature’s
2. Consumptionism is dealt with below, in Part A of virtually infinite endowment accessible and economi-
Chapter 13. As for asceticism, which claims to find value cally useable. This in turn was shown to be accomplished
in self-denial for its own sake, there is nothing to say to the degree that man gains understanding of and power
except that wealth is the means to better health and longer over nature through scientific and technological progress
life, as well as to greater enjoyment of life. Thus, its value and correspondingly improved capital equipment.26
is logically implied in the very concept of human values,
which presupposes the existence of living human beings The Actual Nature of Industrial Civilization
who value their lives.24 Moreover, as was shown in Before considering the specific claims the environ-
Chapter 2, wealth without practical limit is necessary for mental movement makes concerning the alleged dangers
the achievement of values in the physical world on the of economic progress, it is vital to recognize the enor-
scale made possible and required by man’s possession of mous contribution that the essential vehicle of economic
reason.25 Asceticism is thus simply a doctrine of the progress, namely, industrial civilization, has made to
negation of human values and human life. human life and well-being since its birth over two cen-
In the last three decades, a powerful new opposition turies ago in the Industrial Revolution.
to economic progress has developed. This opposition Industrial civilization has radically increased human
emanates from the so-called ecology or environmental life expectancy: from about thirty years in the mid-eight-
movement. (In what follows, I use the expressions “ecol- eenth century to about seventy-five years today. In the
ogy doctrine” and “environmentalism,” and “ecologists” twentieth century, in the United States, it has increased
and “environmentalists,” interchangeably.) This move- life expectancy from about forty-six years in 1900 to the
ment has achieved such a degree of influence that it present seventy-five years. The enormous contribution
presently seems on the verge of actually being able to of industrial civilization to human life is further illustrated
stop further economic progress by means of the enact- by the fact that the average newborn American child has
ment of its program into law. a greater chance of living to age sixty-five than the
24
25
26 Cf.
SeeAyn
above,
Rand,
chap.
sec. Atlas
12,
ofsec.
pt.
Shrugged
A
3,of
thethis
discussion
(New
chapter.
York:“Human
Random
Reason
House,
and1957),
the Scope
pp. 1012–13;
and Perfectibility
The Virtueofof
Need
Selfishness
Satisfactions.”
(New York: New American Library, 1964), pp. 1–34.
average newborn child of a nonindustrial society has of people across town or across the world. They even fly
living to age five. These marvelous results have come through the air at six hundred miles per hour, forty
about because of an ever improving supply of food, thousand feet up, watching movies and sipping martinis
clothing, shelter, medical care, and all the conveniences in air-conditioned comfort as they do so. In the United
of life, and the progressive reduction in human fatigue States, most people can have all this, and spacious homes
and exhaustion. All of this has taken place on a founda- or apartments, carpeted and fully furnished, with indoor
tion of science, technology, and capitalism, which have plumbing, central heating, air conditioning, refrigerators,
made possible the continuous development and introduc- freezers, and gas or electric stoves, and also personal librar-
tion of new and improved products and more efficient ies of hundreds of books, records, compact disks, and tape
methods of production. recordings; they can have all this, as well as long life and
In the last two centuries, loyalty to the values of good health—as the result of working forty hours a week.
science, technology, and capitalism has enabled man in The achievement of this marvelous state of affairs has
the industrialized countries of the Western world to put been made possible by the use of ever improved ma-
an end to famines and plagues, and to eliminate the once chinery and equipment, which has been the focal point
dread diseases of cholera, diphtheria, smallpox, tubercu- of scientific and technological progress.28 The use of this
losis, and typhoid fever, among others. Famine has been ever improved machinery and equipment is what has
ended, because industrial civilization has produced the enabled human beings to accomplish ever greater results
greatest abundance and variety of food in the history of with the application of less and less muscular exertion.
the world, and has created the storage and transportation Now inseparably connected with the use of ever im-
systems required to bring it to everyone. This same proved machinery and equipment has been the increas-
industrial civilization has produced the greatest abun- ing use of man-made power, which is the distinguishing
dance of clothing and shoes, and of housing, in the characteristic of industrial civilization and of the Indus-
history of the world. And while some people in the trial Revolution, which marked its beginning. To the
industrialized countries may be hungry or homeless (al- relatively feeble muscles of draft animals and the still
most always as the result of destructive government more feeble muscles of human beings, and to the rela-
policies), it is certain that no one in the industrialized tively small amounts of useable power available from
countries needs to be hungry or homeless.27 Industrial nature in the form of wind and falling water, industrial
civilization has also produced the iron and steel pipe, the civilization has added man-made power. It did so first in
chemical purification and pumping systems, and the the form of steam generated from the combustion of coal,
boilers, that enable everyone to have instant access to and later in the form of internal combustion based on
safe drinking water, hot or cold, every minute of the day. petroleum, and electric power based on the burning of
It has produced the sewage systems and the automobiles any fossil fuel or on atomic energy.
that have removed the filth of human and animal waste This man-made power, and the energy released by its
from the streets of cities and towns. It has produced the use, is an equally essential basis of all of the economic
vaccines, anesthesias, antibiotics, and all the other “won- improvements achieved over the last two hundred years.
der drugs” of modern times, along with all kinds of new It is what enables us to use the improved machines and
and improved diagnostic and surgical equipment. It is equipment and is indispensable to our ability to produce
such accomplishments in the foundations of public health the improved machines and equipment in the first place.
and in medicine, along with improved nutrition, clothing, Its application is what enables us human beings to ac-
and shelter, that have put an end to plagues and radically complish with our arms and hands, in merely pushing the
reduced the incidence of almost every type of disease. buttons and pulling the levers of machines, the amazing
As the result of industrial civilization, not only do productive results we do accomplish. To the feeble pow-
billions more people survive, but in the advanced coun- ers of our arms and hands is added the enormously
tries they do so on a level far exceeding that of kings and greater power released by energy in the form of steam,
emperors in all previous ages—on a level that just a few internal combustion, electricity, or radiation. In this way,
generations ago would have been regarded as possible energy use, the productivity of labor, and the standard of
only in a world of science fiction. With the turn of a key, living are inseparably connected, with the two last en-
the push of a pedal, and the touch of a steering wheel, tirely dependent on the first.
they drive along highways in wondrous machines at sixty Thus, it is not surprising, for example, that the United
miles an hour. With the flick of a switch, they light a room States enjoys the world’s highest standard of living. This
in the middle of darkness. With the touch of a button, is a direct result of the fact that the United States has the
they watch events taking place ten thousand miles away. world’s highest energy consumption per capita. The United
With the touch of a few other buttons, they talk to other States, more than any other country, is the country where
27
28 The
amenities
Chapter
destructive
4 will
haveshow
the
government
effect
how the
of pricing
policies
invention,
housing
I refer
production,
tobeyond
are prounion
and
the reach
application
andof
minimum-wage
someofpeople.
machinery
In
legislation,
the
allabsence
dependtheon
ofwelfare
such
the division
laws
system,
andofof
farm
labor.
rentsubsidies,
controls,
See below,some
rent
chap.
controls,
amount
4, sec.and
of1,housing
the
laws
subsection
prescribing
would be
“The
such
available
Usethings
of Machinery.”
forasand
thewithin
numberthe
offinancial
people whoreach
mayofoccupy
every working
an apartment
person.
orFor
the minimum
elaborationfloor
of allspace,
thesewindow
points, see
area,
below,
and so
Chap
forth
ters
which
6–8, must
passim,
exist
Chapter
per occupant.
13, PartProunion
C, and Chapter
and minimum-wage
14, pt. B, sec. 6,
legislation
the subsection
deprive
“Labor
people
Uni
of the
ons.”
opportunity of obtaining employment by making labor artificially more expensive and thus reducing the quantity of it demanded below the supply available. The welfare system eliminates the necessity of being self-supporting and thus of learning the skills necess ary to do so and thus the possibility of advancing from there. Farm subsidies make the priceof food higher than it would otherwise be. Rent controls create shortages of rental housing by enlarging the quantity of rental housing demanded and reducing the supply available, thereby making it impossible for some people to find housing. Laws prescribing minimum levels of housing
78 CAPITALISM
intelligent human beings have arranged for motor-driven the values of capitalism, none of the preceding is to say
machinery to accomplish results for them. All further that life in the modern world is without serious problems,
substantial increases in the productivity of labor and especially in many of today’s large cities.31 It is to say,
standard of living, both here in the United States and however, that the problems are not the result of economic
across the world, will be equally dependent on man- progress, capitalism, technology, science, or human rea-
made power and the growing use of energy it makes son. On the contrary, they are the result precisely of the
possible. Our ability to accomplish more and more with absence of these values. The solution to every problem,
the same limited muscular powers of our limbs will from crime to unemployment is a combination of one or
depend entirely on our ability to augment them further more of these essential attributes of industrial civiliza-
and further with the aid of still more such energy. tion. Thus, for example, if rent control destroys the
So little are these elementary facts understood that a quality of housing in cities, if minimum-wage and pro-
thoroughly perverted concept of economic efficiency has union legislation cause unemployment, if inflation and
come into vogue, a concept whose actual meaning is the confiscatory taxation cause capital decumulation and
precise opposite of economic efficiency. Economic effi- economic decline, if acceptance of the doctrine of deter-
ciency centers on the ability of human beings to reduce minism stops the punishment of criminals—on the grounds
the quantity of labor they need to expend per unit of that they could not help it—and the crime rate soars, if
output and thus to be able to produce more and more people are sick and seek health, if they are poor and seek
while expending the same or a smaller amount of labor. to be richer, the solution is not the destruction of indus-
This, of course, requires the growing use of energy per trial civilization. The solution is more of what industrial
capita, as I have just explained. Nevertheless, increas- civilization rests upon. It is economic freedom—capital-
ingly the practice today is to view economic efficiency ism. It is recognition of the power of reason and thus the
as centering on how little energy can be consumed per power of the individual to improve himself. And it is
unit of output, which, of course, necessarily implies an science, technology, and economic progress.
increasing need for human labor per unit of output. For What the solution is not, is environmentalism.
example, a front-page article in The New York Times, of
February 9, 1991, was headlined “Bush’s Energy Plan The Environmental Movement’s Dread of
Emphasizes Gains in Output over Efficiency.” Although Industrial Civilization
the headline meant to refer specifically to the output of The environmental movement is characterized by patho-
energy, the article’s actual position reduces to the absurd- logical fear of industrial civilization and of science and
ity the headline suggests, namely, that increases in the technology. It fears the “pollution” of water and air as the
overall output of goods produced by the same amount of result of industrial production and the emission of its
human labor are a contradiction of efficiency, for any by-products. It fears the poisoning of fish, the destruction
such increase in production requires the greater produc- of rivers and lakes, the “pollution” of entire oceans. It
tion and use of energy per capita, which the article fears “acid rain,” the destruction of the ozone layer, the
characterizes as inefficient. Along the same lines, a later onset of a new ice age, the contrary onset of global
headline in the same newspaper read “Bad News: Fuel warming and the melting of the polar icecaps and rise of
Is Cheap.”29 Later discussion will make clear that the sea levels. It fears the use of pesticides and herbicides
perversion of the concept of efficiency is philosophically out of fear of the food chain being poisoned. It fears the
consistent with the environmental movement’s most fun- use of chemical preservatives and countless other alleged
damental values. causes of cancer stemming from the “chemicals” pro-
Now not only does the environmental or ecology duced by industrial civilization. It fears radiation not
movement respond to the marvelous accomplishments of only from atomic power plants but also from color tele-
industrial civilization with all of the sensibilities one vision sets, microwave ovens, toasters, electric blankets,
might expect from a dead log, but in virtually every and electric power lines. It fears the disposal of atomic
respect, it represents an attack on industrial civilization, wastes, all other toxic wastes, and all nonbiodegradable
on the values of science, technology, and capitalism on wastes. It fears landfills and the destruction of wetlands.
which that civilization rests, and on all of its material It fears the destruction of animal and vegetable species
fruits, from air conditioners and automobiles to televi- that are useless or even hostile to man, and demands the
sion sets and X-ray machines. The environmental move- preservation of each and every one. It demands the
ment is, as Ayn Rand so aptly characterized it, “the preservation or re-creation of everything as it is or was,
Anti-Industrial Revolution.”30 before the arrival of man on the scene, from “old-growth”
*** forests, stretches of prairie, and Arctic and Antarctic
Consistent with what I said earlier in connection with wastes to the reintroduction of wolves and bears into
31
29
30 See
NewAyn
Cf. above,
YorkRand,
Times,
chap.The
2,
Maysec.
New25,
3,Left:
the
1992,
subsection
Thep.Anti-Industrial
1. “The Objective
Revolution
Value
(New
of aYork:
Division-of-Labor,
New American Capitalist
Library,Society.”
1971).
areas from which they had been eliminated.32 disaster. But this fact is not an indictment of atomic
As I wrote elsewhere, as a result of the influence of power, still less of modern science and technology in
the environmental movement, increasing numbers of general. It is an indictment only of the incompetence, and
present-day Americans and West Europeans “view sci- indifference to human life, inherent in communism. Under
ence and technology in reality as they used to be humor- communism (socialism), there is no incentive to supply
ously depicted in Boris Karloff and Bela Lugosi movies, people with anything they need or want, including safety.36
namely, as frightening ‘experiments’ going on in Frank- In addition, under communism (socialism), the ability of
enstein’s castle. And casting themselves in a real-life role the government to prosecute wrongdoing in connection
of terrified and angry Transylvanian peasants, they seek with the use of means of production is necessarily com-
to smash such science and technology.”33 For all practi- promised by the very nature of the case, inasmuch as the
cal purposes, the effect of environmentalism has been the state itself is the owner of the means of production and
creation of a horde of hysterical bumpkins in the midst therefore is itself the party responsible for any misuse in
of modern civilization. connection with them. Indeed, any prosecution by the
As a leading manifestation of this phenomenon, a state would have to be a prosecution of its own officials,
growing number of our contemporaries view atomic logically entailing the prosecution of its very highest
power as a terrifying death ray, beyond man’s power to officials. This is because under the central planning that
use safely. Their fear is such that they refuse to sanction is an essential characteristic of socialism the highest
even the establishment of dump sites for atomic wastes. officials have responsibility for every detail of economic
Indeed, as previously mentioned, the government of the activity. The implicit need to challenge the top leaders,
state of New York, itself having been overcome by the of course, greatly diminishes the likelihood of such pros-
fears inculcated by the ecology movement, has disman- ecutions. Thus under communism, as the result of the
tled the brand-new, fully constructed Shoreham atomic lack both of economic and legal incentives to provide
power plant on Long Island, a plant whose power output safety, industrial accidents of all kinds are commonplace,
would have prevented the overloads and brownouts and including airplane and train crashes. This is a good
blackouts that are now a much more real possibility in reason for rejecting communism, but certainly not a
the New York City area in the years to come. It and the rational basis for rejecting atomic power and an indus-
environmentalists seem to be totally unaware of or un- trial society.
concerned with such likely consequences of the plant’s As indicated, as a result of the influence of the envi-
dismantling as people being trapped in elevators and ronmental movement, the fears of a growing number of
subways, massive food spoilage, deaths from heat stroke our contemporaries are such that they refuse to sanction
because of lack of air conditioning, and so on, because not only atomic dump sites but also new dump sites for
that plant and its power output will not exist. All that the the disposal of all kinds of more mundane chemicals that
state government and the environmentalists seem to have result as a by-product of industrial processes, such as
been aware of is their imagining of a large-scale radiation sulfuric, hydrochloric, or nitric acid, dioxin, PCBs, and
leak. even ordinary lead or mercury. They refuse to do so out
In indulging their fear of atomic power, the environ- of fear of being poisoned by “toxic wastes.” In addition,
mentalists simply disregard all the scientific and engi- they stop eating one thing after another, in terror that it
neering safeguards built into atomic power plants in the too is poisoned—with preservatives, pesticides, “chem-
United States, such as backup systems, automatic shut- icals.” Increasingly, they view every man-made chemi-
down in the event of coolant loss, and containment cal additive to food as though it were a cause of cancer
buildings capable of withstanding the direct crash of a jet or other dread disease. More and more they turn to
liner.34 They ignore such facts as that the worst nuclear “natural” foods, as though millions of years of blind
accident in American history—that of the Three Mile evolution in the selection of food were to be trusted, but
Island nuclear plant—actually confirmed the safety of the application of science and human intelligence to the
atomic power plants in the United States. Totally unlike improvement of food were not. The fear of “chemicals”
the more recent case of Chernobyl in the former Soviet is such that a major and once proud chemical company
Union, there was not a single death, not a single case of has felt obliged to change its slogan from “Better Things
radiation overdose to any member of the public in that for Better Living Through Chemistry” to, simply, “Better
accident. In addition, according to studies reported in The Things for Better Living,” because the very word chem-
New York Times, the cancer rate among residents in the istry has become controversial and a source of fear.
area around Three Mile Island is no higher than normal Increasingly, our contemporaries also fear ordinary me-
and has not risen.35 chanical devices, from automobiles and washing ma-
To be sure, the case of Chernobyl was a genuine chines on down to stepladders, and demand absolute
32
33
34
35
36 An
George
Newexcellent
For aelaboration
York
comprehensive
Reisman,
Times,
book
ofSeptember
“Education
that
thisdiscussion
refutes
point,20,
see
and
most
1990,
of
below,
the
the
ofRacist
the
safety
p.chap.
A15.
specific
Road
of8,nuclear
pt.
claims
to A,
Barbarism,”
sec.
power,
of the
4. See
environmentalists
seeIntellectual
also,
Petr Beckmann,
chap.Activist
6, pt.isA,
The
Jay
5,sec.
no.
Lehr,
Health
41 for
(April
ed.,
an
Hazards
Rational
account
30, 1990),
ofReadings
of
Notthe
pp.
Going
contrasting
4–7;
onNuclear
reprinted
Environmental
operations
(Boulder,
as a pamphlet
Concerns
ofColo.:
capitalism.
(Laguna
Golem
(NewPress,
York:
Hills,1976).
California:
Van Nostrand
TheReinhold,
Jefferson1992).
SchoolPortions
of Philosophy,
of this chapter,
Economics,
previously
and Psychology,
published1992).
as a p amphletThe Toxicity of Environmentalism, appear as the summary to the book.
80 CAPITALISM
guarantees of safety in connection with their use. All of overwhelmingly surpasses the negative of any respiratory
these fears are supposedly in response to the allegedly diseases resulting from industrial civilization. Sagan, of
self-destructive tendencies of an industrial society. course, does not even bother to specify the nature and
Yet in virtually no case has any actual proof of danger extent of such alleged diseases. In his view, in developing
ever been offered. Indeed, some of the claims immediately industrial civilization, we have gotten ourselves into a
show themselves to be absurd on simple logical grounds. “mess.”38
For example, it is a contradiction to fear both a new ice The fear the environmental movement has of indus-
age and a global warming. Since everything physical in trial civilization leads it to want to destroy industrial
the world is a chemical, it is absurd to fear chemical civilization. Thus, an essential goal of environmentalism
preservatives. Such a fear is tantamount to the fear of is to block the increase in one source of man-made power
preservatives as such and thus fear of the very fact that after another and ultimately to roll back the production
food does not spoil as rapidly. of man-made power to the point of virtual nonexistence,
Not only is there no proof of danger from industrial thereby undoing the Industrial Revolution and returning
civilization and science and technology, but all the proof the world to the economic Dark Ages. There is to be no
runs entirely the other way. As I have shown, the actual atomic power. According to the environmentalists, it
effect of industrial civilization, science, and technology represents the death ray. There is also to be no power
has been to increase life expectancy by two and a half based on fossil fuels. According to the environmentalists,
times since the beginning of the Industrial Revolution it causes “air pollution,” and now global warming, and
and radically to improve human health and well-being. must therefore be given up. There is not even to be
The environmentalists simply ignore all this. In their significant hydropower. According to the environmen-
view, it is outweighed by “air pollution.” This belief is talists, the building of the necessary dams destroys in-
clearly present in the words of Carl Sagan, a leading trinsically valuable wildlife habitat.
environmentalist: Only three things are to be permitted as sources of
The “satanic mills” of England in the early years of the energy, according to the environmentalists. Two of them,
industrial revolution polluted the air and caused an epi- “solar power” and power from windmills, are, as far as
demic of respiratory disease. The “pea soup” fogs of Lon- can be seen, utterly impracticable as significant sources
don, which provided haunting backdrops to the Sherlock of energy. (If, somehow, they became practicable, the
Holmes stories, were deadly domestic and industrial pollu- environmentalists would undoubtedly find grounds for
tion. Today, automobiles add their exhaust fumes, and our attacking them: they would denounce them for such
cities are plagued by smog—which affects the health, things as the massive reflection of light from thousands
happiness and productivity of the very people generating
or tens of thousands of acres filled with solar panels, or
the pollutants. We’ve also known about acid rain, the
pollution of lakes and forests, and the ecological turmoil for maiming and killing birds with their propellers.) The
caused by oil spills. But the prevailing opinion has been— third allowable source of energy, “conservation,” is a
erroneously, in my view—that these penalties to health and contradiction in terms. Conservation is not a source of
environment were more than balanced by the benefits that energy. Its actual meaning is simply using less. Conser-
fossil fuels bring.37 vation is a source of energy for one use only at the price
Thus, Sagan has declared that in his view it is errone- of deprivation of energy use somewhere else.39
ous to believe that the progressive and radical increase The environmentalists’ campaign against energy calls
in life expectancy and in human health and well-being to mind the image of a boa constrictor entwining itself
outweigh the ill effects of air pollution. For it is precisely about the body of its victim and slowly squeezing the life
these which are the benefits which fossil fuels have out of him. There can be no other result for the economic
brought. The avoidance of air pollution is allegedly more system of the industrialized world but enfeeblement and
important. ultimately death if its supplies of energy are progres-
Interestingly, in presenting the Industrial Revolution sively choked off.
as the cause of respiratory disease, Sagan somehow
manages to forget the virtually total elimination of tuber- The Toxicity of Environmentalism and the
culosis and the radical reduction in the frequency of, and Alleged Intrinsic Value of Nature
mortality resulting from, pneumonia, which has been The environmental movement’s blindness to the value
achieved by industrial civilization. Tuberculosis and pneu- of industrial civilization is matched only by the blindness
monia, of course, were traditionally the leading respira- of the general public toward the nature of the environ-
tory diseases. In virtually totally eliminating the one and mental movement’s own actual values. Those values
radically reducing the other, the positive contribution of explain the movement’s hostility to industrial civiliza-
industrial civilization specifically to respiratory health tion, including its perversion of the concept of efficiency.
37
38
39 Carl
Ibid.,
It should
Sagan,
p. 11.
be “Tomorrow’s
realized that itEnergy,”
is no answer
Parade,
to this
November
fact to point
25,to1990,
casesp.in10.
which the loss of energy may appear to be compensated for by a change in the kind of equipment or materials used—forexample,obtainingthesameillumination,despitetheconsumptionoflesselectricity , by means of using specially designed lamps. By their nature, cases of this kind entail greatercosts. If they did not, there would be no need for the conservationists to urge, let alone attempt to compel, the adoption of such things. The significance of the higher costs is that less wealth is available for other purposes. Thus, conservation provides energy for one use only by depriving people of energy needed for other uses and, in provoking their efforts to compensate for this loss, may well deprive them of wealth required for other purposes.
They are not known to most people, because the environ- choose to end its orgy of fossil-energy consumption, and
mental movement has succeeded in focusing the public’s the Third World its suicidal consumption of landscape.
attention on absolutely trivial, indeed, nonexistent dan- Until such time as Homo sapiens should decide to rejoin
nature, some of us can only hope for the right virus to come
gers, and away from the enormous actual danger it itself
along.40
represents.
Thus, not so long ago, as a result of the influence of While Mr. Graber openly wishes for the death of a
the environmental movement, a popular imported min- billion people, Mr. McKibben, the author he reviewed,
eral water was removed from the market because tests quotes with approval John Muir’s benediction to alliga-
showed that samples of it contained thirty-five parts per tors, describing it as a “good epigram” for his own,
billion of benzene. Although this was an amount so small “humble approach”: “‘Honorable representatives of the
that not many years ago it would have been impossible great saurians of older creation, may you long enjoy your
even to detect, it was assumed that considerations of lilies and rushes, and be blessed now and then with a
public health required withdrawal of the product. mouthful of terror-stricken man by way of a dainty!’”41
Such statements represent pure, unadulterated poison.
Such a case, of course, is not unusual nowadays. The
They express ideas and wishes that, if acted upon, would
presence of parts per billion of a toxic substance is
mean terror and death for enormous numbers of human
routinely extrapolated into being regarded as a cause of
beings.
human deaths. And whenever the number of projected
These statements, and others like them, are made by
deaths exceeds one in a million (or less), environmental-
prominent members of the environmental movement.42
ists demand that the government remove the offending
The significance of such statements cannot be dimin-
pesticide, preservative, or other alleged bearer of toxic
ished by ascribing them only to a small fringe of the
pollution from the market. They do so, even though a
environmental movement. Indeed, even if such views
level of risk of one in a million is one-third as great as
were indicative of the thinking only of 5 or 10 percent of
that of an airplane falling from the sky on one’s home.
the members of the environmental movement—the “deep
While it is not necessary to question the good inten- ecology,” Earth First! wing—they would represent tox-
tions and sincerity of the overwhelming majority of the icity in the environmental movement as a whole not at
rank-and-file members of the environmental or ecology the level of parts per billion or even parts per million, but
movement, it is vital that the public realize that in this at the level of parts per hundred, which, of course, is an
movement itself, which is so widely regarded as noble enormously higher level of toxicity than what is deemed
and lofty, can be found more than a little evidence of the to constitute a danger to human life in virtually every
most profound toxicity—evidence provided by leaders other case in which deadly poison is present.
of the movement themselves, and in the clearest possible But the toxicity level of the environmental movement
terms. Consider, for example, the following quotation as a whole is much greater even than parts per hundred.
from David M. Graber, a research biologist with the It is certainly at least at the level of several parts per ten.
National Park Service, in his prominently featured Los This is obvious from the fact that the mainstream of the
Angeles Times book review of Bill McKibben’s The End environmental movement makes no fundamental or sig-
of Nature: nificant criticisms of the likes of Messrs. Graber and
This [man’s “remaking the earth by degrees”] makes McKibben. Indeed, John Muir, whose wish for alligators
what is happening no less tragic for those of us who value to “be blessed now and then with a mouthful of terror-
wildness for its own sake, not for what value it confers upon stricken man by way of a dainty” McKibben approvingly
mankind. I, for one, cannot wish upon either my children quotes, was the founder of the Sierra Club, which is
or the rest of Earth’s biota a tame planet, be it monstrous
proud to acknowledge that fact. The Sierra Club, of
or—however unlikely—benign. McKibben is a biocentrist,
course, is the leading environmental organization and is
and so am I. We are not interested in the utility of a
particular species or free-flowing river, or ecosystem, to supposedly the most respectable of them.
mankind. They have intrinsic value, more value—to me— There is something much more important than the
than another human body, or a billion of them. Sierra Club’s genealogy, however—something which
Human happiness, and certainly human fecundity, are provides an explanation in terms of basic principle of
not as important as a wild and healthy planet. I know social why the mainstream of the ecology movement does not
scientists who remind me that people are part of nature, but attack what might be thought to be merely its fringe. This
it isn’t true. Somewhere along the line—at about a billion is a fundamental philosophical premise which the main-
years ago, maybe half that—we quit the contract and be- stream of the movement shares with the alleged fringe
came a cancer. We have become a plague upon ourselves and which logically implies hatred for man and his
and upon the Earth. achievements. Namely, the premise that nature possesses
It is cosmically unlikely that the developed world will intrinsic value—that is, that nature is valuable in and of
40
41
42 diseases
Los
Bill
Another
Angeles
McKibben,
of
example
middle
Times
The
isage.”
Book
that
Endof
In
Review,
ofChristopher
his
Nature
view,
Sunday,
(New
such
Manes,
York:
preoccupation,
October
the
Random
author
22, 1989,
House,
and
of Green
p.
its9.
consequent
1989),
Rage:p.Radical
176.
lengthening
Environmentalism
of human lifeand
expectancy,
the Unmaking
“willof
lead
Civilization
to disaster.”
(Boston:
(Ehrlich,
Little,
TheBrown,
Population
1990).
Bomb
He and
[NewtheYork:
EarthBallantine
First! organization
Books, 1968],
he supports
p. 91).regard famine in Africa and the spread of AIDS as environmentally beneficial developments. The founder of Earth First! David Foreman, has described mankind “as a cancer on nature,” and has said, “I am the antibody” (in New York Times Book Review, Sunday, July 29, 1990, p. 22). Another representative of Earth First! writes: “Only a very few of human pathogens are shared by other partners on our planet. Biological warfare will have no impact on other creatures, big or small, if we design it carefully” (inForbes, October 29, 1990, pp. 96–97). And Paul Ehrlich, one of the oldest and most prominent leadersof the environmental movement, who is supposedly entirely respectable, criticizes the “preoccupation with death control,” by which he means, “preoccupation with the problems and
82 CAPITALISM
itself, apart from all contribution to human life and mize his existence by minimizing his impact on the rest
well-being. of the world, and to feel guilty for every action he takes
The antihuman premise of nature’s intrinsic value in support of his existence.
goes back, in the Western world, as far as St. Francis of The doctrine of intrinsic value is itself, of course, only
Assisi, who believed in the equality of all living crea- a rationalization for a preexisting hatred of man. It is
tures: man, cattle, birds, fish, and reptiles. Indeed, pre- invoked not because one attaches any actual value to
cisely on the basis of this philosophical affinity, and at what is alleged to have intrinsic value, but simply to serve
the wish of the mainstream of the ecology movement, St. as a pretext for denying values to man. For example,
Francis of Assisi has been officially declared the patron caribou feed upon vegetation, wolves eat caribou, and
saint of ecology by the Roman Catholic church. microbes attack wolves. Each of these, the vegetation,
The premise of nature’s intrinsic value extends to an the caribou, the wolves, and the microbes, is alleged by
alleged intrinsic value of forests, rivers, canyons, and the environmentalists to possess intrinsic value. Yet ab-
hillsides—to everything and anything that is not man. Its solutely no course of action is indicated for man. Should
influence is present in the Congress of the United States, man act to protect the intrinsic value of the vegetation
in such statements as that made by Representative Morris from destruction by the caribou? Should he act to protect
Udall of Arizona: to wit, that a frozen, barren desert in the intrinsic value of the caribou from destruction by the
Northern Alaska, where substantial oil deposits appear wolves? Should he act to protect the intrinsic value of the
to exist, is “a sacred place” that should never be given wolves from destruction by the microbes? Even though
over to oil rigs and pipelines. It is present in the support- each of these alleged intrinsic values is at stake, man is
ing statement of a representative of the Wilderness Soci- not called upon to do anything. When does the doctrine
ety that “There is a need to protect the land not just for of intrinsic value serve as a guide to what man should
wildlife and human recreation, but just to have it there.”43 do? Only when man comes to attach value to something.
It has, of course, also been present in the sacrifice of the Then it is invoked to deny him the value he seeks. For
interests of human beings for the sake of snail darters and example, the intrinsic value of the vegetation et al. is
spotted owls. invoked as a guide to man’s action only when there is
The idea of nature’s intrinsic value inexorably implies something man wants, such as oil, and then, as in the case
a desire to destroy man and his works because it implies of Northern Alaska, its invocation serves to stop him
a perception of man as the systematic destroyer of the from having it. In other words, the doctrine of intrinsic
good, and thus as the systematic doer of evil. Just as man value is nothing but a doctrine of the negation of human
perceives coyotes, wolves, and rattlesnakes as evil be- values. It is pure nihilism.
cause they regularly destroy the cattle and sheep he It should be realized that it is logically implicit in what
values as sources of food and clothing, so on the premise has just been said that to establish a public office such as
of nature’s intrinsic value, the environmentalists view that proposed in California, of “Environmental Advo-
man as evil, because, in the pursuit of his well-being, man cate,” would be tantamount to establishing an office of
systematically destroys the wildlife, jungles, and rock Negator of Human Valuation. The work of such an office
formations that the environmentalists hold to be intrinsi- would be to stop man from achieving his values for no
cally valuable. Indeed, from the perspective of such other reason than that he was man and wanted to achieve
alleged intrinsic values of nature, the degree of man’s them.
alleged destructiveness and evil is directly in proportion ***
to his loyalty to his essential nature. Man is the rational Of course, the environmental movement is not pure
being. It is his application of his reason in the form of poison. Very few people would listen to it if it were. As
science, technology, and an industrial civilization that I have said, it is poisonous only at the level of several
enables him to act on nature on the enormous scale on parts per ten. Mixed in with the poison and overlaying it
which he now does. Thus, it is his possession and use of as a kind of sugarcoating is the advocacy of many mea-
reason—manifested in his technology and industry—for sures which have the avowed purpose of promoting
which he is hated. human life and well-being, and among these, some that,
Indeed, the doctrine of intrinsic value implies that considered in isolation, might even achieve that purpose.
man is to regard himself as profaning the sacredness of The problem is that the mixture is poisonous. And thus,
nature by virtue of his very existence, because with every when one swallows environmentalism, one inescapably
breath he draws and every step he takes he cannot help swallows poison.
but disturb something or other of alleged intrinsic value. Given the underlying nihilism of the movement, it is
Thus, if man is not to extinguish his existence altogether, certainly not possible to accept at face value any of the
he is obliged by the doctrine of intrinsic value to mini- claims it makes of seeking to improve human life and
43 New York Times, August 30, 1990, pp. A1, C15.
well-being, especially when following its recommenda- industrialized countries may be dirtier today than in the
tions would impose on people great deprivation or cost. past, supplies of safe drinking water have never been
Indeed, nothing could be more absurd or dangerous than greater, thanks to modern industry. (And, no doubt, many
to take advice on how to improve one’s life and well- or most of the presently dirty bodies of water too would
being from those who wish one dead and whose satisfac- be clean and safe, if they were made subject to private
tion comes from human terror, which, of course, as I have property rights. In that case, individuals would have the
shown, is precisely what is wished in the environmental incentive to make them clean and safe by being able to
movement—openly and on principle. This conclusion, it charge for water and such benefits as fishing rights.)
must be stressed, applies irrespective of the scientific or Second, as concerns the relationship between indus-
academic credentials of an individual. If an alleged sci- trialization and air quality, the obvious fact is that al-
entific expert believes in the intrinsic value of nature, though air quality in large towns and cities is poorer than
then to seek his advice is equivalent to seeking the advice that in the open country, and always has been, it is far
of a medical doctor who was on the side of the germs better today than in the past—precisely because of eco-
rather than the patient, if such a thing can be imagined. nomic progress. Before the advent of modern industry,
Obviously, congressional committees taking testimony the open streets served as sewers. In addition, in any large
from alleged expert witnesses on the subject of proposed town or city, a heavy concentration of horses created an
environmental legislation need to be aware of this fact enormous pollution problem from the dropping of vast
and never to forget it. quantities of manure and urine. The development of the
Not surprisingly, in virtually every significant case, modern iron and steel industry eliminated the sewage
the claims made by the environmentalists have turned out problem with low-cost iron and steel pipe; the develop-
to be false or simply absurd. ment of the automobile industry eliminated the pollution
from horses. Central heating, air conditioning, indoor
The Alleged Pollution of Water and Air plumbing, and modern methods of ventilation have made
and Destruction of Species further major contributions to improving the quality of
The ecologists claim that economic progress and the the air in which people live and work.
industrial civilization that underlies it have been respon- And although in the earlier years of the Industrial
sible for polluting the water and air and wantonly destroy- Revolution the process of economic improvement was
ing animal and vegetable species, thereby endangering accompanied by coal dust in towns and cities (which
human life. To answer the ecologists’ claims in these people willingly accepted as the by-product of not having
areas, it is only necessary to recall a few facts that are to freeze and of being able to have all the other advan-
known to everyone. tages of an industrial society), subsequent advances, in
First, as concerns the relationship between industrial- the form of electricity and natural gas, have radically
ization and water quality: it is obvious that the actual reduced this problem. The substitution of atomic power
safety of drinking water is in direct proportion to a plants for coal and oil-fired plants would make a further
country’s degree of economic advancement. One can major contribution to air quality, because they emit no
safely drink the water virtually everywhere in the United particulate matter of any kind into the atmosphere. Atomic
States. One can do so in the major cities of Western power, however, is the form of power most hated by the
Europe. But in travelling to poorer areas, such as Mexico, environmentalists.44 As shown previously, the virtual
most of the rest of Latin America, and most of Asia and elimination of tuberculosis and the radical reduction in
Africa, it is necessary to take precautions. (The recent the frequency of, and mortality rate resulting from, other
cholera epidemic in Peru, with its chemically untreated, respiratory diseases, such as pneumonia, provide further
“natural” water supply provides a tragic testimony to the eloquent testimony to the actual contribution of indus-
truth of the preceding statements.) Certainly, if one trav- trial civilization to air quality.
els in the African or Vietnamese jungles, or even in the Third, as concerns man’s alleged wanton destruction
Canadian wilderness, one had better boil the water or use of other species: man is responsible for the existence of
purification tablets. Even in a beautiful blue Canadian many species of animals and plants in their present
lake—the kind for which environmentalist posters used numbers and varieties. For example, man is responsible
to depict an American Indian shedding a tear—there can for the existence of the overwhelming majority of the
be dead, decaying animals emitting morbific germs into cattle, sheep, hogs, chickens, goats, horses, and cats and
the water one may happen to drink. The safety of water dogs that are alive, and for the existence of most of the
supplies obviously depends on chemical purification plants, specific breeds in which they exist. There would cer-
pipelines, and pumping stations—in a word, on modern tainly be no such things as Holstein cattle, thoroughbred
industry. While some rivers, lakes, and streams in the racehorses, miniature schnauzers, toy poodles, or Persian
44 The alleged danger of radiation is not a valid objection to atomic power. The radiation emission of an atomic power plant located next door to one’s house is equal to about 2 percent of the radioactivity one normally receives from all other—almost entirely natural—sources. Onthis point, see Beckmann, HealthHazards, pp. 112–13. Nor are the alleged dangers of storing atomic wastes a valid objection. Nature itself has always stored such highly radioactive elements as radium and uranium without significant danger to human life.
84 CAPITALISM
cats, in the absence of man. The population of all varie- throw anything away, for who knows, the clutter might
ties of domestic animals would be radically reduced contain a letter from George Washington or a winning
without the existence of man to feed them, promote their lottery ticket. Furthermore, the ecology movement, iron-
health, and protect them from their natural enemies. In ically enough, strongly opposes any human use to which
the same way, man is responsible for the fact that grain, such an enlarged future gene pool might be put: it is
vegetables, flowers, and grass grow where otherwise totally opposed to genetic engineering. The sense of
there would be only weeds. Man is responsible for the moral imperative it projects in seeking not to permit the
existence of all manner of specific strains of plant life, loss of any species derives from its mistaken notion that
from American Beauty roses to varieties of zucchini. species possess intrinsic value.
Furthermore, as we have seen, despite the misconcep- The disappearance of species has been going on since
tions spawned by conservationism and the ecology doc- the beginning of life on earth. It appears to be no more
trine, where forest land is privately owned, man is also rapid now than at any other time. Furthermore, to what-
responsible for the existence of many trees and forests, ever extent it occurs as the result of human activity, it is
which the profit motive leads him to regard as a long- still simply part of the process of nature. Man himself is
term crop.45 In addition, of course, man also plants trees part of nature. Any species that he may destroy in the
as objects of beauty to enhance his surroundings. Practi- course of his activities cannot in reason be regarded any
cally all of the trees in many portions of Southern Cali- differently from the countless species destroyed by any
fornia and other arid areas were planted and are maintained other natural process.
by man for just this reason. If one wishes to judge matters from an ethical perspec-
Man is clearly not the destroyer of species. He enor- tive, the only valid perspective is that of man himself—
mously promotes the existence of those species that are that is, a perspective which takes for granted the supreme
of benefit to him. He seeks to destroy only those species value of human life and well-being and man’s right to do
that are harmful to him, including those that are harmful everything in his power to promote his life and well-
to the species whose existence he tries to promote. Thus, being. From this point of view, one cannot regard man’s
he seeks to extirpate such species as the smallpox virus, activities in relation to nature with anything but awe and
rats, fleas, rattlesnakes, coyotes, wolves, and mountain admiration. In the territories embraced by modern West-
lions. ern civilization, he has not only succeeded in these
Sometimes, of course, cases arise in which his activity activities, but succeeded with surpassing brilliance. For
threatens the existence of species that are not hostile and he has transformed his environment to promote his sur-
that have been useful to him, such as the American vival and well-being. He has transformed enormous areas
buffalo and, nowadays, certain varieties of whales. In that were originally hostile or at best indifferent to his
these cases, the species are not domesticated and raised survival into virtual gardens—into thriving areas of ag-
commercially because the usefulness of the animal is not riculture, industry, and commerce. In so doing, he has
great enough to justify the expense involved.46 changed the balance of nature radically in his favor.
It might be of some value if a few members of every In view of these facts, the environmentalists’ claims
species could be preserved as objects of study or curios- that the effect of man’s productive activities in an indus-
ity and perhaps as a future source of genes for use in trial society on water, air, and species represents any kind
genetic engineering. From this point of view, it would be of danger to human life and well-being are patently
a welcome event if the story line of some low-budget absurd. All of the isolated negatives the environmental-
films became a reality and a scientific expedition were ists point to, such as smog in some cities, or dirty rivers,
to come upon a preserve of dinosaurs somewhere. Those lakes, or beaches in various places, have occurred in the
who consider such objectives important, and there cer- context of the most radical improvements in human life,
tainly appears to be no lack of such people, are free to health, and well-being, including the most radical im-
raise money to establish wildlife preserves. Neverthe- provements in the quality of the water people drink and
less, from a practical point of view, it is obvious that otherwise use, in the quality of the air they live and work
man’s life would simply not be significantly affected by in, and in the whole balance of nature. Nevertheless, the
the passing of such species as the buffalo or the endan- environmentalists proceed as though problems of filth
gered whales. The mere fact that the loss of a species may emanated from industrial civilization, as though filth
be irreplaceable from a genetic point of view, and that at were not the all-pervasive condition of human life in
some point in the future it might conceivably be regretted preindustrial societies, and as though industrial civiliza-
for this reason, is not a logical basis for arguing that it tion represented a decline from more healthful condi-
must not be allowed to occur. If this line of argument tions of the past. If it is filth and squalor one wants to
were accepted, people could never clean their garages or complain about, one should go to virtually any of the
45
46 See
In the
above,
case ofpt.
whales,
A, sec.domestication
3, of this chapter.
might be feasible if the establishment of electronically fenced ocean “ranches” were allowed and if some part of the existing population of whales could be made private property. In the case of the buffalo, it appears that to a modest extent they now are raised commercially.
countries of the so-called third world, which are not lion and then dividing by 70. In the same one-year period,
industrialized. There one will find filth and squalor— approximately 50,000 deaths occur in motor vehicle
“pollution”—of the worst kind: human excrement and, accidents in the United States, most of them within a few
indeed, human corpses floating downstream and contam- miles of the victims’ homes, and undoubtedly far more
inating the rivers through which they pass. than 15 of them on trips to or from supermarkets. Nev-
Moreover, as previously indicated, what would over- ertheless, because of irresponsible, sensationalist news-
come most of the isolated negatives in the industrial paper and television reporting of the ecologists’ claims
societies, apart from the wider use of atomic power, concerning Alar, a panic ensued, followed by a plunge in
would be the extension of private ownership of the means the sale of apples, the financial ruin of an untold number
of production, especially of land and natural resources. of apple growers, and the virtual disappearance of Alar.
The incentive of private owners is to use their property Before the panic over Alar, there was the panic over
in ways that maximize its long-run value and wherever asbestos. According to Forbes magazine, it turns out that
possible, to improve their property. Consistent with this in the forms in which it is normally used in the United
fact, ways should be sought for extending the principle States, asbestos is one-third as likely to be the cause of
of private ownership to lakes, rivers, beaches, and even death as being struck by lightning.47
to portions of the ocean. Privately owned lakes, rivers, Then there is the alleged damage to lakes and forests
and beaches, would almost certainly be clean lakes, caused by acid rain. While the phenomenon of acid rain
rivers, and beaches. Privately owned, electronically fenced certainly exists (largely as the result of governmental
ocean ranches would guarantee abundant supplies of insistence on the construction of smokestacks two hun-
almost everything useful that is found in or beneath the dred feet or more tall), it turns out, according to Policy
sea. Certainly, the vast landholdings of the U.S. govern- Review, that the acidification of the lakes and surround-
ment in the Western states and in Alaska should be ing forests has been the result not of acid rain, but of the
privatized. cessation of logging operations in the affected areas and
Of course, what leads the environmentalists to make thus the absence of the alkaline runoff produced by such
their claims concerning water and air pollution and the operations. This runoff had made naturally acidic lakes
destruction of species is not any actual concern with and forests nonacidic for a few generations.48 Further-
human life and well-being. Human life and well-being, more, according to the final report of the U.S. government’s
it cannot be repeated too often, are not their standard of National Acid Precipitation Assessment Program, the
what is good; instead, it is the alleged intrinsic values direct major cause of acidification appears to be simply
found in nature. one hundred fifty million tons a year of bird droppings.49
Besides these cases, there were the respective hyste-
The Alleged Threat from Toxic Chemicals, Includ- rias over dioxin in the ground at Times Beach, Missouri;
ing Acid Rain and Ozone Depletion TCE in the drinking water of Woburn, Massachusetts; the
Almost all of the other claims of the environmental- chemicals in Love Canal, in New York; and radiation at
ists, which for the most part are more recent, do not fare Three Mile Island, in Pennsylvania. (The last has already
any better than their claims concerning water and air been shown to be groundless.) According to Professor
pollution and the destruction of species. In virtually Bruce Ames, one of the world’s leading experts on can-
every case, they too have turned out to be false or simply cer, the amount of dioxin that anyone would have ab-
absurd. sorbed in Times Beach was far less than the amount
Consider, for example, the recent case of Alar, a required to do any harm and, indeed, the actual harm to
chemical spray used for many years on apples in order Times Beach residents from dioxin was less than that of
to preserve their color and freshness. Here, it turned out drinking a glass of beer.50 (The Environmental Protec-
that even if the environmentalists’ claims had actually tion Agency itself subsequently reduced its estimate of
been true, that the use of Alar would result in 4.2 deaths the danger from dioxin by a factor of fifteen-sixteenths.51)
per million over a 70-year lifetime, all that would have In the case of Woburn, according to Ames, it turned out
been signified was that eating apples sprayed with Alar that the cluster of leukemia cases which occurred there
would then have been less dangerous than driving to the was statistically random and that the drinking water there
supermarket to buy the apples! was actually above the national average in safety, and
Consider: 4.2 deaths per million over a 70-year period not, as had been claimed, the cause of the leukemia
means that in any one year in the United States, with its cases.52 In the case of Love Canal, Ames reports, it
population of roughly 250 million people, approximately turned out upon investigation that the cancer rate among
15 deaths would be attributable to Alar! This is the result the former residents was no higher than average.53 (It is
obtained by multiplying 4.2 per million times 250 mil- necessary to use the phrase “former residents” because
47
48
49
50
51
52
53 Forbes,
Cf.
SeeEdward
“20/20”;
March
New
Fortune,
January
Ames,
York
18,
C.February
Times,
1988
Krug,
“Major
8, 1990,
broadcast
“Fish
August
11,
Carcinogens,”
p.1991,
Story,”
303.
15,
of ABC’s
p.
1991,
Policy
145.p.pp.
“20/20.”
242.
244.
Review,
1, A14.
See
no. also
52 (Spring
Bruce Ames,
1990), “What
pp. 44–48.
Are the Major Carcinogens in the Etiology of Human Cancer?” in V. T. De Vita, Jr., S. Hellman, and S. A. Rosenberg, eds., Important Advances in Oncology 1989(Philadelphia: J. B. Lippincott, 1989), pp. 241–42.
86 CAPITALISM
the town lost most of its population in the panic and forced iments nor on the concept of causality.
evacuation caused by the environmentalists’ claims.) Over- No one ever has observed, or can or will observe, such
all, Ames writes, “There is no convincing evidence from a thing as two groups of a million people identical in all
epidemiology or toxicology that pollution is a significant respects except that over a 70-year period the members
source of birth defects and cancer. . . . the epidemiologic of one of the groups consume apples sprayed with Alar,
studies of Love Canal, dioxin in Agent Orange, Contra while the members of the other group do not, and then
Costa County refineries, Silicon Valley, Woburn, and the 4.2 members of the first group die. The process by which
use of DDT provide no convincing evidence that pollu- such a conclusion is reached, and its degree of actual
tion was the cause of human harm in any of these well-pub- scientific seriousness, is essentially the same as that of a
licized exposures.”54 The reason is that the amount of actual college students’ bull session, which consists of practi-
exposure was simply far too small to be harmful. cally nothing but arbitrary assumptions, manipulations,
Before these hysterias, there were allegations about guesses, and plain hot air. In such a session, one might
the death of Lake Erie and mercury poisoning in tuna start with the known consequences of a quarter-ton safe
fish. All along, Lake Erie has been very much alive and falling ten stories onto the head of an unfortunate pass-
was even producing near record quantities of fish at the erby below, and from there go on to speculate about the
very time its death was being announced. The mercury conceivable effects in a million cases of other passersby
in the tuna fish was the result of the natural presence of happening to drop from their hand or mouth an M&M or
mercury in sea water; and evidence provided by muse- a peanut on their shoe, and come to the conclusion that
ums showed that similar levels of mercury had been 4.2 of them will die.
present in tuna fish since prehistoric times. Furthermore, as indicated, in contrast to the proce-
And now, in yet another overthrow of the environ- dures of a bull session, reason and actual science estab-
mentalists’ claims, a noted climatologist, Professor Robert lish causes, which, in their nature, are universal. When,
Pease, has shown that it is impossible for chlorofluoro- for example, genuine causes of death, such as arsenic,
carbons (CFCs) to destroy large quantities of ozone in strychnine, or bullets, attack vital organs of the human
the stratosphere because relatively few of them are even body, death is absolutely certain to result in all but a
capable of reaching the stratosphere in the first place. He handful of cases per million. When something is in fact
also shows that the celebrated ozone “hole” over Antarc- the cause of some effect, it is so in each and every case
tica every fall is a phenomenon of nature, probably in in which specified conditions prevail, and fails to be so
existence since long before CFCs were invented, and only in cases in which the specified conditions are not
results largely from the fact that during the long Antarctic present, such as a person’s having built up a tolerance to
night ultraviolet sunlight is not present to create fresh poison or wearing a bulletproof vest. Such claims as a
ozone.55 thousand different things each causing cancer in a hand-
ful of cases are proof of nothing but that the actual causes
The Dishonesty of the Environmentalists’ Claims are not yet known—and, beyond that, an indication of
The reason that one after another of the environ- the breakdown of the epistemology of contemporary
mentalists’ claims turn out to be proven wrong is that they science. (This epistemological breakdown, I might add,
are made without any regard for truth in the first place. has radically accelerated since the 1960s, when the gov-
In making their claims, the environmentalists reach for ernment took over most of the scientific research in the
whatever is at hand that will serve to frighten people, United States and began the large-scale financing of
make them lose confidence in science and technology, statistical studies as a substitute for the discovery of
and, ultimately, lead them to deliver themselves up to the causes.)
environmentalists’ tender mercies. The claims rest on In making their claims, the environmentalists will-
unsupported conjectures and wild leaps of imagination fully ignore such facts as that carcinogens, poisons, and
from scintillas of fact to arbitrary conclusions, by means radiation exist in nature. Fully half of the chemicals
of evasion and the drawing of invalid inferences. It is out found in nature are carcinogenic when fed to animals in
and out evasion and invalid inference to leap from find- massive quantities—the same proportion as applies to
ings about the effects of feeding rats or mice dosages the man-made chemicals when fed in massive quantities.
equivalent of a hundred or more times what any human (The cause of the resulting cancers, according to Profes-
being would ever ingest, and then draw inferences about sor Ames, is actually not the chemicals, either natural or
the effects on people of consuming normal quantities. man-made, but the repeated destruction of tissue caused
Fears of parts per billion of this or that chemical causing by the massively excessive doses in which the chemicals
single-digit deaths per million do not rest on science, but are fed, such as saccharin being fed to rats in a quantity
on imagination. Such claims are based neither on exper- comparable to humans drinking eight hundred cans of
54
55 Ames, “Major
Orange CountyCarcinogens,”
Register, October
p. 244.
31, 1990, p. B15. See also Rogelio A. Maduro and Ralf Schauerhammer,The Holes in the Ozone Scare (Washington, D. C.: 21st Century Science Associates, 1992), pp. 11–40, 98–149.
diet soda a day.56) Arsenic, one of the deadliest poisons, claims should be taken as nothing but further proof of the
is a naturally occurring chemical element. Oleander, one environmental movement’s hatred of man’s nature and
of the most beautiful plants, is also a deadly poison, as man’s life, certainly not of any actual significant danger
are many other plants and herbs. Radium and uranium, to human life and well-being.
with all their radioactivity, are found in nature. Indeed,
all of nature is radioactive to some degree. If the envi- The Alleged Threat of “Global Warming”
ronmentalists did not close their eyes to what exists in Currently, the leading claim of the environmentalists
nature, if they did not associate every negative exclu- is that of “global warming.” It is alleged that man’s
sively with man, if they applied to nature the standards economic activities, above all the burning of fossil fuels,
of safety they claim to be necessary in the case of man’s are increasing the amount of carbon dioxide in the atmo-
activities, they would have to run in terror from nature. sphere. This will supposedly raise the average mean
They would have to use one-half of the world to construct temperature of the world by several degrees over the next
protective containers or barriers against all the allegedly century and will cause a rise in sea levels because of
deadly carcinogens, toxins, and radioactive material that melting ice.
constitute the other half of the world. It should be realized that despite the sensationalist
It would be a profound mistake to dismiss the repeat- claims of James Hansen of NASA, made during the heat
edly false claims of the environmentalists merely as a wave of the summer of 1988, that global warming was
case of the little boy who cried wolf. They are a case of at hand, weather satellites showed no evidence of global
the wolf crying again and again about alleged dangers to warming in the 1980s.57 According to The New York
the little boy. The only real danger, of course, is to listen Times, “Few scientists believe that greenhouse warming
to the wolf. can now be detected amid the normal swings of cli-
Direct evidence of the willful dishonesty of the envi- mate.”58
ronmental movement comes from one of its leading If one did not understand its underlying motivation,
representatives, Stephen Schneider, who is well-known the environmental movement’s resort to the fear of global
for his predictions of global catastrophe. In the October warming might appear astonishing in view of all the
1989 issue of Discover magazine, he is quoted (with previous fears the movement has professed. These fears,
approval) as follows: in case anyone has forgotten, have concerned the alleged
“. . . To do this, we need to get some broad-based sup- onset of a new ice age as the result of the same industrial
port, to capture the public’s imagination. That, of course, development that is now supposed to result in global
entails getting loads of media coverage. So we have to offer warming, and the alleged creation of a “nuclear winter”
up scary scenarios, make simplified, dramatic statements, as the result of man’s use of atomic explosives.
and make little mention of any doubts we may have. This The words of Paul Ehrlich and his incredible claims
‘double ethical bind’ we frequently find ourselves in cannot in connection with the “greenhouse effect” should be
be solved by any formula. Each of us has to decide what
recalled. In the first wave of ecological hysteria, that
the right balance is between being effective and being
honest.” “scientist” declared:
At the moment we cannot predict what the overall
Thus, in the absence of verification by sources totally
climatic results will be of our using the atmosphere as a
independent of the environmental movement and free of
garbage dump. We do know that very small changes in
its taint, all of its claims of seeking to improve human either direction in the average temperature of the Earth
life and well-being in this or that specific way must be could be very serious. With a few degrees of cooling, a new
regarded simply as lies, having the actual purpose of ice age might be upon us, with rapid and drastic effects on
inflicting needless deprivation or suffering. In the cate- the agricultural productivity of the temperate regions. With
gory of malicious lies fall all of the environmental move- a few degrees of heating, the polar ice caps would melt,
ment’s claims about our having to abandon industrial perhaps raising ocean levels 250 feet. Gondola to the
civilization or any significant part of it in order to cope Empire State Building, anyone?59
with the dangers of alleged global warming, ozone de- The 250-foot rise in the sea level projected by Ehrlich
pletion, exhaustion of natural resources, or any other as the result of global warming has been scaled back
alleged danger. Indeed, all claims constituting denunci- somewhat. According even to McKibben, the “worst
ations of science, technology, or industrial civilization case scenario” is now supposed to be 11 feet, by the year
which are advanced in the name of service to human life 2100, with something less than 7 feet considered more
and well-being are tantamount to claiming that our sur- likely.60 According to a United Nations panel, it is sup-
vival and well-being depend on our abandonment of posed to be 25.6 inches.61 (Even this still more limited
reason. (Science, technology, and industry are leading projected rise did not stop the U.N. panel, allegedly
products of reason and are inseparable from it.) All such composed of scientists, from calling for an immediate 60
56
57
58
61
59
60 Cf.
Ibid.,
See
Ehrlich,
Ames,
McKibben,
“Scientists
“NoDecember
Evidence
Population
“MajorWarn
End
13,
Carcinogens,”
ofBomb,
of
1989,
Global
ofNature,
Dangers
p.
p.Warming
A18.
61.
p.in
pp.
111.
See
a 243–44.
Warming
in
also
1980’s
Lehr,
Earth,”
IsRational
Detected
NewReadings
York
by Satellites,”
Times,
onEnvironmental
MayNew
26,
York
1990.
Times,
Concerns,
Marchpp.30,
393–437.
1990.
88 CAPITALISM
percent reduction in worldwide carbon dioxide emis- The meaning of this insanity is that industrial civili-
sions to try to prevent it.62) zation is to be wrecked because this is what must be done
Perhaps of even greater significance is the continuous to avoid bad weather. All right, very bad weather. If we
and profound distrust of science and technology that the destroy the energy base needed to produce and operate
environmental movement displays. The environmental the construction equipment required to build strong,
movement maintains that science and technology cannot well-made, comfortable houses for hundreds of millions
be relied upon to build a safe atomic power plant, to of people, we shall be safer from the wind and rain, the
produce a pesticide that is safe, or even to bake a loaf of environmental movement alleges, than if we retain and
bread that is safe, if that loaf of bread contains chemical enlarge that energy base. If we destroy our capacity to
preservatives. When it comes to global warming, how- produce and operate refrigerators and air conditioners,
ever, it turns out that there is one area in which the we shall be better protected from hot weather than if we
environmental movement displays the most breathtaking retain and enlarge that capacity, the environmental move-
confidence in the reliability of science and technology, ment claims. If we destroy our capacity to produce and
an area in which, until recently, no one—not even the operate tractors and harvesters, to can and freeze food,
staunchest supporters of science and technology—had to build and operate hospitals and produce medicines, we
ever thought to assert very much confidence at all. The shall secure our food supply and our health better than if
one thing, the environmental movement holds, that sci- we retain and enlarge that capacity, the environmental
ence and technology can do so well that we are entitled movement asserts.
to have unlimited confidence in them is forecast the There is actually a remarkable new principle implied
weather—for the next one hundred years! here, concerning how man can cope with his environ-
It is, after all, supposedly on the basis of a weather ment. Instead of our taking action upon nature, as we
forecast that we are being asked to abandon the Industrial have always believed we must do, we shall henceforth
Revolution or, as it is euphemistically put, “to radically control the forces of nature more to our advantage by
and profoundly change the way in which we live”—to means of our inaction. Indeed, if we do not act, no
our enormous material detriment. We are being asked to significant threatening forces of nature will arise! The
begin with a curtailment of energy consumption suffi- threatening forces of nature are not the product of nature,
cient to achieve a global limitation on carbon dioxide but of us! Thus speaks the environmental movement.
emissions, indeed, a curtailment sufficient to achieve an In answer to this insanity, it must be stressed that even
immediate 60 percent reduction in such emissions. (It is if global warming turned out to be a fact, the free citizens
significant, of course, that any global limitation on car- of an industrial civilization would have no great diffi-
bon dioxide emissions, let alone a 60 percent reduction, culty in coping with it—that is, of course, if their ability
implies that the economic development, and hence in- to use energy and to produce is not crippled by the
creased energy consumption, of the vast presently back- environmental movement and by government controls
ward regions of the world would have to be accomplished otherwise inspired. The seeming difficulties of coping
at the expense of the equivalently reduced energy con- with global warming, or any other large-scale change,
sumption of the more advanced countries.) arise only when the problem is viewed from the perspec-
Very closely connected with the demand for reduced tive of government central planners.
carbon-dioxide emissions and energy consumption is It would be too great a problem for government bu-
something else that might appear amazing. This concerns reaucrats to handle (as is the production even of an
prudence and caution. As we have seen, no matter what adequate supply of wheat or nails, as the experience of
the assurances of scientists and engineers, based in every the whole socialist world has so eloquently shown). But
detail on the best established laws of physics—about it would certainly not be too great a problem for tens and
backup systems, fail-safe systems, containment build- hundreds of millions of free, thinking individuals living
ings as strong as U-boat pens, defenses in depth, and so under capitalism to solve. It would be solved by means
on—when it comes to atomic power, the environmental of each individual being free to decide how best to cope
movement is unwilling to gamble on the unborn children with the particular aspects of global warming that af-
of fifty generations hence being exposed to harmful fected him.
radiation. But on the strength of a weather forecast, it is Individuals would decide, on the basis of profit-and-
willing to wreck the economic system of the modern loss calculations, what changes they needed to make in
world—to literally throw away industrial civilization. their businesses and in their personal lives, in order best
(Any significant limitation on carbon dioxide emissions to adjust to the situation. They would decide where it was
would be utterly devastating, let alone the enormous now relatively more desirable to own land, locate farms
immediate reduction urged by that U.N. panel.) and businesses, and live and work, and where it was
62 Ibid.
relatively less desirable, and what new comparative ad- low-lying coastal areas, like Bangladesh and Egypt, the
vantages each location had for the production of which obvious solution is for those countries to sweep away all
goods. Factories, stores, and houses all need replacement of the government corruption and underlying irrational
sooner or later. In the face of a change in the relative laws and customs that stand in the way of large-scale
desirability of different locations, the pattern of replace- foreign investment and thus of industrialization. This is
ment would be different. Perhaps some replacements precisely what needs to be done in these countries in any
would have to be made sooner than otherwise. To be sure, case, with or without global warming, if their terrible
some land values would fall and others would rise. poverty and enormous mortality rates are to be over-
Whatever happened, individuals would respond in a way come. If they do this, then the physical loss of a portion
that minimized their losses and maximized their possible of their territory will not entail the death of anyone, and,
gains.63 The essential thing they would require is the indeed, their standard of living will rapidly improve. If
freedom to serve their self-interests by buying land and they refuse to do this, then nothing but their own irratio-
moving their businesses to the areas rendered relatively nality should be blamed for their suffering. The threat of
more attractive, and the freedom to seek employment and global warming, if there is really anything to it, should
buy or rent housing in those areas. propel them into taking now the actions they should have
Given this freedom, the totality of the problem would taken long ago.65
be overcome. This is because, under capitalism, the Indeed, it would probably turn out that if the necessary
actions of the individuals, and the thinking and planning adjustments were allowed to be made, global warming,
behind those actions, are coordinated and harmonized by if it actually came, would prove highly beneficial to
the price system (as many former central planners of mankind on net balance. For example, there is evidence
Eastern Europe and the former Soviet Union have come suggesting that it would postpone the onset of the next
to learn).64 As a result, the problem would be solved in ice age by a thousand years or more and that the higher
exactly the same way that tens and hundreds of millions level of carbon dioxide in the atmosphere, which is
of free individuals have solved much greater problems, supposed to cause the warming process, would be highly
such as redesigning the economic system to deal with the beneficial to agriculture by stimulating the growth of
replacement of the horse by the automobile, the settle- vegetation.66 Growing seasons too might be extended.67
ment of the American West, and the release of the far Furthermore, any loss of agricultural land, such as that
greater part of the labor of the economic system from which is supposed to take place in low-lying areas as the
agriculture to industry. result of higher sea levels, would be far more than
This is not to deny that important problems of adjust- compensated for by vast quantities of newly useable land
ment would exist if global warming did in fact come to in central Canada and in Russia. In addition, there would
pass. But whatever they would be, they would all have be the major contribution made by the preceding clearing
perfectly workable solutions. The most extreme case of the Amazon and other jungles. (The clearing of these
would be that of the Maldive Islanders, in the Indian jungles—not “tropical rain forests,” as they are euphe-
Ocean, all of whose land might disappear under water. mistically called nowadays—and the concomitant elim-
The population of the Maldive Islands is less than two ination of their poisonous snakes and other hostile beasts,
hundred thousand people. In 1940, in a period of a few and replacement with farms and ranches, is an enormous
days, Great Britain was able to evacuate its army of more boon from the point of view of human life and well-
than three hundred thousand soldiers from the port of being.68)
Dunkirk, under the threat of enemy gunfire. Surely, over Whether global warming comes or not, it is certain
a period of decades, the opportunity for comfortable that nature itself will sooner or later produce major
resettlement could be arranged for the people of the changes in the climate. To deal with those changes and
Maldives. virtually all other changes arising from whatever cause,
Even the prospective destruction of much of Holland, man absolutely requires individual freedom, science, and
if it could not be averted by the construction of greater technology. In a word, he requires the industrial civiliza-
sea walls, could be dealt with by the very simple means tion constituted by capitalism. What he does not require
of the rest of Europe, and the United States and Canada, is the throttling of his ability to act, by the environmental
extending the freedom of immigration to Dutch citizens. movement. If it really were the case that the average
If this were done, then in a relatively short time, the mean temperature of the world would rise a few degrees
economic losses suffered as the result of physical de- in the next century as the result of the burning of fossil
struction in Holland would hardly be noticed, and least fuels and of other modern industrial processes, the only
of all by most of the former Dutchmen. appropriate response would be along the lines of being
For densely populated, impoverished countries with sure that more and better air conditioners were available.
63
64
65
66
67
68 Seethe
On
Thethese
ibid.,
below,
process
ecologists,
operations
points,
December
Chapter
of rational
ofsee
of
course,
6,
the
New
13,especially
reform
price
1989,
York
denounce
system
would
Times,
p. A18.
pt. it,
B,
be
and
January
on
secs.
greatly
the
thevital
4grounds
16,
and
accelerated,
role
1990,
5. that
it plays
p.itC1,
if
destroys
students
inand
genuine
ibid.,
various
fromeconomic
September
such
plant
countries,
and
planning—that
18,animal
1990,
when
species
p. B5.
attending
is, and
the economic
contributes
universities
planning
toin
global
the United
ofwarming
private
States,
individuals
through
weredestroying
taught
and business—see
the virtues
forests.ofThey
capitalism
below,
alsochap.
claim
rather
5,
that
pt.
than
after
A,Marxist
sec.
the1land
and
propaganda.
has
Chapters
been cleared
6–8, passim.
and the existing soil nutrients are exhausted, the land becomes desert. In answer to this last, they have apparently never heard of the Atherton tablelands in Australia, which were originally jungle and which are now, and for many years have been, beautiful and thriving farmland. Nor, apparently, do they take into account the ability to replenish soil nutrients through the use of chemical fertilizers.
90 CAPITALISM
(Similarly, if there were in fact to be some reduction in planes, ships, and railroad trains, and in countless other
the ozone layer, the appropriate response, to avoid the ways serve human life. It follows that insofar as man’s
additional cases of skin cancer that would allegedly environment consists of the chemical elements iron,
occur from exposure to more intense sunlight, would be copper, carbon, oxygen, and hydrogen, and his produc-
to be sure that there were more sunglasses, hats, and tive activity makes them useful to himself in these ways,
sun-tan lotion available.) In absolutely no case would the his environment is correspondingly improved.
appropriate response be to seek to throttle and destroy All that all of man’s productive activities fundamen-
industrial civilization. Primitive man, the ideal of the tally consist of is the rearrangement of nature-given
environmentalists, was incapable of successfully coping chemical elements for the purpose of making them stand
with climate changes. Modern man, thanks to industrial in a more useful relationship to himself—that is, for the
civilization and capitalism, is capable of successfully purpose of improving his environment.
coping with climate changes. To do so, it is essential that Consider further examples. To live, man needs to be
he ignore the environmentalists and not abandon the able to move his person and his goods from place to
intellectual and material heritage that elevates him above place. If an untamed forest stands in his way, such
primitive man. movement is difficult or impossible. It represents an
improvement in his environment, therefore, when man
Why Economic Activity Necessarily Tends to moves the chemical elements that constitute some of the
Improve the Environment trees of the forest somewhere else and lays down the
It is important to realize that when the environmental- chemical elements brought from somewhere else to con-
ists talk about destruction of the “environment” as the stitute a road. It is an improvement in his environment
result of economic activity, their claims are permeated when man builds bridges, digs canals, opens mines,
by the doctrine of intrinsic value. Thus, what they actu- clears land, constructs factories and houses, or does
ally mean to a very great extent is merely the destruction anything else that represents an improvement in the
of alleged intrinsic values in nature such as jungles, external, material conditions of his life. All of these
deserts, rock formations, and animal species which are things represent an improvement in man’s material sur-
either of no value to man or hostile to man. That is their roundings—his environment. All of them represent the
concept of the “environment.” If, in contrast to the envi- rearrangement of nature’s elements in a way that makes
ronmentalists, one means by “environment” the sur- them stand in a more useful relationship to human life
roundings of man—the external material conditions of and well-being.
human life—then it becomes clear that all of man’s Thus, all of economic activity has as its sole purpose
productive activities have the inherent tendency to im- the improvement of the environment—it aims exclu-
prove his environment, indeed, that that is their essential sively at the improvement of the external, material con-
purpose. ditions of human life. Production and economic activity
This becomes obvious when one recalls that the entire are precisely the means by which man adapts his envi-
world physically consists of nothing but chemical ele- ronment to himself and thereby improves it.
ments. These elements are never destroyed. They simply So much for the environmentalists’ claims about man’s
reappear in different combinations, in different propor- destruction of the environment. Only from the perspec-
tions, in different places. Apart from what has been lost tive of the alleged intrinsic value of nature and the
in a few rockets, the quantity of every chemical element nonvalue of man, can man’s improvement of his envi-
in the world today is the same as it was before the ronment be termed destruction of the environment.
Industrial Revolution. The only difference is that, be- The environmentalists’ claims about the impending
cause of the Industrial Revolution, instead of lying dor- destruction of the “planet” are entirely the result of the
mant, out of man’s control, the chemical elements have influence of the intrinsic value doctrine. What the envi-
been moved about, as never before, in such a way as to ronmentalists are actually afraid of is not that the planet
improve human life and well-being. For instance, some or its ability to support human life will be destroyed, but
part of the world’s iron and copper has been moved from that the increase in its ability to support human life will
the interior of the earth, where it was useless, to now destroy its still extensively existing “wildness.” They
constitute buildings, bridges, automobiles, and a million cannot bear the thought of the earth becoming fully
and one other things of benefit to human life. Some part subject to man’s control, with its jungles and deserts
of the world’s carbon, oxygen, and hydrogen has been replaced by farms, pastures, and forests planted by man,
separated from certain compounds and recombined in as man wills. They cannot bear the thought of the earth
others, in the process releasing energy to heat and light becoming man’s garden. In the words of McKibben,
homes, power industrial machinery, automobiles, air- “The problem is that nature, the independent force that
has surrounded us since our earliest days, cannot coexist attacks technology and economic progress. When it does
with our numbers and our habits. We may well be able to this, it proceeds as though despite all the best efforts of
create a world that can support our numbers and our scientists, engineers, and businessmen to improve human
habits, but it will be an artificial world. . . .”69 life and well-being they systematically fail, at least in the
The influence of the doctrine of intrinsic value and of long run. Here, as in the case of alleged global warming,
its implicit hatred of mankind is present in the usage of the movement apparently claims to be able to see from
the very word pollution. More and more, “pollution” is the vantage point of its allegedly superior wisdom that
used to mean any change in the state of nature caused by the true road to human well-being requires that mankind
man. It is only from this perspective that one can label as not attempt to travel the road to well-being—that it
“pollution” such things as the possible changes in the renounce action based on science and technology. Only
chemical composition of the earth’s atmosphere which then, allegedly, by virtue of its renunciation of such
may result as the by-product of man’s productive activ- activity, and by virtue of its inaction, will mankind avoid
ity. Consider. Somewhat more carbon dioxide in the self-destruction.
atmosphere or less ozone in the stratosphere (assuming In proceeding in this way, the ecology movement
these things were in fact the result of human productive adopts the tactic of taking for granted all the benefits of
activity) does not make the atmosphere dirty. It merely economic activity and proceeds as though they existed
makes it somewhat different, requiring a somewhat differ- independently of such activity. It then concentrates all of
ent response on the part of human beings in order most its attention on a few relatively minor phenomena of a
efficiently to adapt to their environment. It is of a radically negative kind that it traces to economic activity and that
different character from pollution in the legitimate sense of, it regards as the sum and substance of such activity, such
say, the discharge of human fecal material into drinking as the emission of certain chemicals into the atmosphere
water. Its being subsumed under the concept of “pollution” and the consequent creation of smog or, more recently,
serves as a vehicle to attack productive activity. alleged global warming. Thus, for example, it treats
Closely related to the misuse of the word pollution is automobiles and power plants as though they were a
the practice of describing the chemical emissions into the threat to human life and well-being rather than the enor-
atmosphere entailed in industrial production, as using the mous source of improvement that they actually are. It
atmosphere as “a garbage dump.” The meaning of the proceeds as though people could continue having effi-
word “garbage,” according to The American College cient transportation and electric power and light while
Dictionary, is “1. refuse animal and vegetable matter being deprived of the means required for their existence:
from a kitchen. 2. any foul refuse; vile or worthless the oil fields, pipelines, and power plants whose con-
matter.” To use the term to describe chemical emissions struction it fights tooth and nail.
is an unwarranted extension of the term having no other In this process, the ecology movement refers to “con-
purpose than to attack productive activity and man’s life. servation” as though it were some kind of magical method
Ironically, garbage is precisely that allegedly good “bio- of achieving radical reductions in energy use without
degradable” material the environmentalists are so fond sacrifice. It claims, for example, that the loss of millions
of. A further irony is that precisely when human beings of barrels of oil per day can easily be offset by such
eliminate garbage, by burning it and thus reducing it to means as simply doubling the number of miles per gallon
mere carbon and gases, they are denounced for dumping obtained by the average automobile Americans drive. (In
garbage—into the atmosphere. its view, evidently, people have up to now simply been
Like the use of the word concupiscence in an earlier too foolish to realize that they could get along just as well
age to describe sexual desire, the use of the word pollu- with automobiles that would cut their cost of fuel in half.
tion to describe essential aspects of the productive activ- Or, allegedly, if the buyers of cars have realized it, each
ities of an industrial society represents an attempt to and every manufacturer and potential manufacturer of
defame an entirely proper human capacity by means of automobiles has been too foolish to realize the enormous
using an evil sounding name for it. competitive advantage he would enjoy by meeting the
public’s demand for such fuel-efficient cars. Or, if the
manufacturers have realized it, they have not provided
3. The Collectivist Bias of Environmentalism such cars, because each and every automobile manufac-
As I have said, the ecology movement could not have turer and potential automobile manufacture is allegedly
nearly the following and the influence it does if its basic part of a “monopolistic conspiracy” or otherwise just
ethical perspective were known. Thus, most of the time arbitrarily refuses to provide the market with such cars.
it asserts that it actually has the welfare of people in mind, In this way, the environmental movement contemptu-
and that it is in the name of human well-being that it ously dismisses as of no significance such differences in
69 McKibben, End of Nature, p. 170. Italics supplied.
92 CAPITALISM
automobiles as size, weight, and power of acceleration, thereby causing flooding, as allegedly occurred along the
and the public’s demonstrated preference for larger, heavier, Mississippi River as the result of the settlement of the
and more powerful automobiles that obtain fewer miles per Midwest. Likewise, they consider the fact that the move-
gallon, over smaller, lighter, less powerful automobiles ment of large numbers of people into the same area may
that obtain more miles per gallon.) result in traffic congestion. And in exactly the same way,
In its masquerade as fighter for human welfare, the they consider the effects of hundreds of millions or
technique of the ecology movement consists of an appeal billions of people burning fossil fuels, using CFCs, and
to collectivism and hysteria, in order to create the impres- so on, which actions allegedly result in global warming
sion of an overthrow of the harmony-of-interests doctrine and ozone depletion.
of classical economics and the existence of a conflict of In their treatment of all such cases, the ecologists
interests between the individual and the rest of society. show themselves to be collectivists. They are prepared
The truth is that the necessary tendency of economic to hold individuals responsible for negative effects that
activity to improve the environment, which was de- are not the responsibility of individuals qua individuals,
scribed at the end of the preceding section, is powerfully that is, for negative effects which are not caused by any
reinforced by the existence of freedom and free ex- individual, but which are the result of the combined
change. Freedom and free exchange create an inherent actions of the members of the group to which the indi-
harmony of the rational self-interests of people. When vidual belongs. Such negative effects, not being the
the actions of individuals are free and do not represent responsibility of any individual, should properly be re-
the use of force, their effect is necessarily to benefit garded as the equivalent of acts of nature, and individuals
everyone involved. This is because each individual acts should be left free to respond to them in the way most to
to benefit himself and must at the same time benefit those their advantage. Instead, the ecologists seek to paralyze
whose cooperation is to be secured, or else he will not the individual by harnessing him to the collective—to
receive it. In addition, no one standing outside the trans- prohibit him from acting in all cases in which noticeable
action can be harmed, because any evidence of harm to negative consequences flow from the actions of the
the person or property of others is grounds to prohibit the collective to which he belongs. And then, of course,
action as an act of force and violation of freedom. For instead of allowing the negative effects to be dealt with
example, under freedom, if I decide to construct a build- by the free actions of individuals, the ecologists can see
ing, I do so because I judge that I can serve my own no other solution than that of collective action, in the
interests by doing so. At the same time, I can find workers form of government planning.
and suppliers to help me build it and a buyer or tenants In such cases, the ecologists mistakenly assume that
to use it, only by making it to the self-interest of all of they have the right to prohibit the actions they find
these parties to deal with me. In addition, the construc- displeasing. Actually, however, they do not. The fact that
tion of my building must not endanger other, surrounding the separate, independent actions of vast numbers of
buildings or passersby; if it does, I am guilty of an people may result in significant negative consequences
initiation of physical force against the property or per- to someone by virtue of their cumulative effect is simply
sons of others, and thus grounds exist to stop me. As a not the responsibility of any of the individuals con-
result, the inherent tendency of my action is to produce cerned. It should not be a basis for prohibiting his actions.
improvement for others as well as myself, and thereby to To prohibit the action of an individual in such a case is
improve general well-being. to hold him responsible for something for which he is
The stock in trade of the ecologists, however, is to find simply not in fact responsible. It is exactly the same in
cases in which perceptible negative consequences to principle as punishing him for something he did not do.
others appear when the actions of large numbers of The harm that results from the cumulative actions of
individuals are cumulated, and then incredibly to exag- the whole category of individuals, without any of the
gerate the importance of those negatives by techniques individuals qua individuals being responsible, should, as
of hysteria, in the process obliterating all concern for the I say, be regarded as having the same status as harm
rights and responsibilities of individuals. The ecologists caused by acts of nature. That is, such phenomena as
conclude by arguing that no individual should be allowed floods downstream possibly resulting from the actions of
to act without first proving that his action will have no tens or hundreds of thousands of separately acting indi-
adverse “impact” on the “environment.” viduals, each of whom as an individual causes no per-
Thus, for example, ecologists consider such phenom- ceptible harm to anyone, should be regarded in exactly
ena as the clearing of large areas of land for the estab- the same way as floods that result when few or no human
lishment of farms. Such clearing of land may sometimes beings are present upstream. Exactly the same is true of
have the effect of raising the water level downstream and the similar phenomena, or alleged phenomena, of global
warming, ozone depletion, and acid rain. As the result, the Mississippi, but also on the pollution of many rivers
or alleged result, of the actions of vast numbers of and lakes, and on the disturbance of the habitat of this or
individuals, each of whom has no individual responsibil- that species. The impending near extinction of the buf-
ity for them, they should be regarded in exactly the same falo would probably have been considered sufficient by
way as one would regard global warming, ozone deple- itself to stop the settlement of the Midwest, if the envi-
tion, or acid rain existing totally apart from modern ronmental movement had existed at the time.)
economic activity. That is, they should be regarded as Precisely the same principles apply to the cases of
phenomena of nature, for which no individual human global warming, ozone depletion, and acid rain. Each
being is responsible and to which individual human individual who uses an automobile, electricity, and so on,
beings must be left free to respond. derives immense benefits from doing so and causes
Those who are adversely affected in such cases should absolutely no perceptible harm to anyone. The same is
not blame anyone, but should simply be left free to take true of the manufacturers of automobiles and is probably
steps to protect themselves by engaging in the appropri- true even of the very largest individual electric utilities
ate form of productive activity. In the case of downstream and chemical companies, in connection with the creation
flooding, this might consist of building dikes or flood- of acid rain. The prohibition or curtailment of such
control channels; in the case of traffic congestion, it activities for the sake of preventing global warming,
might consist of building more roads, or moving else- ozone depletion, or acid rain is fully comparable to
where.70 The kind of responses appropriate to the alleged prohibiting or curtailing the development of the Midwest
cases of global warming, ozone depletion, and acid rain for the sake of preventing floods at New Orleans. It is the
have already been explained, in the preceding section. attempt to stop production and its immense benefits for
The all-encompassing appropriate answer to the ecolo- the sake of avoiding the relatively minuscule negative
gists in all the cases they bring forward of this kind is effects of the by-products of production. It is comparable
simply that under capitalism, man will deal with the to prohibiting the use of machinery and the achievement
negative forces of nature resulting as by-products of his of all its benefits for the sake of avoiding such a thing as
own activity in precisely the same successful way that he short-run technological unemployment.
regularly deals with the primary forces of nature. ***
Furthermore, it must never be forgotten that the harm Of course, it is possible in productive processes for
done in these cases is necessarily minuscule in compar- individual producers to cause perceptible negative ef-
ison with the good achieved. The ecologists use the fects on others. Even if this is not so in the case of acid
technique of weighing the full harm against the actions rain, it was certainly so in the days when power plants
of each individual alone. For example, they argue that an and steel mills generated large quantities of soot which
individual farmer should not be allowed to clear his land fell in the surrounding territory, and which the very tall
because if hundreds of thousands do so, flooding may be government-mandated smokestacks that result in acid
caused downstream. The fact is, the individual farmer rain were designed to overcome.
accomplishes a substantial amount of good and no per- In such cases, an important principle is that of who
ceptible damage. If one wants to look at the damage holds prior established rights. For example, if a steel mill
caused by all the farmers together, it must be compared begins operations in the open countryside, where the
with the enormous good accomplished by all the farmers surrounding land is simply unused, and the landowners
together. make no complaint over a period of several years or
The development of the Midwest, for example, obvi- more, it appears reasonable to say that the steel mill
ously represented a far greater gain to virtually everyone acquires a right to continue its operations. The same, of
than the occasional greater flooding in the New Orleans course, would certainly be true if the steel mill made a
area, which may have been its result, represented a loss. mutually agreeable payment to the owners of the sur-
(It represented a gain even to the people who lived in the rounding land as compensation for the negative effects
areas subject to occasional greater flooding.) Yet the of its operations. In either case, the price at which the
logic of the environmental movement, had it been pres- surrounding land sells would tend to be cheaper in reflec-
ent and guided government policy in the nineteenth tion of the negative consequences caused by the exis-
century, could well have prohibited the development of tence of the nearby steel mill. On the basis of such
the Midwest and required the American people to remain considerations, the owners of the surrounding land would
bottled up behind the Appalachian Mountains. (One can have no justifiable basis for complaint. Justifiable grounds
easily imagine a nineteenth-century campaign of ecolog- for complaint exist in cases in which an action of a
ical hysteria centering not only on the fear of such producer creates some new negative effect, which has
allegedly horrifying results as higher flood levels along not become an established right, and which was not
70 Nature, of course, does not produce anything directly comparable to traffic congestion, but it does produce all manner of obstacles in the way of travel, such as forests, rivers, and mountains. Thus, traffic congestion is abstractly comparable to nature’s obstacles to travel.
94 CAPITALISM
reflected in the price that the present owners of the willing to ravage a fragile ecosystem. To build airfields,
surrounding land paid for it. In such cases, the only pipelines and roads where caribou, polar bears and wolves,
proper way in which the producer can proceed is by golden eagles, swans and snow geese make their home. To
destroy a wilderness—perhaps North America’s greatest
buying the right to do so from the owners of the affected
wilderness—forever denying the right of future genera-
surrounding land.71
tions to marvel at its majesty. And why. For a 19% chance
In the absence of modern technology, the existence that they will find a 200-day supply of oil!73
of densely populated areas necessitates considerable,
individually perceptible mutual impositions by the Thus, if an individual oil field succeeds in adding 200
inhabitants on the health, cleanliness, and property of days’ worth of oil to the world supply, it is allegedly too
one another. In the absence of low-cost iron and steel small to be worth developing. Presumably, each oil field
pipe, for example, there is virtually no alternative to must be capable of dramatically increasing the entire
using the open streets as sewers. In the absence of the world’s supply—adding at least several years’ worth all
automobile, there is no alternative to the streets being by itself—if it is to be allowed to be developed. The
filled with horse droppings. In the absence of heating implication of this position is that no one is to be allowed
oil, natural gas, and electric power, there is no alterna- to act unless his action all by itself can have absolutely
tive to the soot produced by wood or coal-burning fires stupendous positive consequences, and is virtually cer-
which falls on neighboring properties as well as on tain to achieve them. Since the world supply of anything
one’s own. is almost always produced by large numbers of produc-
ers, each of whom produces a relatively small percentage
If people are to live in towns and cities in such
of the total supply, the adoption of this standard easily
circumstances, they must put up with such problems.
serves to prohibit increases in production by practically
However, thanks to economic progress, it becomes eco-
every private individual or firm.
nomically and financially feasible to reduce the extent of
The leadership of the Sierra Club almost certainly
these impositions. This comes about as the result of the
knows that a 19 percent chance of finding oil is almost
continual widening of technological alternatives, reduc-
four times the chance that is present in most exploratory
tions in cost, and fall in prices relative to incomes that
efforts and that oil in the area concerned is actually found
economic progress represents.72 It is in this spirit that one
seeping out of the ground. It is not so illogical as seri-
should fundamentally understand such public health mea-
ously to believe that roads and pipelines would be con-
sures as the requirement of sewer hookups as a precon-
structed without definite proof having first been obtained
dition to housing construction. It is in this spirit that one
that substantial quantities of oil were actually present in
should understand such measures as the city of London’s
the region. Nor is it so illogical as to believe that future
requiring some years ago the gradual replacement of
generations will be able to go and marvel at the “majesty”
coal-burning furnaces with natural gas and electric fur-
of the area without the benefit of roads and airfields to
naces. Measures of this kind, though they were better
bring them to it (that is, if the area were not a frozen
carried out by organs other than local governments,
barren desert and thus actually had majesty worth trav-
namely, by associations of private property owners, are
elling to see). And the Sierra Club is almost certainly
consistent with the principle of individual rights. Fur-
capable of realizing that if, as might be expected, the field
thermore, they are fully in the spirit of economic prog-
contributed to production over a 20-year period and
ress. They thus have nothing in common with the kind of
added just a 10-day supply to the otherwise existing
measures characteristically advocated by the environ-
supply of oil in each of those years, that would represent
mental movement.
an almost 3 percent increase in the world supply of oil in
*** each of those years. It is capable of realizing that such an
The ecologists employ the technique of confusing the increase in supply is approximately equal to the reduc-
effects of the actions of specific individuals with effects tion in supply caused by Iraq’s invasion of Kuwait and
that can be caused only by cumulating the actions of large the consequent embargo imposed against Iraq, and that
numbers of individuals to downplay the importance of it would likely have as much effect in reducing the price
positive individual contributions. For example, the Si- of oil as the Iraqi invasion had in increasing it. The Sierra
erra Club has argued against government approval of the Club’s leadership undoubtedly is aware of all of these
search for oil in Northern Alaska on the grounds that if things.
oil were found there, it would represent only a 200-day Nevertheless, it attempts to trivialize the importance
supply, which is too little to justify the project, according of the project by setting an impossible standard of what
to the Sierra Club. In a mailing to its members, the must be produced in order for the project to be considered
executive director of the Sierra Club declared: worthwhile.74 Having trivialized the project in this way,
Imagine! The supporters of drilling in the Refuge are it can then rank the project below the alleged value of
71
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maintaining absolutely undisturbed the wildlife in the areas, which may or may not be connected with en-
region and the existing state of the mere ground itself, to vironmentalism. Thus, for example, an individual crim-
neither of which anyone attaches any actual value. inal is held not to be responsible for his actions. Instead,
Thus a major technique of the environmentalists is to responsibility is held to lie with “society” and with other
confuse the individual with the collective—to hold the individuals, who somehow convey negative social atti-
individual responsible for the negative effects resulting tudes to such individuals, such as lack of respect for their
from the actions of the whole category of individuals to race or national origin.
which he belongs and to demand that his positive actions The fallacy of such misplaced responsibility is present
be on a scale great enough dramatically to benefit the in the case of product liability, when large manufacturers
whole of society. who are aware that statistically so many accidents of a
Confusion of the individual with the collective, in- certain kind will occur per hundred thousand or million
deed, of the individual with the cosmic, is present also in units of their product are held to be morally responsible
the environmentalists’ scare tactics. For example, Carl for those accidents, especially if it is possible to take
Sagan writes: “The typical temperature difference aver- steps to prevent or mitigate them and they do not do so.
aged over the whole world between an ice age and an To illustrate the logic of this view, one might imagine a
interglacial is only 3˚ to 6˚C (equivalent to 5˚F to 11˚F). fruit company that imports tens or hundreds of millions
This should immediately sound an alarm: A temperature of bananas. Some percentage of the peels from these
change of only a few degrees can be serious business.”75 bananas will end up in places where people can slip on
Of course, Dr. Sagan and every housewife knows how them and suffer serious injury. Never mind who thought-
easy it is to bring a pot of water to a boil, let alone to raise lessly threw away the banana peels or who was respon-
its temperature by a mere few degrees. On this basis, he sible for watching where he walked. If it is known that
apparently believes that raising the temperature of the statistically one person will break his neck or arm as the
hundreds of millions of cubic miles of the earth’s atmo- result of every X million bananas imported, the logic of
sphere and oceans and thus the surface of the whole earth this view implies that the fruit company somehow has
a few degrees is a comparably easy matter, which we are responsibility for the injuries people suffer as the result
readily capable of doing if we do not employ him and his of slipping on banana peels. (Presumably, it should be
colleagues to take charge of our lives. obliged to work on a nonskid banana peel.)
Indeed, as should now be clear, the mentality of While the example of banana peels may seem far-
collectivism permeates environmentalism. It contributes fetched, because no one has gotten around to bringing
to the notion of a “fragility of nature” in all of its suit on this basis, it is difficult to distinguish the logic of
immensity comparable to the fragility of an individual’s it from cases which have been brought and won by the
possessions or an individual’s life. As we have seen, it plaintiffs. For example, the Ford Motor Company was
plays a vital role in the existence of the belief that there held responsible for the fact that in a certain category of
is an “environmental crisis,” in projecting that only in- collision the fuel tank of its Pinto automobile was appar-
competent governmental action is available to deal with ently capable of exploding. On this view, the responsi-
the changing environmental conditions allegedly caused bility of the individual(s) who caused the accident was
by man’s productive activities, and not the intelligent dropped from view, and it was assumed that because
actions of individual human beings. That is, it is totally statistically there could be a certain percentage of such
ignorant of the intelligent actions of individuals coordi- accidents, the manufacturer was responsible: he alleg-
nated by the price system, as the means of solving such edly should not only have known about such a statistical
problems. Indeed, the very notion of an “environmental probability but also have taken steps so that people would
crisis” is the result of a preexisting mentality of collec- not suffer such grave injury in the accidents for which
tivism. If not for the prevalence of the mentality of somehow none of them allegedly bore responsibility.
collectivism, human productive activity would have gone The logic of holding an individual responsible for the
on just as smoothly and successfully as before, with actions of others is also present in legislation requiring
individuals being happily and legitimately unconcerned soft-drink manufacturers to charge return deposits on
with avoiding the effects resulting from the actions of the cans and bottles, which they would normally not seek to
collectives of which they are members and easily dealing have returned and on which, therefore, they would not
with such effects as and when they arose. charge such deposits. The manufacturers are viewed as
responsible for the actions of their customers, who sim-
Environmentalism and Irrational Product Liability ply leave the cans or bottles lying on the ground.
Confusions—inspired by collectivism—concerning the The effect of imposing such wrongly increased liabil-
responsibility of individuals also arise in other important ity on producers is to increase costs and prices for every-
75 Carl Sagan, “Tomorrow’s Energy,” p. 10.
96 CAPITALISM
one. And because of the grave uncertainties created It is believed by many economists, including some
wherever the sums in question are substantial, to prevent who are usually staunch defenders of capitalism, that
the introduction of new products, and sometimes, as in many of the demands of the environmental movement
the case of the manufacture of small private airplanes, could be satisfied in this way within the framework of a
cause even the discontinuation of existing products. Ir- capitalist society. They regard the demands of the exter-
rational product liability is an important ally of the ecol- nalities doctrine as fully consistent with the principles of
ogy movement in its campaign to end economic progress capitalism, indeed, as representing a more-perfect im-
and reduce the standard of living. plementation of those principles. In their eyes, the de-
mand for compensation for all the benefits one causes is
Environmentalism and the Externalities Doctrine merely the principle of being paid for one’s work; the
The influence of the environmental movement has demand for liability for all the costs one imposes on
been promoted in the science of economics by a perni- others appears to them as an implication of the principle
cious doctrine known as the theory of “external costs and of accepting responsibility for one’s actions.
benefits” or, sometimes, simply the theory of “external- The externalities doctrine is a further confusion re-
ities.”76 specting the responsibilities of individuals. Even apart
The externalities doctrine must be understood against from imposing responsibility on individuals for results
the background of the fact that economists realized early that individuals qua individuals do not cause, the error of
that the pattern of spending adopted by consumers deter- the externalities doctrine is that it states matters far too
mines the pattern of spending adopted by businessmen, broadly. A moment’s reflection will show that one should
whose products must sooner or later serve to satisfy not be compensated for all the benefits one causes, nor
consumers. They saw, for example, that if consumers be made liable for all the costs one imposes. One should
spent more money for shirts and less for shoes, business- be compensated only for those benefits one gives to
men would be impelled to spend more money in produc- others which those others freely contract to receive. One
ing shirts and less in producing shoes. The economists should be liable for damages to others only insofar as
recognized in this the operation of a profoundly benevo- one’s action causes demonstrable physical harm to the
lent principle enabling people to obtain what they wanted persons or property of specific, individual others.
by virtue of the ways in which they spent their money. The broader standard of the externalities doctrine is
The supporters of the externalities doctrine are not an invitation to chaos and tyranny, for it opens the door
satisfied with the fact that the spending pattern of con- to all kinds of arbitrary claims. According to the logic of
sumers determines the spending pattern of businessmen. the doctrine, beautiful women and the owners of beauti-
They add the further arbitrary demand that the individual ful homes and gardens should demand compensation for
should be able to lay claim to compensation for all the the pleasure the appearance of their persons or property
benefits his action causes to the rest of mankind and brings to others without charge. Even the senders of
should be liable for all the costs it imposes on the rest of unsolicited merchandise through the mail should also be
mankind, even though the benefits and costs in question able to demand compensation, if their merchandise con-
are not subjects of purchase and sale in the normal fers any benefit on the recipients. Indeed, on the basis of
context of the individuals concerned. From the perspec- the externalities doctrine, it is arguable that people are
tive of the externalities doctrine, it is a flaw of capitalism liable for payment for all the benefits that now come to
whenever an individual’s action provides any kind of them freely in the form of the work of all the inventors
benefits to others for which he is not compensated, or and authors whose discoveries or creations are not eligi-
imposes any kind of costs on others for which he does ble for patent or copyright protection, starting with such
not compensate them. It calls upon the government to contributions as fire and the wheel. Whether or not these
enter the scene and set matters right by deciding who payments are to be made to the descendants of the
owes what to whom and then effecting the necessary inventors or innovators, to the government, or to some
redistribution of wealth and income. other party, is a separate question. The principle holds
The alleged environmental damage caused by eco- that payment must be made for benefits received.
nomic progress is regarded as falling under the heading Whatever it may hold about the specific claims of the
of external costs, and it is urged that those responsible be descendants of inventors and innovators, the doctrine
held liable for damages. For example, it is argued that implies that every living inventor or innovator should be
everyone whose car or factory emits any chemical into prepared to meet demands for compensation by those
the air should be made to pay a share of whatever displaced by the competition he inaugurates. For exam-
damages may be caused by the total volume of emissions ple, the doctrine implies that Henry Ford should have
of that chemical. been made to pay for the support of unemployed black-
76 For an exposition of the doctrine, see Paul Samuelson and William Nordhaus, Economics, 13th ed. (New York: McGraw-Hill, 1989), pp. 770-75.
smiths and horse breeders, as though the latter had a right activities carried on by countless private charities. In
to go on in their routine irrespective of Ford’s improve- their case, individual donors give without expecting to
ments and irrespective of the voluntary choices of the receive any corresponding material payment, direct or
buyers of means of transportation. indirect. Although the free-rider doctrine’s supporters are
It is a distortion of sound principles and totally inap- focused on such cases as lighthouses, the logic of the
propriate to call for payment for every benefit bestowed doctrine implies that all charitable activities should be
or to demand compensation for every cost imposed. It is performed by the government. The doctrine also implies
in the nature of a division-of-labor, capitalist society to that in every case in which there are benefits of any
bestow enormous benefits for which people do not have description which are not paid for, the government is to
to pay. Indeed, in such a society perhaps 99.9 percent or be put in a position in which it can demand a blank check,
more of everyone’s standard of living comes to him as since no one can actually determine what voluntary
an “external benefit” provided by the thinking of others payments made by the citizens on their own would be
past and present. It is also in the nature of such a society “adequate.”
to impose various costs of a minor and transitional nature The truth is that private citizens are capable on their
in the process of improving the methods of production own of providing for necessary activities for which it
and raising the general standard of living. The external- may not be possible to arrange the normal system of
ities doctrine implicitly represents a two-pronged attack payment for goods or services received. This is true even
on a division-of-labor, capitalist society: its logic would in cases requiring the cooperation of millions of individ-
deprive people of the benefits such a society freely gives uals. There is no reason why in such cases individuals
them, by making them pay the equivalent of those bene- could not agree to contribute to the financing of a project
fits. And, by making those who are the source of the on a contingency basis, namely, on the basis of a suffi-
benefits bear unnecessary and unjust costs in the process cient number of other individuals making the same pledge.
of bringing them about, it would operate to prevent the Whether it is a matter of a hundred ship owners con-
achievement of the benefits in the first place.77 cerned with constructing a lighthouse or a million prop-
*** erty owners concerned with building a dam to prevent
There is no better place than this to observe that in flood damage (or perhaps installing catalytic converters
addition to being used in support of environmentalism, on their automobiles to reduce smog), there is no reason
the externalities doctrine is used as a fundamental justifi- why an arrangement could not be made whereby the
cation for government activity beyond defense against the individual pledges his contribution on the condition of
initiation of physical force. It is argued that insofar as an equal or otherwise comparable contribution being
important benefits are obtainable without individuals pledged by a certain percentage of other such individu-
having to pay for them, a free market cannot function als. For example, the individual ship owner or property
successfully. A typical case advanced to illustrate this owner might agree to pledge a definite sum on the
claim is that of lighthouses, which, once they exist, condition that half or two-thirds of the other ship owners
benefit all the ships passing in the night, whether the or property owners made the same or a comparable
ships’ owners have helped to pay for the lighthouses or pledge. Only when it was established that the necessary
not. It is argued that in this case, the possibility of number of pledges had been made, would the pledges of
avoiding payment and getting by as a “free rider” on the the various individuals become binding. In such cases,
strength of the contributions of others will result in large there might be a class of free riders, but they would
numbers of shipowners refusing to pay for lighthouses certainly not stop the activity from proceeding. (To some
and thus in either preventing their construction alto- people, of course, such a procedure may appear cumber-
gether or making their construction and operation less some. Nevertheless, it is an insignificant price to pay for
adequate. More broadly, as a general principle, it is maintaining consistent respect for the rights of the indi-
argued that in such circumstances vital services will not vidual.)
be performed, or will be performed inadequately, be- Finally, although the payment for a good or service in
cause too many people will be hoping to take advantage such circumstances might be less than it would be if
of a “free ride.” somehow the usual circumstance prevailed of receipt of
The substance of the free-rider argument is the gratu- the benefit being directly contingent on payment being
itous assumption that people lack sufficient rationality to made, it by no means follows that the amount of benefit
act in their own interest in cases in which they cannot provided would be any less under private control than
receive corresponding direct payment, and hence must under government control. Government is inherently
be forced to act in their own interest in such cases. The wasteful. As a result, it needs to spend much more money
clearest contradiction of this belief is the success of the than a private organization to provide the same amount
77 It is worth noting that in a division-of-labor, capitalist society everyone normally does earn his standard of living, even people of average and below average ability. But he earns it very easily. The essential thing that is required of the great majority of people is merely the expenditure of the mental effort required to learn the new skills made necessary by the work of the innovators. Thus, someone with the muscles and brawn of a caveman, or a blacksmith, is enabled to enjoy a standard of living that includes such things as automobiles and television sets, merely by being willing to acquire an elementary education, to learn some new skills throughout his life when others introduce further advances, and, above all, to respect the rights of such others to their greater gains. For elaboration on the economic position of the average person under capitalism, see in particular Chapters 9 and 14, below.
98 CAPITALISM
of goods or services. True, if it spends still more than that, private property rights and thereby of untold thousands
it may provide more of the good or service than would of acres of land not being developed for the benefit of
be provided privately. But no objective basis exists for human beings, and thus of countless homes and factories
showing that it should provide more. In fact, the one not being built. They must be shown how as the result of
outstanding objective fact in the situation is that in taking all the necessary actions it prohibits or makes more
responsibility for activities beyond defense against the expensive, the environmental movement has been a major
initiation of force, the government does something it cause of the marked deterioration in the conditions in
should not do: namely, it initiates physical force against which most people now must live their lives in the United
people.78 States—that it is the cause of families earning less and
having to pay more, and, as a result, being deprived of
the ability to own their own home or even to get by at all
4. The Economic and Philosophic Significance of without having to work a good deal harder than used to
Environmentalism be necessary.
The American people must be made aware of what Ironically, while claiming to be concerned about the
environmentalism actually stands for and of what they “environmental impact” of everyone’s actions, the envi-
stand to lose, and have already lost in economic terms as ronmental movement is utterly unconcerned about the
the result of its growing influence. They must be made economic impact of its own actions. It demands that
aware of the environmental movement’s responsibility before human beings be allowed to act, they first prove
for the energy crisis and the accompanying high price of an impossibility: namely, that their actions will bring no
oil and oil products, which is the result of its systematic harm to any species, indeed, any geologic rock forma-
and highly successful campaign against additional en- tion, anywhere on earth, for an indeterminately long
ergy supplies.79 They must be made aware of its conse- period of time. It itself, however, is to be free to act
quent responsibility for the enrichment of Arab sheiks at without any concern whatever for the consequences of
the expense of the impoverishment of hundreds of mil- its actions on the lives and well-being of human beings.
lions of people around the world, including many mil- The environmental movement does not care to know
lions here in the United States. They must be made aware that the rise in the price of oil and all other increases in
of its responsibility for the vastly increased wealth, power, the cost of living that it has brought about necessarily
and influence of terrorist governments in the Middle have a negative impact on human health as well as on
East, stemming from the high price of oil it has caused, happiness, and have actually cut short an undetermined
and for the resulting need to send an American army to number of human lives. This is because as a consequence
the region. In the absence of the environmental move- of having to meet higher costs of living, there are always
ment, the war in the Persian Gulf would not have been at least some people who are put in the position of having
necessary. For in that case, the Iraqi dictator would not to do without, or at least postpone, such things as medical
have been able to achieve a significant military build-up: checkups and necessary repairs on their automobiles,
he would not have had the oil revenues to finance it. home heaters, or wiring systems, and who, because of
The American people must be made aware of how the this, suffer injury or even death from illnesses or acci-
environmental movement has steadily made life more dents they might otherwise have avoided.
difficult for them in prohibiting, or increasing the cost, This kind of result is the effect of all legislation which
of one economic activity after another. They must be increases costs. Such legislation always has negative
shown how, as the result of its existence, people have economic consequences which are not immediately ob-
been prevented from taking such necessary and rela- vious. For it embraces the consequences of millions of
tively simple actions as building power plants and roads, people having to respond to some degree of straightening
extending airport runways, and even establishing new of their financial circumstances and corresponding de-
garbage dumps. They must be shown how the history of cline in their standard of living.80
the environmental movement is a history of destruction: Even more insidious, legislation that increases costs,
of the atomic power industry; of oil fields, oil refineries, or in any way reduces economic efficiency, has a cumu-
and oil pipelines; of coal mines; of metal smelters and lative negative effect on the standard of living, which
steel mills; of the Johns Manville Company and the results from the fact that it reduces the ability of the
asbestos industry; of logging companies, sawmills, and economic system to accumulate and maintain capital.
paper mills; of cranberry growers and apple growers; of This is the result of the vast diversion of capital from
tuna fishermen—to name only those which come readily normal, productive uses to uses required by law to be in
to mind. They must be shown how the environmental compliance with the ever swelling array of “environmen-
movement has been the cause of the wanton violation of tal” regulations—for example, the vast sums of capital
78
80
79 For a further
These full
principles
account
critique
were
of how
ofclearly
thethe
externalities
environmental
understooddoctrine,
both
movement,
byinthe
particular
United
in conjunction
States
the external-benefits
Federal
withAppeals
the U.S.
doctrine,
government,
Court for
see
the
below,
District
has been
chap.
ofresponsible
Columbia
9, pt. B, sec.
Circuit
not2,only
theand
subsection
forby
the
thehigh
United
“Economic
price
States
of oilgovernment’s
Inequality
and oil products
andOffice
the
but
Law
also
of Management
offor
Diminishing
virtuallyand
every
Marginal
Budget
otherUtility.”
under
aspectthe
of Bush
the energy
administration.
crisis, see the
Thediscussion
Court cited
“The
research
Energy
demonstrating
Crisis” in pt.that
A ofone
thisadditional
chapter; and
death
chaps.
may6result
and 7,from
passim,
reduced
especially
incomes thecaused
discussion
by each
“How
$7.5the
million
U.S. of
Government,
additional expense
Not the imposed
Oil Companies,
by government
Caused the
regulation.
Oil Shortage.”
On this basis, the Office of Management and Budget blocked the enactment of a costly set of environmental regulations proposed by the Department of Labor which ostensibly sought to promote workers’ health and safety. The Office found that the regulations were so expensive that their enactment would cause more deaths than they would avoid. See “Citing Cost, Budget Office Blocks Workplace Health Proposal,” New York Times, March 16, 1992, p. A13.
that must be unnecessarily expended to remove asbestos which contemporary society has fallen, I offer the fol-
from buildings, to replace underground gasoline storage lowing excerpt from a recent news story. I believe that
tanks at service stations, or to prevent the escape of the actions described in this news story rival in absurdity,
ordinary chemical fumes from dry cleaning establish- and far exceed in viciousness, those described in the
ments. Capital diverted in this way is drawn not only ancient report that the Roman Emperor Caligula had
from the production of consumers’ goods but also from made his horse a member of the Roman senate.
the production of subsequent capital goods. This last A New York commodities dealer pleaded guilty in Fed-
reduces the ability of the economic system to produce eral District Court today to destroying 86 acres of wetlands
more capital goods than it uses up in production and thus on his hunting retreat and was ordered to pay a $1 million
its ability to increase the supply of capital goods, on fine and $1 million as restitution.
which depends its ability to increase production in the The dealer, Paul Tudor Jones 2d, was also banned from
future, including the future supply of capital goods. hunting migratory wildfowl through 1991—“restitution for
Carried far enough, by means of enough wasteful and the birds,” said Judge Frederick Smalkin, who sentenced
destructive environmentalist regulations, the reduction him.
in the production of capital goods may be so great as to . . . Under the plea bargain, he was fined $1 million,
make impossible even the replacement of the capital ordered to pay $1 million in restitution to the National Fish
goods used up in production. If that happens, the subse- and Wildlife Foundation and ordered to restore the 86 acres,
quent ability to produce declines, including the subse- said Jane Barrett, assistant United States attorney. Mr. Jones
quent ability to produce capital goods.81 was placed on 18 months’ probation and barred from de-
veloping 2,500 of his 3,272-acre estate. Wetlands are crit-
In sum, the American people need to be shown how ical because they filter pollutants and provide wildlife
the actual nature of the environmental movement is that habitats.82
of a virulent pest, consistently coming between man and
The meaning of this news story is that the rightful
the work he must do to sustain and improve his life.
owner of a piece of property has been wantonly deprived
If and when such understanding develops on the part of his property—the substance of it—and then outra-
of the American people, it will be possible to accomplish geously humiliated by a gang of smirking tormentors,
the appropriate remedy. This would include the repeal of indistinguishable in the nature of their behavior from
every law and regulation in any way tainted by the hoodlums robbing an innocent man on the street. For
doctrine of intrinsic value, such as the endangered spe- what else does it mean to seize the power to determine
cies act. It would also include repeal of all legislation the use of someone else’s property, without his consent
requiring the banning of man-made chemicals merely and without compensation, and then punish him for dar-
because a statistical correlation with cancer in laboratory ing to use what is in fact absolutely his right to use, and
animals can be established when the chemicals are fed to no one else’s, and, in the process, as a calculated act of
the animals in massive, inherently destructive doses. And outrage, make him pay compensation—for his use of his
it would include abolition of the Environmental Protec- own property—to birds. The only difference between
tion Agency, which is one of the foremost practitioners this and the activities of ordinary hoodlums is that the
of pseudo-science in the United States today and the hoodlums in this case wear the robe of a U.S. district
leading instrument of the economic destruction that is judge and occupy the office of an assistant U.S. attor-
practiced in the name of environmentalism. The overrid- ney.
ing purpose and nature of the remedy would be to break
the constricting grip of environmentalism and make it
possible for man to resume the increase in his productive 5. Environmentalism, the Intellectuals, and Socialism
powers in the United States in the remaining years of this Environmentalism is the enemy not only of industrial
century and in the new century ahead. civilization, individualism, and capitalism, but also of
*** technology, science, human reason, and human life. It
As I will show in the remainder of this chapter, the must be fought in the name of these values. Those who
philosophic significance of environmentalism is more should be leading the fight against it are the intellectuals.
profound than its economic significance, which is cer- They, presumably, are men of the mind and thus auto-
tainly great enough. The cultural acceptance of a doctrine matically advocates of reason, human life, and all the
as irrational as environmentalism makes clear that the fundamental human values that are obviously based on
real problem of the industrialized world is not “environ- reason, such as science and technology.
mental pollution” but philosophical corruption and mor- Unfortunately, of course, it is not working out that
al depravity. way. If the intellectuals were opposed to environmental-
As an indication of the depths of the depravity into ism, it would never have achieved the following it has.
81
82 For elaboration
“Marsh Destroyed,
of the
Owner
principles
Is Fined,”
involved
Newin
York
the Times,
presentMay
discussion,
26, 1990.
see below, chap. 14, pt. B, sec. 3.
100 CAPITALISM
It would probably be nonexistent; if it existed, it would who consistently evaded the ideas of the major theoreti-
be utterly disreputable. The fact is that the great majority cal defenders of capitalism and critics of socialism, by
of today’s intellectuals, who should be fighting for human ignoring or otherwise refusing to take those ideas seri-
values, either do not know enough to do so, or have ously. As the result of this evasion, even the very name
become afraid to do so, or, still worse, have themselves of Ludwig von Mises, who was the greatest defender of
become the enemies of human values and are actively capitalism and critic of socialism of all time, is still
working on the side of environmentalism. unknown to the great majority of intellectuals.
It is important to explain how this has happened. The great majority of intellectuals never bothered to
I believe that to an important extent the hatred of man try to understand the intellectual case for capitalism:
and distrust of reason displayed by the environmental namely, the economic theories not only of von Mises but
movement are a psychological projection of many con- also of the Austrian and British classical economists in
temporary intellectuals’ self-hatred and distrust of their general, and the political philosophy of John Locke and
own minds, which have been made much more acute as the Founding Fathers of the United States, and, more
the result of the visible worldwide collapse of socialism, recently, the philosophy of Ayn Rand. For the most part,
and the fact that they, as the advocates and apologists of the intellectuals either ignored the intellectual case for
socialism, have been responsible for the destruction it capitalism or found it to be an object of amusement, and
has wrought. As the parties responsible for socialism— ridiculed it. Yet such ideas as the law of comparative
for a system which has brought poverty and tyranny to advantage and the harmony of the rational self-interests
every country upon which it was imposed, from Soviet of all individuals and groups, which the advocates of
Russia and the East European nations to mainland China, capitalism espoused, would have prevented the rise both
Indochina, Ethiopia, Angola, and Cuba—they have cer- of Marxism and of Nazism, and the existence of both
tainly been “a plague upon the world.” And if socialism world wars—if the intellectuals had taken the trouble to
had in fact represented reason and science, as most understand them.83
intellectuals cannot help but continue to believe, there Thus, I believe, it is certainly not without cause that
would be grounds to distrust reason and science. For the “mainstream” of today’s intellectuals has lost confi-
then, reason and science would have been responsible for dence in reason. The “intellectual mainstream” has prac-
scores of millions of murders. ticed a long-standing policy of massive and willful evasion,
Of course, it is not reason and science that have been in refusing to know what it could have known. It has
responsible for those murders. What have been respon- carried evasion to the point of creating for itself an
sible are the vicious, irrational ideas and immoral char- entirely illusory, make-believe notion of rationality, which
acter of the majority of the last several generations of has now come crashing down. The intellectual main-
intellectuals. Although it is never spoken of, the undeni- stream has so far removed itself from reality that insofar
able fact is that the hands of several generations of as it turns to introspective evidence for the reliability of
Western intellectuals are covered with blood: intellectu- reason, it encounters the fact that on the basis of virtually
ally and morally, they have been accessories, either be- everything it believes, socialism should work. As I stated
fore the fact or after the fact, to the mass murders committed previously, it believes that on the basis of every principle
by the socialist regimes. it knows, socialism is ethically and economically supe-
Socialism, international and national, Marxist and rior to capitalism.84 And when, at last, the intellectual
Nazi, with all of its wanton destruction and mass murder, mainstream is confronted with inescapable, overwhelm-
was not an accident visited upon mankind from heaven. ing evidence of the failure of socialism, rather than admit
It was the product of the leading ideas, moral and eco- it has been profoundly, devastatingly wrong, it decides
nomic, of generations of Western intellectuals. Karl Marx that it has no other choice than to throw up its hands, and
and Friedrich Engels, and all of the intellectuals who take the failure of socialism as the final, convincing proof
elaborated and disseminated their theories, were respon- of the failure of reason. And then, I believe, in appraising
sible for socialism’s coming to power in Russia and what it perceives as its long-standing adherence to rea-
China and everywhere else that the rule of the Commu- son in supporting socialism in the face of rising rivers of
nists extended. And all those intellectuals who thereafter blood, it comes to the conclusion that reason can be a
refused to know what was going on in those countries, devastatingly destructive force, and that those who have
who denied the facts, excused them, or outright lied about adhered to reason are worthy of hatred.
them—they bear responsibility for socialism’s having re- Today’s intellectual mainstream, in other words, has
mained in power. very good reason for doubting its mind and hating itself.
And wider than these groups, and fundamentally just And thus it is not surprising to see that just as the failure
as responsible, have been all the hordes of intellectuals of Marxian “scientific” socialism has become more and
83
84 T heabove,
See law of chap.
comparative
1, pt. B,asec.
dvantage
5, the discussion
is explained“Economics
in chap. 9, pt.
Versus
C, sec.
Irrationalism.”
4. The doctrine of the har mony of interests is demonstr ated in almost every chapter of this book, but see especially, Chapters 6, 9, 11, 13, and 14.
more apparent, the ranks of the “greens,” who hate the grounds for the revolutionary change that is the political
science and technology, have more and more swelled. outcome of the Marxist analysis. . . .
But while the greens have come to hate science and In a curious way, an explanation of why Marx’s predic-
technology, they continue to love socialism. Their con- tion has failed to materialize—that is, until now—emerges
ception of a “postindustrial” world is entirely socialistic. from the improved understanding of economic processes
Indeed, it should be realized that the environmental that is one product of the recent concern with the environ-
ment. . . . Since no one has to pay for it, there is nothing to
movement has the potential for bringing about the achieve-
keep pollution from happening. And, as we now well know,
ment of socialism on a global basis, despite all of the the cost is borne by society as a whole. As I pointed out in
enormous setbacks socialism has recently suffered around The Closing Circle, “A business enterprise that pollutes the
the world. The establishment of worldwide socialism is environment is therefore being subsidized by society; to
implied in efforts to limit global carbon-dioxide emis- this extent, the enterprise though free is not wholly private.”
sions and other global chemical emissions. The setting I pointed out as well that this arrangement leads to “. . . [a]
of such global limits and their allocation among the temporary cushioning effect of the ‘debt to nature’ repre-
various countries of the world imply the existence of a sented by environmental degradation on the conflict be-
worldwide central planning authority with respect to a tween entrepreneur and wage earner, which as it now
reaches its limits may reveal this conflict in its full force. . . .
wide variety of essential means of production. Such an
In this sense the emergence of a full-blown crisis in the
authority would be necessary to determine which coun- ecosystem can be regarded, as well, as the signal of an
tries were to receive the right to burn how much oil or emerging crisis in the economic system.”85
coal, and to carry on how much of virtually any industrial
Thus, according to Commoner, Marx will be proved
process that emitted chemicals held to be dangerous
right after all—on the basis of such things as the accu-
global pollutants. A global central planning authority is
mulation of carbon dioxide in the atmosphere and of beer
implicit in all potential international efforts to combat
cans on the beach. These will allegedly compel the world
alleged global problems. For what is necessarily present
to adopt a social system in which much less is produced
in all such efforts is the attempt to organize mankind into
in total and in which the members of one group can gain
a collective unit that acts as one and does so with consis-
only at the expense of the loss of the members of other
tency and coordination, i.e., is centrally planned.
groups. In that world, apparently, Commoner will feel at
Not surprisingly, one of the most prominent theorists
home. It will be a world in which men do not join together
of the environmental movement, Barry Commoner, of-
to subdue nature for their mutual and increasing benefit,
fers a specific bridge between the doctrines of the social-
but an impoverished, static world in which men must
ists and those of the ecologists. The bridge is in the form
fight one another for scraps of bread, for the alleged sake
of an attempted ecological validation of one of the earli-
of appeasing nature.
est discredited notions of Karl Marx—namely, Marx’s
Along these lines, it should be realized that the belief
prediction of the progressive impoverishment of the wage
in the need for global limits on carbon dioxide and other
earners under capitalism. Commoner attempts to salvage
chemical emissions and thus in the need for international
this notion by arguing that what has prevented Marx’s
allocation of permissible emissions implies that every
prediction from coming true, until now, is only that
country is an international aggressor to the degree that it
business firms have been subsidized by society at the
is economically successful (and thus, of course, that the
expense of the environment. In effect, says Commoner,
United States is the world’s leading aggressor). For the
the exploitation of the workers has been mitigated by
consequence of its success is held to be either to push the
capitalism’s ability—temporarily—to exploit the envi-
volume of allegedly dangerous emissions beyond the
ronment. But now this process must come to an end, and
safe global limit or to impinge upon the ability of other
the allegedly inherent conflict between the capitalists
countries to produce, whose populations have more ur-
and the workers will emerge in full force. In Commoner’s
gent needs. Thus, in casting the production of wealth in
own words:
the light of a danger to mankind, by virtue of its alleged
Marx believed that as capital accumulated, the amount effects on the environment, and thereby implying the
of its fixed forms (productive machinery)—which is related need for global limits on production, the ecology move-
to what he called the “organic composition of capital”—
ment attempts to validate the thoroughly vicious propo-
would increase. This is the denominator in the profit equa-
sition, lying at the very core of socialism, that one man’s
tion, and Marx believed that as this denominator grew, the
rate of profit would fall. To counteract this trend, the gain is another’s loss.86
capitalists would need to make increasing inroads on the Another important illustration of the profoundly so-
share of production that goes to the workers. The working cialistic sympathies of the greens is provided by a recent
class would become increasingly impoverished, and the publication of the Sierra Club. This is a collection of
growing conflict between capitalist and worker would lay essays entitled Call to Action, Handbook for Ecology,
85
86 Barry
If the influence
Commoner,of the
Theecology
Poverty
movement
of Power continues
(New York:to grow,
Alfredthen
A. Knopf,
it is perfectly
1976),conceivable
pp. 252, 254.
that
Forinayears
refutation
to come,
of all
theaspects
very intention
of the Marxian
of a country
exploitation
to increase
theory,
its production
see below,could
chap.serve
11, pt.
asCa and
cause
chap.
of war,
14, pt.
perhaps
B. precipitating the dispatch of a United Nations security force to stop it. Even the mere advocacy of economic freedom within the borders of a country would logically—from the depraved perspective of the ecology movement—be regarded as a threat to mankind. It is, therefore, essential that the United States absolutely refuse to sanction in any way any form of international limitations on “pollution”—that is, on production.
102 CAPITALISM
Peace and Justice. The book is dedicated to “the people ment of the environmentalists and the old red movement
of El Salvador” and has a preface by Jesse Jackson. It of the Communists and socialists is the superficial one
contains articles with such titles as “Share the Wealth” of the specific reasons for which they want to violate
and “Co-ops: An Alternative to Business as Usual.” Very individual liberty and the pursuit of happiness. The Reds
significantly, and capturing the essence of the book, the claimed that the individual could not be left free because
editor declares in the foreword that “[T]he political and the result would be such things as “exploitation,” “mo-
economic system that destroys the Earth is the same nopoly,” and depressions. The Greens claim that the
system that exploits workers. . . .”87 individual cannot be left free because the result will be
The environmental movement, of course, also advo- such things as destruction of the ozone layer, acid rain,
cates socialism on a much less grandiose scale than that and global warming. Both claim that centralized govern-
of a worldwide central planning authority. For example, ment control over economic activity is essential. The
it also advocates socialism in the form of “bio-regional- Reds wanted it for the alleged sake of achieving human
ism,” which represents socialism on the scale of self-suffic- prosperity. The Greens want it for the alleged sake of
ient local regions allegedly distinguished by their biological avoiding environmental damage and for the actual, ad-
characteristics.88 Indeed, it is to be expected that the mitted purpose of inflicting human misery and death
environmental movement will increasingly revert to the (which was also the actual, but unadmitted purpose for
advocacy of such utterly naïve forms of socialism, which which the Reds wanted it). Both the Reds and the Greens
Marx labeled utopian. want someone to suffer and die; the one, the capitalists
Such forms of socialism are more consistent than is and the rich, for the alleged sake of the wage earners and
Marxism with the movement’s thoroughgoing irrational- the poor; the other, a major portion of all mankind, for
ism and also with the irrationalist origins of socialism the alleged sake of the lower animals and inanimate
itself. Socialism was originally founded on hatred for nature.
reason, science, technology, and the industrial civiliza- Thus, it should not be surprising to see hordes of
tion that rests on them. It began as an irrational reaction former Reds, or of those who otherwise would have
against the emergence of modern capitalism—as part of become Reds, turning from Marxism and becoming the
a wider “romantic” reaction against the Enlightenment Greens of the ecology movement. It is the same funda-
as a whole. But in the nineteenth century, the prestige of mental philosophy in a different guise, ready as ever to
capitalism’s underlying values was beyond challenge. wage war on the freedom and well-being of the individual.
The major contribution of Marx to socialism was to In seeking to destroy capitalism and industrial civiliza-
separate himself and his supporters from the then exist- tion, both movements provide ample potential opportunity
ing main body of the socialist movement, which he for those depraved individuals who would rather kill than
labeled utopian, and to wrap the socialist program in the live, who would rather inflict pain and death than expe-
mantle of reason and science. Henceforth, socialism was rience pleasure, whose pleasure comes from the inflic-
to be in the vanguard of science, enlightenment, and tion of pain and death.
progress. The unraveling of that effort, which is now Unfortunately, there is no lack of such individuals.
taking place across the world and which is manifest in There are serial murderers in the world. History tells us
the collapse of Communist regimes, means that social- of mobs that cheered at the sight of human beings being
ism should be expected to revert to its irrationalist ori- torn to pieces by wild beasts in the arena, and of other
gins, which is precisely what it is doing in the rise of the mobs that cheered at the sight of “witches” and heretics
environmental movement. burning alive at the stake. In our own time, there have
Thus, the green movement is the old red movement, been Hitler, Stalin, and Mao, and an array of lesser such
deprived of its pretensions to rationality and seeking to gangsters, each with a whole army of sadistic murderers
evade its guilt by turning on reason itself, as though at his beck and call. In every case but that of the serial
reason were responsible for the failure of socialism and murderers, there has been some kind of philosophical
for all the horrors that have been committed as the result justification for the murders, such as the security of the
of socialism. The green movement, in other words, is the State, the will of God, the achievement of Lebensraum,
red movement stripped of the veneer of reason and or the establishment of communism and a future classless
science and bent on the destruction of reason and science society. Each of these alleged values supposedly justified
rather than take the trouble to learn what reason and the murder of living human beings. As the Communists
science actually are. The green movement is the red were so fond of saying, “The end justifies the means.”
movement no longer in its boisterous, arrogant youth, but And now there are the leaders of the ecology movement,
in its demented old age.89 whose alleged end is the preservation of such things as
The only difference I can see between the green move- wildlife, jungles, and rock formations for their own sake,
87
88
89 Cf. Brad
See,Ayn
for example,
Rand,
Erickson,
“The
Kirkpatrick
ed.,
Left:
Call
OldtoSale,
and
Action,
Dwellers
New”
Handbook
in Ayn
in theRand,
for
Land
Ecology,
The
(San
New
Francisco:
Peace
Left.andSierra
JusticeClub
(SanBooks,
Francisco:
1985).
Sierra
ThisClub
bookBooks,
is marked
1990),
by total
p. 5. ignorance of history and of every proposition of economics.
and for whose alleged sake they look forward to throt- possible for many years for people to believe that the
tling and destroying industrial civilization and decimat- purpose of the human sacrifices being called for on the
ing mankind. part of the rich and the capitalists was to raise the level
Whatever may have been the delusions of religious of the average human being by bringing justice and
fanatics and the advocates of racial or class warfare prosperity to the wage earners, who had allegedly been
concerning the actual nature of their values, such delu- victimized by the injustices and economic evils of capi-
sions must wear exceedingly thin in the case of the talism.
environmental movement. It is transparently obvious But with environmentalism and the Greens, the first
that no one in the world can actually value such things thing to be sacrificed, with scarcely a moment’s concern,
as rock formations, jungles, and dangerous wildlife for is the standard of living of the wage earners and the
their own sake. At best, that would be comparable to average human being. Indeed, from the perspective of
valuing pebbles on Mars or gas clouds on Jupiter for their environmentalism, their very existence for the most part
own sake. But what some people can value, unfortu- represents “surplus population,” which prevents the ex-
nately, is the sight of other human beings suffering. This istence of allegedly more important members of animal
was the value which the Communists and the Nazis species. Thus the livelihood of wage earners is to be
sought, which religious fanatics have sought, which se- sacrificed en masse, without a thought, whenever the
rial murderers seek, and which the leaders of the envi- preservation of any “endangered species” is in question.
ronmental movement seek. Everything wage earners buy is to be made more expen-
The kind of potential murderers that are to be found sive by restricting the production of energy and by im-
in the ranks of the environmental movement are, for the posing one unnecessary cost after another in efforts to
most part, probably not personally violent in any appar- escape imaginary terrors.90 Environmentalism and the
ent way. In eras that are philosophically and culturally Greens stand for human sacrifice without even the pre-
better than our own, they might even pass their entire tense of human beneficiaries. They stand for sacrifice—
lives quietly, in modest obscurity, causing harm to no for destruction—pure and simple. They reveal far more
one. In such a better era, Hitler might have passed his clearly than did socialism and the Reds the actual nature
days as an obscure paperhanger, Himmler as a chicken of the doctrine of altruism—of human sacrifice.91
farmer, and Eichmann as a factory worker or office clerk. However justified today’s intellectual mainstream is
Lenin would probably have been just a disgruntled intel- in doubting its mind and hating itself, it has absolutely
lectual, and Stalin perhaps an obscure cleric. But in the no basis for blaming its self-doubt and self-hatred on
conditions of a collapse of rationality, frustrations and reason. What it took as reason in advocating socialism
feelings of hatred and hostility rapidly multiply, while was never reason, but contemptible ignorance; what it
cool judgment, rational standards, and civilized behavior apparently takes as having been loyalty to reason in its
vanish. Monstrous ideologies appear and monsters in adherence to socialism was never loyalty to reason, but
human form emerge alongside them, ready to put them willful, defiant ignorance. The roots of the intellectuals’
into practice. The ecology movement is just such a abandonment of reason are to be found not in the collapse
movement, with just such a potential. Its expressions of of socialism, but in their previous support of socialism.
approval for such images as that of a terrified human In the days of a generation or more ago, when the
being, being eaten alive by alligators, is an invitation to intellectual mainstream still projected confidence in rea-
torturers and murderers looking for a rationale to call for son, what it took reason to mean in the realm of politics
the exercise of their blood lust. and economics was that a comparative handful of men—
In my view, the open irrationalism of environmental- an intellectual elite—would arrogate to themselves a
ism and ecology marks them as nothing but the intellectual monopoly of thought: they would deny the rationality
death rattle of socialism in the West, the final convulsion and the independence of the great mass of mankind, and
of a movement that only a few decades ago eagerly treat everyone as clay for them to mold. Everyone would
looked forward to the results of paralyzing the actions of be compelled to live his life in compliance with their
individuals by means of “social engineering” and now central plan. This was the meaning of socialism and its
seeks to paralyze the actions of individuals by means of “social engineering.”
prohibiting engineering of any kind. If such comparisons Naturally, this project failed miserably. Its failure was
are possible, I think the Greens are actually a cut below certainly not the failure of reason, however. On the
the Reds and will fade much more quickly from the contrary, it was the failure of a monumentally irrational
scene, because of their open irrationality. In the case of idea: namely, that the independent exercise of reason by
socialism and the Reds, there was for many years at least the great mass of mankind could be prohibited in the
room for some doubt on the part of many people. It was economic realm, and that somehow, on the strength of a
90
91 The
On the
costs
nature
merely
of altruism
of complying
and self-sacrifice,
with the environmental
see Ayn Rand,
movement’s
AtlasShrugged
demands
andfor
Virtue
the cleanup
ofSelfishness.
of toxic waste sites is estimated at between $300 billion and $700 billion over the coming few years. See “Experts Question Staggering Costs of Toxic Cleanups,” New York Times, September 1, 1991, p. 1. (The cost of complying with other antipollution regulations is currently $115 billion per year [Ibid., p. 12].) Even using the EPA’s far-fetched methods of estimating risk, the maximum number of cancer cases which can be linked to public exposure tohazardous wastes is approximately 1,000 per year. (Ibid.) All reasonable protection against such wastes can frequently be secured for as little as a half of 1 percent of the costs presently mandated by law and by the EPA. (Ibid.) Thus, hundreds of billions of dollars have been and are to be squandered to appease the imaginary terrors of the environmentalists.
104 CAPITALISM
tiny, insignificant fraction of mankind’s collective intel- two centuries or more.

ligence, economic success could be achieved for all. However, because today’s intellectual mainstream does
Whatever sort of “fatal conceit” this may have been, to not fundamentally distinguish man from inanimate na-
use the expression of Professor Hayek, it was not any ture—on such explicit philosophical grounds as deter-
conceit of reason.92 At its base, the entire project was minism—the inference today’s intellectuals have apparently
marked by the most profound contempt for reason—for drawn from the failure of socialism is the lunatic notion
the reason of all of mankind but that of the intellectual that it is dangerous to violate laissez faire in the realm of
elite, which was to rule mankind under socialism. nature. Instead of arriving at the insights of the British
Today, the intellectuals apparently think they have classical economists into the natural economic harmo-
learned their lesson. They are through with engineer- nies prevailing among free, rational beings and requiring
ing—all of engineering—and through with reason, be- the absence of government intervention, they believe
cause they think they know how badly the seemingly they have gained insights into alleged natural harmonies
best-laid rational plans can run amuck. They now believe prevailing among wild animals and inanimate objects.
that man’s acting on nature on a foundation of reason and They call these alleged harmonies “ecosystems,” and
science is as dangerous as their acting on man on a they believe that the existence of “ecosystems” requires
foundation of “reason” and “science”—on what, in a the absence of intervention by rational human beings in
state of virtual dementia, they choose to believe is reason nature. In a manner reminiscent of economists arguing
and science, namely, Marxism and other variants of against government intervention into the affairs of human
collectivism. Thus, for example, they believe that the beings, they argue against human interference with na-
engineering of atomic power plants and dams is as dan- ture and its alleged ecosystems.
gerous as the engineering of people that they so long Ironically, in arguing in this way, the ecology move-
supported in countries such as the former Soviet Union. ment not only seeks the perpetuation of all the horrors of
This is how they act. This is how their behavior can be socialism, but also turns out to embody the substance of
understood. what was once an unjust caricature of the defenders of
The lesson the intellectuals should have learned from capitalism. For it adopts as its actual policy what its
the failure of socialism, and still could learn if they intellectual predecessors ridiculed the defenders of cap-
finally chose to end their ignorance and read the authors italism for supposedly believing, namely, that man should
I have mentioned, above all, Ludwig von Mises and Ayn not intervene in nature for fear of unleashing unknown
Rand, is the precise opposite of the one they claim to have forces. That was what the advocates of socialism and
learned. The correct lesson is that it is human reason that government intervention repeatedly accused the defend-
one must respect, namely, the reason of the individual ers of capitalism of believing when the latter stood on the
human being. The substantive meaning of this proposi- grounds of economic law and its harmonies as an argu-
tion is that one must respect individual rights, as under- ment against government interference in the economic
stood by John Locke and the Founding Fathers of the system. In taking this position, the advocates of capital-
United States, and that the social system which one must ism, of course, never advocated a policy of “do nothing,”
uphold, as representing the consistent implementation of as their socialist and interventionist critics claimed. On
respect for individual rights, is laissez-faire capitalism. the contrary, they have always advocated that the gov-
If the intellectuals understood this lesson, then they ernment do nothing, so that the individual citizens could
would understand that what it is dangerous to violate is be free to do what was necessary to achieve their pros-
laissez faire in the realm of human beings. perity.
The obvious fact is, of course, that man can success- The defenders of capitalism argue both against gov-
fully control nature for the benefit of his life. But the ernment interference into the affairs of men and in favor
essential politico-economic requirement of his doing so of human interference in nature. The two are merely
is that the government must not attempt to control man. different sides of the same coin: namely, individuals must
The individual man or woman is the possessor of reason be free of government intervention precisely in order for
and the being of ultimate value, each to himself or them to be able effectively to intervene in nature. It is the
herself, whose rights must be fully respected. It is these individual citizens, not the government, who are the
individually sovereign beings who must be free to act controllers of nature. Whether the government prohibits
upon nature. When they are free, they form and intensify its citizens from acting on nature on the grounds that it
the associations that constitute a division-of-labor soci- must have a monopoly of such activity, or on the grounds
ety. They create capitalism. They are then capable of that such activity is simply dangerous, the substance and
acting upon nature with all of the progressively growing the consequences are identical: namely, paralysis, pov-
success demonstrated in the Western world over the last erty, and death. The socialists at least kept up the pretense
92 Cf. F. A. Hayek, The Fatal Conceit: The Errors of Socialism, W. W. Bartley III, ed. (London: Routledge, 1988).
that they wanted to achieve human values more effi- people who, in the words of a well-known “liberal” of
ciently than free individuals could. The environmental- the last generation, needed to be “dragged, kicking and
ists make clear that their actual purpose in alleging the screaming, into the twentieth century”—into the modern
harmonies of “ecosystems” and arguing against human world—it is today’s Left: the Greens of the ecology
intervention in nature is the destruction of human values. movement.
In the ecology movement, the Left has reduced itself The transformation of the socialist movement into the
to a mass of terrified ignoramuses, fearful of all “new- ecology movement creates the opportunity for the de-
fangled” technology. It reveals itself as a virtual Ma and fenders of capitalism to reclaim their rightful place as the
Pa Kettle of the intellect; a remnant from the Dark Ages, true representatives of science, progress, and enlighten-
having managed to survive all this time on some kind of ment, and to make sure that wherever intelligent people
intellectual wildlife preserve, to borrow an expression of who value reason are found, they will increasingly enroll
Ayn Rand’s. What irony it is, that even as this is what the under the banners of capitalism.
Left has become, its members continue to have the Furthermore, the advocates of capitalism should now
audacity to criticize the advocacy of capitalism and proudly proclaim that they turn to the thinkers of earlier
economic freedom as “reactionary.” The more consistent centuries of the modern era for inspiration—to thinkers
elements of the ecology movement openly urge a return such as Adam Smith and John Locke—rather than to
to the Pleistocene—to the Stone Age—in order to live in most of today’s intellectuals. Thanks to the Left’s trans-
an alleged harmony with nature. Yet, at the very same formation into the ecology movement, they can now
time, in the political arena, advocates of some measure claim, with obvious justification, the same kind of mo-
of freedom and capitalism, who espouse recognizable dernity in doing so that men of the Renaissance could
elements of the social philosophy formed in the eigh- claim in looking to the thinkers of antiquity for inspira-
teenth century, in the Age of Reason, and found in the tion rather than to their ignorant contemporaries.
United States Constitution, are ridiculed as “dinosaur It can readily be conceded that Adam Smith and John
Republicans”—because they presumably wish to return Locke and the Founding Fathers of the United States rode
to the Age of Reason. in horse-drawn carriages and wore powdered wigs, and
It is high time this travesty ended. Its foundation was that contemporary intellectuals fly in jet planes and wear
the Marxist doctrine that socialism was the politico-eco- the fashions of today. But those men were the source of
nomic system called for by human reason and thus that essential ideas on which the Industrial Revolution and
movement toward it represented an improvement in human our present level of technological and economic devel-
conditions, and, moreover, that mankind was impelled opment rest. When they rode in horse-drawn carriages,
toward progress by automatic historical forces. All of they were thinking the thoughts that made possible the
these notions, of course, are totally false and are now jet planes of today. Today’s intellectuals, although they
discredited in the eyes of the world. Socialism is a fly in jet planes, are thinking thoughts which are in-
vicious, destructive system. Movement toward socialism compatible with the continuation of industrial civiliza-
is movement toward tyranny, poverty, and death. On the tion. This is now blatantly obvious in their support of the
other hand, capitalism is the politico-economic system ecology movement and in their growing denunciations
actually called for by human reason. Its rising production of economic progress and transparent efforts to stifle it
and improving standards of living represent economic and undo it. They should certainly not be given any form
progress. Movement toward capitalism, or toward a more of credit for the technological and economic achieve-
consistent form of capitalism, is what represents progress ments of the age in which they live, and which they are
in the political realm. And, of course, neither movement in fact out to destroy, and then, on the basis such error,
toward capitalism nor toward socialism, that is to say, be regarded as superior in any way to the thinkers of
neither progress nor decline, is inevitable. Each depends earlier centuries who made possible the accomplish-
on the influence of ideas: progress, on the influence of ments of our own. The nature of their souls and the
rational ideas; decline, on the influence of irrational intellectual level of their philosophy are well expressed
ideas. in the call “Back to the Pleistocene!” a call which if they
In the environmental movement, the Left now clearly do not make themselves, they are certainly not at pains
reveals itself to be the most reactionary movement in the to dispute or capable of disputing. In other words, con-
history of the world, a movement whose “moderates” temporary intellectuals, with few exceptions, are not at
seek a return to the economic conditions of a century ago, all “modern” or advanced, but backward and primitive,
and whose logically consistent elements openly seek a far, far behind intellectuals of earlier generations whom
return to the economic conditions of the Middle Ages or, they delight in ridiculing.
indeed, of the Stone Age. If ever there were a group of The future course of civilization hinges on the extent
106 CAPITALISM
to which the advocates of capitalism and reason can take rising generation, which then starts out in life in posses-
the intellectual offensive against an opposition that is sion of a larger body of knowledge than did the present
now nothing more than a rapidly decomposing intellec- generation. If the new generation continues to think, it
tual corpse. Their ultimate victory appears to be assured, succeeds in further enlarging the sum of human knowl-
provided only that they keep their philosophy alive. edge and thus it too passes on a larger body of knowledge
to its successors than it inherited. And so it can continue
from generation to generation, with each succeeding
6. Environmentalism and Irrationalism generation receiving a greater inheritance of knowledge
While the collapse of socialism is an important pre- than the one before it and making its own fresh contribu-
cipitating factor in the rise of environmentalism, there tion to knowledge. This continuously expanding body of
are other, more fundamental causes as well. Philosophi- knowledge, insofar as it takes the form of continuously
cal-cultural forces are at work in the rise of environ- increasing scientific and technological knowledge and
mentalism which are of the same fundamentality and correspondingly improved capital equipment, is the foun-
significance as built modern civilization.93 Only now, dation of continuous economic progress.
centering on a negative appraisal of the reliability of Progress is a concept unique to man: it is founded on
reason, they are working in reverse, to bring about the his possession of reason and thus his ability to accumu-
destruction of modern civilization. late and transmit a growing body of knowledge across
Environmentalism is the product of a growing loss of the generations. Totally unlike growth, whose essential
confidence in reason long predating the collapse of so- confines are the limits of a single organism, progress has
cialism. It is the leading manifestation of a rising tide of no practical limit. Only if man could achieve omnisci-
irrationalism that is engulfing our culture. As previously ence would progress have to end. But the actual effect of
mentioned, over the last two centuries the reliability of the acquisition of knowledge is always to lay the foun-
reason as a means of knowledge has been under a con- dation for the acquisition of still more knowledge. Through
stant attack led by philosophers from Immanuel Kant to applying his reason, man enlarges all of his capacities,
Bertrand Russell.94 The growth of irrationalism has been and the more he enlarges them, the more he enlarges his
manifested in a series of developments each of which has capacity to enlarge them.96
contributed to the rise of environmentalism. Among them The concept of progress differs radically from the
have been the loss of the concept of economic progress, concept of growth in that it also has built into it a positive
the growth of irrational skepticism, a growing decline evaluation: progress is movement in the direction of a
and outright perversion of education, and the cultural higher, better, and more desirable state of affairs. This
devaluation of man. improving state of affairs is founded on the growing body
of knowledge that the possession and application of
The Loss of the Concept of Economic Progress human reason makes possible. Its foundation is the rising
An important intellectual confusion in the decades potential for human achievement that is based on grow-
prior to the appearance of the ecology movement, which ing knowledge.
helped to pave the way for it and continues to sustain it, While it is possible to utter denunciations of too rapid
was the loss of very concept of economic progress. “growth” as being harmful, it would be a contradiction
Somewhere along the line, the seemingly synonymous, in terms even to utter the thought of too rapid progress,
but in fact very different, concept of economic growth let alone denounce it. The meaning would be that things
took its place. Only after this change had occurred could can get better too quickly—that things getting better
the ecology doctrine succeed. meant they were getting worse.
Growth is a concept that applies to individual living
organisms. An organism grows until it reaches maturity, Irrational Skepticism
then it declines, and sooner or later dies. The concept of A major foundation of the ecologists’ irrationalism
growth is also morally neutral, equally capable of de- that is of long standing is the conviction that whatever
scribing a negative as a positive: tumors and cancers can we may think we know today about anything, can turn
grow. Thus the concept of growth both necessarily impl- out to be wrong tomorrow, because of the discovery of
ies limits and can easily be applied negatively. something new which totally invalidates all of our pre-
In contrast, the concept of progress applies across sumed knowledge about it. This doctrine, which is now
succeeding generations of human beings.95 The individ- increasingly popular, has been a virtual stock in trade of
ual human beings reach maturity and die. But because philosophy courses and of higher education in general
they possess the faculty of reason, they can both discover for several generations. It is on this premise that the
new and additional knowledge and transmit it to the ecologists believe and project that every technological
95
96
93
94 ISee
This
amchap.
above
indebted
proposition
1,
, chap.
pt.for
B,bears
this
1,
sec.
pt.vital
5,an
B,
the
essential
sec.
distinction
discussion
1. similarity
to“Economics
von Mises.
to the theory
ItVersus
wasof
anIrrationalism.”
capital
observation
accumulation
he madepresented
in his seminar
belowat New
in chap.
York14,University.
pt. B, sec. 3.
advance is a potential thalidomide.97 All of their wild ing irrationality, progress in safety has continued decade
conjectures about mass destruction are reinforced by this by decade in the twentieth century. (The irrationality I
premise, of which they are already convinced, in advance refer to is not only the phenomenon of narcotics use, but
of, and apart from, the facts of any particular case. also destructive government interference through such
Such skepticism rests on ignorance of the science of means as inflation, confiscatory taxation, and stifling
epistemology and on the fallacy of equivocation. It does regulation. Such policies can prevent the necessary re-
not understand how man achieves knowledge—how he placement or maintenance of facilities, let alone their
validates his conclusions and can therefore be rationally improvement.)
confident of them. It assumes, in effect, that all claims to
The Destructive Role of Contemporary Education
knowledge are equal—the proved and the unproved—
and that because some claims to knowledge turn out to It is sometimes observed that most of today’s high
be false, any claim to knowledge can turn out to be false. school and college graduates have very little education
For example, it believes that the very fact that people in science and mathematics and thus do not understand
ardently believed in Ptolemaic astronomy at one time, and cannot properly appreciate modern technology. There
and were later proved wrong by Copernicus and Galileo, is considerable merit in these observations, but the prob-
itself raises the possibility that Copernican and Galilean lem goes much deeper. Namely, from the earliest grades,
astronomy will someday be proved wrong.98 the prevailing methodology of contemporary education
The truth is that knowledge is knowledge and contin- systematically encourages the irrational skepticism I
ues to be knowledge for all time to come. It is not have just described.
overthrown by later discoveries, but is supplemented and To explain how this is the case, I must briefly digress
expanded by them. The physics of Archimedes was not into the history of philosophy.
overthrown, but expanded by the physics of Newton. The At the end of the eighteenth century, Immanuel Kant
geometry of Euclid is as true today as ever, though we foisted on the intellectual world a distorted version of what
now know much more about mathematics than Euclid reason is, namely, a faculty divorced from knowledge of the
did. The truths in the writings of Adam Smith are as true real world and limited to awareness of a world of mere
today as when he first wrote them, though our knowledge appearances created by the human mind itself.99 Both in
of economics has been greatly expanded by Ricardo, the reaction against the Kantian version of reason and on the
Mills, Böhm-Bawerk, von Mises, and others. All of direct foundation of it, as early as the first quarter of the
technological and economic progress is a confirmation nineteenth century, reason was being popularly denounced
of the fact that the discoveries of later generations add to by intellectuals of the “Romantic” era as “a false secondary
the discoveries of previous ones rather than refute them. power by which we multiply distinctions.”100
If new discoveries constantly refuted previous discover- The Romantics’ reaction against the Kantian version
ies, as the skeptics claim, progress of any kind would of reason can be understood in part in exactly the same
simply be impossible. Progress rests on the fact that way as Ayn Rand has described the later reaction of the
knowledge is a growing sum, in which the contributions Existentialists against it, namely, if “this is reason, to hell
of succeeding generations are added to those of previous with it!”101 Romanticism, however, also follows on the
generations. direct foundation of Kantianism, which holds that man’s
mind is incapable of actually knowing reality and thus
Similar reasoning applies to the possibility of acci-
that “‘to attain a knowledge of the real, we must go out
dents, which the ecologists fear so greatly. Despite man’s
of consciousness.’”102 According to W. T. Jones, a lead-
best efforts, accidents sometimes occur. A dam may
ing historian of philosophy:
burst, a building may collapse, a drug may turn out to be
unsafe. But by the nature of the case, accidents are the To the Romantic mind, the distinctions that reason
exception—a departure from the normal. Moreover, they makes are artificial, imposed, and man-made; they divide,
and in dividing destroy, the living whole of reality—“We
are steadily tending to be reduced in frequency and
murder to dissect.” How, then, are we to get in touch with
severity as man’s knowledge and prosperity grow. In- the real? By divesting ourselves, insofar as we can, of the
deed, each accident, if its causes are studied and ana- whole apparatus of learning and scholarship and by becom-
lyzed, itself tends to prevent a repetition of that accident. ing like children or simple, uneducated men; by attending
Thus, the actual record of man (when he chooses to use to nature rather than to the works of man; by becoming
his reason) is a steady increase in safety. Few things passive and letting nature work upon us; by contemplation
could be more obvious than that the food, drugs, dams, and communion, rather than by ratiocination and scientific
buildings, bridges, ships, trains, and factories of the method.103
twentieth century are incomparably safer than those of The Romantics held that “we are nearer to the truth
the nineteenth century. Apart from the influence of grow- about the universe when we dream than when we are
97
98
99
100
101
102
103 Thalidomide,
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damage
American
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to fetuses.
1969),
Library,
p. 102.
1990), pp. 77–82.
108 CAPITALISM
awake” and “nearer to it as children than as adults.”104 child begins school. It perceives its job as allowing the
The clear implication of the philosophy of Romanticism student to exercise his native problem-solving abilities,
is that the valuable portion of our mental life has no while imposing on him as little as possible of the alleg-
essential connection with our ability to reason and with edly unnecessary and distracting task of memorization.
the deliberate, controlled use of our conscious mind: we In the elementary grades, this approach is expressed
allegedly possess it in our sleep and as children. in such attitudes as that it is not really necessary for
In its essentials, the philosophy of Romanticism is the students to go to the trouble of memorizing the multipli-
guiding principle of contemporary education. Exactly cation tables if the availability of pocket calculators can
like Romanticism, contemporary education holds that be taken for granted which they know how to use; or go
the valuable portion of our mental life has no essential to the trouble of memorizing facts of history and geog-
connection with our ability to reason and with the delib- raphy, if the ready availability of books and atlases
erate, controlled use of our conscious mind—that we containing the facts can be taken for granted, which facts
possess this portion of our mental life if not in our sleep, the students know how to look up when the need arises.
then nevertheless as small children. This doctrine is In college and graduate courses, this approach is ex-
clearly present in the avowed conviction of contempo- pressed in the phenomenon of the “open-book examina-
rary education that creativity is a phenomenon that is tion,” in which satisfactory performance is supposedly
separate from and independent of such conscious mental demonstrated by the ability to use a book as a source of
processes as memorization and the use of logic. Indeed, information, proving once again that the student knows
it is an almost universally accepted proposition of con- how to find the information when he needs it.
temporary pseudoscience that one-half of the human With little exaggeration, the whole of contemporary
brain is responsible for such conscious processes as the education can be described as a process of encumbering
use of logic, while the other half is responsible for the student’s mind with as little knowledge as possible.
“creativity,” as though, when examined, the halves of the The place for knowledge, it seems to believe, is in
brain revealed this information all by themselves, per- external sources—books and libraries—which the stu-
haps in the form of bearing little labels respectively dent knows how to use when necessary. Its job, its
marked “Logic Unit, Made in Hong Kong” and “Creativ- proponents believe, is not to teach the students knowl-
ity Unit, Made in Woodstock, New York.” Obviously, the edge but “how to acquire knowledge”—not to teach
view of the brain as functioning in this way is a conclu- them facts and principles, which, it holds, quickly be-
sion, which is based on the philosophy and thus inter- come “obsolete,” but to teach them “how to learn.” Its job,
pretative framework of the doctrine’s supporters. its proponents openly declare, is not to teach geography,
Now, properly, education is a process by means of history, mathematics, science, or any other subject, in-
which students internalize knowledge: they mentally cluding reading and writing, but to teach “Johnny”—to
absorb it through observation and proof, and repeated teach Johnny how he can allegedly go about learning the
application. Memorization, deduction, and problem solv- facts and principles it declares are not important enough
ing must constantly be involved. The purpose is to develop to teach and which it thus gives no incentive to learn and
the student’s mind—to provide him with an instantane- provides the student with no means of learning.
ously available storehouse of knowledge and thus an The results of this type of education are visible in the
increasingly powerful mental apparatus that he will be hordes of students who, despite years of schooling, have
able to use and further expand throughout his life. Such learned virtually nothing, and who are least of all capable
education, of course, requires hard work from the stu- of thinking critically and solving problems. When such
dent. Seen from a physiological perspective, it may be students read a newspaper, for example, they cannot read
that what the process of education requires of the student it in the light of a knowledge of history or economics—
through his exercises is an actual imprinting of his brain. they do not know history or economics; history and
Yet, under the influence of the philosophy of Roman- economics are out there in the history and economics
ticism, contemporary education is fundamentally op- books, which, they were taught, they can “look up, if they
posed to these essentials of education. It draws a distinction need to.” They cannot even read it in the light of elemen-
between “problem solving,” which it views as “creative” tary arithmetic, for they have little or no internally auto-
and claims to favor, and “memorization,” which it ap- mated habits of doing arithmetic. Having little or no
pears to regard as an imposition on the students, whose knowledge of the elementary facts of history and geog-
valuable, executive-level time, it claims, can be better raphy, they have no way even of relating one event to
spent in “problem solving.” Contemporary education another in terms of time and place.
thus proceeds on the assumption that the ability to solve Such students, and, of course, the adults such students
problems is innate, or at least fully developed before the become, are chronically in the position in which to be
104 Ibid., p. 104.
able to use the knowledge they need to use, they would facts, and thus have no basis for developing genuine
first have to go out and acquire it. Not only would they understanding of all that depends on those facts, they are
have to look up relevant facts, which they already should placed in the position in which to pass examinations they
know, and now may have no way even of knowing they must attempt to memorize out-of-context conclusions. It
need to know, but they would first have to read and is because of this that a growing proportion of what they
understand books dealing with abstract principles, and to learn as the years pass has the status in their minds of
understand those books, they would first have to read arbitrary assertions. They are chronically in the mental
other such books, and so on. In short, they would first state of having no good reason for most or almost all of
have to acquire the education they already should have what they believe. Thus, in their context of actual igno-
had. rance masked by pretended knowledge, they are prime
Properly, by the time a student has completed a col- targets for irrational skepticism. To them, in their mental
lege education, his brain should hold the essential con- state, doubt of everything can only seem perfectly natural.
tent of well over a hundred major books on mathematics, Such students, such adults, are easy targets for a
science, history, literature, and philosophy, and do so in doctrine such as “environmentalism.” They are totally
a form that is well organized and integrated, so that he unprepared intellectually to resist any irrational trend and
can apply this internalized body of knowledge to his more than willing to leap on the bandwagon of one that
perception of everything in the world around him. He caters to their uncertainties and fears. Environmentalism
should be in a position to enlarge his knowledge of any does this by blaming the stresses of their life on the
subject and to express his thoughts on any subject clearly existence of an industrial society and holding out the
and logically, both verbally and in writing. Yet, as the prospect of an intellectually undemanding and thus seem-
result of the miseducation provided today, it is now much ingly stress-free pastoral existence, one which is alleg-
more often the case that college graduates fulfill the edly “in harmony with nature.”
Romantic ideal of being “simple, uneducated men.” The destructive work of contemporary education car-
Contemporary education is responsible for the grow- ried on against the development of students’ conceptual
ing prevalence of irrational skepticism. The students abilities from the earliest grades on is compounded, as
subjected to it do not acquire actual knowledge. They their education advances to the higher grades, by the
have no firm foundation in a base of memorized facts and teaching of a whole collection of irrationalist doctrines
they have not acquired any solid knowledge of principles that constitute the philosophical substance of contempo-
because their education has avoided as far as possible the rary liberal arts education.
painstaking processes of logical proof and repeated ap- Among them, besides irrational skepticism and the
plication of principles, which latter constitutes a vital and recent addition of environmentalism, are collectivism in
totally legitimate form of memorization. Such students its various forms of Marxism, racism, nationalism, and
go through school “by the seat of their pants.” They are feminism; and cultural relativism, determinism, logical
forever “winging it.” And that is how they go through life positivism, existentialism, linguistic analysis, behavior-
as adults. It is impossible for them to have genuine ism, Freudianism, and Keynesianism.
understanding of anything that is beyond the realm of These doctrines constitute a systematic attack on rea-
their daily experience, and even of that, only on a super- son and its role in human life. All the varieties of collec-
ficial level. To such people, almost everything must tivism deny the free will and rationality of the individual
appear as an arbitrary assertion, taken on faith. For their and attribute his ideas, character, and vital interests to his
education has made them unfit to understand how things membership in a collective: namely, his membership in
are actually known. Their failure to memorize such things an economic class, racial group, nationality, or sex, as the
as the multiplication tables in their childhood, makes it case may be, depending on the specific variety of collec-
impossible for them to understand whatever directly tivism. Because they view ideas as determined by group
depends on such knowledge, which, in turn, makes it membership, these doctrines deny the very possibility of
impossible for them to acquire the further knowledge that knowledge. Their further effect is the creation of conflict
depends on that knowledge, and so on. With each passing between members of different groups: for example, be-
year of their education, they fall further behind. tween businessmen and wage earners, blacks and whites,
Ironically, their failure to memorize what it is appro- English speakers and French speakers, men and women.
priate to memorize ends up putting them in a position in And, of course, when collectivism becomes the guiding
which to pass examinations, they have no other means political principle of a country, the results are unmiti-
than out-of-context memorization—that is, memoriza- gated disaster, ranging from impoverishment to mass
tion lacking any foundation in logical connection and murder.105
proof. Because they have never memorized fundamental Determinism, the doctrine that man’s actions are con-
105 See below, chap. 8, passim.
110 CAPITALISM
trolled by forces beyond his power of choice, denies the deed, as we shall see, of the meaning and value of
very possibility of rational thought being capable of membership in the human race. It has been responsible
guiding human life and achieving human happiness. for the decline in the quality of government in the United
Existentialism, the philosophy that man is trapped in a States, as, unavoidably, many such miseducated gradu-
“human condition” of inescapable misery, obviously teaches ates have found their way into the halls of Congress and
exactly the same conclusion. the state legislatures, and into major offices in all the
Cultural relativism denies the objective value of mod- other branches of government, and, of course, into all the
ern civilization and thus undercuts students’ valuation various branches of the news media and publishing. I
not only of it, but also of the technology and science believe it has even been responsible for the widespread
necessary to build such a civilization, and the valuation use of drugs, inasmuch as living in the midst of modern
of human reason itself, which is the ultimate foundation civilization with a level of knowledge as meager as that
of modern civilization. It also undercuts people’s will- imparted by contemporary education, must be a source
ingness to work hard to achieve personal values in the of chronic and profound anxiety, urgently calling for
context of modern civilization. The doctrine blinds peo- relief. To many, drugs may seem to provide that relief.
ple to the objective value of such marvelous technolog- The “intellectual mainstream” has been at war with
ical advances as automobiles and electric light, and thus the surrounding capitalist society for over a century and
further prepares the ground for the sacrifice of modern a half. Today, the rise of environmentalism, and of fem-
civilization to such nebulous and, by comparison, utterly inism and the new racism, on university campuses and
trivial values as “unpolluted air.” elsewhere, makes clear that the contemporary intellec-
Logical positivism denies the possibility of knowing tual mainstream is also at war with the wider intellectual
anything with certainty about the real world. Linguistic tradition of Western civilization as well. Environmental-
analysis regards the search for truth as a trivial word ism denounces Western civilization for extolling man
game. Behaviorism denies the existence of conscious- above nature.106 Feminism and the new racism denounce
ness. Freudianism regards the conscious mind (the “Ego”) it as “sexist” and “racist,” the alleged product of white
as surrounded by the warring forces of the unconscious male genes.107 Contemporary education, despite the ex-
mind in the form of the “Id” and the “Superego,” and thus istence of individual exceptions, is thus reduced in its
as being incapable of exercising substantial influence on essentials to the activities of a clutch of nonentities
the individual’s behavior. Keynesianism regards wars, engaged in a two-front war with the surrounding material
earthquakes, and pyramid building as sources of prosper- civilization of capitalism and with the intellectual heri-
ity. It looks to peacetime government budget deficits and tage of all of Western civilization.
inflation of the money supply as a good substitute for Clearly, as Ayn Rand observed over thirty years ago,
these allegedly beneficial phenomena. Its practical ef- “the intellectuals are dead.” And matters have now reached
fects, as the present-day economy of the United States the point where the most urgent task confronting the
bears witness, are the erosion of the buying power of Western world is to find replacements—“new intellectu-
money, of credit, of saving and capital accumulation, and als,” who, unlike the alleged intellectuals of today, will
of the general standard of living. be committed to the value of human reason.108 Unless
Such doctrines, as I say, constitute the philosophical such intellectuals can be found, and in sufficient number,
substance of what now passes for a liberal arts education. the world coming into existence before our very eyes will
If one wishes to use the expression “intellectual main- be very much like the one H. G. Wells described in his
stream,” and borrow for a moment the environmentalists’ science fiction story The Time Machine. In Wells’ story,
alleged concern with the cleanliness of streams and such, set in the far future, the human race has divided into two
these doctrines may justifiably be viewed as intellectual degenerate branches: the hideous, subterranean Morlocks,
raw sewage comparable to what can be seen bobbing up who feast on human flesh, and the pretty, surface-dwell-
and down in a dirty river. They and the methodology of ing Eloi, who in totally vacuous innocence serve as food
contemporary education have totally fouled the “intel- for the Morlocks.109
lectual mainstream.” The kind of education I have de- It is sometimes difficult to avoid believing that, figu-
scribed—if it can still be called education, consisting as ratively speaking, as a result of irrationalist philosophy
it does of an unremitting assault on the rational faculty and its inculcation through contemporary education, these
and every rational value—is responsible for the hordes degenerate branches of the human race already exist, in
of graduates turned out over the last decades who have the form of the leaders of the environmental movement
had no conception of the meaning and value of the and those who offer it no resistance or even rush to join
Constitution and history of the United States, of the it, oblivious to the obvious destruction that awaits them.
meaning and value of Western civilization itself, or in- For it would seem that contemporary education has
108
109
107
106 See
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rocks around us, could give way to ten [sic] thousand years of humble civilization, when we choose to pay more for the benefits of nature, when we rebuild the sense of wonder and sanctity that could protect the natural world.” (McKibben, End of Nature, p. 215.) According to this passage, the ten thousand years in which man has risen from the cave and which embrace the totality of man’s civilization were a mistake—they were “encroaching, defiant.” In the next ten thousand years, McKibben hopes, the wildlife, the weeds, and the rock formations that constitute nature will be protected from us, because we will have abandonedanythingresemblingWesterncivilization.
resulted in the creation both of monsters and of vast they believe, because of “social injustice”—that is, be-
numbers of people so mentally enfeebled and so deprived cause of an unfair distribution of wealth. And that is the
of even an elementary sense of manhood that they have basis on which they explain the lower standard of living
no wish or capacity to resist the monsters. Almost every of earlier periods, especially the nineteenth century.
day, such people hear open calls for the radical curtail- Thus, like small children, they believe that automo-
ment of energy consumption—their energy consump- biles, television sets, and everything else exist automati-
tion—and they do not react. They buy bestselling books cally, that, in effect, they just grow on trees. Moreover, they
by environmentalists and read such passages as, “The believe that these trees, unlike the trees of nature, will
environmentally sane standard of living for a population always exist, no matter what is done to them, and that, in
our current size would probably be somewhere between the absence of “social injustice,” they will always be able
that of the average Englishman and of the average Ethiop- to obtain from them all of the goods they now enjoy.
ian—each lives unreasonably.”110 In other words, they On this basis, they feel free to support the delivery of
read an open declaration by a leading environmentalist one blow after another to the economic system—ever
that if environmentalism has its way, their standard of more taxes, ever more regulations—in the expectation
living would be somewhere between poverty by Ameri- that they themselves will never suffer as a result of such
can standards and outright famine! Again, they do not actions. All that will happen, they believe, is that they
react. Of course, they do not even react against calls for will succeed in shaking loose some more goods, or,
mass death. nowadays, more and more, succeed in putting an end to
I believe that the reason the masses of people do not this or that irritant or annoyance. The only ones ever to
respond with outrage against environmentalism is partly suffer, they believe—if anyone ever actually suffers—
the fact that their education has left them unable to take are rich businessmen.
ideas seriously. They hear and read such pronounce- All of this is an essential part of the intellectual
ments and have the reaction that, like so much of what environment in which the ecology movement has flour-
they were taught in school, the pronouncements do not ished. In this intellectual environment, it is perfectly
mean what they say. In addition, and even more import- possible for people to proceed as though, for example,
ant, their education, reinforced by the experience of the only connection between their lives and the existence
growing up in a welfare state, has left many of them with of oil companies is that the oil companies contribute to
a mentality similar to that of small children, who, lacking the pollution of beaches, or, with their pipelines, prevent
all knowledge of how wealth is created, sometimes ap- the migration of one or another species of cute, precious
pear to believe that “money grows on trees.” Very many animals. It is perfectly possible for them to carry such
of our contemporaries, almost certainly the overwhelm- blindness to the level of economic activity as such, and
ing majority of the rank and file of the environmental to believe that the only practical effect of economic
movement, believe that the availability of goods is auto- activity is “pollution,” and that in stopping economic
matic and indestructible, and that they have a corre- activity all they will stop is “pollution.”
sponding automatic right to goods. For the most part, It is in this way that they are ripe for the remarkable
they have little or no knowledge of history, and even the conclusion, described earlier, that the threatening forces
very best educated among them have absolutely no real of nature are created by us and that we could do better
knowledge of economic theory. They simply have no without our material means for dealing with nature than
conception of the process of creating wealth or what its with them. They feel free to abandon industrial civiliza-
requirements are. They have absolutely no concept of tion in the unstated conviction that if and when it is
what a remarkable productive achievement the economic abandoned, they will still be able to keep essentially all
system of the present-day industrial world actually is and the goods they now enjoy, and in addition will have such
that it is capable of being destroyed. benefits as cleaner air, the preservation of assorted cute
They are not, of course, so incredibly ignorant as to animals, and the avoidance of such allegedly impending
believe that human beings all over the world live as calamities as frighteningly bad weather. Nothing, they
people do in the United States or the other industrial believe, will be required of them but some token loss,
countries, or that even in these countries people have such as having to sort their garbage for recycling, or to
always lived as they now do. And they certainly do not form carpools, which is not so bad, they feel, because it
believe that everyone even in the present-day United provides new bases for such good things as “sharing” and
States lives well. But to the extent that they have any camaraderie.
explanation of differences in the standard of living, it Thus, in what may prove to be the greatest tragedy in
centers on the notion of a distribution of wealth. There all of human existence, we see at the end of more than
are poor people in America and elsewhere in the world, two centuries of man’s most dazzling success, the prolif-
110 McKibben, End of Nature, p. 202.
112 CAPITALISM
eration of heirs who as adults possess less than the the last generation, as the growth of irrationalism has
mentalities of children. We see a culture of reason and further accelerated and the effects of the process have
science being transformed before our very eyes into one more and more reached the general public, confidence in
which more and more resembles a culture of primitive the reliability of reason, and thus the philosophical status
man. of man, have declined so far that now virtually no basis
Only the emergence of a large number of “new intel- is any longer recognized for a radical differentiation
lectuals” prepared to fight against environmentalism and between man and animals. This explains why the doc-
irrationalism and for reason and capitalism can assure trine of St. Francis of Assisi and the environmentalists
that twenty-first-century man will be man in a sense concerning the equality between man and animals is now
worthy of the name.111 accepted with virtually no opposition. (Indeed, newspa-
per and television reporting of animal deaths has taken
The Cultural Devaluation of Man on a tone once reserved for the human victims of airplane
The popular acceptance of environmentalism is ex- crashes and similar tragedies. This was evident, for ex-
plainable in all of its aspects on the basis of the irratio- ample, in the reporting of the Exxon-Valdez oil spill in
nalism inculcated by the contemporary educational system Alaska and later in that of the oil spills in the Persian Gulf
and the consequent cultural decline of reason. caused by Saddam Hussein. Numbers of dead animals
The cultural decline of reason is what has created the and birds were reported in the same tone of tragedy as
growing hatred and hostility on which environmentalism numbers of human casualties are reported.)
feeds, as well as the unreasoning fears of its leaders and To the environmentalists, and the closely related sup-
followers. To the degree that people abandon reason, porters of “animal rights,” the possession of reason does
they must feel terror before reality, because they have no not seem significant—because they consider reason to
way of dealing with it other than by reason. By the same be unreliable; indeed, they regard it as a trap and a snare
token, their frustrations mount, since reason is their only and hate it. With man’s distinctive attribute thus held to
means of solving problems and achieving the results they be unworthy of special valuation, man himself necessar-
want to achieve. In addition, the abandonment of reason ily appears unworthy of special valuation. Thus, as the
leads to more and more suffering as the result of others’ environmentalists see matters, they are advocates of a
irrationality, including their use of physical force. Thus, universal brotherhood of all species and all elements of
hatred and hostility increase as rationality decreases. the “environment.” In their eyes, there are, in effect,
The closely related readiness of people to accept the blacks, caucasians, orientals, giraffes, snail darters, flies,
doctrine of intrinsic values is also a consequence of the spotted owls, and mountainsides, all with equal rights in
growing irrationalism. An “intrinsic value” is a value that the “environmental family.”113 The assertion of man’s
one accepts without any reason, without asking ques- rights above those of any other species or inanimate
tions. It is a “value” designed for people who do what object is, in their view, a form of racism and Nazism—of
they are told and who do not think. A rational value, in “speciesism”—in which man seeks to treat other parts of
contrast, is a value one accepts only on the basis of the brotherhood of nature as concentration camp in-
understanding how it serves the self-evidently desirable mates.114
ultimate end that is constituted by one’s own life and This trend is directly and powerfully reinforced inso-
happiness. far as people are increasingly unaware that there ever was
As was implicit in earlier discussion, along with de- such a thing as the Age of Reason and what it stood for,
stroying confidence in science and technology, the rising and that there existed, and still do exist, philosophers of
tide of irrationalism and growing loss of confidence in reason. Furthermore, people increasingly lack the intel-
reason means loss of the philosophical basis of the valu- lectual capacity to acquire even the slightest understand-
ation of man. For reason is man’s fundamental distin- ing of what such thinkers have to say. For example, a
guishing attribute and a culture’s view of reason determines book written in the eighteenth or nineteenth century is
its view of man.112 Thus, as a further result of the assault beyond the power of many of today’s college students
on reason and loss of confidence in it, the philosophical and recent graduates to read; they think of it as having
and cultural status of man has been in decline. This been written in “old English.” Worst of all, the introspec-
decline was evident well before the emergence of en- tive experience of the growing hordes of such misedu-
vironmentalism. It was evident in such phenomena as the cated people does not provide very powerful testimony
acclaim given to the “antihero” in literature, to works of on behalf of reason or the value of man. Nor does their
art and sculpture that were grotesque, twisted represen- external behavior, which increasingly incorporates such
tations of human beings, and to books describing man in practices as the use of narcotics. To someone who can
such terms as “the naked ape” or “the trousered ape.” In barely read, let alone write or even speak coherently,
111
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works
betwe
every
en
was
his
imaginable
explained
own childr
above,
absurdity
en andinflies
the
thatIntroduction
aisndpresent
earthworms.
in to
thethis
doctrine
book.of
Inanimal
addition,
rights.
a thorough
For example,
knowledge
it states,
of history
approvingly:
and extensive
“The ecologist
readingnoted
of the that
greatsmallpox,
classics ofasliterature
part of the
and
biotic
philosophy,
community,
as well
was asafamiliarity
product ofwith
evolution
mathematics
as wereand
wolves
na tural
and whales
scienceand
at what
redwood
used trees.
to be the
According
college level,
to the biocentric
are also requisite.
readingInofother
environmental
words, to be
ethics,
a “newthere
intellectual,”
was no logical
one must
reason
have
for an
discriminating
education similar
against
in kind
the virus
to that
just
which
because
intellectuals
it was small
used
and
toharmful
have, plus
to be
humans”
thoroughly
(p. 85).
familiar
Interestingly,
with the philosophy
the author pretends
of Objectivism,
throughout
the to
writings
be a fervent
of vonsupporter
Mises, classical
of Johnand
Locke
Austrian
and the
economics,
doctrine ofand
natural
the political
rights. Yet
philosophy
at no point
on which
in his book
the United
is there
States
a discussion
was established.
of the connection between human reason and rights or of the proreason, proman context in
despite years of schooling, a view of man as a heroic mony of the self-interests of human beings and the abso-
being, if comprehensible at all, must appear to be from lute priority of human life and well-being over that of
another planet. Such people are intellectually far more at any lesser species.
home with the animals of the forest than with the man of It is only in the name of the special value of man that
the Renaissance and the Enlightenment. They fulfill to individual rights can be upheld and such evils as racism
the letter the ideal of the Romantics. and Nazism be opposed. The attempt, for example, to
The environmentalists do not realize that, apart from introduce the concept of “speciesism” as something akin
man, the allegedly beautiful and harmonious “Nature” to racism totally cuts the ground from all genuine oppo-
that they extol is in reality merely a place in which one sition to racism. If man had the same status as cock-
thing eats another—alive. If man were nothing more than roaches, what possible difference could it make if two
an animal, he would be entitled to act toward the rest of beings the equivalent of cockroaches applied for a job,
nature in exactly the same way as all other living things say, and the employer chose one and rejected the other
act, namely, to use it for no other purpose than as a means because he had a prejudice in favor of one color of
of serving his own survival. But man’s possession of cockroach over another? Racism can only be opposed on
reason elevates him above the rest of nature. By virtue the grounds that it is a denial of what the victim is entitled
of it, man has a range of knowledge and awareness to as a human being, namely, among other things, recog-
incomparably surpassing that of every other species. And nition of his achievements and qualifications irrespective
with the aid of goods that his reason makes it possible for of his skin color—i.e., justice. The environmentalists are
him to produce, he comes to surpass all other species in able to get away with such a concept as “speciesism”
virtually every physical respect as well. Thus, with the only because hardly anyone any longer stops to think of
aid of goods such as automobiles, airplanes, ships and the meaning of words, but reacts to mere sounds and the
submarines, telescopes and microscopes, radio and radar, tone of voice in which they are uttered. To the unthinking,
and bulldozers and steam shovels, he can outrace any “speciesism” sounds similar to racism in that it purports
animal, fly higher and faster than any bird, move in water to attach significance to membership in some kind of
deeper and faster than any fish, and see and hear further category, and when it is uttered with the same tone of
and in more detail and exert incomparably greater force condemnation as that used in connection with racism, it
than any other living being. sounds as though it must be an equivalent evil.118
The possession of reason not only elevates man above When the environmentalists disregard the special sta-
the rest of nature in the inherent conflict of species for tus conferred on man by the possession of reason, they
survival. Within the human race, it also creates a har- do not thereby elevate flies, snail darters, and mountain-
mony of rational self-interests by virtue of making all sides to the level of man, but rather reduce man to the
men potential cooperators in the division of labor and level of those things. If man is regarded as no better than
thereby enabling each to serve his own self-interests flies, that is how he will be treated—that is how he is
better by living in peace with his fellow men and enjoy- treated in every irrational culture.
ing the benefits of the exercise of their reason as well as Indeed, the doctrine of the environmentalists and the
his own.115 Thus, it is man’s possession of reason that is animal rights advocates implies nothing less than that a
the foundation for an objectively demonstrable brother- human being deserves to be killed for killing a fly—or
hood of man, and for the respect that each human being for walking on grass or for leaving his footprints in the
should accord every other human being. It is man’s sand. Each of these things—flies, grass, sand—is alleged
possession of reason that is the only basis for the exis- by the environmentalists to have a right either to life or
tence of the concept of rights. Rights are precisely the to its preexisting condition.119 If capital punishment is to
social conditions of existence rational beings require be used to defend such an alleged right to life or preex-
their fellow creatures to acknowledge for the sake of the isting condition, then the conclusion follows inescapably
proper survival of all. The essential such social condition that human beings are to be killed for such things. And
is that others not initiate the use of physical force against what if capital punishment is not to be used? Are human
the individual. Only on the basis of respect for individual beings then to be imprisoned or flogged for the violation
rights can human beings reap the benefits of the opera- of such alleged rights of flies, etc.? If they are not, is there
tion of each other’s motivated intelligence.116 To put this then to be no punishment at all for the violation of such
another way, rights are fundamental utilitarian princi- alleged rights? If the violation of such alleged rights is
ples, with human life and well-being as the standard of not to be punished, does that mean that there is also to be
what constitutes utility.117 no punishment for the violation of a human being’s right
The only proper ethical standpoint is one which, on to life? In proclaiming an equality of species and of the
the basis of man’s possession of reason, asserts the har- “environmental family,” environmentalism is not merely
117
115
116
118
119 See
Cf.
This
Interestingly,
theam
“I competent
Ayn
below,
observation,
quite
Rand,
seriously
Chapter
exactly
over
“Man’s
ofthe
4.
course,
proposing
the
incompetent.
See
Rights,”
same
also
haskind
von
that
bearing
in Virtue
Mises,
we
process
give
onofHuman
the
Selfishness;
legal
ofdispute
lack
rights
Action,
of thought
between
to
andforests,
pp.
thehas
143–76
those
discussion
oceans,
resulted
defenders
on the
rivers
in
ofthe
nature
rights
of
and
term
capitalism
in
other
of“discrimination”
Atlas
human
so-called
Shrugged,
who
society,
support
‘natural
pp.
and
becoming
the
1061–63.
below,
objects’
doctrine
one
Chapter
inof
of
the
opprobrium.
natural
environment—indeed,
9, passim.
rightsItand
is perfectly
those who
to
proper,
the
describe
natural
in fact
themselves
environment
absolutely
asnecess
utilitarians.
as a whole.”—Christopher
ary to human
If rights
survival,
are understood
D.
to discriminate
Stone,inathe
University
context
betweenof taking
Southern
food and
man’s
poison,
California
life between
as the
lawstandard
professor
tigers and
ofin
useful
pussycats,
Nash,action,
Rights
between
there
of Nature,
need
danger
be
p.no
121.
and
conflict.
Stone
the lackargued
of danger.
this position
What isbefore
not proper
the U.S.
is to Supreme
ignore anCourt
individual’s
with the
achievements
support of theand
Sierra
superior
Club.qualifications
His views werebecause
endorsed
of his
byracial
Justice
membership.
Douglas (Ibid.,
Suchpp.
behavior
128–31).
represents a failure to discriminate on the basis of fundamentals—namely, what the individual has accomplished—in favor of discriminating on the basis of a triviality, namely, his mere racial membership. It is to deny credit to the individual for what is within his power, whilecondemning him for what is not in his power. It is for this reason that discrimination based on race is wrong. But today’s unthinking mentalities hear the word “discrimination” uttered with condemnation and then believe that any form of discrimination is evil, including discrimination in favor of
114 CAPITALISM
mistaken. It reveals itself as psychopathic. represent them as best they can.

In this light, one may wish to consider such statements Regrettably, large numbers of our contemporaries ap-
as: “It is an intensely disturbing idea that man should not parently have so little self-esteem that it appears suffi-
be the master of all, that other suffering might be just as cient to them merely to assert the existence of any kind
important. And that individual suffering—animal or hu- of will or value seeking that is contrary to their own and
man—might be less important than the suffering of spe- they are prepared to abandon their own values. Thus,
cies, ecosystems, the planet.”120 The reader may find it there are growing numbers of people who abstain from
difficult to distinguish some of the above thoughts from wearing furs or eating meat out of deference to the desire
the utterances of a psychopath who, in the process of of lower animals to go on living. Such people value
torturing his victim, declares that the victim’s suffering themselves and the enhancement of their own lives below
is “less important than the suffering of species, ecosys- the lives of lower animals. They place their own value
tems, the planet.” The reader may encounter similar not only below that of the lower animals whose furs they
difficulties in differentiating these words as well: might wear or whose flesh they might eat, but also below
To cap his argument, White [Lynn White, the leading the value that lower animals attach to themselves. That
environmentalist theologian] even dared to defend the rights is, they accord less value to themselves relative to lower
of life-forms undeniably hostile to his own species, like the animals than all the animals that hunt accord to them-
smallpox virus, Variola. . . . The implication was that a selves relative to other lower animals. A lion or leopard
thoroughgoing Christian sense of morality must include values himself above a zebra or gazelle. But the environ-
smallpox, just as St. Francis included man-eating wolves.
mentalists and advocates of animal rights value them-
Perhaps White hoped for a latter-day saint who could
instruct Variola in cosmic courtesy. More likely, he simply selves below cattle and sheep and as less worthy of
recognized that in killing people the smallpox virus was enjoying cattle and sheep than lions and leopards. The
only performing its appointed role in the eco-system God logically consistent expression of their view is that of
created.121 McKibben and White, which calls for surrender to suf-
Of course, these words cannot actually be psycho- fering and disease.
pathic. After all, if they were, such prestigious publishers True enough, the environmentalists do not always put
as Random House and the University of Wisconsin Press it this way. What they often say is something along the
could not possibly have published them. Could they? lines that because man is higher than the animals his
Furthermore, how could anyone object to the teachings behavior must be better than theirs—that, in effect, he
of those who “love” so much that they love the enemies must become their benevolent keeper. In other words, the
of man, and love man fully as much as they love waste- human race is to become a kind of Mother Teresa to the
lands, ferocious beasts, and vermin? lower animals. This is altruism at the very bottom of the
Contrary to the environmentalists, man and man alone pit. Man, the being who can reach the stars, is to sacrifice
introduces conscious purpose and the perception of order his ascent to the heavens for the sake of animals who
and harmony into the world, and is the source of all value cannot rise from the mud, and this is how he is to be better
to himself. All of these concepts center entirely on his than them. Exactly the same point applies to the nonsen-
furtherance, fulfillment, and enjoyment of his life. Man sical claim that the role of human beings is to serve as
and man alone is capable of having purposes, and must “stewards” of the animal kingdom and of inanimate
have them if he is to live, since he can live only by means matter, as though the highest creature on earth existed for
of thinking, planning, and acting on a long-range basis.122 the sake of the lowest and of inanimate matter.123
The perception of order and harmony comes into the To be sure, in serving his own life, man may extend
world as man comes to understand the world and how to the hand of a form of friendship to members of such
use that understanding to serve his life. In the process of species as cats and dogs, which in some ways resemble
serving his life, man gives value to nature and to other small children and which typically respond to him with
species of life, as means of serving his life. Always, he what can only be described as joy and love. Indeed, the
is the center and the source of all value and purpose and love people feel for such friendly creatures may provide
of the perception of order and harmony. a basis for overcoming the growing lunacy of animal
Of course, the members of other species may be rights. Whoever loves a dog, for example, should think
presumed to be of value to themselves, in that they act to of his dog’s pleasure in chewing on a steak bone, say, and
survive. However, insofar as their survival clashes with ask himself if he does not, after all, value his dog’s
any human value, conflict exists between them and man, pleasure above the life of the cow that provided the steak
and man must—deserves to—prevail. The standard of bone. And then he should ask if this is not perfectly right
man’s values is man’s life. All presumed other standards in view of the fact that the dog is capable of recognizing
of value may be safely left to other forms of life, to and responding to him with love, while the cow is little
120
121
122
123 McKibben,
Nash,
Cf.
People
overwhelmingly
Ayn
Rights
can,
Rand,
of
End
ofcourse,
Nature,
Virtue
ofclear
Nature,
legitimately
of
top.
Selfishness,
him,
95.
p. if
182.
he has
bepp.
concerned
read
11–16.
with any
withsignificant
the avoidance
degree
of unnecessary
of understanding,
cruelty
how,
to animals.
for example,
Muchthe
more
opening
importantly,
of just one
theygood-sized
can legitimately
factory
bein
concerned
Calcutta on
with
thethe
basis
avoidance
of the profit
of unnecessary
motive accomplishes
suffering onfar
the
more
partreal
of their
benefit
fellow
for the
human
poorbeings.
of that city
The than
proper
thecourse
work of
fora those
Motherwho
Theresa.
truly are concerned with eliminating unnecessary human suffering is not to immolate themselves, but, first and foremost, to support capitalism and its underlying philosophy and economic theory, and, no less, to pursue their own rational self-interest. For elaboration see below, chap. 9, pt. B, sec. 2, the discussion “Economic Inequality and the Law of Diminishing Marginal Utility” and above, the last footnote of the preceding subsection, which provides a list of the major philosophical and theoretical sources in defense of capitalism. Practically the whole of this book is a demonstration of how the pursuit of rational self-interest operates to the interest of all. Long before the reader reaches the end of this book, it should be
more than an object, whose greatest contribution to human reflection of the existence of the division of labor, not of
life and well-being is to serve as a source of milk, meat, wanton, pointless killing. Those who work as seal hunt-
and leather. Finally, he should ask himself if it is not also ers and so forth, act on behalf of the enormously larger
perfectly right that while his dog chews on the steak number of people who consume the products the animals
bone, he, the man, eats the steak itself because he values make possible.) Surely, even if human beings were no
his own pleasure even more highly than that of his dog. better than lions or leopards, an individual human being
It is worth noting here that a frequent tactic of the would have as much right to the skin of a seal as a lion
environmentalists in promoting the notion of animal or leopard has to the flesh of a gazelle. But human beings
rights is to depict all animals as the equivalent of loving are incomparably better, more efficient in serving their
and adorable pets which man somehow viciously chooses needs, and deserve incomparably more of everything
to hunt down and terrorize. Amazingly, one environmen- than any animal does.
talist television “documentary” attempts to depict grizzly The environmentalists and the advocates of animal
bears as the equivalent of puppies or kittens on the basis rights need to learn the value of man and of themselves
of the behavior of a young grizzly cub. It casually ne- as the possessors of reason. Perhaps if they were to
glects the fact that an adult grizzly is a terror to man and, acquire the education they thus far have apparently lacked,
incidentally, to cats and dogs. they would succeed in learning their own value.
The producers of such “documentaries” also casually Man—rational man—not only is capable of creating
show wild jungle cats terrifying weaker animals and an economic system which can produce an ever rising
actually eating them alive—animals whom their camer- standard of living, but, precisely because he is rational—
amen, being present on the scene, might have saved from because he is man properly so called—also deserves such
such brutality. At the same time, they and the rest of the an economic system and all of the marvelous goods it can
environmental movement endlessly berate man for his bring. In this spirit, the twenty-first century should be the
killing of animals that are not conscious of their fate and century when man begins such great undertakings as the
that, if necessary, he renders unconscious before killing, colonization of the solar system. It should not be a
as, for example, seal pups. (It should not be necessary to century in which he returns to the Dark Ages. It is the
say that the fact that in such cases typically a small intention of every page and every word of this book to
number of human beings kills animals on a vastly larger make sure that it is the former alternative which pre-
scale than is the case in the animal kingdom itself is a vails.
Notes
1. See above, pp. 39–41. Most of this section previously ap- 7. See below, pp. 234–237.
peared in my book The Government Against the Economy 8. “Dismantling of the Shoreham Nuclear Plant Is Completed,”
(Ottawa, Ill.: Jameson Books, 1979), pp. 15–19. New York Times, October 13, 1994, p. B6. See also “New
2. In recent years, considerable progress has been made in Chapter for Shoreham: New York Files to Take Plant,” ibid.,
reducing the costs of extracting oil from tar sands, to the point June 29, 1990, p. B3. Remarkably, the environmentalist de-
where such oil now accounts for approximately one-fourth of stroyers of the Shoreham plant attack its owner, the Long Island
Canada’s annual production of crude oil. The recoverable oil Lighting company (Lilco), for having high power rates, as
from the deposits in Alberta alone is estimated to be 300 billion though their policies had nothing to do with those rates. It
barrels, versus 265 billion barrels estimated for Saudi Arabia. appears, moreover, that Lilco’s acquiescence in its own total
See New York Times, December 28, 1994, p. C5. elimination has been obtained by a $9-billion takeover offer
3. See below, pp. 123–128, for an explanation of how the from New York State, which is to be financed by the sale of
division of labor provides the framework for continuous eco- municipal bonds in that amount. If this offer is consummated,
nomic progress. See also below, pp. 176–180, for an explana- it will repeat the pattern previously evident in the government’s
tion of how, within the framework of a division-of-labor society, takeover of the American railroad industry, namely, first, the
the profit motive achieves continuous economic progress, and government’s destruction of an industry’s or company’s profit-
pp. 622–642, for an explanation of the process of capital ability, followed by the comparative relief of socialization at a
accumulation. price that at least provides some measure of compensation.
4. See Ayn Rand, Capitalism: The Unknown Ideal (New York: Following an official statement of the takeover offer, which
New American Library, 1966), p. 14. would entail a purchase price of Lilco’s stock at $21.50 a share,
5. In W. T. Jones, The Medieval Mind, vol. 2 of A History of the firm’s stock rose 25 cents to $17.375 a share on the New
Western Philosophy, 2d ed. (New York: Harcourt, Brace, and York Stock Exchange. (Wall Street Journal, Western ed., Octo-
World, 1969), p. 6. ber 28, 1994, p. A9.)
6. See below, pp. 303–304, for the reasons why government 9. See “Mideast Crisis Puts New Spotlight On an Idle Oil Plant
ownership of an industry causes inefficiency. in California,” New York Times, September 1, 1990, p. 1.
116 CAPITALISM
10. The expression “factors of production” can be understood New American Library, 1964), pp. 1–34.
as synonymous with the expressions “means of production” or 25. See above, pp. 43–45.
“physical elements of production.” As will be seen, in the 26. See above, pp. 63–66.
context of a division-of-labor economy, in which all productive 27. The destructive government policies I refer to are prounion
activity is vitally dependent on the earning of money, use of the and minimum-wage legislation, the welfare system, farm sub-
expressions implicitly requires that the physical goods or ser- sidies, rent controls, and laws prescribing such things as the
vices representing the factors of production be purchased for number of people who may occupy an apartment or the mini-
the sake of making subsequent sales. On this point, see below, mum floor space, window area, and so forth which must exist
pp. 442–456. per occupant. Prounion and minimum-wage legislation deprive
11. Cf. Ludwig von Mises, Human Action, 3d ed. rev. (Chicago: people of the opportunity of obtaining employment by making
Henry Regnery Co., 1966), pp. 127–131. labor artificially more expensive and thus reducing the quantity
12. See ibid. of it demanded below the supply available. The welfare system
13. Cf. David Ricardo, Principles of Political Economy and eliminates the necessity of being self-supporting and thus of
Taxation, 3d. ed. (London, 1821), chaps. 2 and 3; reprinted as learning the skills necessary to become so and thus the possi-
vol. 1 of The Works and Correspondence of David Ricardo, ed. bility of advancing from there. Farm subsidies make the price
Piero Sraffa (Cambridge: Cambridge University Press, 1962). of food higher than it would otherwise be. Rent controls create
14. See above, n. 3 of this chapter. See also above, pp. 45–46, shortages of rental housing by enlarging the quantity of rental
and below, 106. housing demanded and reducing the supply available, thereby
15. For elaboration of this point, see below, pp. 313–316. making it impossible for some people to find housing. Laws
16. For elaboration of these propositions, see below, pp. 191– prescribing minimum levels of housing amenities have the
192 and 206–209. effect of pricing housing beyond the reach of some people. In
17. Of course, if the property in question were of truly outstand- the absence of such laws and of rent controls, some amount of
ing beauty, it would have greater economic value as a tourist housing would be available for and within the financial reach
attraction than in any ordinary economic use such as coal of every working person. For elaboration of all these points, see
mining. All that would be necessary to ensure its use in this below, pp. 172–294 passim, 580–594, and 655–659.
capacity would be that it be privately owned. In this way, all 28. Chapter 4 will show how the invention, production, and
possible competing uses would be free to find expression in application of machinery all depend on the division of labor.
competing bids to the owner, with the one most highly valued See below, pp. 123–128.
by the consumers thereby being free to outcompete the ones 29. New York Times, May 25, 1992, p. 1.
less highly valued by the consumers. 30. Cf. Ayn Rand, The New Left: The Anti-Industrial Revolu-
18. Cf. Llewellyn H. Rockwell, “Government Garbage,” Free tion (New York: New American Library, 1971).
Market 8, no. 2 (February 1990), pp. 2, 8. See also Peter Passell, 31. See above, pp. 48–49.
“The Garbage Problem: It May Be Politics Not Nature,” New 32. An excellent book that refutes most of the specific claims
York Times, February 26, 1991, pp. B5, B7. of the environmentalists is Jay Lehr, ed., Rational Readings on
19. Rockwell, “Government Garbage.” Environmental Concerns (New York: Van Nostrand Reinhold,
20. Ibid. 1992). Portions of this chapter, previously published as a pam-
21. Today’s conservationists and environmentalists, of course, phlet The Toxicity of Environmentalism, appear as the summary
have a preference for “biodegradable” garbage, such as decay- to the book.
ing animal and vegetable matter, which rots and smells. They 33. George Reisman, “Education and the Racist Road to Bar-
prefer this to the inert kind, such as aluminum or styrofoam, barism,” Intellectual Activist 5, no. 4 (April 30, 1990), pp. 4–7;
which appears to remain in its original condition for an indefi- reprinted as a pamphlet (Laguna Hills, Calif.: The Jefferson
nitely long time. The basis of their preference appears to be that School of Philosophy, Economics, and Psychology, 1992).
they object to the existence of permanent evidence of modern 34. For a comprehensive discussion of the safety of nuclear
technology and concomitant mass consumption. power, see Petr Beckmann, The Health Hazards of Not Going
22. The last sentence of this paragraph and the next two para- Nuclear (Boulder, Colo.: Golem Press, 1976).
graphs are taken, with a few minor changes, from The Govern- 35. New York Times, September 20, 1990, p. A15.
ment Against the Economy, pp. 19–20. 36. For elaboration of this point, see below, pp. 275–278. See
23. Of course, the essential objection to the policy of con- also pp. 172–180, for an account of the contrasting operations
servationism is not strictly that it compels us to perform more of capitalism.
labor, though that is almost always true, but that it compels us 37. Carl Sagan, “Tomorrow’s Energy,” Parade, November 25,
to expend means of production of greater value to achieve a 1990, p. 10.
saving of lesser value. There are cases in which we must expend 38. Ibid., p. 11.
two or more hours of low-paid labor to save one hour or less of 39. It should be realized that it is no answer to this fact to point
high-paid labor, or many hours of labor to save a quantity of to cases in which the loss of energy may appear to be compen-
extremely valuable material. The comparative market prices sated for by a change in the kind of equipment or materials
involved determine which is the appropriate course of action. used—for example, obtaining the same illumination, despite
See below, pp. 206–209 and 212, for further explanation of this the consumption of less electricity, by means of using specially
principle. designed lamps. By their nature, cases of this kind entail greater
24. Cf. Ayn Rand, Atlas Shrugged (New York: Random House, costs. If they did not, there would be no need for the conserva-
1957), pp. 1012–1013; The Virtue of Selfishness (New York: tionists to urge, let alone attempt to compel, the adoption of
such things. The significance of the higher costs is that less 54. Ames, “Major Carcinogens,” p. 244.
wealth is available for other purposes. Thus, conservation 55. Orange County Register, October 31, 1990, p. B15. See
provides energy for one use only by depriving people of energy also Rogelio A. Maduro and Ralf Schauerhammer, The Holes
needed for other uses and, in provoking their efforts to com- in the Ozone Scare (Washington, D. C.: 21st Century Science
pensate for this loss, may well deprive them of wealth required Associates, 1992), pp. 11–40, 98–149.
for other purposes. 56. Cf. Ames, “Major Carcinogens,” pp. 243–244.
40. Los Angeles Times Book Review, Sunday, October 22, 1989, 57. See “No Evidence of Global Warming in 1980’s Is Detected
p. 9. by Satellites,” New York Times, March 30, 1990.
41. Bill McKibben, The End of Nature (New York: Random 58. Ibid., December 13, 1989, p. A18. See also Lehr, Rational
House, 1989), p. 176. Readings on Environmental Concerns, pp. 393–437.
42. Another example is that of Christopher Manes, the author 59. Ehrlich, Population Bomb, p. 61.
of Green Rage: Radical Environmentalism and the Unmaking 60. Cf. McKibben, End of Nature, p. 111.
of Civilization (Boston: Little, Brown, 1990). He and the Earth 61. See “Scientists Warn of Dangers in a Warming Earth,” New
First! organization he supports regard famine in Africa and the York Times, May 26, 1990.
spread of AIDS as environmentally beneficial developments. 62. Ibid.
The founder of Earth First!, David Foreman, has described 63. See below, Chapter 6, especially pp. 209–211 and 212.
mankind “as a cancer on nature,” and has said, “I am the 64. On the operations of the price system and the vital role it
antibody” (in New York Times Book Review, Sunday, July 29, plays in genuine economic planning—that is, the economic
1990, p. 22). Another representative of Earth First! writes: planning of private individuals and business—see below, pp.
“Only a very few of human pathogens are shared by other 137–139 and 172–294 passim.
partners on our planet. Biological warfare will have no impact 65. The process of rational reform would be greatly accelerated,
on other creatures, big or small, if we design it carefully” (in if students from such countries, when attending universities in
Forbes, October 29, 1990, pp. 96–97). And Paul Ehrlich, one the United States, were taught the virtues of capitalism rather
of the oldest and most prominent leaders of the environmental than Marxist propaganda.
movement, who is supposedly entirely respectable, criticizes 66. On these points, see New York Times, January 16, 1990, p.
the “preoccupation with death control,” by which he means, C1, and ibid., September 18, 1990, p. B5.
“preoccupation with the problems and diseases of middle age.” 67. See ibid., December 13, 1989, p. A18.
In his view, such preoccupation, and its consequent lengthening 68. The ecologists, of course, denounce it, on the grounds that
of human life expectancy, “will lead to disaster.” (Ehrlich, The it destroys various plant and animal species and contributes to
Population Bomb [New York: Ballantine Books, 1968], p. 91). global warming through destroying forests. They also claim
43. New York Times, August 30, 1990, pp. A1, C15. that after the land has been cleared and the existing soil nutrients
44. The alleged danger of radiation is not a valid objection to are exhausted, the land becomes desert. In answer to this last,
atomic power. The radiation emission of an atomic power plant they have apparently never heard of the Atherton tablelands in
located next door to one’s house is equal to about two percent Australia, which were originally jungle and which are now, and
of the radioactivity one normally receives from all other—al- for many years have been, beautiful and thriving farmland. Nor,
most entirely natural—sources. On this point, see Beckmann, apparently, do they take into account the ability to replenish soil
Health Hazards, pp. 112–113. Nor are the alleged dangers of nutrients through the use of chemical fertilizers.
storing atomic wastes a valid objection. Nature itself has always 69. McKibben, End of Nature, p. 170. Italics mine.
stored such highly radioactive elements as radium and uranium 70. Nature, to be sure, does not produce anything directly
without significant danger to human life. comparable to traffic congestion, but it does produce all manner
45. See above, p. 75. of obstacles in the way of travel, such as forests, rivers, and
46. In the case of whales, domestication might be feasible if the mountains. Thus, traffic congestion is abstractly comparable to
establishment of electronically fenced ocean “ranches” were nature’s obstacles to travel.
allowed and if some part of the existing population of whales 71. Of course, it would be possible for the owners of surround-
could be made private property. In the case of the buffalo, it ing land at some later time to buy back this right. This would
appears that to a modest extent they now are raised commer- occur in cases in which the increase in the value of their land
cially. once free of the negative effects caused by the present producer
47. Forbes, January 8, 1990, p. 303. outweighed the value to that producer of continuing his present
48. Cf. Edward C. Krug, “Fish Story,” Policy Review, no. 52 operations. In such cases, the owners of the surrounding land
(Spring 1990), pp. 44–48. would be able to offer him a price that made the surrender of
49. See Fortune, February 11, 1991, p. 145. his previously acquired right financially worthwhile.
50. See March 18, 1988 broadcast of ABC’s “20/20.” See also 72. The fall in prices relative to incomes that economic progress
Bruce Ames, “What Are the Major Carcinogens in the Etiology achieves is, of course, present when incomes rise faster than
of Human Cancer?” in V. T. De Vita, Jr., S. Hellman, and S. A. prices, which is the way the phenomenon is experienced when
Rosenberg, eds., Important Advances in Oncology 1989 (Phil- accompanied by inflation of the money supply. On the subject
adelphia: J. B. Lippincott, 1989), pp. 241–242. of how real incomes rise, see below, pp. 176–180. See also pp.
51. See New York Times, August 15, 1991, pp. 1, A14. 618–622 and 655–659.
52. “20/20”; Ames, “Major Carcinogens,” p. 242. 73. Letter signed by Michael L. Fisher is undated (but appeared
53. “20/20”; Ames, “Major Carcinogens,” p. 244. sometime in 1990), p. 3. Emphasis his.
118 CAPITALISM
74. Exactly the same practice, it is worth noting, was followed then it is perfectly conceivable that in years to come, the very
by the administration of former Governor Jerry Brown of intention of a country to increase its production could serve as
California, which argued that oil fields off a certain portion of a cause of war, perhaps precipitating the dispatch of a U.N.
the state’s coast should not be developed because they would security force to stop it. Even the mere advocacy of economic
provide the nation as a whole with only a ten-day supply of oil. freedom within the borders of a country would logically—from
75. Carl Sagan, “Tomorrow’s Energy,” p. 10. the depraved perspective of the ecology movement—be re-
76. For an exposition of the doctrine, see Paul Samuelson and garded as a threat to mankind. It is, therefore, essential that the
William Nordhaus, Economics, 13th ed. (New York: McGraw- United States absolutely refuse to sanction in any way any form
Hill, 1989), pp. 770–775. of international limitations on “pollution”—that is, on produc-
77. It is worth noting that in a division-of-labor, capitalist tion.
society everyone normally does earn his standard of living, 87. Cf. Brad Erickson, ed., Call to Action, Handbook for Ecol-
even people of average and below average ability. But he earns ogy, Peace and Justice (San Francisco: Sierra Club Books,
it very easily. The essential thing that is required of the great 1990), p. 5.
majority of people is merely the expenditure of the mental effort 88. See, for example, Kirkpatrick Sale, Dwellers in the Land
required to learn the new skills made necessary by the work of (San Francisco: Sierra Club Books, 1985). This book is marked
the innovators. Thus, someone with the muscles and brawn of by total ignorance of history and of every proposition of eco-
a caveman, or a blacksmith, is enabled to enjoy a standard of nomics.
living that includes such things as automobiles and television 89. Cf. Ayn Rand, “The Left: Old and New,” in Ayn Rand, The
sets, merely by being willing to acquire an elementary educa- New Left.
tion, to learn some new skills throughout his life when others 90. The costs merely of complying with the environmental
introduce further advances, and, above all, to respect the rights movement’s demands for the cleanup of toxic waste sites is
of such others to their greater gains. For elaboration on the estimated at between $300 billion and $700 billion over the
economic position of the average person under capitalism, see coming few years. See “Experts Question Staggering Costs of
in particular Chapters 9 and 14, below. Toxic Cleanups,” New York Times, September 1, 1991, p. 1.
78. For a further critique of the externalities doctrine, in partic- (The cost of complying with other antipollution regulations is
ular the external-benefits doctrine, see below, pp. 335–336. currently $115 billion per year. [Ibid., p. 12.]) Even using the
79. For a full account of how the environmental movement, in EPA’s far-fetched methods of estimating risk, the maximum
conjunction with the U.S. government, has been responsible number of cancer cases which can be linked to public exposure
not only for the high price of oil and oil products but also for to hazardous wastes is approximately 1,000 per year. (Ibid.) All
virtually every other aspect of the energy crisis, see above, pp. reasonable protection against such wastes can frequently be
66–67 and 172–264 passim, but especially pp. 234–237. secured for as little as one-half of one percent of the costs
80. These principles were clearly understood both by the U.S. presently mandated by law and by the EPA. (Ibid.) Thus,
Federal Appeals Court for the District of Columbia Circuit and hundreds of billions of dollars have been and are to be
by the U.S. government’s Office of Management and Budget squandered to appease the imaginary terrors of the environ-
under the Bush administration. The Court cited research dem- mentalists.
onstrating that one additional death may result from reduced 91. On the nature of altruism and self-sacrifice, see Ayn Rand,
incomes caused by each $7.5 million of additional expense Atlas Shrugged and Virtue of Selfishness.
imposed by government regulation. On this basis, the Office of 92. Cf. F. A. Hayek, The Fatal Conceit: The Errors of Social-
Management and Budget blocked the enactment of a costly set ism, W. W. Bartley III, ed. (London: Routledge, 1988).
of environmental regulations proposed by the Department of 93. See above, pp. 19–36.
Labor which ostensibly sought to promote workers’ health and 94. See above, pp. 35–36.
safety. The Office found that the regulations were so expensive 95. I am indebted for this vital distinction to von Mises. It was
that their enactment would cause more deaths than they would an observation he made in his seminar at New York University.
avoid. See “Citing Cost, Budget Office Blocks Workplace 96. This proposition bears an essential similarity to the theory
Health Proposal,” New York Times, March 16, 1992, p. A13. of capital accumulation presented below on pp. 622–642.
81. For elaboration of the principles involved in the present 97. Thalidomide, of course, was the drug that was prescribed
discussion, see below, pp. 622–642. as a tranquilizer for pregnant women and that turned out to
82. “Marsh Destroyed, Owner Is Fined,” New York Times, May cause major damage to fetuses.
26, 1990. 98. On these points, see the article of Leonard Peikoff, “Maybe
83. The law of comparative advantage is explained on pp. You’re Wrong,” Objectivist Forum 2, no. 2 (April 1981), pp.
350–356. The doctrine of the harmony of interests is demon- 8–12.
strated in almost every chapter of this book, but see especially 99. See Ayn Rand, Introduction to Objectivist Epistemology, 2d
Chapters 6, 9, 11, 13, and 14. ed. enl., ed. Harry Binswanger and Leonard Peikoff (New York:
84. See above, pp. 35–36. New American Library, 1990), pp. 77–82.
85. Barry Commoner, The Poverty of Power (New York: Alfred 100. In W. T. Jones, Kant to Wittgenstein and Sartre, vol. 4 of
A. Knopf, 1976), pp. 252, 254. For a refutation of all aspects A History of Western Philosophy, 2d ed. (New York: Harcourt,
of the Marxian exploitation theory, see below, pp. 473–498 and Brace, and World, 1969), p. 102.
613–666. 101. Ayn Rand, “The Cashing-in: The Student Rebellion,” in
86. If the influence of the ecology movement continues to grow, Ayn Rand, Capitalism, p. 235.
102. Ayn Rand, Objectivist Epistemology, p. 81. whales and redwood trees. According to the biocentric reading
103. Jones, Kant, p. 102. of environmental ethics, there was no logical reason for dis-
104. Ibid., p. 104. criminating against the virus just because it was small and
105. See below, Chapter 8 passim. harmful to humans” (p. 85). Interestingly, the author pretends
106. For example, McKibben writes: “Perhaps the ten [sic] throughout to be a fervent supporter of John Locke and the
thousand years of our encroaching, defiant civilization, an doctrine of natural rights. Yet at no point in his book is there a
eternity to us and a yawn to the rocks around us, could give way discussion of the connection between human reason and rights
to ten [sic] thousand years of humble civilization, when we or of the proreason, proman context in which John Locke wrote.
choose to pay more for the benefits of nature, when we rebuild The word reason does not even appear in the book’s index.
the sense of wonder and sanctity that could protect the natural Although publication of such a philosophically disgraceful
world.” (McKibben, End of Nature, p. 215.) According to this book by a university press should not be surprising in today’s
passage, the ten thousand years in which man has risen from environment, it should still provoke outrage.
the cave and which embrace the totality of man’s civilization 115. See below, Chapter 4. See also von Mises, Human Action,
were a mistake—they were “encroaching, defiant.” In the next pp. 143–176 on the nature of human society, and below, Chap-
ten thousand years, McKibben hopes, the wildlife, the weeds, ter 9 passim.
and the rock formations that constitute nature will be protected 116. Cf. Ayn Rand, “Man’s Rights,” in Virtue of Selfishness;
from us, because we will have abandoned anything resembling and the discussion of rights in Atlas Shrugged, pp. 1061–1063.
Western civilization. 117. This observation, of course, has bearing on the dispute
107. On the new racism and its hostility to Western civilization, between those defenders of capitalism who support the doctrine
see my essay “Education and the Racist Road to Barbarism.” of natural rights and those who describe themselves as utilitar-
108. See Ayn Rand, For the New Intellectual (New York: ians. If rights are understood in the context of taking man’s life
Random House, 1961) p. 67. as the standard of useful action, there need be no conflict.
109. See H. G. Wells, The Time Machine (London, 1895); 118. Interestingly, exactly the same kind of process of lack of
reprinted in Treasury of World Masterpieces: H. G. Wells (New thought has resulted in the term “discrimination” becoming one
York: Octopus Books, 1982.) of opprobrium. It is perfectly proper, in fact absolutely neces-
110. McKibben, End of Nature, p. 202. sary to human survival, to discriminate between food and
111. An essential requirement of becoming such a “new intel- poison, between tigers and pussycats, between danger and the
lectual” is, of course, to read and understand the works of Ayn lack of danger. What is not proper is to ignore an individual’s
Rand, Ludwig von Mises, and the British classical and Austrian achievements and superior qualifications because of his racial
economists, as well as the political philosophy of John Locke membership. Such behavior represents a failure to discriminate
and the Founding Fathers of the United States. The importance on the basis of fundamentals—namely, what the individual has
of all of these works was explained above, in the Introduction accomplished—in favor of discriminating on the basis of a
to this book. In addition, a thorough knowledge of history and triviality, namely, his mere racial membership. It is to deny
extensive reading of the great classics of literature and philos- credit to the individual for what is within his power, while
ophy, as well as familiarity with mathematics and natural condemning him for what is not in his power. It is for this reason
science at what used to be the college level, are also requisite. that discrimination based on race is wrong. But today’s unthink-
In other words, to be a “new intellectual,” one must have an ing mentalities hear the word “discrimination” uttered with
education similar in kind to that which intellectuals used to condemnation and then believe that any form of discrimination
have, plus be thoroughly familiar with the philosophy of Ob- is evil, including discrimination in favor of the competent over
jectivism, the writings of von Mises, classical and Austrian the incompetent.
economics, and the political philosophy on which the United 119. “I am quite seriously proposing that we give legal rights
States was established. to forests, oceans, rivers and other so-called ‘natural objects’ in
112. See above, pp. 19–21. the environment—indeed, to the natural environment as a
113. It is interesting to recall here some previously quoted whole.” (Christopher D. Stone, a University of Southern Cali-
words of Graber, whose implications I did not develop at the fornia law professor in Nash, Rights of Nature, p. 121. Stone
time: “I, for one, cannot wish upon either my children or the argued this position before the U.S. Supreme Court with the
rest of Earth’s biota. . . .” The philosophical meaning of these support of the Sierra Club. His views were endorsed by Justice
words is that Graber sees no fundamental distinction, requiring Douglas. [Ibid., pp. 128–131].)
separate classification, between his own children and flies and 120. McKibben, End of Nature, p. 182.
earthworms. 121. Nash, Rights of Nature, p. 95.
114. The term speciesism appears, among other places, in Rod- 122. Cf. Ayn Rand, Virtue of Selfishness, pp. 11–16.
erick Frazier Nash, The Rights of Nature (Madison, Wisc.: 123. People can, of course, legitimately be concerned with the
University of Wisconsin Press, 1989) pp. 5, 138, 142, 153. This avoidance of unnecessary cruelty to animals. Much more im-
book is impregnable against all arguments falling in the cate- portantly, they can legitimately be concerned with the avoid-
gory of reductio ad absurdum inasmuch as it enthusiastically ance of unnecessary suffering on the part of their fellow human
supports almost every imaginable absurdity that is present in beings. The proper course for those who truly are concerned
the doctrine of animal rights. For example, it states, approv- with eliminating unnecessary human suffering is not to immol-
ingly: “The ecologist noted that smallpox, as part of the biotic ate themselves, but, first and foremost, to support capitalism
community, was a product of evolution as were wolves and and its underlying philosophy and economic theory, and, no
120 CAPITALISM
less, to pursue their own rational self-interest. For elaboration plish far more economic benefit for the poor, and thereby
see below, pp. 332–335, and above, n. 111, which provides a alleviate far more suffering and hardship, than the work of the
list of the major philosophical and theoretical sources in de- most devout practitioners of self-sacrifice and charity ever has
fense of capitalism. Practically the whole of this book is a accomplished or ever could accomplish. These results, of
demonstration of how the pursuit of rational self-interest oper- course, are not the motive of the businessmen’s and capitalists’
ates to the interest of all. Long before the reader reaches the end activities—selfish profit is the motive—but they are the neces-
of this book, it should be overwhelmingly clear to him, if he sary, inevitable effect of those activities, provided only that the
has read with any significant degree of understanding, how the businessmen and capitalists are left free to pursue their profit
self-interested activities of businessmen and capitalists accom- and thus to carry on their activities.
PART TWO
CHAPTER 4
THE DIVISION OF LABOR AND PRODUCTION
It enables the various regions of the world to concen-

1. The Division of Labor and the Productivity of trate on producing the crops and minerals for which they
Labor are best suited on the basis of differing conditions of
H uman life and well-being depend on the produc-

tion of wealth. The production of wealth vitally
depends on the division of labor, that is, a system of
climate and geology.
It increases the efficiency of the processes of learning
and motion that are entailed in production.
production in which the labor required to support human It underlies the use of machinery in production.
life and well-being is broken down into separate, distinct
occupations. As we have seen, under a system of division The Multiplication of Knowledge
of labor, the individual lives by producing, or helping to To understand how the division of labor represents a
produce, just one thing or at most a very few things, and multiplication of the knowledge used in production, it is
is supplied by the labor of others for the far greater part only necessary to realize that in a division-of-labor soci-
of his needs. ety, such as our own, there are as many distinct bodies of
The division of labor raises the productivity of labor knowledge used in production as there are distinct spe-
in six major ways, and thereby achieves a radical in- cializations and subspecializations of employment. Steel
crease in the efficiency with which man is able to apply producers, for example, have a different body of knowl-
his mind, his body, and his nature-given environment to edge from that of auto producers. Wheat farmers have a
production. different body of knowledge from both of these and even
It increases the amount of knowledge used in produc- from that of other farmers, such as vegetable growers or
tion by a multiple that corresponds to the number of dairy farmers. The bodies of knowledge of all such
distinct specializations and subspecializations of em- specializations enter into the process of production in a
ployment. This makes possible the production of prod- division-of-labor society, and each individual is enabled
ucts and the adoption of methods of production that to obtain products reflecting the total of such knowledge.
would otherwise be impossible. Thus, steel producers give the benefit of their knowledge
It makes it possible for geniuses to specialize in sci- to the whole rest of society; in return, they are able to
ence, invention, and the organization and direction of the receive from the rest of society the benefit of the special-
productive activity of others, thereby further and pro- ized knowledge held by all other categories of producers.
gressively increasing the knowledge used in production. And so it is with the members of every specialization.
It enables individuals at all levels of ability to concentrate This is a result of enormous importance, and its sig-
on the kind of work for which they are best suited on the basis nificance needs to be carefully considered. What a divi-
of differences in their intellectual and bodily endowments. sion-of-labor society represents is the organization of the
124 CAPITALISM
same total sum of human brain power in a way that types of machinery. What they know is how to produce
enables it to store and use vastly more knowledge than such pens from this stage on. But others must know how
would otherwise be possible. to produce the plastic, the ink, the points, and the equip-
To grasp this point fully, we must consider the con- ment. Still others must know how to produce the petro-
trasting case of a non-division-of-labor society, such as chemicals, from which the plastic comes; the various
exists in most of Asia, Africa, and Latin America. In those chemicals from which the ink is made; the metals from
areas, where the overwhelming majority of people live which the points are produced; and the components for
as virtually self-sufficient farmers, each family knows the equipment.
essentially what all the others know about production. To At further stages of remove from the pen, yet still
confirm this fact, one might imagine an effort to compile others must know how to refine petroleum, how to ex-
all the knowledge entering into production in such places. plore for it, drill for it, and store and transport it; how to
One might imagine a corps of interviewers who obtain a produce the drilling and refining equipment, the parts
grant from the U.S. government to go out and write down and materials to make that equipment, and so on. Tracing
all that the rural farm families of these areas know about now the chemicals for the ink, the metals for the points,
production. After interviewing the first such family in and the components for the pen-making equipment fur-
each area, very little additional information would be ther back, we are led into the chemical industry, the
gained from interviewing the hundreds of millions of mining industry, and the machine tool industry. At prac-
other such families. What this means, in essence, is that tically all stages, we encounter the construction industry,
the sum total of the knowledge used in production in a which had to erect the various factories involved; the
non-division-of-labor society is limited to what the brain electric power industry, which provides the factories and
of just one or two individuals can hold. Any one farmer, machines with light and power; and the transportation
or farmer plus his wife, in those areas holds practically industry, which moves the various products and means
all of the knowledge that is used in production in the of production to where they are required. And these
entire society. industries lead us back to the industries producing the
To put it mildly, such a situation is a case of wasteful materials and equipment they in turn require.
duplication. It is the wasteful duplication of the mental We find that the production of a seemingly simple
contents of the human brain—the wasteful use of man’s product like a ballpoint pen is not so simple after all. It
ability to store and use knowledge. In this respect and in is closely tied to the production of most of the rest of the
this sense, a division-of-labor society is indispensable to economic system in a virtual spider web of complexity,
the efficient use of the human mind in production. To the with threads running back and across to almost every
degree that production is divided into separate special- other branch of industry in ways that are too complex
izations, with separate bodies of knowledge, the same even to be completely and accurately named by anyone,
total of human brain power is enabled to store and use let alone actually understood in the way required for
more knowledge, to the benefit of each and every indi- production. This “simple” product is the result of vastly
vidual member of that society. This is the meaning of the more knowledge applied to production than any one
proposition that the division of labor represents the mul- individual, family, village, or tribe could ever hope to
tiplication of the knowledge used in production. It mul- acquire.
tiplies such knowledge to the degree that specializations A division-of-labor society is obviously indispensable
and specialized bodies of knowledge exist. And it multi- for the production of all the wonderful products intro-
plies correspondingly the benefits that man is able to duced over the last two centuries, from steam engines to
derive from the use of his mind. rocketships. By the same token, it is equally indispens-
The enlarged body of knowledge that a division-of- able for the ability to use modern, efficient methods of
labor society makes possible is the precondition for production in making goods that can be produced in
producing products and adopting methods of production modest quantities with little or no division of labor—for
that require more knowledge than any one person, fam- example, being able to use tractors and chemical fertil-
ily, village, or tribe can possess. To illustrate this fact and izers to help produce wheat.
be able to appreciate its importance, let us consider the
amount of knowledge required to produce a relatively The Benefit from Geniuses
simple product, such as a ballpoint pen, which almost Closely related to the multiplication of the knowledge
everyone uses practically every day in our society. used in production is the fact that the division of labor
To make the pen, far more knowledge is required than makes possible a radical and progressive increase in the
is possessed by the producers of the pen. They can begin benefit derived from the existence of geniuses. In the
with the purchase of plastic, ink, pen points, and various absence of a division-of-labor society, geniuses, along
THE DIVISION OF LABOR AND PRODUCTION 125
with everyone else, must pass their lives in producing labor society, on the other hand, such individuals can
their own food, clothing, and shelter—assuming they are realize their potential. And all the rest of mankind gains
fortunate enough to have survived in the first place. from it—from being able to enjoy the art and music they
Perhaps their high intelligence enables them to produce create, from being able to live because of the surgical
these goods somewhat more efficiently than do other operations they perform, and from being able to have the
people. But their real potential is obviously lost—both to pleasure of observing the feats they accomplish.
themselves and to the rest of society. In a division-of-labor society, every productive ad-
In contrast, in a division-of-labor society geniuses are vantage that individuals possess tends to be put to use
able to devote their time to science, invention, and the and to raise the productivity of labor. Imagine, for exam-
organization and direction of the productive activity of ple, the case of just two people: Robinson Crusoe and
others. Instead of being lost in obscurity, they become Friday. Assume that Crusoe is particularly skillful in
the Newtons, the Edisons, and the Fords of the world, fishing, but not very skillful in hunting. Assume that with
thereby incalculably raising the productivity of every Friday, it’s just the opposite: he is very skillful in hunting,
member of the division-of-labor society. but not particularly skillful in fishing. To make the case
The effect of a division-of-labor society is thus not more concrete, imagine that it takes Crusoe 1 day to catch
only to increase the total of the knowledge that the same 10 salmon, and 2 days to hunt a deer; while Friday
amount of human brain power can store and use, but also requires 2 days to catch 10 salmon, but only 1 day to hunt
to bring that knowledge up to a standard set by the most a deer. If the two men work independently of each other,
intelligent members of the society. The average and below- without dividing labor, then in 3 days each will have
average member of a division-of-labor society is enabled caught 10 salmon and hunted 1 deer. Their combined
to produce on the strength of the intelligence of the most output will be 20 salmon and 2 deer. But if they divide
intelligent. Thus, in a division-of-labor society, people labor, with Crusoe concentrating on fishing, and Friday
even of minimal intelligence are enabled to produce and on hunting, then in exactly the same time, their combined
obtain such goods as automobiles and television sets— output will be 30 salmon and 3 deer—that is, 50 percent
goods which on their own they would not even have been more. For in 3 days Crusoe can catch 30 salmon, while
able to imagine. Friday can hunt 3 deer.
And in each succeeding generation, geniuses are able In a society of millions, hundreds of millions, or
to begin with the knowledge acquired by all the preced- however many people, each person tends to concentrate
ing generations, and then make their own, fresh contri- on the specific things for which he is intellectually and
butions to knowledge. In this way, the knowledge and physically best suited. And thus the production of every-
productive power of a division-of-labor society are able thing tends to be carried on in the most efficient way it
progressively to increase, reaching greater and greater can be carried on in the circumstances. The production
heights as time goes on. of everything tends to be carried on by those who can do
it relatively best.
Concentration on the Individual’s Advantages
In a division-of-labor society, not only productive Geographical Specialization
geniuses, but everyone is enabled to concentrate on the A special aspect of individuals concentrating on what
kind of work for which he is best suited by virtue of his they do best is the more efficient utilization of land and
intellectual and bodily endowment. This principle ap- natural resources. What an individual does best depends
plies to artistic and musical geniuses, to individuals with not only on his intellectual and bodily endowments, but
the kind of rare talents required to perform surgical also on the external conditions of nature that confront
operations or to be a champion athlete, on down to people him. An individual living in a tropical climate, say, is able
whose special advantage may consist merely of such to grow tropical fruits or vegetables far more easily than
attributes as the possession of relatively keen eyesight or someone living in a temperate climate, if the latter can
relatively great physical strength. grow them at all. An individual living close to rich
As with productive geniuses, those with the potential deposits of iron ore, say, is able to mine such ore far more
ability to be great artists or musicians, great surgeons or easily than someone not living close to such deposits, if
athletes, or outstanding creators or performers of any the latter can mine iron ore at all.
kind, would not be able to realize their potential in the Thus, a major aspect of the gains provided by the
absence of a division-of-labor society. Because even if division of labor is that it raises the productivity of labor
they managed to be born and reach adulthood, their time in the exploitation of land and natural resources. For what
would be taken up with growing their own food and many people do best and are led to concentrate on is
making their own clothing and shelter. In a division-of- precisely the exploitation of advantages afforded them
126 CAPITALISM
by climate and by their proximity to special types of land problem very quickly, decide exactly what needs to be
and natural resources. done, reach for the appropriate tools and supplies, and do
The result of specialization along these lines is that it. The inexperienced homeowner, on the other hand,
every geographical area can obtain products that depend who tries to repair his own plumbing, must probably first
on the special advantages of other areas. Each area that read a book about how to do it, and then, assuming he
possesses special advantages concentrates on those ad- has correctly diagnosed the problem and obtained all the
vantages to some degree and produces more of the prod- necessary tools and supplies, fumble about trying to do
ucts in question than its own inhabitants consume. The it. Even if, later on, he needs to make the same repair
difference is exchanged for the products of other areas, again, the homeowner will probably experience many of
which possess different advantages. The effect is that his original difficulties, because probably so much time
every area can obtain the benefit of the special advan- will have gone by that he will have forgotten much of
tages of every other area. Thus, the people of the whole what he learned the first time he made the repair.
United States can be supplied with iron ore from Minne- This example illustrates the second way that the divi-
sota, coal from Pennsylvania, oil from Texas, wheat from sion of labor increases the efficiency of the learning
Kansas, corn from Iowa, and oranges from Florida. And, process in connection with production: it increases the
of course, the gains are international: the whole world ratio of the time spent in using knowledge to the time
can benefit from Brazil’s advantages in coffee growing, spent in acquiring it. Our plumber spends a given amount
Saudi Arabia’s oil deposits, and the advantages of the of time learning how to make a given repair, and then
various American states just described. makes that repair over and over again. The homeowner
Furthermore, the ability of each area to exploit its own spends a given amount of time learning how to make a
advantages vitally depends on its incorporation into the given repair, and then hardly ever uses the knowledge he
division of labor. For example, very little iron ore could has acquired. The learning time put in by the plumber is
be smelted without coal to provide fuel. By the same obviously much more fruitful. The same principle, of
token, very little coal could be mined without iron and course, applies to all specialists in comparison with
steel to make possible the production of the necessary nonspecialists, and is the reason that it pays specialists to
equipment. The exploitation of every natural resource is acquire vastly more knowledge about their work than it
enormously improved by virtue of access to the resources can ever pay nonspecialists to acquire.
of other areas. Finally, the division of labor increases the efficiency
of the learning process in connection with production by
Economies of Learning and Motion making education and communications—indeed, all the
The division of labor increases the efficiency of the activities concerned with storing and transmitting knowl-
processes of learning and motion that are entailed in edge—into specializations. These, like all other special-
production. izations, also tend to be carried on by those best suited
First, under the division of labor, the individual who for them. In this way, the diffusion of knowledge of all
learns an occupation is able to apply his learning repeat- kinds, including, of course, all that pertains to produc-
edly, because he devotes his full working time to that tion, tends to become more efficient.
occupation. The effect of this repetition is that he be- Thus, the division of labor increases the degree to
comes extremely proficient in the use of his knowledge. which knowledge of production is assimilated and there-
In effect, he subconsciously automatizes the knowledge— fore the proficiency with which it is used, the yield to the
he learns it so well that he no longer has to think things time spent in acquiring it, and the efficiency with which
out step by step, as one does before one has the necessary it is disseminated. These advantages, of course, are ob-
experience or after one has been away from a field for a viously closely related to the multiplication of knowledge
long time. A worker who is constantly practiced in his work that was discussed at the beginning of this investigation of
can obviously accomplish a great deal more in the same the ways in which the division of labor raises the produc-
time than one who is not. Outside the division of labor, on tivity of labor.
the other hand, even in cases in which people might be able The division of labor also achieves a large increase in
to acquire sufficient knowledge to accomplish something, production simply by eliminating unnecessary motion in
they would most likely not have sufficient occasion to use production. The tendency under the division of labor is
that knowledge to become proficient in its use. to concentrate work of the same type in the same place,
A good example of this, drawn from the context of our and, depending on the volume of work that can be so
own society, is the case of a professional repairman concentrated, to break it down into the simplest possible
versus a do-it-yourself homeowner. A good professional steps, consisting of the smallest possible number of
plumber, say, can usually spot the source of a plumbing separate motions.
For example, most factory-made products are pro- labor makes science and invention into specializations
duced under an arrangement whereby the typical worker carried on by geniuses, which, of course, greatly facili-
remains in just one place and performs just one kind of tates the invention of machinery. And, in reducing jobs
operation in the course of his working day. Typically, he wherever possible to a small number of distinct motions
performs just one step in the making of just one compo- repeated over and over again, it enormously simplifies
nent or part, or joins just one component or part to one the problems of designing a machine or special tool to
other component or part. The advantages of such a sys- help do the work. As a result, machines and tools have
tem are that it eliminates the time that would otherwise frequently been invented by intelligent, ambitious work-
be lost in walking back and forth from one place to ers who gave careful thought to the exact nature of the
another to do different kinds of work, in constantly operations they performed every day and who thus dis-
picking up and putting down different types of tools, and covered how their work might be aided by the application
in constantly having to finish up and perhaps clean up of some special mechanical device or implement.
what one has been doing and warm up to what one is Lastly, by concentrating a large volume of work of the
about to do.1 same type in the same hands, the division of labor makes
Repetitious factory work is a further and important the use of machinery and specialized tools economically
example of the division of labor’s enhancement of the worthwhile. For example, it pays a plumber to acquire
yield to learning. It represents the yield to learning being not only all kinds of knowledge about plumbing, but also
raised so high that people can live by virtue of knowing all kinds of specialized plumbing tools that it would not
merely how to perform a few simple motions. Under the pay a homeowner to acquire. In the same way, it pays a
division of labor, the intelligence of businessmen, capi- large-scale manufacturer to use all manner of machinery
talists, industrial engineers, and managers, achieves the that it would not pay a small-scale manufacturer to use.
isolation, concentration, and coordination of small, dis- This is because machinery and specialized tools are often
tinct steps in production, which then constitute highly very expensive. If their use is to be economical, they
productive jobs for people even of very limited intelli- must be used fairly often, so that their high cost can be
gence. Because of the productive efforts of the first spread over a large number of units of output. Where this
group, highly sophisticated products, such as automo- is not possible, it is probably cheaper to produce by hand.
biles and even computers, can be produced by members In concentrating work of the same type in the same place,
of the second group—by people who otherwise could the division of labor operates to ensure that the use of
hardly even conceive of such products, let alone produce machinery pays. It increases the productive yield to
them. specialized machinery just as it does to specialized knowl-
edge, and thus makes its acquisition and employment
The Use of Machinery worthwhile.
Finally, the division of labor raises the productivity of ***
labor by constituting the foundation for the use of ma- The above connections between the division of labor
chinery in production. It does so, first of all, by creating and the use of machinery make it possible to understand
a sufficient fund of knowledge in a society to make the why the Industrial Revolution began in England in the
production of machinery possible. As explained in the late eighteenth century. At that time, England already
discussion of the multiplication of knowledge, the divi- possessed the highest degree of division of labor ever
sion of labor is indispensable to the production of all achieved and was also the world’s greatest commercial
products requiring the existence of an extensive body of nation. It thus possessed or had access to the necessary
knowledge—a body of knowledge greater than can be fund both of knowledge and of materials required for the
held by any one individual or family, or even village or construction of machines. By the same token, it also
tribe. Virtually all machinery is in this category. possessed conditions favoring the invention and design
The division of labor is equally indispensable to the of machines and the conditions in which their use would
existence of machinery in providing the extensive and pay.
widely scattered range of materials necessary for the Far more importantly, because the use of machinery
production and use of most machines, such as iron, is utterly dependent on the division of labor, it follows
copper, lead, tin, leather, rubber, timber, coal, oil, and so that the division of labor must indirectly be credited with
on. In the absence of division of labor among the differ- all the magnificent advances in human life and well-
ent regions of the world, it would be virtually impossible being that have taken place over the last two centuries or
to obtain the materials required for the production and more and that have been the result of the use of ma-
use of machines. chinery. These advances, ranging from improvements in
In addition, also as explained earlier, the division of sanitation to high-speed travel by jet aircraft, and elo-
1 These particular advantages of the division of labor are sometimes lost sight of in misguided efforts to make unskilled factory jobs more interesting. One such recent effort in the automobile industry failed with a loss of over $800 million in just eighteen months. This was a case in Sweden, in which assembly lines were abolished and replaced by work groups of ten to fifteen members with responsibility for building vehicles on their own. See “Saab Is Closing Plant After Venture’s Loss,” New York Times, February 9, 1991.
128 CAPITALISM
quently summarized by the radical lengthening of life it is the essential foundation of all significant wealth and
expectancy, were described at length in the preceding of the vital contribution made by wealth to man’s life and
chapter.2 health. Take away a division-of-labor society, and pro-
duction shrivels to the level of medieval feudalism, with
its consequently recurring famines and plagues and re-
2. The Division of Labor and Society sulting average life expectancy of twenty-five years—
All of the preceding discussion of the division of labor years, it should never be forgotten, whose passage was
can be summarized by saying that the division of labor marked with cold, hunger, exhaustion, and pain. Apart
increases the efficiency with which man is able to apply from the amelioration provided by Western aid in the
his mind, his body, and his nature-given environment to form of food and medicines, such continues to be the
production. It expands his capacity to store and use miserable condition of human life today in all that vast
knowledge, which knowledge it raises to a standard set part of the world that is not integrated into the division
by the most intelligent members of society. This standard of labor.
in turn tends to rise higher and higher in each succeeding Thus, the widely held notion that life in society re-
generation, as creative geniuses again and again enlarge quires the sacrifice of the individual’s self-interest is
the stock of technological knowledge. The division of totally mistaken in regard to a division-of-labor society.
labor also increases the degree to which knowledge of That notion applies only to societies characterized by
production is assimilated, the yield to the time spent in force and plunder, not to a division-of-labor society. A
acquiring it, and the efficiency with which it is dissem- division-of-labor society represents the mutual coopera-
inated. tion of individuals for the purpose of achieving their own
It increases the efficiency with which man applies his individual ends. The radical and progressive increase in
body to production inasmuch as it enables everyone to the productivity of labor it brings about makes it possible
concentrate on whatever he is relatively best suited for for everyone to achieve his ends incalculably better
by virtue of his bodily endowment. It also eliminates within its framework than outside of it.3
unnecessary motion in production. And, finally, it makes These considerations have major implications for eth-
possible the addition of machine and mechanical power ics. They imply that the ethical principle of respect for
to the power of human muscles. This last enables man to the persons and property of others is not something that
accomplish physical results that would otherwise be is arbitrarily enjoined upon the human race by an outside
unthinkable. authority, but has a rational basis in the requirements of
Similarly, by means of geographical specialization the the individual serving his own material self-interest. In
division of labor increases the efficiency with which man order for the individual to enjoy the benefits of the
applies his nature-given environment to production. And division of labor, he needs the existence of other people
it does so even more by the use of ever improved ma- who participate in the division of labor with him. He also
chinery and methods of production that flow from the needs those others to be secure in their persons and
heightened and progressively increasing efficiency that property—that is, to be free from the initiation of force
it lends to man’s use of his mind and body. This enables and the threat of the initiation of force—and thus to be
man to obtain progressively more from his environment. motivated and able to work and produce as efficiently as
On the basis of all of the foregoing considerations, it possible, so that there will be the most abundant and best
should be obvious that from the perspective of the pro- possible supply of goods available for him to buy. Thus,
duction of wealth and all that depends on the production it is to his self-interest that others, as well as himself, be
of wealth, a division-of-labor society is the form of secure from such threats as murder, assault, and robbery,
society that is appropriate to man’s nature. While man and that others, as well as himself, be free.4 These princi-
always possesses the faculty of reason, a division-of- ples apply to all other human beings the world over who
labor society is necessary if he is to use his rationality might potentially associate with him in the division of
efficiently in production. It is necessary if he is to actu- labor and thus contribute to his material well-being by
alize the productive potential provided by his possession enlarging and improving the supply of goods available
of reason. for him to buy. Thus, the gains from the division of labor
It should be equally obvious that the existence of a constitute an objective foundation for the existence of
division-of-labor society is to the material self-interest good will on the part of each individual toward the rest
of every individual. Whoever, in the words of von Mises, of mankind.
prefers wealth to poverty and life and health to sickness Furthermore, it can be stated categorically that these
and death, is logically obliged to value the existence of principles are in no way lessened, let alone contradicted,
a division-of-labor society and all that it depends on. For by the existence of free economic competition. On the
234 See
On the
above,
voncontribution
Mises,
chap.Human
3, pt.
of B,
the
Action,
sec.
division
2,pp.
theof
170–74.
subsection
labor to the
“The
self-interests
Actual Nature
of theofindividual,
Industrial Civilization.”
see Ludwig von Mises,HumanAction , 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 143–76. See also idem,Socialism(New Haven: Yale University Press, 1950), pp. 289–358; reprint ed. (Indianapolis: Liberty Classics, 1981). Page references to Socialismare to the Yale University Press edition; pagination from this edition is retained in the reprintedition.
contrary, as later chapters will demonstrate, they are even the otherwise most monotonous, repetitious types
powerfully reinforced by the existence of such competi- of factory work would be given an important measure of
tion. The effect of free economic competition is to im- challenge and excitement through the establishment of
prove the organization and efficiency of the division of piecework and competition among individual workers
labor. It is both to provide everyone with the opportunity and, perhaps, among assembly-line teams. Under such
to work and produce in the area in which he is best suited conditions work becomes perceived as the direct, im-
and to increase the output per unit of labor, especially on mediate means of putting money into one’s pocket. Work-
the part of individuals of lesser ability. Thus it enables ers then go at the otherwise dullest kinds of jobs with
everyone to enjoy a higher and continually rising stan- enthusiasm. Physically, the dullest kind of job can be no
dard of living.5 duller than pulling the handle of a slot machine over and
over again, which multitudes eagerly do in gambling
casinos, in the hope of winning a jackpot. In a factory
3. Rebuttal of the Critique of the Division of Labor operating under the piecework system, each such opera-
Because of the dependency of human life and well- tion brings a guaranteed small jackpot, as it were.8
being on wealth, and of wealth on the division of labor, It is also significant that a free market operates to offer
it should now be obvious that in the name of the value of premium wage rates for any jobs that most people find
human life and well-being, a division-of-labor society is relatively dull and unappealing, and, by the same token,
itself a cardinal value, and should be upheld with all the to reduce the wage rates of jobs that most people find
means at our disposal. Indeed, every individual who relatively exciting and attractive.9 Consistent with this
decides that he is better off working for money and fact, to the extent that intellectually overqualified people
buying the things he wants, rather than attempting to presently in relatively dull jobs decided to do what was
produce for himself, acts to build or maintain the divi- necessary to find more demanding, more interesting,
sion-of-labor society as he thereby positions himself in and, at the same time, higher-paying jobs—higher pay-
it; and in this way he affirms its value. A division-of-labor ing because of the higher skill requirements—the effect
society is formed and maintained precisely on the basis would be that everyone who had to remain in the rela-
of such self-interested actions of individuals.6 tively dull jobs would be compensated by receiving
Despite the fact that man’s vital interests depend on higher wages. The effect of the establishment of the
it, the division of labor has been attacked, most notably higher wages in turn would be to provide an inducement
by Marx and Engels, who blame it for making work to employers to seek ways to make such jobs more
boring and unpleasant, for “alienating” the worker from interesting, in order to attract workers without having to
his work, and for making him narrow and one-sided offer such higher wages. (Of course, the increase in the
rather than broad and well rounded in his interests and supply of labor in the more-skilled fields, into which the
capacities. Socialism, they boast, will abolish the divi- previously overqualified workers moved, would operate
sion of labor and turn work into a pleasure.7 to reduce wage rates in those fields.)10
These accusations are nonsensical. Work in a routine The charge that factory work is “alienating” rests on
factory job may well be boring and unpleasant for many a view of the average factory worker as being incapable
people. This is particularly likely to be so in the case of of intellectually understanding the importance of his
people who have the potential for doing much more particular work to the final product. It assumes that to
intellectually demanding work but who, for psychologi- take personal pride in his work, a worker has to be in the
cal reasons, are unwilling to challenge themselves and position of a medieval cobbler and oversee the process
acquire the necessary skills. Yet even so, routine factory from raw material to finished product. It does not see that
work is far less boring and unpleasant than the work of a worker can conceptually understand that, for example,
primitive farmers, which preceded it, and from which the welds he performs help to keep an airplane in flight
tens of millions of people in the Western world willingly or an automobile in operation. The charge of alienation
fled to take factory jobs. Even now, large numbers of does not see that in a division-of-labor society a worker
housewives consider it less boring than housework, which can take pride in the fact that he contributes to the
consists of little more than a wide variety of boring jobs. production of magnificent products whose very exis-
A dull job performed for money is almost always less tence would appear absolutely miraculous to any medi-
dull than one performed merely for the sake of a given eval cobbler.
physical result, because the money can be exchanged for Finally, it is in a division-of-labor society that the
so many different things and thus at least ties the work average worker, for the first time in all of human history,
to interesting possibilities. has the opportunity of actually becoming something of a
Furthermore, if a fuller measure of capitalism existed, Renaissance man, if that is what he chooses to be. The
876510
9 On
Cf.
Karl
The
Forthese
above,
athe
piecework
discussion
Marx,
explanation
points,
chap.
Economic
system
showing
see
1, pt.
of
below,
and
this
B,
is often
how
secs.
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fact,
chap.
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mistakenly
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5,below,
pt.
4. Manuscripts
Also
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sec.
chap.
implementation
cf.4von
6,
andon
pt.
of
Mises,
chap.
the
A,
1844;
sec.
grounds
9,
Human
of
Karl
4.
pt.
procapitalist
C.
Marx
that
Action,
itand
operates
pp.
Friedrich
policies,
143–44.
perversely.
namely,
Engels,To
aThe
free
wit:
Holy
market
it isFamily:
argued
in labor
that
A Critique
and
the aincentives
100-percent-reserve
of Critical
theCriticism
piecework
gold
(1845);
system
standard,
The
provides
Communist
would
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create
Manifesto
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a wide range
(1848);
production,
of readily
Friedrich
which,
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Engels,
if great
employment
Anti-Dürhing
enough relative
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(1878).
to the demand
see below,
for the
chap.
product,
13, pt.in
C,turn
sec.results
3, the subsection
in the piece“A
rates
Rational
beingFull-Employment
cut and thus in workers
Policy.”
earning
In such
lessconditions,
money than people
they did
would
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haveThe
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error in this
to develop
argument
theisability
essentially
to dothe
a variety
same asofthat
jobswhich
and toismove
present
between
in the doctrine
those jobs.
of overproduction and in criticisms of Say’s Law. See below, chap. 13, pt. B, sec. 2, in particular the analysis of the hypothetical case of the potato growers who double their production and earn less as the result of doing so. See also the discussion “Say’s Law and Competition” in sec. 3 of the same chapter, and chap. 14, pt. B, sec. 6, the subsection “Labor Unions.” The ultimate effect in all such cases is to raise the general standard of living, including the standard of living of those who might initially lose by the process of improvement.
130 CAPITALISM
division of labor has raised the productivity of labor so we cannot escape, we are at least able to understand it as
high that today the average member of a division-of- a natural phenomenon, and not as the visitation of the
labor society has both substantial real wealth at his wrath of some mysterious power. Wealth and education
disposal and substantial leisure in which to enjoy it. The are the physical and intellectual means of being in control
average worker today can easily afford an extensive of our lives, and therefore of not being alienated. Both
personal library—in paperback—of books on science depend on the productivity of a division-of-labor society.
and philosophy. He can afford an extensive collection of Marx and Engels were correct about one thing, how-
fine musical recordings and prints of the greatest works ever: socialism, if it were ever imposed on a global basis,
of art. He has the leisure to engage in all kinds of athletic would abolish the division of labor. The division of labor
activities, including year-round swimming if he lives in that socialist regimes inherit from a preceding era of
a sizable town or city. In short, he has open to him in no capitalism can endure, in a crippled, highly inefficient
small measure precisely the kind of life that the ancient state, only so long as an outside capitalist world exists
Greeks thought could be enjoyed only by a slave-owning which is large enough, and foolish enough, to subsidize
aristocracy. Further improvements in the productivity of the socialist regimes with such things as free food and
labor under the division of labor will place still more the proceeds of government-guaranteed loans, and which
wealth and leisure at the average worker’s disposal. provides a continuous market for the purchase of emer-
In addition, the proportion of truly interesting and gency supplies.11 Recent revelations about the poverty
challenging jobs in the economic system has steadily of Eastern Europe and the former Soviet Union fully
increased with the progress of the division of labor, and confirm these propositions.
will continue to increase in the future, if the division of A division-of-labor society is a capitalist society.
labor and capitalism are preserved. Today, a far larger
proportion of the population than ever before works in
the professions, in management, and in various mechan- 4. Universal Aspects of Production
ical and skilled trades that have sprung up and grown While the division of labor is the hub of production
with the intensification of the division of labor. These under capitalism, and creates the need for the science of
jobs are in addition to those of the custom craftsmen that economics, there are other important aspects of produc-
came into existence with the first revival of the division tion as well. These aspects are present in one form or
of labor in early modern times, and that the enemies of another both under capitalism and all other imaginable
the division of labor like to contrast with factory work— forms of economic activity, such as feudalism and that
forgetting that before the factories, very few people held of Robinson Crusoe on a desert island. They may be
such jobs as craftsmen and that the overwhelming ma- described as universal aspects of production. It behooves
jority were half-starving, illiterate peasants. Computeri- economics as a science to take notice of them. Thus we
zation and automation, if allowed to proceed, will make shall consider here the general concepts of production,
possible substantial further improvements along these product, producer, labor, land, and capital goods, and
lines. also the concept of consumption with respect to its mul-
Furthermore, Marx and Engels were wrong because tifaceted relationship to production. Later on, in Chapter
the wealth and leisure and the resulting education and 11, we will show how the existence of the division of
level of knowledge that a division-of-labor society makes labor profoundly modifies the whole concept of produc-
possible are powerful forces working against feelings of tive activity, including these other aspects.12
“alienation.” While it is true that alienation—a sense of Physically, production can be defined as man’s alter-
lack of belonging and lack of control in one’s life—is a ation of matter in form or location, in accordance with
growing problem in present-day society, it is not because conscious design, in order to make the matter thus altered
of, but in spite of the existence of the division of labor. serve a further purpose. (In a division-of-labor society,
The wealth the division of labor makes possible enables as we shall see, the concept of production becomes more
us to gain control over our physical circumstances. Our complex. It incorporates, as a necessary feature, the
houses are not blown down by every strong wind. We do earning of money, and comes to include the rendition of
not starve when the rain does not fall or when the locusts services performed for money.13) When the matter thus
come. We do not, as a common occurrence, see our altered undergoes some significant physical, chemical,
children and loved ones or our friends and neighbors or biological change—such as the making of flour from
dead and dying around us. We do not live in the constant wheat, metal from ore, or wine from grape juice—man
fear of disaster, disease, and death. Yet that is the normal may be said to produce a distinct product, and a new good
state of life in non-division-of-labor societies. By the may be said to result. Where the alteration is relatively
same token, when a disaster does strike us from which minor, or consists of a mere change in location—for
11
12
13 On the
Much
See below,
of
necessary
thechap.
material
failure
11,in
pt.this
of
A,socialism
section
secs. 2–6,
originally
and
anditsabove,
incompatibility
appeared
chap.in
2,my
sec.
with
article
2. the“Definitions
division of labor,
Pertaining
see below
to Production
chap. 5, pt.
andA,Consumption,
sec. 1, and chap.
Il Politico
8, pt. A,32,
passim.
no. 1 (March 1967).
example, removing stains from clothing or carrying water when they rust or rot. The using up, wearing out, or
from one place to another—production takes place, but a deterioration both of products and nature-given goods
distinct product does not result; no new good is produced. (such as mineral deposits) is consumption, in its physical
A product is matter that has been altered in one or more sense. And a consumer in this sense is one who uses
of the above ways (e.g., flour), or the alteration in matter goods up, wears them out, or in whose possession they
that we perceive as essentially unchanged (e.g., the re- deteriorate.
moval of a stain). A producer in the physical sense is one Production and consumption are related in a double
who effects such alterations. way. On the one hand, every product produced is subse-
All production, of course, entails the performance of quently consumed. On the other hand, every product
human labor. Labor is the means by which man’s mind reflects a prior consumption in the process of its own
transmits his designs and purposes to matter. It is man’s production. The production of bread, for example, entails
application of his bodily and mental faculties for the the consumption of flour and other ingredients, and of
purpose of altering matter and thereby making it serve a the pots, pans, oven, and building which are employed
further end. in its production. There is no product the production of
By the same token, all production also entails the which does not entail consumption. Even the cave man,
presence of preexisting matter, which is to be altered. The in producing the very first products, had to consume
ultimate source of this matter is always nature. The name nature-given goods. And all production above the cave
which economists have traditionally given to nature’s man level entails a consumption of previously produced
contribution to production is land. “Land” includes land products. The materials consumed in production come,
as we normally think of it, namely, pieces of ground, plus for the most part, to be themselves products, and even
all the natural resources within it and all the trees and where the materials remain nature-given goods, as in
plants and animals that are naturally present upon it— mining, products are nonetheless consumed in the form
i.e., present without man’s intervention. It also embraces of the wearing out of tools, implements, machinery,
bodies of water and their contents, air, and, eventually no buildings, and other installations, at least some varieties
doubt, even outer space, insofar as these things are em- of which are employed in all branches of production
ployed in production. Land and labor together are some- without exception once economic activity advances be-
times referred to as the original factors of production. yond the most primitive level.
(The description of land as an original factor of produc- The recognition that consumption is entailed in the
tion can be misleading, however, insofar as man is re- very process of production itself, led the classical econ-
sponsible for whatever wealth-character it possesses.14) omists to distinguish between two, and sometimes three,
Materials of production which are themselves prod- very different kinds of physical consumption, which they
ucts or otherwise the result of the previous performance called, respectively, productive, unproductive, and re-
of labor, plus tools, implements, and machines, and productive consumption. Retaining these terms, I define
buildings used in production (and land too, insofar as it them as follows:
has been improved by the previous performance of labor), Productive consumption: consumption for the pur-
have traditionally been called capital goods. It must be pose of production. For example, the consumption of
stressed, however, that this description can at most be flour and ovens for the purpose of baking bread, as
allowed to stand only in the context of a non-division-of- above; the consumption of steel and stamping equipment
labor economy. As will be shown later, the division of for the purpose of producing automobiles; the consump-
labor exerts such a profound influence on virtually every tion of cloth and sewing machines for the purpose of
aspect of economic activity that its existence requires making clothing.
that many materials of production, and even many tools Unproductive consumption: consumption not for the
and machines be categorized as consumers’ goods rather purpose of production. For example, the eating of bread,
than capital goods—for example, the materials required the driving of an automobile for pleasure, the wearing of
for serving meals in the home, and all sorts of tools and clothes.
machines found in homes, such as knives and forks, Reproductive consumption: that variety of productive
hammers and screwdrivers, washing machines, sewing consumption in which the product produced can play the
machines, and automobiles. In a division-of-labor soci- same role in further production as the goods consumed
ety, the concepts of capital and capital goods, like that of in its own production, or can be employed in the produc-
production, come to incorporate as a necessary feature tion of such products. The consumption of seed in the
the purpose of earning a money revenue or income.15 production of wheat and the wearing out of trucks in
Products produced are continuously used up, worn making deliveries to truck factories are obvious exam-
out, or simply deteriorate through the action of nature, as ples of reproductive consumption. The same phenome-
14
15 See above,
below, chap. 2,
11,sec.
pt. 1,
A,and
secs.
chap.
2–4.3, pt. A, sec. 1.
132 CAPITALISM
non is no less present, however, in the wearing out of For example, while a plow enables a farmer to grow more
oxcarts in the construction of a railroad. For though food than he could grow without it, a blast furnace of
physically very different, oxcarts and railroads play the some sort is necessary in order to produce any steel at all.
same role in production, in that both are means of trans- A growing supply of capital goods is indispensable to the
port. The using up of steel in the manufacture of iron adoption of more advanced technologies and to the con-
mining equipment is likewise reproductive consump- tinuing rise in the productivity of labor.19
tion, as is the subsequent wearing out of the iron mining As previously indicated, the existence of division of
equipment. For iron mining equipment indirectly serves labor operates to raise the productivity of labor in large
in the production of steel, which, in turn, serves in the measure by virtue of increasing the supply of capital
production of iron mining equipment. goods per capita.20 This is actually the effect of division
The concepts of productive and, especially, reproduc- of labor in all the ways that it serves to increase produc-
tive consumption are closely related to a proper concept tion, insofar as the products are capital goods. In partic-
of capital goods. Capital goods, in the physical sense, are ular the most important sources of gain from the division
goods productively or reproductively physically con- of labor—namely, the multiplication of knowledge, the
sumed. For example, the flour and ovens, steel and benefit from the existence of geniuses, and geographical
stamping equipment, cloth and sewing machines, and the specialization, all of which are indispensable to techno-
seed, trucks, oxcarts, and steel and iron mining equip- logical progress and the use of machinery and ever-improv-
ment, as above. As we shall see, in the context of a ed machinery—make their contribution to the productivity
division-of-labor, monetary economy, in which anything of labor mainly by means of bringing about capital
that is used in the production of a product to be sold can accumulation.21
make possible its own replacement by way of exchange— The present discussion of the role of division of labor
that is, by using the sales proceeds its products bring in, in capital accumulation indicates that in addition to the
to purchase its replacement—the concepts productive proportion of total production in which capital goods are
consumption and reproductive consumption become syn- produced being a determinant of their supply, and thus
onymous.16 And the concepts capital goods and capital of the productivity of labor, there is a further, equally
come to be inseparably connected with the question of important factor: namely, the general efficiency with
whether or not the goods are purchased, or the sums of which labor and existing capital goods are used. The
money are expended, for the purpose of bringing in more efficient an economic system is in the utilization of
subsequent sales revenues.17 its labor and existing supply of capital goods, the greater
The aggregate of capital goods in the possession of an will be its ability to accumulate additional capital goods.
individual can be described as his capital. And capital This is because a greater efficiency in the utilization of
can be defined as wealth reproductively employed—that labor and existing capital goods means that with any
is, as wealth employed in the production of wealth. (In given supply of capital goods it can produce a larger total
the context of a division-of-labor economy, capital is product, including a larger supply of capital goods for
wealth employed in the earning of money.) any given proportion of its productive efforts that it
It is obvious that if the supply of capital goods is to be devotes to the production of capital goods. The effect of
maintained, a substantial proportion of production must this, in turn, is that the proportion of its output which it
be devoted to their production in order to replace the needs to have in the form of capital goods in order to
supplies undergoing productive consumption. If the pro- make possible the replacement of the capital goods con-
portion of labor and capital goods devoted to the produc- sumed in production—its maintenance proportion, so to
tion of capital goods is large enough to more than offset speak—is correspondingly reduced. To whatever extent
productive consumption, then capital accumulation takes the economic system was already devoting to the produc-
place—i.e., the supply of capital goods grows. If the tion of capital goods a larger proportion of its efforts than
proportion is insufficient, then capital decumulation takes was required for mere replacement, this reduction in the
place.18 maintenance proportion further widens the margin by
The supply of capital goods is of vital significance to which it accumulates capital.
production because it is a major determinant of the This point can be illustrated by considering the con-
productivity of labor—i.e., the output per unit of labor. ditions of a self-sufficient farmer, whose own product is
A larger supply of capital goods per capita operates to the source of the capital goods he uses in further produc-
raise the productivity of labor, and a smaller supply to tion. If such a farmer can use one bushel of crop in the
reduce it. More capital goods make it possible to produce form of seed to produce an output of two bushels of crop,
not only more of various products, but products whose then in order to maintain his stock of seed and produce
production would otherwise be completely impossible. the same-sized crop in the next year, the farmer must
16
17
18
19
20
21 See
On
Forthis
aabove,
below,
ibid.,
discussion
point,
sec.
sec.
chap.
ibid.,
see
4.1,of
below,
sec.
14,
the
increases
pt.
subsection
3. B,
ibid.,
sec.
inthe
production
3,“The
subsection
the subsection
Use of
as“The
aMachinery.”
source
“Saving
Reciprocal
of capital
as a Source
Relationship
accumulation,
of Capital
Between
see
Accumulation.”
below,
Capital
chap.
Accumulation
14, pt. B, sec.
and3,Technological
the subsectionsProgress.”
“Technological Progress as a Source of Capital Accumulation” and “Other Factors, Above All Economic Freedom and Respect for Property Rights, as Sources of Capital Accumulation.”
employ half of his output as seed. If he becomes more tained otherwise. The use of labor in a hand-to-mouth
efficient, and can produce three bushels of crop for every process of production—for example, to pick fruits and
one of seed, then he requires only one-third of his output nuts growing wild in the forest—is the most direct,
to replace his stock of seed. If he continues to devote half least-time-consuming method of production one might
or more of his output to seed, he is now enabled to imagine. Yet the product of such a process of production
accumulate capital and increase his production, or to do is insignificant in comparison with processes of produc-
so more rapidly than before. tion in which labor is used first to produce tools and
The exact same principle applies to the accumulation implements; and if labor were not first used to produce
of capital goods in a complex division-of-labor economy materials as well, no products could be produced beyond
such as our own. Just as in the case of the self-sufficient the crudest, most primitive type.22 The division of labor
farmer, the physical source of capital goods for us is the is intimately bound up with the question of the time
product of our economic system. For taking a division- factor involved in production insofar as one group of
of-labor economy as a whole, it resembles the situation workers begins its production with capital goods pro-
of the self-sufficient farmer in that there is nothing out- duced by previous groups of workers. Such temporal
side of it to provide capital goods. The physical source succession in the stages of division of labor can be
of capital goods in a division-of-labor economy, as with described as the division of labor in its vertical aspect.
a self-sufficient farmer, is always its own output. In any discussion of universal aspects of production,
It is worth noting that production with capital goods some mention must be made of the law of diminishing
always represents an indirect, more time-consuming pro- returns, which has application under all economic con-
cess of production as compared to production without ditions. However, inasmuch as this law has already been
capital goods. For labor must first be applied to the explained in the last chapter, it is not necessary to explain
production of the capital goods and only then to the it again.23 It is only necessary to stress that it is the
production of consumers’ goods. The greater lapse of framework provided by the division of labor and capital-
time between the performance of labor and the achieve- ism, and the resulting continuous ability to achieve tech-
ment of its ultimate result is, of course, compensated for nological progress and accumulate capital, that makes it
by the larger size of the result and by the fact that in many possible to counteract and more than counteract the
cases results of the same kind could simply not be ob- influence of the law of diminishing returns.
22
23 Cf. Eugen
See above,von
chap.
Böhm-Bawerk,
3, pt. A, sec. 2.Capital and Interest, trans. George D. Huncke and Hans F. Sennholz (South Holland, Illinois: Libertarian Press, 1959 ), 2:77-118.
Notes
1. These particular advantages of the division of labor are Friedrich Engels, Anti-Dürhing (1878).
sometimes lost sight of in misguided efforts to make unskilled 8. The piecework system is often mistakenly attacked on the
factory jobs more interesting. One such recent effort in the grounds that it operates perversely. To wit: it is argued that the
automobile industry failed with a loss of over $800 million in incentives the piecework system provides result in increased
just eighteen months. This was a case in Sweden, in which production, which, if great enough relative to the demand for
assembly lines were abolished and replaced by work groups of the product, in turn results in the piece rates being cut and thus
ten to fifteen members with responsibility for building vehicles in workers earning less money than they did before. The error
on their own. See “Saab Is Closing Plant After Venture’s Loss,” in this argument is essentially the same as that which is present
New York Times, February 9, 1991. in the doctrine of overproduction and in criticisms of Say’s Law.
2. See above, pp. 76–78. See below, pp. 561–564, in particular the analysis of the hypo-
3. On the contribution of the division of labor to the self-inter- thetical case of the potato growers who double their production
ests of the individual, see Ludwig von Mises, Human Action, and earn less as the result of doing so. See also p. 568 and pp.
3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 143–176. 655–656. The ultimate effect in all such cases is to raise the general
See also idem, Socialism (New Haven: Yale University Press, standard of living, including the standard of living of those who
1950), pp. 289–358; reprint ed. (Indianapolis: Liberty Classics, might initially lose by the process of improvement.
1981). Page references to Socialism are to the Yale University 9. For the explanation of this fact, see below, p. 195.
Press edition; pagination from this edition is retained in the 10. For a discussion showing how the consistent implementa-
reprint edition. tion of procapitalist policies, namely, a free market in labor and
4. See von Mises, Human Action, pp. 170–174. a 100-percent-reserve gold standard, would create a wide range
5. On these points, see below, p. 144 and pp. 343–371 passim. of readily available employment opportunities, see below, p.
6. Cf. above, pp. 27–31. Also cf. von Mises, Human Action, pp. 594. In such conditions, people would have an incentive to
143–144. develop the ability to do a variety of jobs and to move between
7. Karl Marx, Economic and Philosophic Manuscripts of 1844; those jobs.
Karl Marx and Friedrich Engels, The Holy Family: A Critique 11. On the necessary failure of socialism and its incompatibility
of Critical Criticism (1845); The Communist Manifesto (1848); with the division of labor, see below, pp. 135–139 and 267–282
134 CAPITALISM
passim. 18. See below, pp. 622–629.

12. Much of the material in this section originally appeared in 19. On this point, see below, pp. 631–632.
my article “Definitions Pertaining to Production and Consump- 20. See above, pp. 127–128.
tion, Il Politico 32, no. 1 (March 1967). 21. For a discussion of increases in production as a source of
13. See below, pp. 442–462 passim, and above, 41–42. capital accumulation, see below, pp. 629–631 and 634–636.
14. See above, pp. 39–41 and 63–66. 22. Cf. Eugen von Böhm-Bawerk, Capital and Interest, trans.
15. See below, pp. 442–447. George D. Huncke and Hans F. Sennholz (South Holland, Ill.:
16. See below, pp. 444–445. Libertarian Press, 1959), 2:77–118.
17. See below, pp. 445–447. 23. See above, pp. 67–69.
CHAPTER 5
THE DEPENDENCE OF THE DIVISION

OF LABOR ON CAPITALISM I
private ownership of the means of production is based on

PART A the very nature of the gains provided by the division of
labor. These gains, above all the multiplication of knowl-
THE NATURE OF THE edge and the benefit from the existence of geniuses,
DEPENDENCIES fundamentally derive from the fact that individuals pos-
sess separate, independent minds, which permit, indeed,
C hapter 4 explained how the division of labor is

essential to the existence of a high and rising
productivity of labor. This and the next three chapters
require them to have separate independent knowledge
and to make separate, independent judgments and deci-
sions. In a division-of-labor society, each person benefits
demonstrate the dependence of the division of labor on from the fact that other people possess knowledge which
the fundamental economic institutions of a capitalist he does not, and an intelligence separate from and often
society. These institutions, of course, are private owner- greater than his own. His benefit requires that others be
ship of the means of production, saving and capital able to acquire and apply their knowledge on their own
accumulation, exchange and money, economic competi- initiative, without having to await his orders, approval,
tion, economic inequality, and the profit motive and the or permission, which, in the nature of the case, he would
price system. By the end of Chapter 8, the dependence be unable to give in any rational way, since he necessarily
of the division of labor on the institutions of capitalism lacks the knowledge that would be required to do so.
will have been established so thoroughly that the propo- Now, in order for people to act and produce on any
sition will appear unexceptionable that in the long run significant scale, they must possess material means of
the division of labor itself is an institution of capitalism. action and production: they must possess wealth. In order
for them to act and produce separately and independently
from one another, they must hold wealth separately and
1. Dependence of the Division of Labor on Private independently from one another—that is, there must be
Ownership of the Means of Production private property, including private ownership of the means
Private ownership of the means of production is the of production.1
most fundamental of the institutions of capitalism, along In essence, private property and private ownership of
with freedom and the pursuit of material self-interest. It the means of production are fundamental and essential
underlies a division-of-labor society in a direct way and to a division-of-labor society because the separate, inde-
in a variety of indirect ways. pendent thinking and acting of individuals is fundamen-
The direct dependence of the division of labor on tal and essential to it, and because they are the material
1 See Ayn Rand, “What Is Capitalism?” in Capitalism: The Unknown Ideal, ed. Ayn Rand (New York: The New American Library, n.d.), pp. 9–12. See also, Leonard Peikoff,Objectivism: The Philosophy of Ayn Rand (New York: New American Library, 1992), pp. 380–84.
136 CAPITALISM
requirement of such separate, independent thinking and edge pertaining to all economic decisions, which is clearly
acting.2 impossible in a division-of-labor society. It would mean,
for example, that the voters would have to decide such
Socialism and Collectivism Versus questions as whether a new steel mill should be built in
Economic Planning Gary, Indiana, or somewhere else, what kind of steel mill
Just as capitalism—private ownership of the means of it should be, how large it should be, and so on. In the face
production—is indispensable to the existence of a divi- of hundreds or thousands of such questions arising every
sion-of-labor society, so, by the same token, socialism day, the voters would have to devote their lives to nothing
and collectivism are incompatible with the existence of else, and still they would be almost entirely ignorant
a division-of-labor society.3 The truth of these proposi- about the matters raised in each case.
tions is confirmed by the collapse of socialism in Eastern Socialism is not rescued from its incompatibility with
Europe and—how wonderful the words sound—the former a division-of-labor society by substituting the dictator-
Soviet Union. Despite extensive Western aid, economic ship of an alleged expert or body of experts for the
conditions in the Communist bloc were so bad for so long democracy of the ignorant masses. For now, instead of
that finally all hope of improvement under socialism has demanding that everyone know everything about pro-
been abandoned and attempts are now underway to insti- duction, it demands that one person or several people—
tute private ownership of the means of production and the Supreme Dictator or the members of the Central
establish a price system. Planning Board—know everything about production.
The incompatibility of socialism and collectivism with The very expression “central planning” describes the
a division-of-labor society would long since have been essence of this absurdity. It means that one consciousness
blatant if the capitalist countries had not continuously must be able to see and plan the entire economic system,
rescued the Soviet Union and its allies from famine, with either alone or in consultation with one or more other
massive supplies of grain sent for free or on government- such all-seeing consciousnesses. For central planning
guaranteed credit that was never intended to be repaid. means the planning of the entire economic system as an
Even the grain purchases made by the Soviet Union and indivisible whole.
its allies ultimately depended on the aid of Western Socialism is incompatible with a division-of-labor
governments, which guaranteed investments made in the society because in all of its versions it is incompatible
development of natural resources and in the construction with a division of the intellectual labor required in the
of factories in the Soviet Union and other Communist- planning of the conduct of the economic system. When
bloc countries. These investments, particularly those in it attempts such an intellectual division of labor, as it
the development of natural resources, in which the qual- necessarily must, the result is contradictory partial plan-
ity of the product does not enter as a decisive factor, were ning. This is a state of affairs in which separate minis-
the foundation of most of the exports of the Soviet Union tries, industries, regions, and even individual factories
and the Communist bloc and thus of their ability to obtain and farms plan in discoordination and at cross purposes.
funds with which to make purchases from abroad. In the In a word, it is economic chaos.4 As a result of this chaos,
absence of such Western aid, a series of famines—the the whole division of labor disintegrates—or would in
necessary consequence of the massive inefficiencies of the absence of aid from capitalist countries. For people
socialism—would have led to a flight from the cities and are subjected to a chronic inability to obtain vital supplies
resettlement of practically the whole of the surviving from others and thus must attempt to produce them
population of the Communist countries on farms, in an themselves.
effort of people to secure a food supply. This would have The lack of vital supplies includes all manner of
meant the end of all significant division of labor in those things. There are not only shortages of food, but also
countries and their reversion to the economic conditions shortages of such things as lubricants, electric power, and
of feudalism. raw materials and component parts of all kinds, and, of
It should be realized that collectivism openly demands course, labor and all kinds of consumers’ goods.5 It is in
that everyone think and act as a unit. It leaves no room response to such conditions that Soviet factories found it
for the vast differentiation and individuation of knowl- necessary to attempt to manufacture even their own
edge on which a division-of-labor society rests. The screws and nails. Thus, for example, without any aware-
propaganda of socialism fully displays this absurdity ness of the fact that the conditions he described were
when it pretends that under socialism all economic deci- hostile to the division of labor, an admirer of the Soviet
sions will be arrived at democratically. In order for system wrote:
people intelligently to vote on all economic decisions, There is considerable evidence that Russian plants do
everyone would have to have all the necessary knowl- for themselves many things—like producing screws with
2543 A
My
For
See
division-of-labor,
discussion
aHedrick
detailedSmith,
discussion
of thisThe
capitalist
subject
Russians
of the
issociety
completely
economic
(New is,York:
ofchaos
course,
indebted
Quadrangle/New
ofcharacterized
a socialist
to the writings
state,
by
Yorksee
the
of von
Times
existence
below,
Mises
Book
chap.
of
andmedium
Company,
8,
Hayek.
pt. A,and
sec.
See
1976),
large-sized
Ludwig
3, and
pp.
the60–61.
von
references
business
Mises, enterprises,
Socialism
cited in the
(New
in
preceding
which
Haven:
large
note
Yale
numbers
ofUniversity
this chapter.
of individual
Press, 1951),
wagepp.
earners
111–42,
produce
211–20,
under
516–21;
the direction
reprintofed.
businessmen
(Indianapolis:
andLiberty
capitalists.
Classics,
But the
1981);
formation
idem,and
Human
extent
Action,
of all such
3d ed.
enterprises
rev. (Chicago:
is itself
Henry
the product
Regnery
of the
Co.,
separate,
1966), pp.
independent
689–715.thinking
See alsoan
F. A.
d acting
Hayek,ofThe
all the
Road
individual
to Serfdom
participants.
(Chicago: The
Theindividual
University
stockholders
of Chicagodecide
Press, 1944),
the extepp.
nt to48–50.;
which it
Individualism
is advantageous
andto
Economic
pool their
Order
capitals
(Chicago:
and employ
University
other people;
of Chicago
the individual
Press, 1948),
wage pp.
earners
33–56,decide
73–91,the
119–208.
extent to which working for such an enterprise is to their advantage compared with working on their own, as businessmen, and with working for any other such enterprise.
THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM I 137
slow-speed machinery—which could be better done by profit-and-loss calculations.

others—in this case, specialized screw manufacturers using All of these changes represent the adjustment of the
high speed equipment. But this desire to be independent of plans of particular individuals and businesses to the plans
others, in part at least, grows out of the Soviet effort to
of others in the economic system. For it is the plans of
operate its plant capacity at a pace rarely achieved under
others to purchase accounting services rather than acting
capitalism except in wartime. In fact, the sort of barter deals
just discussed are not too different from those which take services that cause the higher income our student can
place in a capitalist economy under the impact of wartime expect to earn as an accountant rather than as an actor. It
shortages.6 is the plans of others willing and able to pay more to live
in certain neighborhoods, and less to live in certain
In describing such conditions, another observer wrote:
others, that determine the relative house prices confront-
For a Soviet factory—or a Soviet research institute—the ing our home buyer. It is the plans of its prospective
best response to unreliable business partners is self-suffi-
customers, of all competing sellers of its goods, and of
ciency. When the planners decided to build the giant Fiat
factory, they decided to make it almost entirely self-suffi- all other buyers of the means of production it uses or
cient. Except for electrical equipment, window glass and otherwise depends on, that enter into the formation of the
tires, every part used in Zhiguli—every nut, bolt, seat cover prices determining the revenues and costs of any busi-
and piston ring—is made in the factory itself. Gersh Bud- ness firm and thus what it finds profitable or unprofitable
ker’s Institute of Nuclear Physics in Novosibirsk couldn’t to produce.
buy the instruments it needed, so the scientists there began Now the fact that capitalism even has economic plan-
to make their own. This kind of self-reliance is expensive ning, let alone the only possible kind of rational economic
and inefficient. Yet no amount of planning can provide the planning, is almost completely unknown. Practically ev-
trust and reliability that could substitute for it.7
eryone under capitalism has been in the position of
The fact is that such results are inescapable under so- Molière’s M. Jourdan, who spoke prose all his life with-
called central planning. They can be avoided only by out ever knowing it. The overwhelming majority of
means of capitalism and its price system. people have not realized that all the thinking and plan-
Happily, at long last, it appears that after more than ning about their economic activities that they perform in
seventy years of abject failure, the concept of central their capacity as individuals actually is economic plan-
planning is now being abandoned in the former Soviet ning.8 By the same token, the term “planning” has been
Union. The process of abandonment of the concept ap- reserved for the feeble efforts of a comparative handful
pears to be well underway even in Communist China. of government officials, who, having prohibited the plan-
Hopefully, within the next few years, these and all other ning of everyone else, presume to substitute their knowl-
socialist countries will have made the transition to private edge and intelligence for the knowledge and intelligence
ownership of the means of production and capitalism. of tens of millions, and to call that planning. This is an
incredible state of affairs, one which implies the most
Capitalist Planning and the Price System
enormous ignorance on the part of the great majority of
Division of labor in the planning process is possible today’s intellectuals, from journalists to professors.
only under capitalism. This is because of the existence of ***
the price system, which is unique to capitalism. Under cap- The dependence of the division of labor on the price
italism each individual plans his own particular sphere system points the way to its indirect dependence on the
of economic activity. But he plans on the basis of a institution of private ownership of the means of produc-
consideration of prices—the prices he will receive as a tion. The price system rests on the profit motive and the
seller and must pay as a buyer. freedom of competition. Operating in conjunction with
The consideration of prices is what integrates and one another, these are the elements that drive and regu-
harmonizes the plans of each individual with the plans late the price system—that determine the formation of
of all other individuals and produces a fully and ration- all individual prices and their integration into a system.
ally planned economic system under capitalism. For The profit motive and the freedom of competition, in
example, a student changes his career plan from actor to turn, vitally depend on the institution of private owner-
accountant when he contemplates the vast difference in ship of the means of production.
income he can expect to earn. A prospective home buyer It is necessary to explain here the nature of both of
changes his plan concerning which neighborhood to live these sets of dependencies: that of the price system on
in when he compares house prices in the different neigh- the profit motive and the freedom of competition and, in
borhoods. And businesses change their plans concerning turn, that of the profit motive and the freedom of compe-
product lines, methods and locations of production, and tition on private ownership of the means of production.
every other aspect of their activities, in response to The profit motive—financial self-interest—makes every-
876 Theelaboration
Robert
For quotation
Kaiser,isRussia
on
from
theHenry
nature
(New York:
H.
of economic
Villard,
Atheneum,
Economic
planning
1976)
Development
under
p. 338.
capitalism,
(Newsee
York:
below,
Reinhart
chap. 8,
& pt.
Co.,
A,1959),
sec. 3p.
and171.
chaps.
Italics
6–8,
supplied.
passim.
138 CAPITALISM
one be concerned with the revenue or income he earns Private ownership of the means of production is what
and the costs or expenses he incurs. As stated, precisely makes the profit motive operative in the formation of
this is what harmonizes and integrates the economic prices, the prices both of means of production and of
plans and the economic activities of all the separate products. Furthermore, private ownership of the means
businesses and individuals who make up a division-ofof production underlies the very existence of the incen-
labor society. While the principles describing just how tives of profit and loss, in that it is private property, above
this occurs are the subject matter of price theory and are all in the form of private ownership of the means of
explained at length in the next three chapters of this book, production, that is the substance of what is gained or lost
this much can be stated now, as a brief, advance indication: by producers. Without the ability to accumulate holdings
Namely, the profit motive provides powerful incentives of private property, there would be nothing for producers
for the steady expansion and improvement of production to gain except the ability to enlarge their immediate
and, at the same time, operates to keep the relative size consumption, and nothing at all for them to lose, because
of all the various industries and occupations in proper losses can be losses only of preexisting property. With
balance. It makes production accord with the will of the private ownership of the means of production there is not
ultimate buyers—the consumers—and ensures that the only the incentive of profit and loss to use the means of
production of each individual good takes place in a way production profitably but also the vitally important fact
that is maximally conducive to production in the rest of that an individual’s control over the means of production
the economic system. The profit motive is what balances is increased or decreased to the extent that he uses them
the demand and supply of each product and ensures the profitably or unprofitably.
most rational and efficient distribution of each product This last results from the fact that those owners who
over space and time—among all the markets that compete use the means of production profitably are in a position
for it—and its delivery into the hands of those individuals to save and reinvest, in proportion to the extent of their
who, within the limits of their wealth and income, need profits. To the extent that their sales proceeds exceed
or desire it the most. The profit motive ensures the most their costs, they obtain the funds not only to replace the
rational and efficient allocation of capital and of every means of production with which they began but to more
type of labor and material among its possible alternative than replace. They are thus enabled to enlarge their
uses, and makes the economic system respond to changes control over the means of production. By the same token,
in economic conditions in the most rational and efficient those owners of the means of production who suffer
manner possible. losses correspondingly lose control over the means of
Thus, the profit motive is what prevents any sort of production. Their losses mean that their sales proceeds
“anarchy of production” and, instead, creates economic are less than their initial outlays and thus that they lack
order and harmony out of the activities of all the different the funds to replace the means of production with which
individuals who comprise the economic system. It is they began.
what enables capitalism to be an economic system that Thus private ownership of the means of production is
is rationally and cohesively planned by each and every what gives the profit motive virtually all of its economic
individual who participates in it. influence: it enables the profit motive both to be opera-
If the profit motive is the engine which drives the price tive in the formation of the prices of means of production
system, competition and the freedom of competition are and products and to direct the use of the means of
the built-in regulator which provide the essential context production. At the same time, it enables success or failure
in which that engine operates. What this means is that in in earning profits to determine the extent of one’s control
seeking to serve his financial self-interest, every seller over means of production in the future. And, of course,
under capitalism must be aware that there are other it is what gives the profit motive its strength.
sellers or potential sellers who might sell to his customers As to economic competition: private ownership of the
and thus that he must accordingly limit the prices he asks. means of production underlies economic competition, in
By the same token, every buyer under capitalism must that economic competition presupposes separate, inde-
be aware that there are other buyers or potential buyers pendent producers, who, in order to be separate and
who might buy from his suppliers and thus that he must independent, must hold the wealth they use in production
set the prices he offers accordingly. separately and independently from one another. Thus
Now while the profit motive and the freedom of competition among producers presupposes private own-
competition are the elements that drive and regulate the ership of the means of production. Furthermore, the
price system, as stated, they themselves in turn rest on freedom of competition, like virtually all other freedoms,
the foundation of private ownership of the means of is an aspect of property rights: it is the freedom of owners
production. of means of production to employ their means of produc-
tion in any branch of industry they choose.9 Further dependencies of a division-of-labor society
*** on the institutions of saving and capital accumulation,
In addition to its dependence on the profit motive and exchange and money, economic competition, and also
freedom of competition, the price system, of course, also economic inequality—all of them leading features of
depends on the institutions of exchange and money. capitalism—can now be explored.
Prices are sums of money exchanged for units of goods
or services. The very phenomenon of exchange presup-
poses the separate ownership of the things exchanged. 2. The Dependence of the Division of Labor on
Exchange is a mutual transfer of property between two Saving and Capital Accumulation
parties, with the property of each being given as the Even before the development of money and monetary
condition of receiving the property of the other. A collec- exchange, saving and capital accumulation are vital to
tivist monopoly on production, which is the essence of the development of the division of labor. They are nec-
socialism, is incompatible with the means of production essary to release people’s labor from the immediate
being exchanged or, therefore, having prices. Capital production of food, so that they can turn to the production
goods cannot be bought or sold because all capital goods of other things, including tools for producing food. In the
are owned by the same party: the state. At the same time, absence of any saving and capital accumulation what-
the leading purpose of socialism is supposed to be the ever, everyone’s labor would have to be devoted almost
removal of labor from the status of a commodity that is exclusively to securing his next meal. With saving and
bought and sold in the market; and, indeed, labor cannot capital accumulation, even if only in the form of stores
be bought and sold under socialism except on the terms of food, people can turn their attention to the production
arbitrarily dictated by a universal monopoly employer: of other things. For example, primitive hunters or fisher-
the state. Thus, private ownership of the means of pro- men who have accumulated stocks of food can live off
duction is essential for the existence of markets and of them while they set about constructing huts and also
market prices of the means of production.10 It is essential better means of hunting and fishing, such as bows and
both for the very existence of a market in capital goods and arrows and boats and nets.
thus for prices of capital goods, and for the existence of The ability to carry on the production of things other
employer competition in the market for labor and thus for than immediate food supplies is an obvious precondition
wage rates greater than the barest minimum of subsistence. of the development of the division of labor, in that
Closely related to the above, the price system further without it there would be the production of essentially
depends on the institution of saving and capital accumu- just one thing, in which virtually everyone would be
lation, in that the prices of the means of production are engaged, namely, food for the next meal. Probably there
not paid by the consumers, who purchase only the ulti- would be some division of labor even at that level—for
mate final products, but by businessmen. All the materi- example, some members of a tribe might concentrate on
als and supplies, all the tools, equipment, and labor chasing animals, while others concentrated on the actual
services used in production are purchased and paid for killing of them. But a precondition of people specializing
by businessmen, almost entirely out of accumulated cap- in the production of distinctly different products is the
ital, not by the ultimate consumers out of consumption ability to carry on the production of such products, and
spending.11 The prices of all the means of production, here saving and capital accumulation are necessary in the
therefore, depend on saving and capital accumulation. case of every product whose production entails the lapse
And, as indicated previously, saving and capital accumu- of more time than transpires between two meals. They
lation vitally depend on the institution of private owner- are necessary insofar as people must have that second
ship of the means of production and its security. In order meal (or whatever else they normally consume) before
for people to save and accumulate capital, to improve the their labor results in the consumers’ goods they help to
productive property at their disposal in any way, or even produce. Their ability to consume before their product is
just to maintain it, they must have the expectation of produced is possible only to the extent that savings exist.
benefitting from such action. They can rationally have As indicated, the accumulation of capital is also vital
that expectation only if that wealth—those means of in raising the productivity of the labor of food producers,
production—are securely their private property. so that not everyone’s labor is required in the production
Thus, through each of these four roots—the profit of food. It is only to the degree that fewer people are
motive, competition, exchange and money, and saving required to produce the food needed by all, that more
and capital accumulation—the price system is grounded people can devote their labor to things other than food,
in the institution of private ownership of the means of and thus the division of labor develop. The relationship
production. between the productivity of labor in food production and
9
10
11 On the
This
For elaboration
insight,
indivisibility
of course,
of this
offundamental
property
is one of the
rights
greatest
fact,
andsee
all
contributions
below,
other rights,
chap. of
15,
see
von
sec.
above,
Mises.
2, the
chap.
subsection
See1,
above,
pt. B,“The
note
sec. 2,
4.Demand
the subsection
for A is“The
the Demand
Indivisibility
for A.”
of Economic and Political Freedom.”
140 CAPITALISM
the division of labor is reciprocal. To the degree that the and tire companies and the receipt of sales revenues by
productivity of labor in food production rises, more these companies. The consequence of a still further lack
people can be spared for other branches of production. of capital, this time by the iron mining concerns and
The effect of the expansion of these other branches in rubber plantations, would, of course, be to make the
turn is a higher productivity of labor in food production, plight of the employees and suppliers of these concerns
because food producers are thereby enabled to work with even worse. And so it would be with every further stage
the aid of more and better products of other branches of of remove from the production of automobiles.
production—for example, farmers can work with the aid The full magnitude of the time factor in production
of more of the products of manufacturing. becomes clear if we begin to look at the equipment and
Saving and capital accumulation, of course, are no buildings used by an industry. For example, the auto
less vital in the context of a monetary economy, as has industry’s equipment probably lasts on the order of a
already been shown. Closely connected with the fact that generation; its factory buildings, on the order of two or
they are the source of the demand for factors of produc- three generations. If the auto industry did not possess
tion is the fact that their existence is what enables pro- capital funds to pay for that equipment and those build-
ducers to be paid within a reasonable period of time after ings, the suppliers of the equipment and the construction
the completion of their work. In the absence of savings contractors involved would have to wait to be paid out
and capital in terms of money, any significant division of of the sales revenues earned by the auto companies over
labor would be impossible, because it would then be a period of from one to three generations.
necessary for many producers to wait years, decades, In the absence of capital in the hands of the equipment
generations, or even centuries before being paid. makers and construction contractors as well, it would be
Consider the case of automobile workers today. At their employees and suppliers who would have to wait
present, like most other workers, they are paid after the this period of time to be paid. These workers and suppli-
completion of a week’s work. Yet far more than a week ers would also have to wait the additional time that
goes by between the performance of the auto workers’ transpires within these industries in the making of the
labor and the time the auto companies are paid for the equipment and the construction of the buildings. Indeed,
cars those workers help to produce. What makes this those involved in the production of such things as con-
possible is the fact that the auto companies possess struction equipment and in the building of factories for
capital. They pay the wages of their workers week after producing machinery and construction equipment would
week out of capital, and only months later do they be confronted with periods of waiting time that extended
recover the outlays of any given week in sales revenues. beyond their life spans and their children’s life spans.
Indeed, even most of the sales revenues of the auto This would be the case, for example, where the steel
companies are paid out of savings and capital. Most girders used to erect an auto plant that will last fifty years
new-car buyers buy on installment credit. Under this come from a steel mill that is itself fifty years old and
arrangement a bank or some other financial institution was constructed with materials produced in a previous
advances them the funds to buy their car, and they then plant that at that time was fifty years old. Here a time
pay off over a period of two to four years. In the absence span of a hundred and fifty years is involved between the
of this capital and the capital of the auto companies, auto performance of labor and the payment by an ultimate
workers would have to wait in excess of two to four years consumer.12
before being fully paid for their work. And the same In the absence of capital in the hands of business
would be true of all the suppliers of the auto companies, enterprises, there would simply be no way for heavily
such as the steel and tire companies, and the like. They time-consuming processes of production to exist. Even
would all have to wait to receive the installment pay- substantial savings in the hands of workers would not be
ments from the car buyers. sufficient. We might imagine a few workers with enough
In the absence of capital in the hands of steel and tire savings to enable them to work for a few years before
producers as well as auto producers and companies fi- they were paid, but we certainly cannot imagine an
nancing automobile purchases, the period for which com- economic system in which there are workers willing to
panies and workers would have to wait to be paid would work and not be paid in their lifetimes, indeed, in which
be increased still further. The workers employed by the payment would not occur even in the lifetimes of their
steel and tire companies, and the suppliers of the steel children or grandchildren.
and tire companies, such as iron mining concerns and In order for the division of labor to exist in an exten-
rubber plantations, would all have to wait the full period sive temporal succession, in which groups of workers
of time waited by the auto workers plus the period of time produce tools or materials taken up by other, succeeding
that presently elapses between the payments by the steel groups, in processes extending over long periods of time,
12 The truth is that to some extent the consumers’ goods that are paid for in the present can be traced back to the performance of labor in the remotest periods of antiquity, indeed, to the point when man first began to use previously produced goods in the production of all goods. However, the extent to which goods of the present owe their existence to labor performed in the past diminishes in geometric progression. See below, chap. 17, secs. 3 and 11.
it is absolutely essential that there be capital funds, so Thus, saving and capital accumulation lay the ground-
that each group can be paid within a reasonable time after work for the division of labor in four ways. They make
completing its work. The existence of capital funds in- possible the production of goods other than the food
troduces a necessary division of payments, so to speak, required for the next meal. They raise the productivity of
that corresponds to the temporal division of labor. labor in food production, so that people can be spared for
In the absence of capital funds, there is only one source other branches of production, which makes possible
of payment—the ultimate, final consumers, whose outlays further increases in the productivity of labor in food
lie months, years, generations, even centuries in the production. They make possible a division of payments,
future. With the existence of capital funds, there is im- so that the time which elapses between the performance
mediate payment, however far in the future the expendi- of labor and the receipt of payment by the producers is
tures of the ultimate, final consumers may lie. Only relatively short, no matter how long is the time which
because of the existence of capital funds can the division must elapse between the performance of labor and pay-
of labor exist in an extensive temporal succession. ment by the ultimate, final consumers. Finally, they
And, as will be shown later in this book, the greater is provide the foundation for larger-scale production and
the accumulation of capital funds relative to consumer thus the basis for carrying the division of labor further at
spending, the greater is the employment of labor serving any given stage of production.
the achievement of temporally remoter ends. This means,
the greater is the accumulation of capital funds relative
to consumer spending, the more does labor in the present 3. The Dependence of the Division of Labor on
serve consumption in the future, and the more is con- Exchange and Money
sumption in the present served by labor performed in the The division of labor presupposes the ability to make
past. As will be shown, the effect of labor being able to exchanges, and the existence of an extensive division of
be employed for temporally more remote ends is to labor presupposes the existence specifically of money
accelerate the rise in its productivity.13 and monetary exchange. The necessity of exchange and
The existence of division of labor in the form of a money is implied by the fact that in a division-of-labor
temporal succession of producers can be termed the society each person produces or helps to produce just one
vertical aspect of the division of labor. It is important to or at most a very few things, and is dependent for his
realize that saving and the provision of capital it makes consumption on the goods and services produced by a
possible also vitally contribute to the division of labor in vast number of others. In these circumstances, some
what may be termed its horizontal aspect—that is, the mechanism must exist whereby the products of each can
extent to which it can be carried at any given stage of be channelled to others and the products of others chan-
production. The extent to which the division of labor can nelled to each. Exchange is that mechanism. A division-
be carried at any given stage of production depends on of-labor society requires exchange on a massive scale, as
the scale on which production is carried on at that stage. a constant, major feature of economic life. In a division-
For example, if automobiles are produced on a scale of of-labor society, all or practically all of everyone’s pro-
only one or two a day in a given establishment, there is duction must leave him through the process of exchange,
obviously room for far less division of labor than if they and all or practically all of everyone’s consumption must
are produced on a scale of hundreds or thousands a day come to him through the process of exchange.
in a given establishment. In the former case, it is impossi- But a special kind of exchange is required to make this
ble to make a full-time job, or anything approaching a possible. The direct, barter exchange of goods for goods
full-time job, of any individual operation that requires is not sufficient. In order for exchange to take place under
only a small amount of labor per unit of output. But in such conditions, a so-called double coincidence of wants
the latter case, it becomes possible to make full-time jobs must exist—that is, each of the two parties must possess
of individual operations requiring quite small amounts what the other desires and desire more what the other
of labor per unit of output.14 possesses. This condition very often, indeed, usually,
What is important to realize here is that in order for cannot be realized. For example, a producer of ball
production to be carried on, on the larger scale, more bearings, steel girders, or sulfuric acid desires food pos-
capital is required. To be able to produce automobiles on sessed by grocers or farmers. Yet few or no grocers or
a scale of hundreds or thousands per day rather than one farmers desire ball bearings, steel girders, or sulfuric
or two per day, vastly more capital is required. In this acid. If exchange were confined to barter, producers of
way, more capital becomes the precondition for the ex- such goods could not live by producing them, and so
tension of the division of labor in its horizontal, as well people would not produce them. The economic system
as vertical, aspect.15 would thus have to get along without such vital goods.
13
15
14 See
Forthe
On abelow,
precise,
relationship
chap.
arithmetic
17,between
sec.illustration
3, the
thesubsection
accumulation
of this“The
point,
ofAverage
capital
see below,
and
Period
the
chap.
division
of9,
Production
pt. C,
ofsec.
labor,
and
6, where
cf.the
Adam
Limits
theSmith,
advantages
to Technological
The Wealth
of a larger
ofProgress
Nations
population’s
as
(London,
a Source
participation
1776),
of Capital
bk.in
2,Accumulation.”
the
Introduction;
division of labor
reprint
Seeare
also,
ofexplained.
Cannan
Eugened.
von(Chicago:
Böhm-Bawerk,
University
Capital
of Chicago
and Interest,
Press,3 vols.,
2 vols.trans.
in 1, George
1976). D. Huncke and Hans F. Sennholz (South Holland, Ill.: Libertarian Press, 1959), 2:79–118.
142 CAPITALISM
Indeed, hardly anyone could live by producing the goods ball bearings, namely, all his suppliers of materials,
or services he now produces, because hardly anyone equipment, fuel, and labor services. The same would be
produces things that are consumed to any significant true of the producers of virtually all goods, whose output
extent by those who supply him. (The reader should now goes to people other than those from whom they
consider to what extent the goods or services he produces receive goods and who are supplied by people other than
or helps to produce are consumed by those who regularly those whom they supply. The problem here is that the
supply him.) costs of indirect exchanges, in terms of the time and
And even where people might be engaged in produc- effort that would have to be spent in effectuating them,
ing things that would be desired by their suppliers, it would be too great to make the system practicable.
would still be impossible to effect many valuable ex- Thus, an economic system operating under the con-
changes. For example, the producers of television sets, straints of barter exchange would obviously offer only
or the builders of houses, desire bread and shoes; and the very limited opportunities for division of labor and would
producers of bread and shoes desire television sets and thus be extremely primitive. In essence, to live in such an
houses. Putting aside such obvious problems as the par- economic system, one would either have to be a farmer or
ticular houses probably being in the wrong location for produce the kinds of things that could be readily exchanged
the bread and shoe producers, there is the very serious with farmers, such as blacksmithing services.
problem of how could the producers of bread and shoes What is required for the existence of a division-of-
make change for the producers of television sets and labor society is the existence of money and monetary
houses when the latter wished to purchase a loaf of bread exchange. Money is a good readily acceptable in ex-
or pair of shoes? Would they require them to accept change by everyone in a given geographical area, and is
hundreds or thousands of loaves of bread or pairs of sought for the purpose of being reexchanged.17 Of course,
shoes? Also, how could the producers of the television one of the properties of money, which helps to make it
sets or houses pay their employees? With a fraction of a universally acceptable, is its divisibility into small units.
television set per hour? With a piece of a house per week? With money, those for whom the individual produces
With the change they received in the form of loaves of and those by whom he is supplied can be, and almost
bread or pairs of shoes?16 always are, different and distinct parties. With money, a
It might be thought that a series of indirect exchanges process of indirect exchange takes place about which no
could provide a solution—that if the goods for which a one need be concerned—it takes place virtually automat-
product was exchanged were not of the kind desired by ically and without cost. Each produces for others, though
those from whom one wanted goods oneself, then one not the others by whom he is supplied. The individual
could reexchange these goods for goods that were in fact produces for anyone who has money to offer, and then
desired by those from whom one wanted goods oneself. uses the money to buy from anyone who has the goods
But this could not actually provide a solution. A producer he wants. With the existence of money, the producers of
of ball bearings or sulfuric acid would probably acquire ball bearings, steel girders, and so on sell them for money
quantities of goods that ball bearings or sulfuric acid to whoever wants them and has money to offer for them,
helped to produce. (A producer of steel girders, however, and then they turn around and spend the money in buying
would immediately confront a problem of indivisibilit- food or whatever else they may wish, from whomever
ies, in that he could not acquire a fraction of a building they choose. Everyone works in his particular specializa-
or bridge.) tion, is paid money, and buys from all manner of people
Putting the problem of indivisibilities aside, it would who do not at all consume the goods or services that he
be necessary to engage in an enormous series of ex- himself produces.
changes, spanning who knows what distances and time With money, the producers of television sets and the
intervals, if one were to assemble the various goods that builders of houses can easily obtain items as small as a
even just a few of the producers desired from whom one loaf of bread or pair of shoes, because they sell their
wished to obtain goods oneself. To obtain the things he products for sums of money, which in turn are divisible
now does, the producer of ball bearings, for example, into parts as small as the price of a loaf of bread or a pair
would have to reexchange the products he received for of shoes. The employees of these producers are likewise
his ball bearings for the collections of goods desired by easily paid out of capital funds.
all the various suppliers of the consumers’ goods he now In these ways, money radically enlarges the opportuni-
obtains, from his grocer and landlord to his physician and ties for specialization. It makes specialization possible not
travel agent. He would also have to reexchange them for merely in a comparative handful of cases, but universally.
the collections of goods desired by all the various sup- ***
pliers of the means of production he uses in producing Closely related to the previous discussion of the price
16
17 Cf. Henry
For an account
Hazlitt,
of the
Time
origin
Willand
Runevolution
Back(Newof money
Rochelle,
andNew
the contemporary
York: Arlington
monetary
House system,
Publishers,
see 1966);
below,originally
chap. 12, sec.
published
2. as The Great Idea (New York: Appleton-Century-Crofts, 1951) p. 155.
system, the use of money also solves another problem specialization.

that would otherwise be insoluble and prevent the exis- ***
tence of a division-of-labor society. Namely, it makes it On the basis of what has been shown concerning the
possible to perform economic calculations and thus eco- importance of money, it should be obvious what igno-
nomic comparisons. Without the use of money, a produc- rance and injustice underlie the utterance that money is
tive process would show only a variety of physical means “the root of all evil.” It would be far more correct and
of production at the beginning and some physical product reasonable to argue that money is the root of all good. It
at the end. For example, it would show at the beginning is an essential root of the division of labor and of all the
quantities of building materials, equipment, and goods benefits to human life that flow from the division of
exchanged for labor services, and at the end a finished labor.20 The destruction of money would mean nothing
building. less than the destruction of the division of labor and thus
In such circumstances, it would be impossible to of modern material civilization. It would mean radical
determine if the product represented a gain or a loss of depopulation and utter impoverishment for whoever re-
wealth, because one would be comparing quantities of mained alive.21
different kinds, with no common denominator in terms The notion that money is the root of all evil finds
of which to add them or subtract them.18 One could not expression in the alleged moral ideal propounded by the
even answer such usually simple questions as which Communists of “from each according to his ability to
represents the higher wage or price? This is because, each according to his need” and in the accompanying
without the use of money, these questions would have to resentments against the necessity of earning money and
be posed in such forms as, which is more, a dozen eggs against the great prominence accorded to the earning and
plus a loaf of bread plus a pair of shoes or two shirts plus spending of money in a capitalist society.22
a blender? But with the use of money, producers are able Those who hold the antimoney mentality, and who
to compare the money value of their outputs with the yearn for goods simply to be “free” for the taking, have
money value of their inputs. They can also compare the apparently not stopped to consider what the alternatives
costs of using different methods of production, the prof- to money are. The alternatives can only be either the
itability of the different branches of production, and the absurdly cumbersome procedures of barter, which would
remuneration of the various occupations. All of this is make the acquisition of goods far more difficult or alto-
vital if production in the various branches of the division- gether impossible, or, worse, having to go naked into the
of-labor system is to be properly coordinated and not forest to hunt and gather what little nature offers to
collapse into chaos. human beings without any mechanisms of exchange at
Guidance by monetary calculations and comparisons, all—namely, a handful of nuts and berries (if others have
in contrast, provides an objectively valid standard for not appropriated them first), or else the establishment of
economic behavior.19 This is because following this stan- a totalitarian socialist dictatorship that is economically
dard enables the individual actually to increase the wealth chaotic.
at his disposal. For example, if the purchasing power of In a capitalist society on the other hand, by the rela-
money has not significantly declined in the interval, tively simple process of earning and spending money, the
selling a building or any other product for a larger sum individual integrates his activities into a division of labor
of money than the sum of money one has previously that has come to embrace the entire world and that
expended to produce it, means that one really does in- stretches back in time to the point when man first began
crease one’s command over goods and services, for one to employ previously produced goods in all of his pro-
now has the means of buying a larger quantity of them ductive activities. Thus, by earning money an individual
than before. Similarly, using a lower-cost method of is able to buy products that represent the application of
production in place of a higher-cost method, buying the intelligence and knowledge of enormous numbers of
anything at a lower price rather than a higher price, and other human beings both living and dead. He is thereby
earning a higher profit or wage rather than a lower profit enabled to obtain goods in a way that is incomparably
or wage—all of these things in fact serve to increase the easier and more rewarding than any conceivable alterna-
quantity of goods and services one can obtain in the tive.
market. Ironically, the earning of money could be substan-
Thus, the existence of money is vital to the existence tially easier and less worrisome for many people than it
of a division-of-labor society, in that it makes possible now is, if only the enemies of capitalism had not in their
economic calculations and thus economic comparisons ignorance succeeded in making it unnecessarily difficult.
serving as an objectively valid standard of economic They have made it more difficult by such means as the
behavior, as well as radically widens the possibilities for imposition of minimum-wage laws and prounion legis-
21
18
19
20
22 Cf. von
And,
Knowledge
For a brilliant
as Mises,
von of
Mises
critique
defense
the
Socialism,
dependence
hasofshown,
the
p.doctrine
moral
121.
it
ofprovides
the
value
of
division
from
ofthe
money
each
of
only
labor
according
such
andon
of
standard.
the
theexistence
to
proposition
hisSee
ability
Socialism
of money
to
that
each
money
, pp.
sheds
according
113–28,
ismajor
the root
to131–35.
light
his
of need,
all
on good,
thesee
causes
see
AynAyn
of
Rand,
theRand,
collapse
Atlas
Atlas
Shrugged,
ofShrugged
the Roman
pp.(New
660–70.
Empire,
York:which
Random
tookHouse,
place following
1957), pp.a 410–15.
century-long process of the destruction of money through inflation. See below, chap. 19, pt. B, sec. 9, the subsection “Inflation and the Potential Destruction of the Division of Labor.” The whole of chap. 19 and much of chap. 12 make clear the potential for inflation and destruction inherent in the present monetary system.
144 CAPITALISM
lation. In raising wage rates above the free-market level, persons for occupations.
such measures have the effect of reducing the quantity Economic competition is necessary because the most
of labor demanded below the supply available and thus efficient form of organization of a division-of-labor so-
of preventing people seeking to earn money from becom- ciety is not automatically known. Also, it is subject to
ing employed and thereby earning it. In the absence of constant change, as new products and methods of pro-
such measures, not only would employment and thus the duction are discovered and old ones must be abandoned,
earning of money be readily possible for everyone, but as individuals’ personal knowledge and preferences change,
also costs of production and prices would be correspond- as capital is accumulated or decumulated, as the size and
ingly lower. This last would mean that the buying power composition of the population changes, as new mineral
of the money earned more easily as the result of lower deposits are found or old ones exhausted, and as soil and
wage rates would be increased. Thus, the lower wage climate conditions change. In a free market, those who
rates needed to secure full employment and the conse- have differing opinions about which product is best
quent ease of earning money would not imply any cor- suited for given customers, which method is most appro-
responding reduction in the goods a worker could obtain priate for producing a given product, or who is best
by virtue of his labor. Indeed, the goods the average qualified for a given job, come forward and submit their
worker could obtain would almost certainly be greater, goods, their investments, and their talents to the judg-
precisely because of everyone who wanted to work being ment of the markets in which they seek to operate, and
able to work and thus not having to be supported by succeed or fail according to the judgment of those mar-
others. Moreover, the productivity of labor would cer- kets. (The judgment of a market, of course, is never final,
tainly rise more rapidly in the absence of government- in that individuals are always free to make further ap-
supported labor-union efforts to sabotage it, such as peals to it, and again and again succeed in swaying it to
preventing or delaying the introduction of labor-saving their side when they have something better to offer.)
machinery. As a result, not only would the earning of Thus, economic competition, far from representing
money be substantially easier and less worrisome, but it any kind of antisocial phenomenon, as its critics claim,
would also be substantially more rewarding in terms of is a highly positive social phenomenon. It is an essential
the goods it brought.23 mechanism of organizing production under the division
of labor, and thus an essential mechanism for improving
the efficiency of the social cooperation which the divi-
4. The Dependence of the Division of Labor on sion of labor represents.24
Economic Competition ***
As explained in Chapter 4, a major source of the gains Consistent with our earlier discussion of the price
from the division of labor is that the production of system, economic competition, or, more correctly, the
everything tends to be carried on by those who are able freedom of such competition, is necessary to a division-
to do it best. Economic competition is the process of of-labor society in a further respect as well. Namely to
establishing who is able to produce things best. prevent it from being put at the mercy of the arbitrary
The significance of economic competition for the demands of particular categories of producers.
division of labor is actually even wider than this state- By its very nature, a division-of-labor society vitally
ment may suggest. It is the process that establishes not depends on the work done by various small minorities of
only which individuals are best suited in the eyes of the people constituting particular categories of producers. In
market for all the various occupations, from wealthy many cases, as the result of the government’s interven-
businessman on down to janitor, but also which products tion into economic activity, coupled with its refusal to
are best suited for any given market, and which techno- enforce ordinary laws protecting individual rights, such
logical methods are best suited for the production of any minorities have been able to coerce the rest of the society
given product. (This last embraces, for example, such into meeting their arbitrary demands, on pain of a break-
choices as machine versus handicraft production, larger- down of the economic system. One has only to think of
scale production versus smaller-scale production, using the consequences of prolonged strikes in such fields as
copper versus using aluminum as a material, or coal transportation, steelmaking, coal mining, electric power
versus oil as a fuel, producing in one geographical loca- production, and even garbage collection—and the terms
tion rather than in another, and so forth.) Thus, economic on which such strikes are almost always settled.
competition is the process of determining the organiza- The existence of such cases is the result of violations
tion of a division-of-labor society with respect to the of the freedom of competition by or on behalf of labor
choice of products for markets and the technological unions. In practically every country, the unions have
methods of producing any given product, as well as of succeeded in having laws enacted that greatly restrict the
23
24 On these
Cf. Ludwig
points,
von Mises,
see below,
Socialism
chap., 14,
pp. pt.
319–21.
B, secs. 1–7, and chap. 13, pt. C, sec. 1.
employment of workers taking the place of strikers. For a supplier, but, at most, one that failed to reflect im-
example, for many years, striking workers in the United provements in efficiency made by other, potential sup-
States were held by law virtually to own their jobs, which pliers. But even this situation could not long exist, if
had to be held open for them even though they refused others possess the legal freedom of entry into the field.26
to work, on pain of the employers having to pay triple
back wages to the strikers in damages. (At the time of
writing, efforts are underway in Congress to reimpose 5. The Dependence of the Division of Labor on the
such conditions.) In addition, where replacement work- Freedom of Economic Inequality
ers for strikers are legally allowed to work, the unions A division-of-labor society depends on the institution
are able to practice violence and intimidation against of economic inequality, insofar as the latter results from
which there is little or no legal recourse. For it is almost the process of economic competition or, more broadly,
impossible to obtain legal protection against so-called from individuals freely engaging in production and ex-
mass picketing, which is inherently intimidating, and the change, whether they are in competition with one another
police and district attorneys rarely enforce the laws against or not.
assault and battery and property damage when it comes Economic inequality inexorably emerges from the
to union violence.25 The recent strike against The Daily freedom of the individual to pursue his own prosperity
News in New York City, in which some newsstands were and to keep as his own whatever he achieves. It emerges
actually set on fire in efforts to intimidate vendors into simply because not everyone is equally intelligent, tal-
not selling the newspaper, and in which no arrests were ented, ambitious, or hardworking, or saves as great a
made, is a glaring illustration of this fact. For further proportion of his income. In effect, it emerges as the
illustration, one has only to recall any of dozens of news consequence of different individuals enacting different
pictures of mobs of burly workers blocking factory gates degrees of economic causation.27
during a strike and the reports of slashed tires, shootings, A division-of-labor society depends on economic in-
and bombings that so frequently accompany strikes, and equality in the sense that it depends on individuals being
the fact that rarely if ever does any legal action take place free and motivated to produce. The abolition of eco-
against the perpetrators. In these ways, the unions and nomic inequality would mean the abolition of all connec-
the government have succeeded in prohibiting freedom tion between an individual’s efforts and his income. It
of competition in the labor market and thus in compelling would be tantamount to the abolition of causality in the
the entire rest of society to give in to whatever arbitrary receipt of income.
demands the unions in various critical branches of pro- To understand why this would be the result, imagine
duction may choose to make. that a group of just ten people were formed whose
*** members agreed to share equally all the income earned
While this is a subject that requires a much fuller by each of them. Now imagine that a member of this
discussion, it can be said that the freedom of competition group found a way to increase the income he earns by
would be a sufficient guarantee against arbitrary de- some given amount. Since he has to turn it over to the
mands by business firms as well as wage earners—even group and share it equally with the other nine members
in cases in which the result of competition might be the of the group, the personal benefit which he would obtain
establishment of just one company in a particular branch would be only one-tenth of that amount.28
of production, such as one electric power company or If the group consisted of a thousand people, then any
one gas company in a given town. The freedom of individual who increased or decreased the income he
competition would permit the entry of a new electric or earned by any given amount, would personally experi-
gas company if the existing one’s rates became exces- ence a gain or loss of only one one-thousandth of that
sive, and this fact would operate as a powerful check on amount: he would personally gain or lose only one dollar
the rates charged by the existing company. Also, in cases for every one thousand dollars by which he increased or
such as these, it is almost certain that different suppliers decreased the income of the group. If, as the egalitarians
would compete with one another in terms of offering the desire, the group consisted of the whole population of the
customers in a given area long-term contractual guaran- United States or of the world, then for any given amount
tees concerning rates and service, so that when a com- by which an individual increased or decreased the in-
pany did succeed in becoming the sole supplier, it would come of the group, he would increase or decrease the
operate under the terms of such a contract and not be able income available to him personally by only one 250-mil-
to impose arbitrarily high rates even temporarily. Under lionth or one 5-billionth of that amount.
such an arrangement, an excessive rate or price would It is obvious that once the size of the egalitarian group
certainly not mean one that was arbitrarily increased by becomes substantial—probably anything much in excess
25
26
27
28 Forcourse,
Of
The apassage
discussion
detailed
economic
ofdiscussion
the
in this
Norris-La
inequality
andof
the
these
Guardia
next
can
points,
several
also
Actresult
see
in
paragraphs
1932
below,
from
eliminated
differences
chap.
was10,
inspired
the
sec.
inpossibility
luck,
8.by Henry
but such
ofHazlitt’s
gaining
differences
federal
Timeare
Will
court
ofRun
relatively
injunctions
Back, pp.
minor
88–91.
against
importance
mass picketing.
in comparison with the kind of differences described above and are certainly not of sufficient importance to detract in any way from the significance of these differences.
146 CAPITALISM
of ten—no significant connection can exist between forced labor—because, as shown, it eliminates the earn-
what an individual produces and what he receives. And, ing of income as an incentive to work. If people are to
what is also very important, no significant connection work without income as the incentive, the only remain-
can exist between what an individual produces and what ing means of getting them to work is force.
any other particular individual receives. It is true that there are other positive incentives for
In a group as small as ten, say, especially if it consists working besides income—such as the enjoyment of the
of close friends and relatives, an individual might ration- work itself. But for the great majority of jobs, this factor
ally consider the effect of his actions on the income exists in a form that is closely related to the earning of
available to the other members of the group and give it income and is largely felt only after the work is com-
substantial weight in deciding how much to produce. But pleted and the satisfaction of supporting oneself can be
in any large group, the individual loses the power signif- experienced. For example, no one digs ditches, hauls
icantly to affect the income available to any other indi- garbage, mines coal, works on an assembly line or in an
vidual, as well as losing the power significantly to affect office, or is even president of a bank, for the sheer love
the income available to himself. In a group of a thousand, of his work, apart from all connection with the income it
a million, or a billion, nothing the average individual brings him. And even in the cases in which the work all
does can significantly affect the income received by his by itself may really be a source of pleasure—for exam-
wife and children or parents and friends; even their ple, in the arts and sciences—this would not be sufficient
combined share is an insignificant part of the group’s to induce the amount of work that is presently done and
total income. Nothing he does can have any significant that only the earning of income elicits. For example, I
effect on the income of the group as a whole or, therefore, personally very much enjoy lecturing on economics and
on any given proportion of that income, for he is only would want to continue my teaching career even if I were
one among many, and his production, a small part of the a millionaire and did not need the income from it. But
total production. In collectivizing his product and spread- instead of teaching two or three classes every term, I
ing it over a large group, egalitarianism destroys the might want to teach only one class every other term. In
ability of the great majority of individuals to achieve the absence of personal material incentives, the only way
results that are of significance to anyone. of inducing any significant amount of work is by means
The average person is capable of accomplishing re- of force.
sults that are large in relation to himself, and large in ***
relation to his immediate family. But very few people are There is an exception to the inability of individuals to
capable of accomplishing results that are large in relation achieve perceptible results in relation to large groups.
to significantly greater numbers of people. It is as though This is the case of individuals of unusually great ability.
egalitarianism, seeing that individuals had legs easily A great scientist, inventor, or businessman is capable of
strong enough to support their own weight, demanded increasing production so greatly that the whole world can
that each individual’s legs had to support the weight of experience a perceptible benefit. Yet this exception cer-
the whole human race as the requirement for his being tainly does not represent a case in which economic
permitted to walk. To make it the job of the individual to equality would be practicable. On the contrary, precisely
improve his own life and well-being only insofar as he this case presupposes the possibility of very great eco-
equally improves the life and well-being of everyone else nomic inequality.
in the country or the world is a demand that is fully No scientist, inventor, or businessman should be im-
comparable. agined to be motivated to devote his life to raising the
If implemented, it would give everyone the incentive standard of living of the world by one, two, five, or x
to do as little as possible. In the same way that doubling percent in order that he may, as part of the process, raise
one’s production, if that were possible, would increase his own standard of living by one, two, five, or x percent.
one’s own income by only one 250-millionth, if egalitar- That would be an absurdly bad bargain: to work so hard
ianism were practiced on a national scale—or by one and achieve so much for the rest of the world and so little
5-billionth, if it were practiced on a world scale—and for oneself.
thus would not be undertaken, so getting away with not The main value that a scientist achieves is the intel-
producing at all would reduce one’s own income only by lectual satisfaction of making his discoveries. In his case,
that amount.29 Increasing one’s production would not be this may stand in the place of any very great material
of perceptible benefit to anyone, and decreasing it would reward. But inventors generally require the prospect of
not be a perceptible loss to anyone. As a result, everyone substantial material rewards, or they will not devote the
would have the incentive to do nothing. time and effort or go to the expense that is necessary to
It should be obvious that equality of income implies make an invention. And as for businessmen, who are the
29 See ibid.
ones who actually implement the work of scientists and save a very substantial portion of them.32
inventors—who search out and perfect the inventions, It is for these reasons that a close, observable relation-
and who often set the scientists and inventors to work in ship exists between relatively high incomes and high
the first place—their work takes place for virtually no rates of saving out of income, and that attempts to restrict
other reason than as the means of accumulating a per- economic inequality must substantially reduce saving
sonal fortune, and, indeed, is possible for the most part, and capital accumulation.
only to the extent that they have already accumulated The role played by economic inequality in connection
one. This last follows from the fact that only to the degree with economic competition is that it profoundly influ-
that businessmen possess capital are they able to imple- ences the areas in which people choose to compete. For
ment their ideas—that is, to buy or build the necessary example, the fact that Mr. A the engineer earns substan-
factories and machines, purchase the necessary materials tially more than Mr. B the mechanic ensures that Mr. A
and supplies, and hire the necessary workers. Ford, Rocke- will not compete against Mr. B for the job of a mechanic,
feller, and Carnegie, for example, could raise the standard even though he might make a much better mechanic. The
of living of the world only in the course of accumulating inequality of income leads people to compete only in the
their fortunes, and only on the basis of the fortunes they areas of those of their talents that pay the most, and to
had already accumulated.30 abstain from competing in the areas of their talents that
Thus, the whole foundation of individuals of excep- pay less. It operates, when necessary, to enable the less
tional ability being able to act on a scale that raises the able actually to outcompete the more able, and thus it
standard of living of everyone is the existence of enor- guarantees the less able a place in the economic sys-
mous economic inequality, in the form of their being able tem.33
to accumulate personal fortunes both as the incentive and ***
as the means for raising the general standard of living. Economic inequality, of course, can also be the prod-
The demand for economic equality turns out to be uct of government coercion, as occurs under feudalism
opposed to causality in a double respect: in respect both and socialism, or as the result of any other arrangement
to the incentives for production and to the means of under which the government grants privileges or imposes
production. It would deprive the average person of the arbitrary burdens.34 This latter sort of economic inequal-
incentive to produce by depriving his productive effort ity is of a radically different character and is not only
of virtually all effect on his own or any other individual’s totally unnecessary, but also positively inimical, to a
standard of living. It would deprive the exceptionally division-of-labor society. This is the case because the gov-
able person of the incentive to produce by making the ernment’s establishment of such inequalities deprives pro-
effect of his productive effort on his standard of living ducers of a more or less considerable part of their product
too small and by depriving him of the material means of or income and directly infringes their freedom to produce
achieving very great productive effects in the first place. in the first place. In so doing, it deprives producers both
*** of the incentive to produce and even, in varying measure,
It should be realized that economic inequality plays a of the very possibility of producing. It deprives them of
vital role in connection with the institutions of saving and the very possibility of producing insofar as it establishes
capital accumulation and economic competition. The arbitrary economic inequality by means of monopolistic
highest incomes in a capitalist society are those earned restrictions against their entry into various lines of pro-
by successful businessmen. Insofar as such incomes duction. It also deprives them of the very possibility of
represent the earning of high rates of profit on capital producing insofar as it appropriates their incomes and
invested, the greater part of them tends to be saved and thereby reduces their ability to save and invest, which
reinvested as the means of accumulating a fortune. For- deprives them of the ability to purchase the means of
tunes are earned by earning a high rate of profit on a production. At the same time, in giving their product or
rapidly growing capital—a capital which grows rapidly income to others or in bestowing monopolistic privileges
because most of the high rate of profit is constantly on others, the government rewards nonproducers or less
reinvested.31 High incomes are also frequently of the efficient producers. Thus, economic inequality based on
kind that must be regarded as temporary or exceptional government coercion is economically destructive.
by their recipients—for example, the incomes of authors The fact that economic inequality can be the result of
of best-selling books and of successful professional ath- coercion is the reason why I did not describe it earlier in
letes and movie stars. If such people want to enjoy the this chapter as an institution to which private ownership
benefit of their currently high incomes over the course of the means of production is essential, as I did in the
of their whole lives, during most of which they will cases of the price system, the profit motive, economic
probably not earn comparably high incomes, they must competition, saving and capital accumulation, and ex-
30
31
32
33
34 For
Seethe
On further
Milton
aelaboration
demonstration
feudalistic-type
Friedman,
explanation
of this
ofAeconomic
point,
how
of
Theory
why
the
see,
incomes
accumulation
ofinequalities
below,
the Consumption
that
chap.
represent
necessarily
of9,great
pt.Function
C,high
fortunes
sec.
prevalent
rates
4,(Princeton,
the
isofadiscussion
case
under
profitofsocialism,
are
New
oneheavily
“How
man’s
Jersey:
see
the
saved,
gain
Princeton
below,
Less
being
see
Able
chap.
below,
other
University
Can
8,men’s
Outcompete
chap.
pt. B,Press,
gain,
16,
sec.pt.
5.
1957).
see
A,
thebelow,
sec.
More3, the
Able.”
chap.
subsection
9, pt. B, sec.
“An1.Explanation of High Saving Rates Out ofHighIncomes.”
148 CAPITALISM
change and money. Private property and private owner- compares the extreme inequality of semi-feudal societies
ship of the means of production are essential only to such as Saudi Arabia, with the lesser inequality of rela-
earned inequalities of wealth and income—that is, to tively free societies such as the United States, and attri-
inequalities arising out of differences in the ability and butes the greater prosperity of the latter to their greater
willingness to produce and save, where the freedom to equality rather than to their greater freedom. The fact is,
own and use property is essential. By the same token, of course, that it is greater freedom which is responsible
unearned inequalities of wealth and income—that is, both for greater prosperity and for a less extreme degree
inequalities forcibly imposed by the government—rep- of economic inequality, while forcible restrictions on the
resent a violation of property rights and thus of the freedom of economic inequality only serve to undermine
institution of private property and private ownership of prosperity.38
the means of production. For they entail depriving people
of their property or the freedom to use their property, Egalitarianism and the Abolition of Cost: The
including, of course, their means of production.35 Example of Socialized Medicine
Thus it should be understood that at a fundamental In addition to encouraging people to do nothing, egal-
level the case for economic inequality that I have pre- itarianism also leads them to demand everything. It is
sented is not at all a case for economic inequality per se, tantamount to the abolition not only of causality in the
but only for the economic inequality that results from the earning of income, but also of cost in the spending of
existence of individual freedom and respect for individ- income. To make something free to the individual and
ual rights. (Such inequality, of course, includes that chargeable to the group as a whole, is to make the
which is based on inherited wealth insofar as the wealth consumption of the individual virtually costless—both
was accumulated by means of production and saving to himself and to every other individual.
under free competition and then must be maintained by Socialized medicine provides an excellent illustration
the heirs in the face of free competition.36) of this principle. When visits to doctors are made free to
*** the individual and chargeable to the taxpayers collec-
In connection with the distinction between the sources tively, then each individual perceives the benefit of his
of economic inequality, it is worth noting that economic going to a doctor, while he and every other taxpayer
inequality that is founded on economic freedom is ac- experiences a personal cost equal to the cost of the visit
companied by much less in the way of visible inequality divided by the number of millions of taxpayers. In such
than is economic inequality founded on the initiation of circumstances, every individual is encouraged to take
physical force. This is because, as I will show in Chapter advantage of the situation and, as a result, the overall cost
9, the economic inequality that is based on economic to everyone actually ends up greatly increasing.
freedom, serves to raise the standard of living of all.37 As What happens is this: A doctor’s visit that might cost
a result, under economic freedom, even the poorest strata an individual fifty dollars, is passed on to, say, one
of society consume substantial and progressively in- hundred million taxpayers, to each of whom it costs a
creasing quantities of wealth. Thus, the inequality that hundred-millionth of fifty dollars. But now, perhaps, two
prevails is not one of a contrast between those who are hundred million people each want to make five times as
starving, half-naked, and living in hovels, and those who many visits to doctors, and so the total cost to everyone
are fat, clad in furs, and living in castles, as is the case ends up being vastly greater than it would otherwise have
under feudal inequality, for example. Rather it is an been. Furthermore, the absence of cost to the individual
inequality between those who are rich enough to drive patient is responsible for an enormous increase in the
Chevrolet or Ford automobiles, and those who are rich amount of medical tests, hospitalizations, and surgeries
enough to drive Cadillacs or Rolls Royces. Under mod- performed, which add even more to the cost of the
ern capitalism, everyone who works is well-fed, comfort- system. And, of course, there is the substantial overhead
ably housed, and attractively dressed. Indeed, it often cost added by the need for a large bureaucracy to admin-
takes an expert to distinguish between the clothing worn ister the system.
by a well-dressed secretary and that worn by a million- Ironically, even though they pay vastly more, people
airess. end up obtaining less actual medical service than before.
Failure to realize that the economic inequality that In large measure, the effect of the system is simply to
results from economic freedom and capitalism is less make doctors’ and other medical fees rise and to create
extreme than the economic inequality that is based on the shortages of doctors’ time and hospital beds—as mani-
initiation of physical force, sometimes leads to the ab- fested in crowded waiting rooms and reduced time with
surd conclusion that forcible restrictions on the freedom the individual patient, and in waiting lists to enter hospi-
of economic inequality can promote prosperity. Thus one tals. A large portion of the additional medical tests,
35
36
37
38 See
For further
The below,
above,
New Yorkchap.
discussion
Times
1,
9, pt.ofof
B,
January
inheritance,
sec. 21,for
8,
for1994,
an
a comprehensive
explanation
seereported
below, chap.
an
of instance
why
demonstration
9, pt.
almost
A,ofsec.
this
all3.violations
error
of this
with
fact.
some
of freedom
degreeentail
of fanfare,
violations
on itsoffirst
property
business
rights.
page,
See
asalso
though
below,
it represented
chap. 9, pt.a scholarly
B, sec. 2, for
finding.
a demonstration of the fact that the economic advantages of the feudal aristocracy vis-à-vis the serfsrested on a foundation of government power, not economic power, and were the result of a violation of property rights rather than of the use of property rights.
hospitalizations, and surgeries is actually unnecessary, medicine in Great Britain, for example, bypass opera-
and serves to prevent or delay the meeting of genuine tions are made difficult to obtain for people over fifty-
medical needs. The measures adopted to deal with these five years of age, and an elderly person who breaks a hip
problems, such as controlling doctors’ fees and their is likely to die before being able to obtain corrective
methods of treatment, and thereby thoroughly surgery.
bureaucratizing the field, ultimately make medicine un- Thus, in an irony with truly ominous implications, the
attractive as a profession and deter talented individuals same system of socialized medicine which began in the
from entering it. In addition, they frequently serve to United States largely as a means of financing the medical
deny necessary treatment to people, since the govern- bills of the aged has the long-run potential of turning the
ment has no rational method of determining what is the aged into sacrificial victims. It has the potential not only
appropriate treatment in the individual case. of depriving them of all the advances in medical care that
In what is perhaps the supreme irony of the system, in they could have obtained in a free market and of making
efforts to control costs, the government ends up actually them share in the general decline in the quality of medical
opposing advances in medical technology. It comes to care that must result from socialized medicine, but also
regard such procedures as the implantation of artificial of placing them in a position of helplessness, in which
hearts as a major threat to its budget. This is with good they are the mercy of a system which attaches little value
reason, since, by the logic of socialized medicine, to their lives.
everyone who needs it is entitled to demand a procedure The fact that socialized medicine has such results
as soon as it becomes recognized as practicable. The should not come as a surprise. It is a profound mistake to
result of this is that the normal, free-market incentives believe that there is such a thing as any form of free lunch
which work to reduce costs before something becomes from the government in the first place. And only someone
available to a mass market are not present under social- very foolish indeed should be surprised that when the
ized medicine. Thus, for these reasons, advances in medi- government buys him lunch it is not eager to increase its
cal technology become feared and arrested under expenses on his behalf and thus is not willing to buy him
socialized medicine. a steak for lunch. He should not be surprised that the
In addition, in further cost-containment procedures, government will much more likely end up placing him
the government begins to restrict or prohibit whole on short rations, in order to have more funds left over for
categories of procedures, from cosmetic surgery to paying the bills for those whose needs it considers to
bypass operations. Such procedures are excluded from have a higher “social priority.” Thus, anyone who wants
the socialized system on the grounds that they are “non- his medical care to be free by virtue of having the
essential” or “too costly relative to the benefits obtained” government pay for it, should not expect very much or
(benefits for the government). Thus, people who under very good medical care. He should rather expect his
private medicine could have obtained such procedures medical care and treatment to resemble that of the
by spending their own money for them are denied the general care and treatment of an unfortunate child whose
ability to obtain them. They are denied this ability be- life has been entrusted to uncaring and potentially cruel
cause taxes to pay for the medical care of others, and stepparents. The state will likely prove just such a guar-
simply to squander, drain them of the necessary financial dian of the aged. A child, of course, does not usually
resources. The possibility of obtaining the necessary select such stepparents. The aged of today, in a state of
procedures, of course, can also end up being prohibited knowledge below that which should be expected of
outright, if the socialized system achieves a complete children, are selecting such a guardian for themselves.39
monopoly and decides not to perform the procedures or ***
not to make them available to specific categories of It should be realized that the collectivization of medi-
individuals. cal costs—an essential feature of socialized medicine—
Along these lines, the government begins to deny has existed for many years in the United States. It was
medical care to those whom it regards as only “marginal- brought into existence not only by the Medicare and
ly valuable to society,” such as the aged. From the Medicaid programs that date from the mid-1960s but also
perspective of the government’s budget, medical care for by unsound private medical insurance practices imposed
the aged is a poor investment: the cost is high and the by government intervention, and which date back to
remaining ability of the aged to pay taxes is relatively World War II. Like Medicare and Medicaid, and social-
small in view both of the limitation of their remaining ized medicine in general, most private medical insurance
years and of their possibly diminished capacity, or total plans of the last fifty years give medical care the ap-
lack of capacity, for working and earning taxable income. pearance of being free or substantially free to the user,
Thus it should not be surprising that under socialized and thus substantially increase the demand for it and its cost.
39 For a free-market solution to the growing problems in the area of medical care, see below, chap. 10, sec. 2, the subsection “Licensing Law Monopoly.” See also George Reisman,The Real Right to Medical Care Versus Socialized Medicine (Laguna Hills, California: The Jefferson School of Philosophy, Economics, and Psychology, 1994.) This pamphlet is a discussion of all aspects of the cause and cure of the current crisis in medicalcare.
150 CAPITALISM
Such private insurance came into being as a substitute about this possibility. In the same way, instead of an
for socialized medicine and was greeted as a means of individual set of parents being able to decide to send their
forestalling the enactment of socialized medicine. It was child to an elementary school that is close to their home,
extended to a significant part of the population first they may have to wait until that possibility is established
through a World-War-II decision by the price-control by means of a national election.
authorities that while ordinary, take-home wages were Thus, to the extent government intervention exists,
subject to controls, employer-financed medical insur- even under democracy, the individual by himself is pre-
ance for employees was not. And then, following the war, vented from accomplishing what he wants to accom-
in the remaining years of the 1940s and in the 1950s, it plish. His power to act as an individual causal agent is
was extended to the great bulk of the population by the destroyed. For government control under democracy still
contract demands of coercive labor unions, which most means collectivization of the power to make decisions.
nonunion employers felt obliged to meet, as part of their And thus from the perspective of any individual the result
efforts to remain nonunion. The growth of such insurance for all practical purposes is as much a loss of the freedom
was also fostered by the fact that from the beginning of choice and the power to act as exists under dictator-
employer contributions to medical insurance on behalf ship. Only limitation of the powers of government can
of employees was made tax exempt, while the payment secure individual freedom and the ability of the individ-
of the same amount of compensation directly to employ- ual to act as a causal agent. Violations of individual
ees has been fully taxable to the employees. freedom by democratic majorities are as much violations
of individual freedom and the ability of the individual to
Government Intervention, Democracy, and the act as those imposed by dictators.
Destruction of the Individual’s Causal Role
Essentially the same kind of destruction of causality
as results from the establishment of equality of income Summary
or an equal sharing of costs among the entire population The preceding sections have shown why the division
results from all governmental usurpations of power and of labor is entirely dependent on the institutions of cap-
responsibility. When, for example, the government comes italism. Section 1 showed how it depends on private
to decide the manner in which individuals provide for property and private ownership of the means of produc-
their old age, or to decide matters pertaining to education, tion as the basis for enabling people to act and produce
it destroys the ability of the individual to choose for separately and independently of one another. Such inde-
himself. pendence is essential if people are to be able to take
The fact that the government may be subject to the advantage of the fundamental facts underlying the gains
verdict of democratic elections only serves to highlight from the division of labor, namely, that individuals pos-
this fact. Instead of signifying that nothing is wrong, sess separate, independent minds and separate, indepen-
because the government is still subject to the will of the dent knowledge. This section showed that socialism and
people, the fact is that the power of the individual to central planning are incompatible with the necessary
determine his own life is submerged in that of an enor- intellectual division of labor that must exist in order to
mous mass of voters. True enough, under democracy if have rational economic planning. It showed why the
a majority of a voting population ranging from several existence of the price system is essential for such plan-
hundred to a hundred million or more (depending on the ning and both why the price system depends on the profit
level of the election—local, state, or federal) votes against motive and the freedom of competition and why these
an existing policy, the policy will likely be changed. But two institutions in turn depend in turn on private owner-
this does not mean, as the supporters of government ship of the means of production. The section also showed
intervention often argue, that the government is still why the price system depends on exchange and money
“controlled by us.” As far as any individual is concerned, and saving and capital accumulation and why they too
the government is totally out of control. are dependent on the institution of private ownership of
For example, when it comes to the use of savings in the means of production.
the so-called individual retirement accounts that the gov- Subsequent sections explained the direct dependence
ernment supervises (let alone the use of savings siphoned of the division of labor on the institutions of saving and
off into the social security system), instead of the indi- capital accumulation, exchange and money, competition,
vidual being able to decide for himself that he wants to and the freedom of economic inequality. Saving and
use a portion of his savings to make the down payment capital accumulation were shown to provide the essential
on a home, he must wait until tens of millions of other basis for making possible the production of goods requir-
citizens have become ready to join with him to bring ing more or less considerable lapses of time between the
performance of labor and the appearance of the resulting an example. And then, government intervention in gen-
product. Saving and capital accumulation were also shown eral, even under democracy, was shown to represent the
to be responsible for initially raising the productivity of destruction of the individual’s ability to act as a causal
labor to the point where labor could be spared from food agent, inasmuch as it requires that before the individual
production for the production of other things, and then can accomplish what he wants to accomplish, he must
for making it possible for wage earners and suppliers to first join with perhaps millions or tens of millions of
be paid within a reasonable period of time after the others to make it possible.
performance of their work, and, finally, to provide the
foundation for larger-scale production and thus the basis
for carrying the division of labor further at any given PART B
stage of production.
Exchange and money were shown to be essential to ELEMENTS OF PRICE THEORY:
the channelling of goods from their producers to their
consumers. The existence specifically of money and DEMAND, SUPPLY, AND COST OF
monetary exchange was shown to be essential to over- PRODUCTION
coming the problem posed under barter of the need for
the existence of a double coincidence of wants as the Before proceeding to the substance of price theory, it
precondition of an exchange. In overcoming this prob- is necessary to deal with matters which occupy the major
lem, the existence of money was shown to make possible portion of most of today’s courses and textbooks on the
a radical widening of the extent of the division of labor. subject, namely, the concepts of demand and supply, and,
Money was further shown to be vital to the existence of in particular, their representation as curves. This material
a division-of-labor society in making possible economic is included in this book in part for the benefit of econom-
calculations and comparisons. The gross injustice of ics instructors who are obliged to present a geometric
regarding money as the root of all evil was pointed out, analysis using such curves. It is offered in the hope that
along with other common errors found in the antimoney if they are otherwise inclined to adopt this book, they will
mentality. not have to turn elsewhere in order to expose their
Economic competition was shown to perform the vital students to such curves.
function of determining the ongoing organization of a Frankly, while I believe that the ability to understand
division-of-labor society with respect to the choice of and visualize downward sloping demand curves, and
which persons are to hold which occupations, which vertical lines as representing supply, is of some signifi-
products are to be produced for which specific markets, cant value, I do not attach very great weight to geomet-
and which technological methods of producing any given rical analysis in economics. I share with von Mises the
product are to be used. Economic competition, or at least conviction that the substantive relationships of econom-
the freedom of such competition, was also shown to be ics must all be explained by an essentially verbal analysis
necessary to prevent a division-of-labor society from and that the drawing of such curves is mere byplay as far
being placed at the mercy of the arbitrary demands of as real economic analysis is concerned.40 I present my
various vital industries or occupations. substantive, verbal analysis of price theory in the next
Finally, the existence of economic inequality, result- three chapters of this book. Indeed, I believe that geo-
ing from unequal degrees of achievement, was shown to metrical analysis using demand and supply curves masks
be essential to individuals being able to act as causal some major confusions. The clearing up of these confu-
agents in accomplishing results, whether within a divi- sions is an important objective of the remainder of this
sion-of-labor society or outside of a division-of-labor chapter and is the main justification for including the
society. The alternative to such economic inequality was extended discussions of the derivation of supply curves
shown to be forced labor, as the only means of inducing and of the prevailing confusions between the concepts of
people to work in the absence of economic incentives. In supply and cost of production. On a positive note, in the
addition, such economic inequality was shown to play a following pages I explain the various meanings that are
major role in promoting saving and capital accumulation attached to the words demand and supply, demonstrate
and in making it possible for the less able to compete with why price and quantity demanded vary inversely, and
the more able. The imposition of equality in the meeting present what is genuinely valuable in being able to
of costs was shown to be tantamount to the abolition of visualize demand and supply curves.
cost from the perspective of the individual user of a good The connection of the following discussions to my
or service. The destructive consequences of such im- theme that the division of labor depends on the institu-
positions were explained, using socialized medicine as tions of capitalism is perforce indirect. As I have already
40 See von Mises, HumanAction, p. 333.
152 CAPITALISM
indicated, the division of labor depends on the existence ing.”42 Here demand is to be understood in terms of the
of the price system both for its successful functioning goods or services one is actually able to obtain by virtue
and, indeed, for its very existence. The following discus- of the expenditure of money. While certainly not incon-
sions are preliminary to the detailed demonstration of sistent with the view of demand as an expenditure of
that proposition. money, this is a different concept of demand. To avoid
confusion, it is best to describe demand in this second
sense as real demand, with the word “real” denoting the
1. The Meaning of Demand and Supply fact that the quantity of goods or services one can obtain
Perhaps no proposition of economics is more fre- for the money expended is essential.
quently uttered than that prices are determined by de- As used in contemporary economics, the concepts
mand and supply. Yet in the history of economics, and to demand and supply mean the set of quantities buyers are
an important extent even at the present time, the concepts prepared to buy or sellers to sell at varying prices,
of demand and supply have had more than one meaning, arranged in descending (ascending) order, all other things
which can make the above proposition highly ambiguous. being equal. Viewed in this light, the concepts refer to
According to the classical economists, demand is to hypothetical schedules, which when diagrammed, ap-
be understood predominantly as an amount of expendi- pear as curves. Illustrations of such hypothetical sched-
ture of money, such as $1 billion, while supply is to be ules and curves appear in Table 5–1 and Figure 5–1
understood as an amount of a good or service offered for respectively.
sale. On this basis, prices are to be conceived as formed In the usage of contemporary economics, the entire
by the ratio of the demand to the supply, with demand as set of prices in Table 5–1, ranging from $10 down to $3,
the numerator and supply as the denominator, and to vary together with the entire set of quantities demanded at
in direct proportion to the demand and in inverse propor- those prices, ranging from 100 up to 500, represents one
tion to the supply. The classical view of price determina- demand schedule—the demand—for the good in question.
tion by demand and supply is expressed in the formula Strictly speaking, the concept of the demand schedule em-
braces prices ranging from zero to infinity, proceeding by the
D
P= , smallest possible increments in price, and all of the quanti-
S
ties demanded at all of these prices. The demand schedule
where P is the price, D is the demand, and S is the presented in Table 5–1, therefore, represents only a few
supply.41 selected points on the actual demand schedule.
The classical economists also frequently defined de- When diagrammed, as in Figure 5–1, the demand
mand as “the will combined with the power of purchas- schedule appears as the demand curve DD. (In Figure
41
42 See John Stuart
E. Cairnes,
Mill, Principles
Some Leading
ofPolitical
Principles
Economy,
of Political
AshleyEconomy
ed. (1909;
Newly
reprint
Expounded
ed., Fairfield,
(1874;N.reprint
J.: Augustus
ed., Fairfield,
M. Kelley,
New 1976),
Jersey:p.
Augustus
445. M. Kelley, 1967), pp. 22–29.
Table 5–1
Hypothetical Demand and Supply Schedules
Quantity Quantity Quantity

Price
Demanded Supplied Demanded II
$10 100 500 250
9 125 325 300
8 160 275 400
77 200 200 500
6 250 150 600
5 325 100 725
4 400 050 850
3 500 000 900

5–1, in accordance with the usual practice, price is shown said to occur only when there is a change in the schedule
on the vertical axis, where it is labeled P, and quantity, or curve. For example, the column labeled “Quantity
on the horizontal axis, where it is labeled Q.) The curve Demanded II” in Table 5–1 is said to represent an in-
results from drawing a line through the various point crease in demand. Here, the quantities demanded are
values derived from Table 5–1. Ideally, the curve would greater at the same set of prices. A change in demand or
be drawn by plotting all the point values derived from a supply is held to mean a change in the quantities de-
complete demand schedule. The demand curve of Figure manded or supplied at the same set of prices, or, equiva-
5–1, of course, represents a limited range of the demand lently, a change in the prices accompanying the same set
schedule, and most of its values are derived by interpo- of quantities demanded or supplied.
lation between the few selected values that were present The demand curve D′D′ in Figure 5–1 is an illustration
in Table 5–1. of a shift in the demand curve. In contrast with the curve
In the same way, the entire set of prices and of quan- DD, it shows larger quantities demanded at the same
tities supplied, ranging from $10 and 500 units down to prices, and higher prices offered for the same quantities.
$3 and 0 units, together with all prices and quantities It is drawn higher and to the right of DD. By the same
supplied above and below these limits, represents one token, a fall in demand would be illustrated by a move-
supply schedule—the supply—of the good in question. ment from D′D′ back to DD.
When diagrammed in Figure 5–1 on the basis of the In the view of contemporary economics, determina-
selected data appearing in Table 5–1, the supply schedule tion of price by demand and supply means determination
appears as the supply curve SS. of price by the intersection point of demand and supply
Accordingly, in the usage of contemporary econom- curves. A rise in demand is held to increase both price
ics, a change in demand or supply does not refer to a and quantity supplied by virtue of the higher demand
change in the quantity demanded or supplied within a curve intersecting the given supply curve at a point up
given demand or supply schedule, or along a given and to the right on the latter. Similarly, a fall in demand
demand or supply curve. For example, the increase in the is held to decrease both price and quantity supplied by
quantity demanded from 100 to 125, accompanying the virtue of the lower demand curve intersecting the given
fall in price from $10 to $9, is not described as an increase supply curve at a point down and to the left on the latter.
in demand, but merely as an increase in the quantity Likewise, an increase in supply, is held to decrease price
demanded within a given demand schedule or along a and increase quantity demanded, while a decrease in
given demand curve. A change in demand or supply is supply is held to increase price and reduce quantity
Figure 5–1
Hypothetical Demand and Supply Curves Based on the Data of Table 5-1
P D′
$10 D
S
9
8
7
6
5
4
D D′
3 S
2
1
Q
0 100 200 300 400 500 600 700 800 900
154 CAPITALISM
demanded. (To show an increase in supply in Figure 5–1, corresponding to the given quantity changes, the expen-
the reader can draw in a new supply curve, down and to diture for the good must change to the same extent.
the right of SS, and more or less parallel to it, which The classical and contemporary concepts of demand
would intersect either DD or D′D′ at a point down and to and supply come closest together in the usage of the
the right of the intersection point given by SS. Movement Austrian school. In the view of the Austrian school,
from that curve back up to SS could then be used to depict supply fundamentally means a given quantity of a good
the effects of a fall in supply.) or service available for sale.43 Thus, in essence, the
The classical and contemporary concepts of demand Austrian school retains the meaning given the concept of
and supply are in agreement concerning the direction of supply by the classical economists. In geometrical terms,
price changes resulting from changes in demand or sup- when the Austrian economists describe price as deter-
ply: on both views, price varies in the same direction as mined by demand and supply, they have in mind the kind
changes in demand and in the opposite direction of of demand curve represented by DD in Figure 5–1, but a
changes in supply. Moreover, it should be noted that supply curve constituted by a vertical line drawn upward
when the demand schedule or curve of contemporary from the point on the horizontal axis (the quantity axis)
economics changes, the change coincides with a change that represents the given amount of supply available.
in demand according to the classical concept as well. For This is shown in Figure 5–2.44
what is implied is a change in the expenditure of money In the Austrian view of things, depicted in Figure 5–2,
for any given quantity of a good supplied. For example, the sellers are presumed merely to be prepared to sell
on demand curve DD, the price corresponding to a quan- their given supply of goods at the best price they can
tity demanded of 400 is $4; on demand curve D′D′, the obtain, from zero on up.45 This is because in the context
price corresponding to this same quantity demanded is of a division-of-labor economy, the sellers normally pos-
$8. Thus, in the first case, demand in the classical sense sess goods in such great quantities that most of their supply
is $1,600 (400 x $4) and in the second case, it is $3,200 has zero marginal utility—zero personal value—to them.
(400 x $8). Whenever, there is a movement of the de- As a result, on the Austrian view, prices that are determined
mand curve, a corresponding change in expenditure is by supply and demand are determined on the basis of the
implied for any given quantity of the good. This is valuations of “the marginal pair of buyers” alone.46
implied by the geometry of the situation, because expen- What this means is that the marginal utility attached
diture for the good equals any given quantity of it times to the price of any good that is purchased must simulta-
the corresponding price indicated by the demand curve; neously be below the marginal utility of the last unit of
insofar as the demand curve changes and thus the price the good purchased and above the marginal utility of one
43
44
45
46 Seesignificance
No
Ibid.
Böhm-Bawerk,should
Capital
be attached
and Interest,
to the2:244–45.
fact that the demand curve in Figure 5–2 is drawn as a straight line. It is drawn that way merely for the sake of convenience and is in accordance w ith the present-day practice of drawing such curves.
Figure 5–2
The Austrian View of Demand and Supply
P
S
D
S
0 Q
additional unit more of the good that potentially might however—where in essence it is a matter of explaining
be purchased. For example, it implies that if a supply of the adjustment of a part of the economic system to the
one million shirts of a given kind is to be met with a rest of the economic system—this book will make use of
quantity demanded of shirts that is also one million, then the contemporary, Austrian concept of demand. This
the price of a shirt must be such that the marginal utility procedure will not be found to be in any way inconsistent
of the price of the shirt is simultaneously below the with the use of the classical concept of demand at the
marginal utility of the one millionth shirt and above the level of the economic system as whole. Rather, it will be
marginal utility of a potential one millionth and first shirt. found to reflect the fact that at the level of individual
The marginal utility of the price of the shirt must, in industries and companies competitive elements are pres-
effect, be sandwiched between the utility of the marginal ent which are mutually canceling at the level of the
pair of shirts, that is, simultaneously below the utility of economic system as a whole.
the marginal shirt and above the utility of the potential The difference in treatment ultimately comes down to
first submarginal shirt (that is, of one potential additional the fact that at the level of the individual industry or
shirt more). company, demand in the classical sense cannot be taken
This is the necessary condition of equalizing the quan- as independent of supply in the classical sense. Changes
tity demanded of any good with any given supply of that in supply at this level represent changes in competitive
good that is to be sold. The marginal utility attaching to conditions among the various firms and industries, which
the price being below the marginal utility of the good in cause changes in the pattern of expenditure for their
question is the condition of all the buyers of the good various goods and services. This is because a change in
finding its purchase to be the source of a gain and hence the supply of any one good, such as automobiles or
worthwhile. By the same token, the marginal utility copper, means a change in its supply relative to the
attaching to the price of the good being above the mar- supply of other goods and a change in its price relative
ginal utility of a potential additional unit of the good is to the prices of other goods. If the supply of the good in
the condition of it not being worthwhile for anyone to question increases, say, and does so in the absence of
attempt to purchase an additional quantity of the good, increases in the supply of other goods, the marginal
and thus of the quantity of the good demanded not being utility of this particular good may fall precipitously be-
greater than the given supply available. Whenever a case cause of its additional supply, thus leading to the amount
exists in which a given quantity of a good or service is of money spent to buy it being reduced. For example,
to be sold in a free market, its price will tend to be while people almost certainly would like to have an
determined within the limits set by the valuations of the additional supply of automobiles, they want them along
marginal pair of buyers—that is, the marginal utility with more and better housing and clothing, more travel
attached to the good by the buyer of the marginal unit and entertainment, and so on. Until they can have more
and the marginal utility attached to the good by the of all of these things, they will not be prepared to accept
potential buyer of one additional unit more, that is, the merely an additional supply of automobiles except at
first submarginal unit.47 disproportionately lower prices.49 On the other hand, in
In this book, the concepts of demand and supply will many circumstances the lower price of the given good
be used both in their classical and contemporary—espe- may enable it to compete more effectively with other
cially Austrian—significations. The classical concept of goods serving the same purposes, as we shall see very
demand as an amount of expenditure of money will be shortly. To the extent that this is so, the amount of money
found to be extremely useful when dealing with ques- spent to buy it will increase. Thus, while demand in the
tions pertaining to the operation of the economic system classical sense can be taken as independent of supply in
as a whole. In that context, it can be related, via the the classical sense at the level of the economic system as
quantity theory of money, directly to the quantity of a whole, it cannot be so taken at the level of the individual
money in the economic system, which will be shown to industry or firm. Hence, at this level, it is necessary to
be its main determinant.48 The fact that economy-wide, resort to the contemporary, Austrian concept of demand.
aggregate demand in the classical sense is determined
primarily by the quantity of money in the economic
system makes it essentially independent of changes in 2. The Law of Demand
aggregate supply in the classical sense, which latter can A fundamental proposition of economics, applicable
be understood as operating in the face of a given aggre- both to the classical and to the contemporary, Austrian
gate demand and thus to result in inversely proportionate concept of demand, is the law of demand. This is the fact
changes in the general price level. In dealing with de- that other things being equal, the quantity demanded of
mand at the level of individual industries and companies, a good is the greater, the lower is its price, and the
47
48
49 See ibid.
above,
below, chap. 2,
7, sec.
pt. A,
5,sec.
the subsection
1, and chap.“Say’s
12, sec.
Law”
1. and, below, chap. 13, pt. B, sec. 3, latter portion.
156 CAPITALISM
smaller, the higher is its price. utility explains why, other things being equal, the quan-
At the level of the economic system as a whole, the tity of a good people are prepared to buy is greater at a
law of demand follows directly from the fact that the lower price than at a higher price.51
need and desire for wealth has no limit and that a fall in The reason is that in order to purchase a good, people
the prices of goods and services is all that is necessary to must attach greater marginal utility to the good than they
enable any given expenditure of money to purchase a attach to the price of the good. A lower marginal utility
larger quantity of goods and services. The fall in prices is attached to a lower price than to a higher price. This is
expands the buying power of any given amount of ex- because the price of a good is the measure of the alterna-
penditure and is potentially capable of making it suffi- tive goods that must be forgone in order to purchase it.
cient to purchase any volume of aggregate supply, however A lower price of any given good means that to be able to
large.50 buy an additional quantity of it, the quantity of alterna-
At the level of the individual industry or company, tive goods that must be forgone in order to have the funds
however, a fall in any given price always means much available to make its purchase is correspondingly re-
more than the fact that the average of prices is now lower duced (assuming their prices are unchanged). Since,
relative to the willingness and ability to spend money and other things being equal, a smaller quantity of alternative
thus that the same aggregate expenditure can buy a larger goods represents a lower marginal utility than a larger
total of goods. As stated, it also means a change in the quantity of alternative goods, this means that the mar-
prices of individual goods and services relative to one ginal utility represented by a lower price is less than the
another. marginal utility represented by a higher price. (The lower
For example, an increase in the supply and fall in the marginal utility of a smaller quantity of goods compared
price of cotton means a fall in the price of cotton relative with that of a larger quantity of goods follows on the basis
to the price of wool and other goods that cotton can more of all that was established about man’s limitless need for
or less satisfactorily be substituted for. As a result, the wealth. If more wealth is better than less wealth, it must
purchase of cotton becomes competitively favored over have more utility, and less wealth must have less utility.)
their purchase. For now, in purchasing it, one can accom- Thus a lower price of a good means that in purchasing it,
plish the common objective for which cotton, wool, and the marginal utility one forgoes in the purchase of other
all the other relevant substitutes are means, and do so goods is less.
without having to forgo as large a quantity of alternative As a result, the marginal utility attached to a lower
goods as previously. A lower price of cotton relative to price tends to stand below the marginal utility of a larger
the price of wool means that if one buys cotton instead number of units of a good than does the marginal utility
of wool, one still obtains clothing (albeit, of course, with attached to a higher price. The consequence is that the
the specific advantages or disadvantages associated with purchase of a larger number units is made advantageous
cotton) and can now do so while forgoing a smaller at a lower price.
quantity of alternative goods than before relative to the As illustration, imagine that an individual attaches
quantity one must forgo to obtain clothing made of wool. marginal utilities of 40, 30, 20, and 10 to four successive
This change results in an increase in the quantity de- units of given good. Imagine also that to the sum of $100
manded of cotton at its lower price, and a decrease in the he attaches a marginal utility of 50, and to the sums $80,
quantity demanded of wool and of the other goods for $60, $40, and $20, he attaches marginal utilities of 35,
which cotton is a substitute, at their given prices. In other 25, 15, and 5, respectively. Thus, at a price of $100, he
words, the quantity demanded of cotton increases, and will not buy any of the good, because the marginal utility
the demand for wool and the other goods for which of its price, 50, stands above the marginal utility even of
cotton is a substitute decreases. the very first unit of the good, which is 40. But at a price
In the literature of contemporary economics, such a of $80, the marginal utility of the price, now 35, stands
change in the quantity demanded of a given good as its below the marginal utility of the first unit of the good.
price falls is described as “the substitution effect.” This And thus this individual will buy one unit of the good.
effect is equally present, of course, when the price of a And for every further $20 reduction in the price, he will
good increases relative to the prices of the goods for buy one additional unit, up to a total of four, because the
which it can be substituted or which can be substituted lower marginal utilities attached to these lower prices
for it. stand below the marginal utilities of the successive units
As will become clear, the substitution effect is actu- of the good.52
ally just a special case of the operation of the law of The role of the different alternative amounts of wealth
diminishing marginal utility. And I turn now to a demon- that different prices represent can be seen in the follow-
stration of how the existence of diminishing marginal ing example, which deals with the hypothetical demand
50
51
52 Indeed,
For
In case
an explanation
the
it will
reader
subsequently
isof
wondering
the lawbeofshown
what
diminishing
would
in detail
happen
marginal
that more
if the
utility,
aggregate
marginal
see above,
supply
utilitychap.
attached
itself2,creates
sec.
to a4.unit
equiva
of the
lently
good
more
andaggregate
to its price
r eal
were
demand
the same,
precisely
the answer
in thisis,
way.nothing.
See beThe
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chap. 13, pt.of
B,asecs.
purchase
1 andis2,the
especia
valuation
lly F of
igure
what
13–3.
is received in exchange above the valuation of what is given inexchange. Actually, as determinants of purchases, marginal utilities should be thought of in terms of ordinal rather than cardinal numbers. On this subject, see von Mises, HumanAction, pp. 119–27.
for radios. If the price of a radio is $100, then the There is another major aspect of the competition that
purchase of a radio implies that one must forgo the is present at the level of individual goods and services.
purchase of whatever else that $100 might have bought— A fall in the price of any given good, whether cotton,
that is, an additional quantity or improvement in the radios, or whatever, also means that to whatever extent
quality of alternative goods that one consumes. In order people were already prepared to be purchasers of the
to buy the radio, one must attach a marginal utility to it good, they can now purchase the quantity they would
that is greater than the marginal utility one attaches to the otherwise have purchased, for a smaller expenditure of
$100 in any alternative line of spending. Those who buy money. This means they will have correspondingly more
radios at the price of $100 do attach a higher marginal money left over for the purchase either of more of that
utility to them than to the expenditure of the $100 in any good or more of other things that they desire. For exam-
other line or lines. Those who buy two, three, or more ple, if one otherwise would buy 10 yards of cotton at $2
radios at the price of $100 attach a marginal utility to each per yard, a fall in price to $1.50 per yard makes possible
of them that is above the marginal utility they attach to the purchase of the same 10 yards for only $15 instead
any other, alternative goods the $100 price could buy. By of $20. This makes an additional $5 available for buying
the same token, those who buy no radios at the price of either additional cotton or additional quantities of other
$100, or who buy one radio but not two, or two but not goods.
three, and so on, do not buy the radio in question because In contemporary economics textbooks, such avail-
they attach a marginal utility to it that is below the ability of additional funds is called “the income effect.”
marginal utility they attach to the purchase of alternative The income effect derives its name from the fact that the
goods with the $100 in question. funds made available by the fall in price of something
If, however, the price of radios fell to $90, say, then one already buys is viewed as similar to an increase in
the quantity/quality of alternative goods that would have income with the price of the good unchanged.54 Thus,
to be forgone in order to make possible the purchase of the additional $5 made available as the result of the fall
a radio would be correspondingly reduced. This would in the price of cotton that we have just imagined is
mean a reduction in the marginal utility that had to be viewed as the equivalent of a $5 increase in income with
forgone in order to purchase a radio. This lower, alterna- the price of cotton unchanged.
tive marginal utility would now tend to stand below the The so-called income effect also operates in accor-
marginal utility of an additional quantity of radios. In the dance with the law of diminishing marginal utility. When,
face of having to forgo alternative goods purchasable for example, the price of cotton falls, it is considerations
with only $90 instead of $100, in order to secure a radio, of marginal utility that determine how the additional
there would be people who previously judged the mar- funds made available will be used in the purchase of
ginal utility of a first, second, or third radio, or which- additional goods. The additional funds will be used to
ever, to be less than the marginal utility of its price, who purchase those additional goods which have the highest
would now decide that it was greater than the marginal marginal utility.
utility of its price. Thus, the effect of a fall in the price of anything on
In this way, a lower price of any good, whether it has the quantity of it demanded can be viewed as the com-
direct substitutes or not, acts to favor its purchase. bined effect of two things. One is an increase in available
Indeed, as stated, the substitution effect is merely a funds that results from the saving in purchasing the
special case of the operation of the law of diminishing quantity of the good that would have been purchased
marginal utility. When the price of one substitute falls without the fall in price. The other is the enhancement of
relative to that of another, as is the case when the price the good’s competitive position in relation to other goods.
of cotton falls and the price of wool stays the same, what These other, competing goods must be understood not
creates the competitive advantage is precisely the fact only in the narrow sense of substitutes serving the same
that the marginal utility of the alternative goods which particular needs or wants, such as wool versus cotton, but
must be forgone in order to purchase the one becomes also in the broader sense of goods in general, or combi-
less relative to the alternative goods which must be nations of goods, that compete in terms of their marginal
forgone in order to purchase the other. This is what favors utility for the expenditure of the same funds. A lower
the cotton, namely, that by buying cotton rather than price of television sets, for example, is capable of draw-
wool, one can still meet the common purpose, in this case ing funds in competition with goods serving physically
having cloth or clothing, and yet have greater marginal dissimilar needs or wants, such as housing or automo-
utility in terms of other things than if one buys wool, biles. This is because a lower price of television sets
because now one gives up less of other things to buy relative to housing or automobiles means that the mar-
cotton.53 ginal utility forgone in buying a television set is that
53
54 Insofar
On the fallacies
as it is businessmen
entailed in viewing
who buyacotton
savinginstead
of expense
of wool,
as actually
they will
thenot
same
be the
as an
parties
increase
whoinhave
income,
the gain
see in
below,
marginal
chap.utility
11, pt.
described
A, sec. 5.here. Those who have the gain in marginal utility will be the consumers of cotton clothing. Precisely as a result of this fact, the consumers will favor the purchase of cotton clothing, and because of this the businessmen will buy more cotton and less wool. The change in the businessmen’s purchases is thus dictated by the effects of changes in marginal utility on the consumers.
158 CAPITALISM
much lower relative to the marginal utility forgone in for example, a halving of price is accompanied by a
buying housing or an automobile. This enhances the doubling of quantity demanded, a cut to a third is accom-
competitive position of television sets vis-à-vis housing panied by a tripling, and so on.
and automobiles. By far the most important example of unit elastic
The operation of the law of diminishing marginal demand, and, at the same time, perhaps the only example
utility, both in and through the substitution and income that is not essentially accidental and passing, is economy-
effects and otherwise, is responsible for the existence of wide, aggregate demand. As previously stated, the vol-
the law of demand, namely, that, other things being ume of expenditure in the economic system as a whole
equal, the quantity of a good that is demanded moves in tends to be the same so long as the quantity of money in
the opposite direction of its price. In the last analysis, the the economic system is the same. Any increases or de-
operation of the law of demand, and of the underlying creases in expenditure for particular goods or services
principle of diminishing marginal utility, is tantamount are accompanied by equivalent decreases or increases in
to the fact that a lower price makes possible the acquisi- expenditure elsewhere in the economic system.
tion of more wealth, which is always desired. For example, an increase in expenditure for cotton,
resulting from the operation of a strong substitution
The Concept of Elasticity of Demand effect accompanying a lower price of cotton, is accom-
Elements of the preceding discussion point the way to panied by a decrease in expenditure for wool and other
what has become an exceptionally prominent concept in substitutes. A possible resulting increase or decrease in
contemporary economics, namely, that of the elasticity the expenditure for clothing as a whole in such circum-
of demand. The elasticity of demand is typically defined stances (depending on the marginal utility of additional
as the percentage change in the quantity demanded of a clothing in comparison with the marginal utility of addi-
good divided by the percentage in its price. As its name tional quantities of other things) would tend to be accom-
indicates, the concept seeks to measure the “stretch” or panied by a counterbalancing decrease or increase in the
“shrinkage” in the quantity of a good or service de- expenditure for things other than clothing. In the same
manded relative to changes in its price. way, a possible decrease in the expenditure for cotton,
Three categories of demand are distinguished accord- resulting from the existence of a weak substitution effect
ing to their degree of elasticity: elastic, inelastic, and unit when its price falls, tends to be accompanied by an
elastic demands. Each is judged by the effect of a price equivalent increase in the expenditure for other goods
change on total expenditure for the good (or, equiva- that is made possible by the availability of additional
lently, on the total revenue derived from its sale). If funds stemming from the fall in the price of cotton.
expenditure (revenue) changes in the opposite direction The principle here is that while competitive elements
of price, the demand is said to be elastic at that point—the entailed in the substitution and income effects cause the
stretch or shrinkage in the quantity demanded outweighs expenditures for the products of individual industries and
the change in price. In the case of an elastic demand, companies to vary in response to supply and price changes,
more is spent in buying the good at a lower price than at nevertheless, in the very nature of the case, these ele-
a higher price, and when the price rises, less is spent in ments, being competitive, cancel out when the level of
buying the good. Here the change in the quantity de- analysis is raised to that of the economic system as a
manded outweighs the change in the price. whole. Competition for expenditure takes place only
If, on the other hand, expenditure (revenue) changes within the economic system, among the various indus-
in the same direction as the price, the demand is said to tries and firms that make up the economic system. It does
be inelastic at that point—the stretch or shrinkage in the not take place between the economic system and any-
quantity demanded is insufficient to offset the change in thing outside of the economic system.
price. In the case of an inelastic demand, more is spent Now a total expenditure for goods that is constant essen-
in buying the good at a higher price than at a lower price, tially so long as the quantity of money in the economic
because of the relative lack of stretch or shrinkage in the system is constant, is one in which price changes are
quantity demanded. necessarily accompanied by inversely proportionate changes
Finally, if expenditure (revenue) for the good remains in quantity demanded. Geometrically, the aggregate de-
the same when the price changes, the demand is said to mand curve has the property that the area under the curve
be unit elastic at that point, which means that the change (found by multiplying the quantity demanded times the
in quantity demanded accompanying the change in price price) is a constant. The curve is asymptotic to both axes.55
precisely counterbalances the change in price. When Such a demand curve is shown in Figure 5–3.
demand has unit elasticity, the change in quantity de- Turning now to the very different case of elastic
manded is inversely proportionate to the change in price— demands, important examples of an elastic demand are
55 To anticipate later discussion under the heading of Say’s Law: given the quantity of money and volume of spending in the economic system, what determines the price level and the goods and services the aggregate demand is actually capable of purchasing at any given time is nothing other than the aggregate supply of goods and services. In this way, it is aggregate supply that determines the aggregate realdemand. See above, the first note of this section for further reference.
Figure 5–3
The Aggregate Unit Elastic Demand Curve
P
D
D
Q
0
provided by goods which are presently luxuries, beyond ties and it will still be less expensive than the substitutes
the reach of most people, and which price reductions for it. Such goods as bread, wheat, potatoes, and salt are
would bring within their reach. Equally important exam- in this category.
ples are provided by goods which can easily substitute The demand for a good will tend to be inelastic to the
for other goods or be substituted for by other goods. degree that the substitutes for it are poor or more expen-
An example of the first kind was the automobile in the sive than it is. It will also tend to be inelastic in cases in
first decades of the twentieth century. Television sets and which it is employed as a factor of production in combi-
personal computers are more recent examples of the nation with other, complementary factors of production
same type. In these cases, price reductions succeeded in and in which its price constitutes only a small portion of
opening up a mass market to the good, which resulted in the total cost of producing the product or products in
the expenditure for the good being greater at the lower question. In the latter instance, a rise in its price raises
price than at the higher price. Possible examples of the the overall cost of production and price of the product(s)
second type, representing varying degrees of substitut- in a much smaller proportion. The consequent reduction
ability, are provided by the case of cotton versus wool, in the quantity demanded of the product and thus of it,
previously considered, beef versus chicken and pork, and corresponds to this much smaller relative increase in the
steel cans versus aluminum cans and plastic and glass price of the product(s).
containers. The degree of substitutability, of course, is Both sets of conditions appear to describe the demand
vastly greater between the products of companies within for a great many goods, such as ordinary nails and
the same industry, such as the steel cans of U.S. Steel and screws, silver and mercury, gasoline and heating oil, and
the steel cans of Nippon Steel. most components or parts. Nails and screws, for exam-
Examples of an inelastic demand arise in cases in ple, both have poor substitutes and their price constitutes
which a good has achieved the status of a low-cost such a small fraction of the overall cost and price of the
necessity. In such cases, in a prosperous country, price products into which they enter—houses in particular—as
reductions are not likely to expand the quantity de- hardly to be noticeable. Thus their price could double or
manded very significantly, since the good is already triple and produce very little effect on the quantity of
probably being consumed at or close to the limit of its them demanded.
usefulness. At the same time, the quantity demanded will The degree of inelasticity of demand for goods tends
diminish only slightly, or even not at all, in the face of to diminish to the degree that time is available for making
moderate price increases, since people will continue to adjustments. For example, a rise in the price of heating
be able to afford the good in virtually unchanged quanti- oil will be accompanied by a greater reduction in quantity
160 CAPITALISM
demanded as time goes by and a larger proportion of for sale at a higher price rather than a larger quantity
furnaces are equipped to burn alternative fuels. available for sale at a lower price.57
The concept of elasticity of demand helps to make Two variants of the concept of elasticity have been
possible the comprehension of such phenomena as the developed, which are known as “income elasticity” and
effect of labor-saving improvements in machinery on “cross elasticity” of demand. By income elasticity is
employment. From the perspective of the economic sys- meant the percentage change in the quantity demanded
tem as a whole, such improvements in machinery neither of a product divided by the percentage change in people’s
cause unemployment nor additional employment. They incomes. By cross elasticity is meant the percentage
enable the same total amount of labor to produce a larger change in the quantity demanded of a product divided by
quantity of goods. But from the perspective of individual the percentage change in the price of one of its substitutes
industries, such improvements in machinery can some- or complements—for example, the percentage change in
times result in additional employment and sometimes in the quantity demanded of aluminum divided by the per-
less employment. It depends on the elasticity of demand centage change in the price of copper, or the percentage
for the particular products. change in the quantity demanded of automobiles divided
If a labor-saving improvement in machinery occurs in by the percentage change in the price of gasoline or
an industry that is confronted with an elastic demand, the automobile insurance.
effect will be more employment in that industry and In the face of the construction of such concepts as
correspondingly less employment in other industries. income and cross elasticity, and of attempts actually to
The saving of labor per unit of product results in a derive concrete measurements of the elasticity of de-
reduction in cost of production and selling price that is mand, it must be pointed out that there is no such thing
accompanied by a more than proportionate increase in as any kind of constancy of elasticities. Elasticities of
the number of units of the product demanded.56 At the demand bear no resemblance to such physical measure-
same time, the larger expenditure for the product in ments as electrical conductivity, specific gravity, or ten-
question necessitates a reduction in expenditure for other sile strength, which scientists and engineers can determine
products in comparison with what such expenditure would for the various elements and compounds. For example,
otherwise have been. Thus, for example, labor-saving it is simply not the case that as there is a definite electrical
improvements in the automobile industry earlier in this conductivity of copper, there is a definite elasticity of
century resulted in a vast increase in the number of demand for copper—or for anything else.
people employed in the automobile industry. At the same The elasticity of demand varies over the length even
time, they resulted in a vast decrease in the number of a given demand curve for a good. For example, the
employed in raising horses and growing oats—goods demand for automobiles is highly elastic in the zone in
which experienced a major reduction in demand as the which a change in their price either brings them within
result of the growth of the automobile industry. or places them beyond the reach of a mass market. But
If a labor-saving improvement takes place in an indus- once the price of automobiles is low enough to achieve
try that is confronted with an inelastic demand, the effect a mass market, further reductions in their price will be
will be less employment in that industry and correspond- accompanied by less elastic responses in the quantity
ingly more employment in other industries, which expe- demanded. The demand for automobiles may very well
rience a rise in demand as the result of the release of funds become inelastic. It is possible that a given demand for
from the industry where the labor-saving improvement a good could go through various zones of elasticity,
occurred. For example, labor-saving improvements in depending on such things as its relationship to the price
agriculture are typically accompanied by a reduction in of various alternative goods at different points. It is
the number of people employed in agriculture and a possible to imagine a good that becomes a worthwhile
corresponding increase in the number employed in in- substitute for a variety of other goods as its price de-
dustry and commerce. This is in response to less money clines, with its demand alternating between elasticity and
being spent to buy farm products, and more being spent inelasticity as it absorbs the market of a competing good
to buy the products of the rest of the economic system. and then must await a fall to a substantially lower price
Regrettably, the major application of the concept of to come within range of competing against a further
elasticity in contemporary economics has been in con- good.
nection with a false theory of monopoly. The practical Beyond this, there is no constancy of demand curves
usefulness of the concept has been thought to lie with themselves. Movement along any given demand curve
enabling ordinary private businessmen, who somehow implies changes in the demand curves of a wide variety
allegedly possess monopoly power, to decide whether it of other goods. Every time a fall in the price of a good
is more profitable to produce a smaller quantity of a good increases the quantity of it demanded by virtue of making
56
57 The
See below,
saving the
of labor
discussion
and increase
of the marginal
in employment
revenue
must
doctrine
be understood
in chap. 10,
in terms
sec. 8.of the overall, total quantity of labor directly or indirectly required in the production of the product. In the case of automobiles, for example, this means the labor required in the production of the iron ore and steel sheet, all the various parts and the materials required to produce them, and the equipment used at all the various stages, as well as the labor required in the auto plants. If a reduction in the overall quantity of labor required per unit of a product can be assumed to result in a corresponding reduction in the unit cost and price of the product, then a more than proportionate increase in the quantity of the product demanded results in an increase in overall employment in the production of the product.
it a more worthwhile substitute for other goods, the found. In these cases, of course, the effect of a fall in price
demand curves for those other goods fall. Every time a is still to increase the quantities demanded (and the
fall in the price of a good inaugurates the income effect, demands) of all manner of other goods, for whose pur-
the demand curves for countless other goods rise. Changes chase the lower price of the good in question makes the
occur mutatis mutandis every time the price of a good necessary funds available.
rises. A seeming exception to the law of demand exists in
Demand curves change because of changes in the cases in which the demand for a good depends in part on
prices of complementary goods as well as substitute its already possessing a recognized high value in ex-
goods. For example, a rise in the price of gasoline re- change. For example, the demand for gold and silver as
duces the demand for automobiles and for the labor and a store of value, and ultimately for use as money, depends
other factors of production used to produce automobiles. upon the fact that in their capacity as ordinary commod-
In effect, a rise in the price of any complementary good— ities they are already highly valuable. It is for this reason,
that is, any good which must be used in conjunction with that when people wish to hold buying power in the form
other goods to accomplish a definite purpose—repre- of stocks of physical commodities, they turn to gold and
sents a rise in the price of accomplishing the overall silver rather than other metals: the comparatively high
purpose. In the face of this rise in the overall price, there value of the precious metals means that they can be used
is a reduction in the quantity demanded of all of the to hold a given store of value in a smaller bulk, which is
complementary goods required for accomplishing the easier and less expensive to store and transport.
desired purpose. Since the individual prices of all of the Similarly, the fact that precious metals, diamonds and
complementary goods but one are unchanged, the fall in other precious stones, and various furs already possess a
quantity demanded of them represents a fall in demand high value as commodities adds to their suitability for
pure and simple. Obviously, the same point applies with being given as gifts: in addition to their physical proper-
the necessary changes to the case of a fall in the price of ties, their existing high value bestows on them the ability
a complementary good. to symbolize the importance of the recipient to the giver.
Demand curves change because of changes in the In such cases, it is true, if the price of the good fell below
price of any other good whatever insofar as the effect is a certain point, part of the demand for it would disappear.
a change in the expenditure for that other good. For a But this does not mean that people prefer to pay more,
change in the expenditure for any good means offsetting other things being equal, rather than less. In these cases,
changes in expenditure for other goods. Demand curves the decline in value would represent a loss of one of the
also change because of changes in the quantity of money good’s useful properties. The case is comparable to the
and the level of money incomes, changes in knowledge, demand for anything else being less when one or more
tastes, and preferences, and the discovery or invention of of its useful properties is impaired. So long as the good
new substitutes or complements. All such changes entail retains sufficient value to serve the purposes for which a
changes in elasticities of demand along with changes in high value makes it qualified to serve, then, within that
the demand curves. The belief in any kind of measurable zone, the quantity demanded varies inversely with the
constancy of demand curves or of elasticities of demand is price in the normal, uncomplicated way. When and if the
a manifestation of the philosophical determinism and arro- price declines to the point that the good ceases to be able
gance of mathematical economics described earlier.58 to serve the purpose that depends on a high value, the
case must be understood in terms of the good having been
Seeming Exceptions to the Law of Demand rendered of lower quality.
The downward sloping demand curve rests on the Thus, the fact that part of the demand for such things
bedrock of fundamental economic principles. The fact as precious metals, precious stones, and various furs
that, other things being equal, people will buy more of would disappear if their value were substantially lower
something at a lower price than at a higher price is not should not be regarded as a contradiction of the law of
contradicted by zones of demand curves in which the demand. It is no more a contradiction of it than the fact
quantity demanded does not increase even though the that, say, grapes which are unsuitable for being made into
price decreases. In such cases, either a greater decrease good wine are less in demand than those which are
in price is what is required to expand the quantity de- suitable for being made into good wine, or that cattle
manded further, or else the good is already purchased to incapable of breeding are less in demand than cattle
the point of satiety—thanks to the price already being which are capable.
low enough so that the marginal utility attaching to the Cases of so-called snob appeal are also essentially
price is below the marginal utility of the last unit of the similar. If one wishes to be in the company mainly of
good for which any useful employment whatever can be wealthy people, then restaurants and hotels that only
58 Seeabove,theIntroduction.
162 CAPITALISM
wealthy people can normally afford derive a further, curve can be taken as unexceptionable, the same is most
useful property in the minds of some people by virtue of certainly not true of the case for the upward sloping
that fact. One may agree or disagree with these people’s supply curve that is presented as typical by contemporary
assessment of what is or is not useful or desirable, but economics textbooks.
one must recognize that their behavior does not contra- It might appear that such a case could be made by
dict the law of demand. So long as the price charged is working the law of diminishing marginal utility in re-
within the zone of being high enough to restrict the verse. For example, it could be argued that a farmer who
clientele in this way, the normal relationship between owns five horses will need a higher price to be willing to
price and quantity demanded prevails. And when the part with his second horse than with his first horse, and
price charged falls below this zone, the usefulness of the a still higher price to part with his third horse than with
good is reduced from the perspective of these buyers. his second, and so on. For as the number of horses
Finally, the law of demand is in no sense contradicted remaining in his possession decreases, the marginal util-
by observations of the fact that over time higher prices ity he attaches to each remaining horse increases. And
are frequently accompanied by increases in the quantity since the marginal utility he attaches to the price he
of a good that is demanded. Such results are precisely the receives for a horse must exceed the marginal utility he
effect to be expected from increases in demand—that is, attaches to any horse he sells, the rising marginal utility
of an upward shift of the demand curve. Increases in of his diminishing supply of horses could be taken to
demand for this or that good or service can, of course, imply a need for a rising price of horses as the condition
occur at any time. However, since the abandonment of of his offering a larger quantity of them for sale. The
the gold standard in the United States in 1933, substantial same principle could then be applied to all other suppliers
and practically universal increases in demand have be- of horses and to suppliers of all other goods. On this
come the norm, because of rapid increases in the quantity basis, a case might be thought to exist for assuming that
of money. It should not even be necessary to mention just as demand curves slope downward, so supply curves
such obvious facts but for the existence of attempts to slope upward.
derive demand curves on the basis of alleged empirical The law of diminishing marginal utility may well play
observations. a significant role in this way in the determination of
supply curves in conditions in which the supplies of
The Derivation of Supply Curves goods are capable of being used by the suppliers them-
While the case for the downward sloping demand selves. But, as already pointed out, in the conditions of a
Table 5–2
Hypothetical Total and Partial Demand Schedules
Total Quantity Quantity Demanded Quantity Demanded

Price
Demanded in Market I in Market II
$10 100 060 040
9 125 075 050
8 160 100 060
7 200 125 075
6 250 150 100
5 325 200 125
4 400 250 150
3 500 300 200

division-of-labor economy, goods are produced in such stood as the demand for a given good, such as wheat or
enormous concentrations that for all practical purposes gasoline, that exists in two distinct geographical markets,
they can be viewed as possessing zero marginal utility such as New York and Chicago, or the demand that exists
for their producers. For example, the pin maker, shirt for wheat or crude oil in two distinct employments, such
maker, or automobile producer who turns out tens or as the baking of bread versus the making of crackers or
hundreds of thousands or even millions of units of his the production of gasoline versus the production of heat-
product, can attach marginal utility only to an insignifi- ing oil. In reality, of course, the number of partial markets
cant fraction of his supply. On this basis, Böhm-Bawerk would be far greater, but for the sake of simplicity, we
pointed out that it is more reasonable to regard him as confine ourselves to the consideration of just two, which
attaching no marginal utility whatever to his supply, and is adequate to illustrate the principle.
thus as being willing to accept any price for his product In Table 5–2, the column “Total Quantity Demanded”
that he can obtain, from zero on up, as determined by the is identical with the column labeled “Quantity Demanded”
competition of the buyers.59 This, of course, is the basis in Table 5–1. However, this column is now presented as
of Böhm-Bawerk and the Austrian school regarding the representing the sum of the quantities demanded at the
supply curve as essentially a vertical line, representing a various prices in Markets I and II, respectively, which are
given amount that the sellers are prepared to sell, irre- shown in the third and fourth columns of the table.
spective of price.60 Figures 5–4 and 5–5 are derived from Table 5–2.
Nevertheless, it is possible, with some difficulty, to Figure 5–4 shows the total demand curve, formed by
derive upward sloping supply curves. This can be done pairing the prices shown in the first column of Table 5–2
by conceiving of them as reflecting the competition for with the quantities demanded in the second column. This
a given overall physical supply that arises from the results, of course, in the replication of the demand curve
existence of two or more competing demand curves that DD, previously depicted in Figure 5–1. Figure 5–4 dif-
represent alternative uses for the same supply. To make fers from Figure 5–1 only in that a given amount of
this point clear, it is necessary to begin by representing supply is now assumed to exist, namely, 200 units. This
the demand schedule previously shown in Table 5–1, as results in the drawing of a vertical supply curve SS,
the summation of two lesser, partial demand schedules. ascending from the quantity 200 on the horizontal axis.
These lesser, partial demand schedules can be under- The implied equilibrium price of $7 is shown by the
59
60 See Böhm-Bawerk,
above, this chap.,
Capital
this pt.,
andsec.
Interest,
1. 2:244.
Figure 5–4
Total Demand Curve With Overall Fixed Supply
P
D S
$10
9
8
7
6
5
4 D
3
2
S
1
Q
0 100 200 300 400 500 600 700 800 900
164 CAPITALISM
intersection of this supply curve with the demand curve DD. II, 75 units, of the total supply of 200 units. Nevertheless,
The upper portion of Figure 5–5 shows the demand it is possible to imagine one of the markets, say, Market
curves in the two partial markets, Market I and Market II, purchasing varying parts of the total supply, from none
II, which when summed, yield the demand curve of of it whatever, all the way on up to the entire 200 units.
Figure 5–4. As can be inferred from Table 5–2, in a state The various possibilities for the division of the supply
of equilibrium the price both in Market I and in Market between Market II and Market I are shown in Figure 5–5
II is $7, with Market I purchasing 125 units, and Market in the diagram immediately below the diagram for the
Figure 5–5
Derivation of the Upward Sloping Supply Curve from a Competing Demand Curve
Demand in Demand in
P DI Market I P Market II SII
DII
$10 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $10
---------------------
--------------------------------------------------------------
--------------------------------------------------------------
9 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -9- - - - - - - - - - - - - - - -
--------------------------------------------------------
--------------------------------------------------------
8 - - - - - - - - - - - - - - - - - - - - - - - - - - - - -8- - - - - - - - - - - - -
--------------------------------------------------
-------------------------------------------------
7 - - - - - - - - - - - - - - - - - - - - - - - - - - 7- - - - - - - - - - -
--------------------------------------------
--------------------------------------------
6 - - - - - - - - - - - - - - - - - - - - - - -6- - - - - - -
DI
-------------------------------------
-------------------------------------
5 - - - - - - - - - - - - - - - - -5-
- -------------- -------------
-----------------------------
SII
4 4
DII
3 3
2 2
1 1
QI QII
0 50 100 150 200 0 50 100 150 200
QI Supply for Market I Equals QI Allocation of Supply

Supply for Market I - - - - - - - - - - - - - - -200
--- Between the Markets
200
QI=QI
150 - - - - - - - - - - - - - - - - - - - - - 150
---------
------------------------------------
100 - - - - - - - - - - - - - - - - - - - - - - - - - - -100
---------------
------------------------------------------------
-----------------------------------------------------
50 50
45˚
QI QII
0 50 100 150 200 0 50 100 150 200
Market II demand curve, that is, in the diagram labeled shows that in order for a supply of 50 units to be attracted
“Allocation of Supply Between the Markets.” The allo- to Market II, which would leave 150 units for Market I,
cation line is drawn as the base of an isosceles triangle, a price of $6 must be paid. For only at that price is the
with the vertical and horizontal axes forming legs of quantity demanded in Market I reduced to 150 units,
equal length. Where the allocation line crosses the verti- thereby releasing 50 units of supply for Market II. Sim-
cal axis, which is labeled QI, the entire supply of 200 ilarly, examination of the diagrams shows that in order
units is shown as going to Market I and none at all as for a supply of 75 units to be attracted to Market II,
going to Market II. Where the allocation line crosses the leaving only 125 for Market I, a price of $7 must be paid,
horizontal axis, which is labeled QII, the entire supply of since only at that price will the quantity demanded in
200 units is shown as going to Market II and none at all Market I be reduced to 125 units, and 75 units be released
to Market I. The various intermediate points on the for Market II. In the same way, a price of $8 in Market
allocation line show the various other possible combina- II will attract 100 units to that market, for at a price of $8
tions of supplies going to the two markets. in Market I, the quantity demanded is reduced to 100
The diagram in the lower left-hand corner of Figure units and thus 100 units of the total supply are made
5–5, labeled “Supply for Market I Equals Supply for available for Market II. A price of $9 in Market II will
Market I,” has the purpose merely of showing the supply attract 125 units, for at that price the quantity demanded
for Market I on the horizontal rather than on the vertical in Market I falls to 75 units, thereby releasing 125 units
axis, which is where it is shown in the “Allocation of of the total supply for Market II. Finally, a price of $10
Supply Between the Markets” diagram. This is accom- in Market II will attract 140 units, because at that price,
plished by drawing a 45 degree line through the origin. the quantity demanded in Market I is only 60 units,
Every point on this line represents an equal distance thereby releasing 140 units of the total supply to Market
along both axes. II. Connecting these various points constitutes the draw-
Thus, on the basis of these four interrelated diagrams ing of the supply curve for Market II.
in Figure 5–5, it is possible to see that the greater is the In effect, the supply curve in Market II is upward
supply in Market II, the smaller is the supply that remains sloping by virtue of the fact that bringing additional
in Market I. At the same time, corresponding to every supplies into Market II requires riding up the demand
given supply in Market I, there is a definite price in curve of Market I, so to speak, as the condition of
Market I, determined by the demand curve in Market I. outbidding Market I for progressively greater supplies.
The price paid for the supply in Market II, must match The principle is that the greater is the supply in Market
the price paid in Market I. And since the larger is the II, the smaller is the supply and thus the higher is the price
supply in Market II, the smaller is the supply that remains in Market I. It is the rising price in Market I, in the face
for Market I, the higher must be this price. of dwindling supplies in that market, that necessitates
In this way, it is possible to trace out an upward that larger supplies in Market II be accompanied by rising
sloping supply curve in Market II. We begin in the upper prices, in order to outcompete the buyers in Market I.
right-hand diagram with a supply in Market II of zero The supply schedule underlying the supply curve for
units. Reading down along the dashed line to the lower Market II can be derived by means of subtracting from
right-hand diagram, this implies a supply available for the total supply of 200 units available for both markets
Market I of all 200 units. Reading now along the dashed the quantities demanded at the various prices in Market
line across to the lower left-hand diagram and then up to I. This is done in Table 5–3.
the upper left-hand diagram, it is clear that with a supply It would be possible, of course, to apply the above
of 200 units, the price in Market I will be $5. This is the procedure to derive an upward sloping supply curve for
price at which the quantity demanded in Market I equals Market I from the demand curve in Market II. An upward
200 units. If the price offered in Market II is not above sloping supply curve in any given partial market can be
$5, the implication is that Market II has no way to bid understood as resulting from the downward sloping de-
supplies away from Market I. Reading the dashed line mand curve(s) in one or more other markets that are in
across from the upper left-hand diagram to the upper competition for the same overall given total supply.
right-hand diagram, it is clear that a price of $5 and a
supply of zero units can be considered as a point on the Limitations of Geometrical Analysis
supply curve in Market II. This is shown in the diagram It should be obvious that the procedure followed for
for Market II. deriving an upward sloping supply curve is extremely
The remaining points on the supply curve in Market cumbersome even when confined to just two partial
II are derived by the same method, as shown by addi- markets. To apply the procedure to three partial markets
tional dashed lines. Examination of the set of diagrams would require the use of solid geometry, to show how a
166 CAPITALISM
Table 5–3
Derivation of an Upward Sloping Supply Schedule
from a Downward Sloping Demand Schedule
Quantity Demanded in Quantity Supplied in

Price Total Supply
Market I Market II
$10 060 200 140
9 075 200 125
8 100 200 100
7 125 200 075
6 150 200 050
5 200 200 000
4 250 200 000
3 300 200 000
definite supply in any given market implied various markets. Those principles will also make it possible to
definite pairs of supplies in the other two markets. The understand in a far more meaningful way than is possible
simultaneous relationships between four or more partial by the mere visualization of the intersection point of two
markets simply cannot be shown by geometrical methods. curves the market processes by means of which prices are
What is implied here is a limitation on the usefulness actually determined.
of supply and demand curves and of geometry in general Contemporary economics, for the most part, is not
in economic analysis. True enough, one may think in troubled by the needless complexities and limitations
such terms as, say, fifty partial markets, each with its own created by an excessive reliance on the use of geometry,
demand curve, and with a larger supply in any one market because, for all practical purposes, when it comes to price
causing diminished supplies in each of the remaining theory, its intellectual horizon is narrowly limited to that
forty-nine partial markets and a corresponding riding up of partial equilibrium.61 In effect, the problems of relat-
along the demand curves of those forty-nine partial mar- ing what goes on in different partial markets do not arise
kets. But at this point, even though the analysis makes for contemporary economics, because it is concerned
reference to supply and demand curves, the references only with what happens in one given market at a time. It
and the analysis itself have become purely verbal. does not derive the upward sloping supply curve it pres-
A case such as this clearly shows why the substantive ents as typical from any consideration of competition
relationships of economics must all be explained by an among various partial markets, but from the operation of
essentially verbal analysis. Geometry is capable of relating the law of diminishing returns.
two, or at most three, elements at the same time, and can The procedure of contemporary economics is to take
neither make qualitative distinctions among them nor con- the prices of the factors of production as given from the
sider any further aspects pertaining to them without regard- point of view of the individual business enterprise. It then
ing what it previously considered to be one element alone, assumes that as the enterprise increases its output from
now to be two or more elements—something which rapidly existing plant and equipment, it encounters diminishing
exhausts and then utterly surpasses its capacity for analysis. returns—less output per unit of the additional factors of
In contrast, a verbal analysis is capable of proceeding both production—which implies that larger quantities of the
in far greater breadth and in far greater depth. The relatively additional factors of production are needed to produce
simple set of verbal principles concerning price determina- equal additional units of the product. Given the prices of
tion presented in Chapters 6 through 8 of this book, will the factors of production, this means rising marginal
make it possible to grasp the competition that goes on for costs per unit. (“Marginal costs” are the addition to total
limited total supplies between any number of partial costs accompanying the production of a given additional
61 See above, the Introduction, sec. 2, the subsection “Mathematical Economics.”
quantity of the product. With plant and equipment taken falling under the general rubric of demand and supply.
as fixed, they are the cost of additional labor, materials, Thus, contemporary economics admits the existence
and fuel. It is these costs which are assumed to increase of cases in which the supply curve is horizontal, as in
per unit of additional output.) The supply curve of an Figure 5–6 or, indeed, even downward sloping, as in
industry is then assumed to consist of a summation of all Figure 5–7. In such cases, however, it continues to pro-
such individual supply/marginal-cost curves of the con- ceed as though prices were determined by demand and
stituent firms. Indeed, it is assumed to consist of a mere supply, merely because one can show demand curves
multiplication of the supply/marginal-cost curve of any intersecting such supply curves.
one of the various allegedly interchangeable “represen- The case of horizontal supply curves is actually ex-
tative firms” of which the industry is assumed to consist, tremely common—probably more common than that of
by the number of such firms.62 upward sloping supply curves. It describes the willing-
ness and ability of sellers to supply a variable quantity at
Confusions Between Supply and Cost a given price. It is typical in retailing, wholesaling,
Ironically, resort to the law of diminishing returns as manufacturing, and the service industries. For example,
the basis for upward sloping supply curves turns out to at the prices posted on its menu, a restaurant is prepared
be inapplicable to actual price formation in the cases in to serve a number of meals ranging from zero on up to
which it might appear to be most plausible—namely, the maximum number it can prepare in its kitchen. The
agriculture and mining. These are cases in which dimin- same kind of wide-ranging variability in quantity is true
ishing returns occupy a prominent position and are rein- of the number of haircuts a barbershop is willing to
forced by the closely related phenomenon of the need to provide at the price it posts for haircuts, of the number
resort to progressively inferior grades of land or mines of television sets an appliance store is willing to sell at
in order to expand production under a given state of the prices it posts, and of the quantity virtually any
technology. Nevertheless, precisely in these cases, out- manufacturer is willing to sell of his product at the price
put comes in large discrete bursts, because it is seasonal he posts. One can express this phenomenon by saying
and depends on the harvests, or because it can be in- simply that the supply curve is horizontal, and one can
creased or decreased only by substantial discrete incre- then bring the case under the formula that the price is
ments as, for example, accompany the adding on or determined by demand and supply, merely because there
elimination of shifts of mine workers or the working or is a demand curve and a supply curve, and they have an
not working of this or that seam of mineral deposit. intersection point.
In these cases, the concept of supply that is relevant to Nevertheless, it should be obvious that the alleged
price formation is the Austro-classical concept of a fixed
quantity, with price being determined by the competition of
the buyers for that quantity. When the law of diminishing Figure 5–6
returns is taken as the basis of supply curves and thus of A Horizontal Supply Curve
price formation in an industry, via the concept of marginal
cost, the result is conceptual chaos of such magnitude that
its sorting out is best left for a separate discussion.63
The derivation of the upward-sloping supply curve P
from a rising marginal-cost schedule is only one aspect
of the confusions contemporary economics suffers from
in connection with the relationship between the concepts
of cost of production and supply. In agriculture and
mining, it confuses cases in which price is actually S S
determined by demand and supply with determination by
cost of production in the form of “marginal cost.” In
manufacturing, wholesaling, and retailing, it confuses
cases in which prices are actually determined in the first
instance by cost of production—the full cost of produc-
tion—with determination by demand and supply. Indeed,
this is its most serious confusion in that it totally obscures
the very existence of cases in which price is directly 0 Q
determined on the basis of cost, by making them appear
to be merely another instance of price determination
62
63 See,
See below,
for example,
chap. 10,
Paulsec.
Samuelson
10, whichand
is aWilliam
critique Nordhaus,
of contemporary
Economics,
economics’
13th ed.doctrine
(New York:
of “pure
McGraw-Hill,
andperfectcompetition.”
1989), pp. 540–45. See also above, the Introduction, sec. 2, thesubsection“MarshallianNeoclassicalEconomics:TheMonopolyDoctrineandKeynesianis m” for a critique of the doctrine of the representative firm.
168 CAPITALISM
the other to cases in which supply can be varied in

Figure 5–7 immediate response to changes in demand. Furthermore,
A Downward Sloping Supply Curve it cannot be stressed too strongly that the bridge between
the two cases has been provided by none other than
Böhm-Bawerk himself, in his demonstration that deter-
mination of value and price by cost of production is itself
merely a special case of the operation of the law of
P diminishing marginal utility.66
At most, cost of production is a determinant of prices
S only in the first instance. When one investigates the
nature of costs, they are always revealed as constituted
by prices of factors of production. These prices are
themselves determined by demand and supply, or on the
basis of costs that reflect the operation of demand and
supply at a further stage of remove. Ultimately, prices
S determined on the basis of costs are determined on the
basis of demand and supply—but on the basis of demand
and supply operating in broad factor markets, not the
market for the individual product itself. Thus, for exam-
ple, in saying that the price of new automobiles is deter-
0 Q mined by cost of production, rather than demand and
supply, what is actually meant is that it is determined in
the first instance by cost of production; but the wage
rates, real estate prices, and many of the raw materials
determination of price by demand and supply is totally prices—all the prices into which the cost of production
superficial in cases of this kind. The price is actually of an automobile is ultimately resolvable—are deter-
determined by the decisions of the sellers. Their asking mined by demand and supply.67
price, together with the demand curve, determines the Downward sloping supply curves represent cases in
quantity of the good that is demanded, and the quantity which cost per unit declines as the level of production
of the good demanded then determines the quantity expands. The charging of lower prices in the face of
supplied at the asking price. The critical question is, what higher levels of demand, which make possible operation
determines the asking prices of the sellers? The answer, on an expanded scale, is also clearly a case in which
as we shall see, is consideration by the sellers of the cost prices are set in the first instance on the basis of a
of production of the item—either their own cost of pro- consideration of costs of production—specifically, the
duction or that of competitors or potential competitors. ability to use declining costs to gain a decisive advantage
Normally, we shall see, cost of production turns out to be over potential competitors by charging prices too low for
the immediate determinant of the prices of manufactured their operations to be profitable, but which are not too
or processed goods—of any goods or services whose low for one’s own operations to be profitable.
quantity can be immediately expanded or contracted in The confusions of contemporary economics are such
response to changes in demand by such means as the that it is largely unaware that in the cases of horizontal
ability temporarily to decrease or increase inventory and downward sloping supply curves, it actually is deal-
levels and, before the inventories are depleted or accu- ing with situations in which cost of production is the
mulate unduly, to increase or decrease production from immediate determinant of prices. Insofar as it is aware
existing plant capacity.64 that these cases are different, it regards the resulting
Cases of this kind may appear to represent a direct prices as standing virtually outside the operation of
contradiction of Böhm-Bawerk’s proposition that prices normal economic law—as representing “administered”
are determined by the competition of buyers for limited prices, set more or less arbitrarily by one or another type
supplies. For these are cases in which price is determined of wielder of “monopoly power,” on the basis either of
by the competition of sellers prepared to offer highly evil motives or at least peculiar motives. These confu-
variable supplies.65 Actually, there is no contradiction sions are the result of the fact that contemporary econom-
between the two patterns of price formation. They pertain ics has lost the ability to understand determination of
to different situations—one to cases in which supply is a price by cost. It cannot deal with cases in which prices
given quantity for a longer or shorter period of time, and are set on the basis of a consideration of the full costs of
67
66
64
65 See
Thisabove,
below,
was the
chap.
chap.
kind2,
6,
ofsec,
pt.
caseA,
5,Ricardo
the
sec.subsection
5. considered
“Determination
typical. Seeof
TheValue
Worksbyand
CostCorrespondence
of Production,” and
of David
below,
Ricardo,
chap. 10,
11sec.
vols.,
8, ed.
for Piero
the previously
Sraffa (Cambridge:
referencedCambridge
lengthy quotation
University
fromPress,
Böhm-Bawerk
1952–73),on
8:276–77.
this subject.
The essential passage from Ricardo is quoted below, in chap. 10, sec. 8, in the discussion titled “Ricardo and Böhm-Bawerk on Cost of Production Versus the Elasticity of Demand.”
production, together with an allowance for earning the counters a problem of circularity. It explains each indi-
going rate of profit, rather than on the basis merely of vidual price on the basis of demand and supply. But the
marginal costs.68 demand curve in each case presupposes all other prices
*** in the economic system: it is constructed on the assump-
Putting aside all the confusions that have character- tion of their existing and remaining unchanged. Yet if the
ized their use, it is an obvious fallacy to believe that formation of those other prices is to be explained on the
demand and supply curves can ever be derived from basis of demand and supply curves, then the price of the
empirical observation. Any price and quantity demanded good in question, which is supposedly first to be ex-
and supplied that one can observe is necessarily only a plained by demand and supply curves, must already be
single point on a demand and supply curve. And, it could, presupposed. Fortunately, the classical concept of de-
conceivably, be a point on any one of a virtually infinite mand, when taken in conjunction with the law of dimin-
number of such curves! For through a given point, there ishing marginal utility, provides a way out of this
is no limit to the number of lines that can be drawn—even circularity.
if, as in the case of the demand curve, they must possess The classical concept of demand makes it possible
a negative slope. to understand the absolute level of prices on the foun-
Whenever a new price and quantity demanded and dation of the quantity theory of money, which will be
supplied are observed, it is inescapable that at least the explained in Chapter 12. At the same time, the law of
demand curve or the supply curve has changed, and more diminishing marginal utility shows that the relative
than likely that both have changed. If neither had changed, prices of all goods and services that exist in some
the change in price and quantity would not have been definite, given supply at any given time, are deter-
possible. The conclusion to be drawn from this is that when mined by their relative marginal utilities.69 For exam-
different prices and quantities are observed over time, ple, the prices of wheat, crude oil, skilled and unskilled
absolutely no rational basis exists for believing that what is labor, the various improved and unimproved land sites,
being observed is movement along any given curve. and so forth are all determined in such a way that the
As previously explained, it should also be apparent on marginal utility attaching to the price in each case is
this basis that observations of rising prices associated below the utility of the marginal unit of the good in
with rising quantities demanded over time are perfectly question and above the utility of a potential additional
consistent with the law of demand. The combination is unit of the good in question. This means that the prices
explained simply by increases in the demand schedule— of these goods relative to one another reflect their
most likely, nowadays, as the result of an increase in the relative marginal utilities. In this way, the prices of
quantity of money. goods and services in limited supply can be explained
without the error of circular reasoning. And because
The Circularity of Contemporary Economics’ prices determined by cost of production are based on
Concept of Demand such prices, all prices can thus be explained without
Contemporary economics’ concept of demand en- falling into the error of circular reasoning.70
68
69
70 See below,
More correctly,
chap.insofar
10,
6, pt.
sec.
A,
as10.
they
sec. themselves
5, and pt. B,are
secs.
not1–3.
consumers’ goods, their relative prices are determined by the relative marginal utilities of their final products to the ultimate consumers.
Notes
1. See Ayn Rand, “What Is Capitalism?” in Capitalism: The extent to which working for such an enterprise is to their
Unknown Ideal, ed. Ayn Rand (New York: The New American advantage compared with working on their own, as business-
Library, n.d.), pp. 9–12. See also Leonard Peikoff, Objectivism: men, and with working for any other such enterprise.
The Philosophy of Ayn Rand (New York: New American Li- 3. My discussion of this subject is completely indebted to the
brary, 1992), pp. 380–384. writings of von Mises and Hayek. See Ludwig von Mises,
2. A division-of-labor, capitalist society is, of course, charac- Socialism (New Haven: Yale University Press, 1951), pp.
terized by the existence of medium and large-sized business 111–142, 211–220, 516–521; reprint ed. (Indianapolis: Liberty
enterprises, in which large numbers of individual wage earners Classics, 1981); idem, Human Action, 3d ed. rev. (Chicago:
produce under the direction of businessmen and capitalists. But Henry Regnery Co., 1966), pp. 689–715. See also F. A. Hayek,
the formation and extent of all such enterprises is itself the The Road to Serfdom (Chicago: University of Chicago Press,
product of the separate, independent thinking and acting of all 1944), pp. 48–50.; Individualism and Economic Order (Chi-
the individual participants. The individual stockholders decide cago: University of Chicago Press, 1948), pp. 33–56, 73–91,
the extent to which it is advantageous to pool their capitals and 119–208.
employ other people; the individual wage earners decide the 4. For a detailed discussion of the economic chaos of a socialist
170 CAPITALISM
state, see below, pp. 269–275, and the references cited in the 25. The passage of the Norris-La Guardia Act in 1932 elimi-
preceding note of this chapter. nated the possibility of gaining federal court injunctions against
5. See Hedrick Smith, The Russians (New York: Quadran- mass picketing.
gle/New York Times Book Company, 1976), pp. 60–61. 26. For a detailed discussion of these points, see below, pp.
6. The quotation is from Henry H. Villard, Economic Develop- 420–421.
ment (New York: Reinhart & Co., 1959), p. 171. Italics supplied. 27. Of course, economic inequality can also result from differ-
7. Robert Kaiser, Russia (New York: Atheneum, 1976) p. 338. ences in luck, but such differences are of relatively minor
8. For elaboration on the nature of economic planning under importance in comparison with the kind of differences de-
capitalism, see below, pp. 269–275, and 172–294 passim. scribed above and are certainly not of sufficient importance to
9. On the indivisibility of property rights and all other rights, detract in any way from the significance of these differences.
see above, p. 23. 28. The discussion in this and the next several paragraphs was
10. This insight, of course, is one of the greatest contributions inspired by Henry Hazlitt’s Time Will Run Back, pp. 88–91.
of von Mises. See above, n. 3. 29. See ibid.
11. For elaboration of this fundamental fact, see below, pp. 30. For a demonstration of how the accumulation of great
682–699. fortunes is a case of one man’s gain being other men’s gain, see
12. The truth is that to some extent the consumers’ goods that below, pp. 327–328.
are paid for in the present can be traced back to the performance 31. For further explanation of why incomes that represent high
of labor in the remotest periods of antiquity, indeed, to the point rates of profit are heavily saved, see below, pp. 741–743.
when man first began to use previously produced goods in the 32. See Milton Friedman, A Theory of the Consumption Func-
production of all goods. However, the extent to which goods of tion (Princeton, N. J.: Princeton University Press, 1957).
the present owe their existence to labor performed in the past 33. For elaboration of this point, see below, pp. 355–356.
diminishes in geometric progression. See below, pp. 820–824 34. On the feudalistic-type economic inequalities necessarily
and 852. prevalent under socialism, see below, pp. 288–290.
13. See below, p. 824. See also Eugen von Böhm-Bawerk, 35. See above, p. 23., for an explanation of why almost all
Capital and Interest, 3 vols., trans. George D. Huncke and Hans violations of freedom entail violations of property rights. See
F. Sennholz (South Holland, Ill.: Libertarian Press, 1959), also below, pp. 331–332, for a demonstration of the fact that
2:79–118. the economic advantages of the feudal aristocracy vis-à-vis the
14. For a precise, arithmetic illustration of this point, see below, serfs rested on a foundation of government power, not eco-
p. 360. nomic power, and were the result of a violation of property
15. On the relationship between the accumulation of capital and rights rather than of the use of property rights.
the division of labor, cf. Adam Smith, The Wealth of Nations 36. For further discussion of inheritance, see below, pp. 306–
(London, 1776), bk. 2, Introduction; reprint of Cannan ed. 308.
(Chicago: University of Chicago Press, 2 vols. in 1, 1976). 37. See below, pp. 326–330 for a comprehensive demonstra-
16. Cf. Henry Hazlitt, Time Will Run Back (New Rochelle, tion of this fact.
N. Y: Arlington House Publishers, 1966); originally published 38. The New York Times of January 8, 1994, reported an in-
as The Great Idea (New York: Appleton-Century-Crofts, 1951) stance of this error with some degree of fanfare, on its first
p. 155. business page, as though it represented a scholarly finding.
17. For an account of the origin and evolution of money and 39. For a free-market solution to the growing problems in the
the contemporary monetary system, see below, pp. 506–517. area of medical care, see below, pp. 378–380. See also George
18. Cf. von Mises, Socialism, p. 121. Reisman, The Real Right to Medical Care Versus Socialized
19. And, as von Mises has shown, it provides the only such Medicine (Laguna Hills, Calif.: The Jefferson School of Philos-
standard. See Socialism, pp. 113–128, 131–135. ophy, Economics, and Psychology, 1994.) This pamphlet is a
20. For a brilliant defense of the moral value of money and of discussion of all aspects of the cause and cure of the current
the proposition that money is the root of all good, see Ayn Rand, crisis in medical care.
Atlas Shrugged (New York: Random House, 1957), pp. 410– 40. See von Mises, Human Action, p. 333.
415. 41. See John E. Cairnes, Some Leading Principles of Political
21. Knowledge of the dependence of the division of labor on Economy Newly Expounded (1874; reprint ed., Fairfield, N. J.:
the existence of money sheds major light on the causes of the Augustus M. Kelley, 1967), pp. 22–29.
collapse of the Roman Empire, which took place following a 42. See John Stuart Mill, Principles of Political Economy,
century-long process of the destruction of money through Ashley ed. (1909; reprint ed., Fairfield, N. J.: Augustus M.
inflation. See below, p. 950. The whole of Chapter 19 and much Kelley, 1976), p. 445.
of Chapter 12 make clear the potential for inflation and destruc- 43. See Böhm-Bawerk, Capital and Interest, 2:244–245.
tion inherent in the present monetary system. 44. No significance should be attached to the fact that the
22. For a brilliant critique of the doctrine of from each accord- demand curve in Figure 5–2 is drawn as a straight line. It is
ing to his ability to each according to his need, see Ayn Rand, drawn that way merely for the sake of convenience and is in
Atlas Shrugged, pp. 660–670. accordance with the present-day practice of drawing such curves.
23. On these points, see below, pp. 613–664 passim, and 580– 45. Ibid.
589. 46. Ibid.
24. Cf. Ludwig von Mises, Socialism, pp. 319–321. 47. See ibid.
48. See below, pp. 219–221 and 503–506. understood in terms of the overall, total quantity of labor
49. See above, pp. 53–54, and, below, pp. 566–568. directly or indirectly required in the production of the product.
50. Indeed, it will subsequently be shown in detail that more In the case of automobiles, for example, this means the labor
aggregate supply itself creates equivalently more aggregate real required in the production of the iron ore and steel sheet, all the
demand precisely in this way. See below, pp. 559–564, espe- various parts and the materials required to produce them, and
cially Figure 13–3, on p. 561. the equipment used at all the various stages, as well as the labor
51. For an explanation of the law of diminishing marginal required in the auto plants. If a reduction in the overall quantity
utility, see above, pp. 49–51. of labor required per unit of a product can be assumed to result
52. In case the reader is wondering what would happen if the in a corresponding reduction in the unit cost and price of the
marginal utility attached to a unit of the good and to its price product, then a more than proportionate increase in the quantity
were the same, the answer is, nothing. The precondition of a of the product demanded results in an increase in overall
purchase is the valuation of what is received in exchange above employment in the production of the product.
the valuation of what is given in exchange. Actually, as deter- 57. See below, pp. 408–409.
minants of purchases, marginal utilities should be thought of in 58. See above, p. 9.
terms of ordinal rather than cardinal numbers. On this subject, 59. See Böhm-Bawerk, Capital and Interest, 2:244.
see von Mises, Human Action, pp. 119–127. 60. See above, p. 154.
53. Insofar as it is businessmen who buy cotton instead of wool, 61. See above, p. 7.
they will not be the parties who have the gain in marginal utility 62. See, for example, Paul Samuelson and William Nordhaus,
described here. Those who have the gain in marginal utility will Economics, 13th ed. (New York: McGraw-Hill, 1989), pp.
be the consumers of cotton clothing. Precisely as a result of this 540–545. See also above, pp. 7–8, for a critique of the doctrine
fact, the consumers will favor the purchase of cotton clothing, of the representative firm.
and because of this the businessmen will buy more cotton and 63. See below, pp. 425–437, which are a critique of contempo-
less wool. The change in the businessmen’s purchases is thus rary economics’ doctrine of “pure and perfect competition.”
dictated by the effects of changes in marginal utility on the 64. See below, pp. 200–201.
consumers. 65. This was the kind of case Ricardo considered typical. See
54. On the fallacies entailed in viewing a saving of expense as The Works and Correspondence of David Ricardo, 11 vols., ed.
actually the same as an increase in income, see below, pp. Piero Sraffa (Cambridge: Cambridge University Press, 1952–
456–459. 73), 8:276–277. The essential passage from Ricardo is quoted
55. To anticipate later discussion under the heading of Say’s below, on p. 414.
Law: given the quantity of money and volume of spending in 66. See above, p. 52, and below, pp. 414–416, for the previously
the economic system, what determines the price level and the referenced lengthy quotation from Böhm-Bawerk on this subject.
goods and services the aggregate demand is actually capable of 67. See below, p. 201.
purchasing at any given time is nothing other than the aggregate 68. See below, pp. 425–437 passim.
supply of goods and services. In this way, it is aggregate supply 69. More correctly, insofar as they themselves are not consumers’
that determines the aggregate real demand. See above, n. 50 of goods, their relative prices are determined by the relative mar-
this chapter for further reference. ginal utilities of their final products to the ultimate consumers.
56. The saving of labor and increase in employment must be 70. See below, pp. 200–201, 209.
CHAPTER 6
THE DEPENDENCE OF THE DIVISION OF LABOR ON

CAPITALISM II: THE PRICE SYSTEM AND ECONOMIC
COORDINATION
toward the establishment of a uniform rate of profit on

PART A
capital invested in all the different branches of industry.
In other words, there is a tendency for capital invested to
UNIFORMITY PRINCIPLES yield the same percentage rate of profit whether it is
invested in the steel industry, the oil industry, the shoe
T he dependence of the division of labor on the price

system centers on the coordinating function of
prices. The price system coordinates the various branches
business, or wherever.
Profit, of course, is the difference between sales rev-
of the division of labor in a variety of essential respects. enues and costs. The rate of profit on capital invested is
It keeps the various branches of industry, and thus the the amount of profit divided by the amount of capital
production of the various products, in proper balance invested.1
with one another by appropriately adjusting their relative The reason for the tendency toward a uniform rate of
size. It does the same with respect to the relative size of profit on capital invested is that, other things being equal,
the various occupations. It also achieves a harmonious investors naturally prefer to earn a higher rate of profit
balancing of the supplies of the various products pro- on their capital rather than a lower one. The higher is the
duced with respect to their distribution in terms of place rate of profit they earn, the larger is the amount of profit
and time. These results are accomplished by the opera- they earn per year and thus the more rapidly they can
tion of a series of principles that I call uniformity princi- augment their wealth through saving and, at the same
ples, which are described and elaborated in the first four time, the more they can afford to consume. As a result,
sections of this part. wherever the rate of profit is higher, and all other things
are equal, investors tend to invest additional capital. And
where it is lower, they tend to withdraw capital they have
1. The Uniformity-of-Profit Principle and Its previously invested. The influx of additional capital in
Applications any initially more profitable industry, however, tends to
The best way to begin to understand the functioning reduce the rate of profit in that industry. This is because
of the price system, and thus the full nature of the its effect is to increase the industry’s production and thus
dependence of the division of labor on capitalism, is by to drive down the selling prices of its products. As the
understanding the following very simple and fundamen- selling prices of its products are driven down, closer to
tal principle. Namely, there is a tendency in a free market its costs of production, the rate of profit earned by the
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industries tend to earn permanently unequal profit margins, even though they tend to earn equal rates of profit on capital invested. Thus, for example, a retail grocery business, which has a substantial portion of its capital invested in merchandise of the kind that is sold within days of purchase, or even on the very same day, may have annual sales revenues equal to five times its capital. A steel mill, on the other hand, may have annual sales revenues that are merely equal to its capital. An electric utility may have annual sales revenues that are equal to only half of its capital. Because of these very different rates of capital turnover—i.e., ratio of sales to capital—namely 5:1, 1:1, and [[$E1/2]]:1,
industry necessarily tends to fall. Conversely, the with- harmoniously coordinated, so that capital is not invested
drawal of capital from an initially less profitable industry excessively in the production of some items while leav-
tends to raise the rate of profit in that industry, because ing the production of other items unprovided for. The
less capital means less production, higher selling prices operation of the uniformity-of-profit principle is what
on the reduced supply, and thus a higher rate of profit on keeps the production of all the different items directly or
the capital that remains invested in the industry. indirectly necessary to our survival in proper balance. It
To illustrate this process, let us assume that initially counteracts and prevents mistakes leading to the relative
the computer industry is unusually profitable, while the overproduction of some things and the relative underpro-
motion-picture industry is earning a very low rate of duction of others.
profit or incurring actual losses. In such conditions peo- To understand this point, assume that businessmen
ple will obviously want to invest in the computer industry make a mistake. They invest too much capital in produc-
and to reduce their investments in the motion-picture ing refrigerators and not enough capital in producing
industry. As investment in the computer industry is stepped television sets, say. Because of the uniformity-of-profit
up, the output of computers will be expanded. In order principle, the mistake is necessarily self-correcting and
to find buyers for the larger supply of computers, their self-limiting. The reason is that the effect of the over-
price will have to be reduced. Thus, the price of comput- investment in refrigerator production is to depress profits
ers will fall and, as a result, the rate of profit earned in in the refrigerator industry, because the excessive quan-
producing them will fall. On the other hand, as capital is tity of refrigerators that can be produced can be sold only
withdrawn from the motion-picture industry, the output at prices that are low in relation to costs. By the same
of that industry will be cut, and the reduced supply it token, the effect of the underinvestment in television set
offers will be able to be sold at higher prices, thereby production is to raise profits in the television set industry,
raising the rate of profit on the investments that remain because the deficient quantity of television sets that can
in the industry. be produced can be sold at prices that are high in relation
In just this way, initially higher rates of profit are to costs. The very consequence of the mistake, therefore,
brought down and initially lower rates of profit are raised is to create incentives for its correction: The low prof-
up. The logical stopping point is a uniform rate of profit its—or losses, if the overinvestment is serious enough—
in all the various industries. of the refrigerator industry act as an incentive to the
withdrawal of capital from it, while the high profits of
Keeping the Various Branches of Industry the television set industry act as an incentive to the
in Proper Balance investment of additional capital in it.
This principle of the tendency of the rate of profit Moreover, the consequence of the mistake is not only
toward uniformity is what explains the amazing order to create incentives for its correction, but simultaneously,
and harmony that exists in production in a free market. to provide the means for its correction: The high profits
It was largely the operation of this principle that Adam of the television set industry are not only an incentive to
Smith had in mind when he employed the unfortunate investment in it, but are themselves a source of invest-
metaphor that a free economy works as though it were ment, because those high profits can themselves be plowed
guided by an invisible hand. back into the industry. By the same token, to the extent
In the United States production is carried on by sev- that the refrigerator industry suffers losses or earns a rate
eral million independent business enterprises, each of of profit that is too low to cover the dividends its owners
which is concerned with nothing but its own profit. need to live on, its capital directly and immediately
Knowing this, and knowing nothing about economics, shrinks, and it is thereby made unable to continue pro-
one might easily be led to think of such conditions as an ducing on the same scale.
“anarchy of production,” which is how Karl Marx de- In this way, the mistakes made in the relative produc-
scribed them. One might easily be led to expect that tion of the various goods in a free market are self-cor-
because production was in the hands of a mass of inde- recting.
pendent, self-interested producers, the market would ran- With good reason, the operation of profit and loss in
domly be flooded with some items, while people perished guiding the increase and decrease in investment and
from a lack of others, as a result of the discoordination production has been compared to an automatic governor
of the producers. This, of course, is the image conjured on a machine or to a thermostat on a boiler. As investment
up by those who advocate government “planning.” It is and production go too far in one direction, and not far
the view of most advocates of socialism. enough in another direction, the very mistake itself sets
The uniformity-of-profit principle explains how the in motion counteracting forces of correction. Moreover,
activities of all the separate business enterprises are the greater the mistake that is made, the more powerful
174 CAPITALISM
are the corrective forces. For the greater the overinvest- the production of A automatically becomes more profit-
ment and overproduction, the greater the losses; and the able and that of B less profitable. Capital then flows to A
greater the underinvestment and underproduction, the and away from B. The production of A is thus expanded,
greater the profits. Thus the greater the incentives and the and that of B contracted, until, once again, both A and B
means (or loss of means) to bring about the correction. afford neither more nor less than the general or average
In this way, the mistakes made in a free market are not rate of profit.
only self-correcting, but self-limiting as well: the bigger Of course, businessmen do not sit back and passively
the mistake, the harder it is to make it. wait for the consumers to shift their demand. On the
Further, in a free market, most of the mistakes that contrary, businessmen seek to anticipate changes in con-
might be made in determining the relative size of the sumer demand and to adjust production accordingly. In
various industries and the relative production of the addition, of course, they constantly seek to introduce
various goods are not made in the first place. This is whatever new or improved products they believe will
because the prospect of profit or loss causes businessmen attract consumer demand once the consumers learn of the
to weigh investment decisions very carefully in advance product. Businessmen will produce anything for which
and thus to avoid mistakes as far as possible from the they believe the consumers will pay profitable prices,
very beginning. In seeking to avoid losses, businessmen and they will cease to produce anything for which the
necessarily aim at avoiding overinvestment and overpro- consumers are unwilling to pay profitable prices. In this
duction. In seeking to make the highest possible profits, sense, business is totally at the disposal of the consum-
they necessarily aim at providing the market with those ers—the consumer is king, as the saying goes. In total
goods in whose production they do not expect other opposition to the misguided efforts of the Marxists to
businessmen to invest enough. This last fact, inciden- contrast production for profit with “production for use,”
tally, makes each businessman eager to invest suffi- the fact is that production for profit is production for use.
ciently in his own industry, lest the opportunities he does It is production for the use of the consumers, as deter-
not seize be seized by others instead. mined by the value judgments of the consumers them-
In addition, the free market performs a constant pro- selves. It is the way production for use takes place in the
cess of selection with respect to the ownership of capital. context of a division-of-labor society, in which the pro-
Capital gravitates, as it were, to those businessmen who ducers produce for the needs of others, whose needs are
know best how to employ it and is taken away from those conveyed to them by means of profit and loss.
who do not know how to employ it. For those who invest
in providing goods that are relatively more in demand i. The “Consumer Advocates” Versus the Consumers
make high profits and are thereby able to increase their It should not be difficult to see that the real advocates
capitals, and, consequently, their influence over future of the consumers—their virtual agents—are business-
production; while those who invest in producing goods men seeking profit, not the leaders of groups trying to
that are relatively less in demand earn low profits or restrict the freedom of businessmen to earn profits. Such
suffer losses, and are correspondingly deprived of capital groups, called, ironically, the “consumer movement,”
and of influence over future production. At any given seek to force businessmen to produce things the consum-
time, therefore, capital in a free market is mainly in the ers do not want to buy, like seat belts and air bags in
hands of those who are best qualified to use it, as dem- automobiles before they are sufficiently improved in
onstrated by their past performance in investing. For this comfort and reliability and reduced in cost to be attrac-
reason, too, most of the mistakes that might be made in tive to many people. At the same time, the so-called
determining the relative production of the various goods consumer movement seeks to prohibit businessmen from
are avoided in the first place in a free market. producing things the consumers do want to buy, like
breakfast cereals that are enjoyable to eat, and full-sized
The Power of the Consumers to Determine the automobiles. As von Mises has pointed out, inasmuch as
Relative Size of the Various Industries what is produced in a free economy is, in the last analysis,
The uniformity-of-profit principle explains not only the result of the free choices of the consumers, the
how a free market prevents and counteracts mistakes in demands of the consumer advocates are comparable to
the relative production of the various industries, but also efforts arbitrarily to overturn the results of a free election
how the consumers in a free market have the power of when one does not like the outcome. The dictatorial
positive initiative to change the course of production. All character of such demands should be obvious.2
the consumers need do to cause production to shift is to Of course, whenever they can be gotten to admit that
change the pattern of their spending. If the consumers it is actually the choices of the consumers they wish to
decide to buy more of product A and less of product B, overturn, not any arbitrary decisions of businessmen, the
2 Cf. Ludwig von Mises, Socialism(New Haven: Yale University Press, 1951), p. 535; reprint ed. (Indianapolis: Liberty Classics, 1981). Page references are to the Yale University Press edition; pagination from this edition is retained in the reprint edition.
“consumer advocates” are almost certain to argue that of the human mind and thus elementary human dignity.
they are nonetheless justified in their activities, on the In sharpest contrast, under freedom, such an affront
grounds that they merely force the consumers to act “for would not only have been avoided, but it might well have
their own good.” Here the “consumer advocates” lose been avoided while people still gained the benefit of seat
sight of the fact that the fundamental basis of achieving belts. When based on compulsion, the use of seat belts
the individual’s good is his guidance by his own judg- does not have to be comfortable and sufficiently econom-
ment. They show absolutely no respect for the character ical—it is simply compelled, whether the consumers like
of the consumers as rational beings, who must be per- it or not. When based on freedom, the use of seat belts
suaded by facts and logic, not compelled as though they does have to be comfortable enough and economical
were brutes, in the name of something allegedly more enough, because the consumers have to both like using
valuable than their free judgment and their dignity as them and value them above their price if they are to buy
rational beings. them. On a free market, these are the kind of seat belts
It may well be the case that using seat belts saves lives the consumers would have to have obtained.
and that if left to their own free choice, the consumers Only a free market can rationally decide such ques-
would not have used them as fast as they have been made tions as whether or not seat belts, and now air bags,
to use them through compulsion. But what saves infi- should be installed in automobiles. In a free market, if air
nitely more lives than seat belts is the acceptance of the bags, for example, represented a major advance in auto-
principle that each human being, as the possessor of mobile safety, one of the consequences would be that
reason, is valuable and competent and should be free to their presence would so reduce the costs of insurance
run his own life and pursue his own happiness. The use companies in the settlement of injury claims that the
of any specific case as the pretext for overturning this insurance companies would be in a position significantly
principle opens the floodgates to unlimited destruction to reduce the premiums of whoever owned a car which
through the use of physical force to overrule people’s had one. This saving in insurance premiums, coupled
judgment and thus to prevent them from achieving their with the personal benefits of reduced likelihood of seri-
well-being or to compel them to act against their own ous injury, would then be weighed by the consumers
well-being. Ayn Rand has rightly compared the use of against the cost of having air bags installed, or the
force in the name of achieving a man’s good to an attempt additional cost of buying an automobile that came with
to give him a picture gallery at the price of cutting out an air bag in comparison with one that came without an
his eyes.3 air bag. The greater the reduction in physical injuries, and
the financial costs associated with them, that air bags
ii. Consumer Safety and Pressure Group Warfare achieved, and the lower the cost of installing air bags, the
The fact of the matter is that the consumers cannot greater would be the demand for air bags. Depending on
even properly be described as irrational in refusing to use these data, the potential quantity of air bags demanded
seat belts, so long as their use had (or has) the effect of would exist on a continuum ranging from none at all, in
making every automobile trip a physically uncomfort- the event the advantages were deemed insufficient by
able experience. It cannot reasonably be claimed that the everyone relative to the additional cost, down through
remote possibility of an accident automatically outweighs high-cost luxury add-on or option, down through widely
any possible physical discomfort that would have to be chosen add-on or option, down through standard feature
experienced on every trip in order to safeguard against on some or most new models, down through standard
it. Let the use of seat belts be made comfortable enough, feature on all new models.
their cost low enough, and knowledge of their benefits Things are very different in a hampered market econ-
widespread enough, and there is no doubt that consumers omy, such as today’s so-called mixed economy, with its
will freely use them, because in such circumstances they pressure-group warfare. In such conditions, each pres-
really would benefit from their use. But when compul- sure group seeks to violate the rights of others for its own
sion is introduced into the picture, it is an entirely differ- benefit, either for its own aggrandizement or in order to
ent story. make good the depredations of others that have been
Thus, even if the “consumer advocates” have suc- inflicted on it. Thus, the automobile insurance industry—
ceeded in compelling the use of seat belts—by means of itself made to bear the skyrocketing medical costs caused
the threat of fines and possibly jail terms for failure to by government intervention into health care (insofar as
use them—what remains is the fact that the consumers it must pay the medical bills of the victims of automobile
have been compelled to endure what in their judgment is accidents), bled white by jury awards based on the notion
a chronic physical discomfort (and/or too high a cost). that any large corporation is fair game for anything, and
This cannot be justified if one values the free judgment the victim of government interference to the point of
3 See Ayn Rand, Capitalism: The Unknown Ideal (New York: New American Library, 1965) pp. 15–16.
176 CAPITALISM
being rendered incapable of controlling the automobile granted. Sooner or later, virtually every innovation does
repair costs it must pay—forms into a pressure group and become general. This implies that for any firm to con-
joins the “consumer advocates” in demanding that the tinue to earn an above-average rate of profit, it must
automobile industry install air bags. It acts in the hope repeatedly outdistance its rivals; it must work as an agent
that the reduction it expects to have in its own costs will of continuous economic progress.
serve as a reprieve. As cover, it waves the banner of Perhaps one of the most dramatic examples of this is
consumer safety, while making no mention of the higher provided by the career of the first Henry Ford. When the
prices that consumers will have to pay for automobiles. Ford Motor Company began, in the early part of the
Ironically, at the same time, on the basis of their own twentieth century, the automobile was a rich man’s toy.
accumulated grievances, automobile owners join in de- Extremely primitive models by our standards were sell-
mands for rate rollbacks for the insurance companies. ing for about $10,000—in the very valuable money of
And while this goes on, the “consumer advocates” the time.5 Henry Ford began to find ways to improve the
lead an ignorant public to believe that the costs imposed quality of automobiles and at the same time cut the costs
on the automobile industry in the name of safety, fuel of their production. But it was not possible for Ford to
economy, pollution control, and whatever are somehow make a single improvement or a single cost reduction and
just at the expense of the automobile companies and have stop there, because it was not long before those innova-
nothing whatever to do with raising the cost of produc- tions were generally adopted in the industry and, indeed,
tion and price of automobiles. The fact is, of course, that superseded. Had Ford stood pat, it would not have been
such legislation has already added several hundred dol- long before his once profitable business was destroyed
lars to the cost of the average new automobile that is sold by the competition. In order for Ford to go on making a
in the United States. The paradoxical effect of this has high rate of profit, he had to continuously introduce
actually been to work to reduce automobile safety! To improvements and reduce costs ahead of his rivals.
the extent that new automobiles are made more expen- The same is true in principle, in a free market, of any
sive than they need to be, people are compelled to operate individual or firm that earns an above-average rate of
their cars longer. Since older cars as a rule are not as safe profit over an extended period of time. What was good
as new cars, this means that people are forced to drive in enough once to make a high rate of profit, ceases to be
automobiles that are not as safe as they would be in the good enough as soon as enough others are able to do the
absence of automobile safety legislation and allied leg- same thing. In order to go on earning an above-average
islation. Thus, the introduction of physical force into the rate of profit, one must continue to stay ahead of the
issue of automobile safety (and anywhere else in the competition. By the same token, any business that stands
market) actually has the perverse effect of operating to pat is necessarily finished in a free economy, no matter
reduce safety.4 how great its past successes. For the technological ad-
vances of any given time are further and further sur-
The Impetus to Continuous Economic Progress passed as time goes on. Think how absurd it would be in
The uniformity-of-profit principle explains how the virtually any industry to try to make money today by
profit motive acts to make production steadily increase producing with the most advanced, most profitable tech-
in a free market. It explains how the profit motive be- nology of 1900, 1940, or even 1980, and not bothering
comes an agent of continuous economic progress. to adapt to the changes that have taken place since then.
In order to earn a rate of profit that is above average, ***
it is necessary for businessmen to anticipate changes in It is necessary to explain in more detail how the
consumer demand ahead of their rivals, to introduce new competitive quest for an above-average rate of profit
and/or improved products ahead of their rivals, or to cut expands the total of production.
the costs of production ahead of their rivals. I say, “ahead If a firm is a leader in the improvement of production,
of their rivals,” because as soon as any innovation be- it expands its sales revenues and profits at the expense of
comes general, then, in accordance with the uniformity- the sales revenues and profits of other firms that are less
of-profit principle, no special profit can be made from it. quick to improve. This is because it has something better
For example, the first firms that produced shoes by or equally good but less expensive to offer than they do;
machinery rather than by hand, or put zippers in clothing, and so buyers shift their purchases to it, thereby enlarging
or found a way to sell a cigar for ten cents, or whichever, its sales revenues and profits and diminishing the sales
were able to make above-average rates of profit by doing revenues and profits of other firms.
so. But once such things became general, no special (It is important to realize that this same result—the
profit could any longer be made from them. They became innovative firm’s gain in sales revenues and profits ac-
the ordinary standard of the industry and were taken for companied by a decline in the sales revenues and profits
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of others, who are less innovative—occurs even in the produce at substantially higher costs—not when its sell-
exceptional case in which a business cuts its costs of ing prices are governed by their lower costs. Nor is it
production and yet keeps its selling price absolutely possible for a business to sell a substantially poorer
unchanged. In this case, it does not attract sales revenues product than others at the same price they are asking for
from other sellers in the same industry, but it almost a better product. The penalty for falling too far behind
certainly attracts sales revenues and profits from sellers either in efficiency or in quality of product is going out
in different industries. Because to the extent that it saves, of business. The only way to avoid this penalty is by
and reinvests its extra profit anywhere in the economic adopting the innovations before it is too late.
system, it will bring about an increase in production. This The fact that sooner or later competitors do adopt
new production in some other line of business will take innovations not only enables them to increase their own
sales revenues and profits away from whichever sellers profitability, or at least to restore it and thus to survive
buyers now abandon in order to be able to purchase this (which of these it is depends on how much sooner or later
new production. For example, imagine that a maker of they adopt them), but it also takes away the special profits
razor blades, say, finds a way to cut his costs, and yet of the innovators. The fact that the special profits of
chooses not to cut his selling price at all. He will not innovating do tend to disappear, because competitors
reduce the sales revenues and profits of other razor blade catch up, is what necessitates that everyone who wants
manufacturers, but to the extent that he saves, and invests to go on making an exceptional rate of profit over an
his profit in the production of some other product— extended period of time introduce repeated innovations.
whether it is an after-shave lotion, chocolate bars, or If he is to prevent the loss of all his special profits to
anything—he will increase the supply of that product and competitors who are catching up, he must make fresh
take sales revenues and profits away from somewhere advances over them. In this way, the combination of the
else in the economic system, because to buy this addi- profit motive and the freedom of competition leads suc-
tional product of his, people will have to restrict their cessful producers to seek continuous improvements. That
expenditures for other things.) is the only way they can sustain an exceptional rate of
Now the combination of an innovator’s higher profits profit; they cannot rest content merely with their past
and others’ lower profits or outright losses is what then successes.
impels these others to improve their production, too. In connection with the freedom of competition, it
These others may simply want to cash in on the high should be realized, moreover, that the ranks of business-
profits of the innovator and so duplicate his innovation men are open to everyone, including penniless newcom-
for that reason. Or they may be in the position of having ers. Those who have a valuable idea, but lack the funds
to duplicate his innovation in order merely to stay in to implement it themselves, can offer a partnership to
business. others who do have capital; and further capital can be
It cannot be stressed too strongly that under the free- borrowed. In a capitalist society, there is an enormously
dom of competition, innovations must be adopted not large number of possible sources of financing for any
only to make exceptional profits, but to be able to make new idea. It is equal to the number of individuals or
any profits whatever. They must be adopted merely to be combinations of individuals who possess the amount of
able to remain in business at all. This is true because capital required. For example, if a million dollars is the
sooner or later, as the result of the freedom of competi- sum required, there are as many potential sources of
tion, virtually all cost cuts are translated into price cuts, financing as there are individuals or combinations of
and whoever does not produce with the lower-cost method individuals who possess a million dollars or more.
cannot cover his costs. Even in our present-day, highly This situation guarantees that every new idea has
inflationary environment, in which wages rise every year many possible chances for being implemented. If the
and prices hardly ever fall, it is necessary for all produc- innovator does not possess the necessary capital himself,
ers to adopt cost-cutting improvements. They must adopt he can turn to as many separate sources of financing as
them in order not to have to raise prices in full proportion there are individuals or groups who do possess the nec-
to the increase in wages and so be in the untenable essary capital. It is not necessary for him to convince
position of requiring price increases greater than their everyone, a majority, or even a significant-sized minority
competitors’ in order to stay in business. of his fellow citizens that his idea is valuable before he
As indicated, there is probably no business in the can put it into practice. If he owns the necessary capital
United States today that would still be in business had it himself, he can go ahead without convincing any other
not adopted major innovations over the last generation person at all. If he does not own the necessary capital
and probably even over the last decade. It is not possible himself, then he needs to convince only a minority con-
for a business to sell at the same prices as others and yet sisting of possibly just one other person, and in no case
178 CAPITALISM
of more than a relative handful of people who in combi- the hand-cranked automobile, or such cases as the tractor
nation possess the necessary capital. bringing about a vast increase in the production of agri-
The importance of this fact cannot be overestimated. cultural products, or the electric motor bringing about a
Not only are new ideas always the product of individual vast increase in the production of all kinds of manufac-
minds, known at first to just one individual member of tured goods. It may be less obvious, however, how the
the whole human race, but also, no matter how sound or day-by-day attention of businessmen to costs, and their
important they are, their value is often not recognized for constant efforts to reduce the costs of production, are an
a considerable time by the overwhelming majority of equally important source of the increase in production.
other people. To confirm this fact, one has only to recall Still less obvious is the role in increasing production that
the difficulties even of such giants of progress as Colum- is played by correct anticipations of changes in consumer
bus, Pasteur, Edison, Ford, the Wright brothers, and demand. Therefore, let us briefly consider the contribu-
Goddard in obtaining recognition and support for their tion of these factors to increasing production.
profoundly important innovations. Columbus had to spend Reducing the costs of production means, for the most
years attempting to raise funds for his voyage, and was part, that one finds a way to produce the same amount of
very lucky finally to succeed in doing so. Pasteur’s a good with less labor. This acts to increase production
theory that germs cause diseases was denounced by the because it makes labor available to produce more of this
French Academy of Sciences as a fraud. Edison’s claim good or more of other goods, somewhere else in the
that he could produce electric light was denied by most economic system. The saving of labor is clearest in the
of the physicists of his day. Ford and the Wright brothers case in which the businessman achieves the cost reduc-
were widely regarded as cranks. Goddard’s ideas on tion by employing labor-saving machinery. But even if
rocketry and space flight were dismissed with contempt the cost reduction is achieved by finding a way to use
by such prominent publications as The New York Times. less of some material or a less costly material, labor will
In the absence of a wide range of chances for new ideas also be saved. If less of a material is required, less labor
being tried, the great majority of valuable innovations are is required to produce the smaller quantity of the mate-
unlikely to be tried, and, in the face of that prospect, rial. If a less costly material is required, it is probable that
unlikely even to be arrived at in the first place. In order labor will be saved, since it is probable that the less costly
for new ideas to flourish, it is essential that a sufficient material is less costly because less labor is required to
number of opportunities for their implementation exist produce it. To this extent, then, saving costs means
so that innovators can above all find ways around the saving labor and, therefore, making the means available
prevailing “mainstream” views—that is, the views of the for increasing production.
then current “experts.” As von Mises often pointed out, Even if a saving in the quantity of labor is not involved
the “experts” are always experts merely on the state of in a cost reduction, the ability to produce something with
knowledge up to their time, never on the subject of new a less costly material, or with less costly labor for that
knowledge, which in the nature of the case has not yet matter—say, unskilled labor in place of skilled labor—
entered the “mainstream” and is often at odds with the still brings about a net increase in total production. What
“mainstream.” happens in these cases is that the more costly material or
Thus, in connection with the operation of the unifor- labor is released to expand the production of something
mity-of-profit principle, a capitalist society provides the else which is comparatively important, while the less
incentive of profit to introduce continuous innovations costly material or labor that replaces it is withdrawn from
and the incentive of avoiding losses to adopt the innova- the production of something else which is comparatively
tions of competitors. At the same time, it opens the unimportant.
possibility of introducing innovations to everyone in the The principle here is perhaps best illustrated by the
entire society and provides an enormous number of pos- case of employing nurses and other aides for many of the
sible sources of financing for innovations. It is impossi- tasks that would otherwise have to be performed by
ble to imagine an economic system that could be more doctors. What is gained is the added work that can only
conducive to economic progress. be performed by doctors and which otherwise would
As for the translation of this process of innovation into have been impossible for lack of availability of doctors’
terms of physical increases in production, it is probably time. What is lost is only the work that the nurses or
self-evident that the introduction of new and/or improved whoever might have performed as secretaries, bookkeep-
products constitutes an increase in production or is a ers, or whatever. Every substitution of less costly labor
source of an increase in production. One has only to think for more costly labor is comparable to this case in its
of such cases as the automobile replacing the horse and effect. The same applies to the substitution of less costly
buggy, or the automobile with the self-starter replacing for more costly materials. In this way, a net economic
gain, equivalent to an increase in production, takes place, of the new or expanding industries brought about by the
because the production of something more important, automobile. In all such cases, to fail to make the appro-
that is, something with higher marginal utility, is in- priate shifts of capital is to lose some or all of the benefit
creased at the expense of the production of something of the improvement in production. For this reason the
less important, that is, something with lower marginal correct anticipation of changes in consumer demand is
utility. As far as labor goes, the ability to substitute an integral part of the process of increasing production.
unskilled for skilled labor and achieve equal results can ***
also be viewed as the equivalent of increasing the intel- I have established that the effect of the quest for an
ligence and ability of workers, which in the very nature above-average rate of profit in the face of the operation
of the case must increase production.6 of the uniformity-of-profit principle is to bring about the
The correct anticipation of changes in consumer de- steady improvement and enlargement of production. The
mand is also a necessary part of the process of increasing inescapable implication of this fact is a powerful ten-
production. To understand this point, it must be realized dency for prices to fall from year to year. It is necessary
that increases in production are one of the most important to reconcile this implication with the fact that based on
causes of wide-ranging changes in the pattern of con- the experience of almost everyone now living the reality
sumer spending. For example, the steady improvements appears to be that prices rise virtually every year.
in agriculture and the consequent drop in the proportion The fall in prices that the profit motive has actually
of people’s income that has had to be tied up in buying achieved can be clearly seen if prices are calculated not
food has made possible a continuously growing demand in terms of depreciating paper money, but in terms of the
for the whole range of industrial goods. Similarly, the amount of labor that the average worker must perform
introduction and development of the automobile brought in order to earn the means of buying any given quantity
about far-reaching shifts in demand: it made possible the of goods. Today, the average worker performs perhaps
development of the suburbs and a whole host of new forty hours of labor in a week and is able to obtain the
businesses from gas stations to motels; expanded the goods that constitute his present standard of living. As
demand for other businesses, such as ski resorts; reduced we look back in time, however, we see that the hours of
the demand for passenger railroads and horses; and vir- work that had to be performed were greater, and the
tually destroyed the businesses of buggymaking and goods constituting the average worker’s standard of liv-
blacksmithing. Every improvement in production exer- ing were less. Thus, as time has gone on, and the average
cises a similar, if less dramatic, effect on the demand for worker has come to receive more and more while work-
other goods. ing less and less, the quantity of goods he can obtain for
In order for these shifts in demand to be accompanied each hour of his labor has increased. To say the same
by corresponding shifts in production, it is necessary for thing in different words, the amount of labor he must
wide-ranging changes in the investment of capital to perform in order to obtain a unit of goods has steadily
occur. Thus, to continue with the examples of agriculture decreased. In this sense, prices—calculated in terms of
and the automobile, capital had to be diverted from the quantities of labor that must be performed in order to
agriculture to industry, from cities to suburbs, from rail- buy goods—actually have fallen steadily as the result of
roads, horsebreeding, buggymaking, and blacksmithing, the operation of the profit motive.
to automaking, gas stations, motels, and ski resorts. To The fact that in terms of paper money, prices have
the extent that the appropriate shifts of capital did not risen is the result of the fact that while prices of goods
occur, or occurred with undue delay, the benefit from the really do tend to fall because of the operation of the profit
improvement in production was lost. For example, to the motive, the value of the paper money tends to fall still
extent that capital was not shifted out of farming rapidly faster. When falling prices are expressed in a standard
enough—as a result of government farm subsidies or the that itself falls even more rapidly (which is the case with
inertia of many farmers—the effect of the improvements paper money), they have the appearance of having risen.
in agriculture was limited to a relatively unwanted in- The following illustration will make this point obvious.
crease in agricultural production and correspondingly In the early 1970s a primitive four-function pocket cal-
less of an increase in much more desired industrial pro- culator sold for about $400. At the same time, a fairly
duction. Similarly, to the extent that capital would not primitive video tape recorder sold for about $2,400.
have been shifted rapidly enough out of buggymaking Thus, at that time, it took 6 pocket calculators to repre-
and horsebreeding, the benefits from the automobile sent the price of one video tape recorder. Today, the price
would have been held down: capital would have been of a much improved video tape recorder is about $400—
wasted in buggymaking and horsebreeding which could which certainly represents a radical drop. But today, the
have been employed with infinitely greater benefit in any price of a comparable pocket calculator is only about
6 For elaboration and related discussion of these points, see below, the present chap., pt. B, secs. 3–5.
180 CAPITALISM
$10. Thus, today, it takes 40 pocket calculators to equal delimits, and largely prevents mistakes from being made
the price of a video tape recorder instead of only 6. When in the relative production of the various goods. Because
the lower price of the video tape recorder is expressed in of it, consumers have the power of positive initiative to
terms of pocket calculators, it appears to have risen shift the course of production simply by changing the
instead of fallen, because the price of the pocket calcu- pattern of their spending; because of it, businessmen are
lators has fallen so much more. made to act virtually as the consumers’ agents. The
Exactly this principle applies to the rise in prices in operation of the tendency toward a uniform rate of profit
terms of paper money. While the profit motive operates requires that high profits be made by continuously intro-
to reduce the prices of the mass of commodities and does ducing productive innovations in advance of competi-
in fact succeed in reducing them when expressed in any tors. These innovations are the base of a continuous
kind of reasonably fixed standard of value, the value of increase in production, whether they take the form of
paper money falls even more rapidly and so gives the new and improved products, reduced costs of production,
appearance that things have become more expensive or correct anticipations of changes in consumer demand.
instead of less expensive. As such, they operate continuously to raise the average
This result can be further understood if we realize that standard of living. They steadily enlarge and improve the
paper money is actually among the cheapest goods in the goods available while reducing not only the amount of
world to produce in the first place. It starts out with a work that must be performed in order to produce any
virtually zero cost of production. If its production were given quantity of goods but also the amount of work that
open to the freedom of competition, so that anyone in must be performed in order to buy any given quantity of
possession of the appropriate paper and printing plates goods. In other words, they make possible progressively
was allowed to manufacture it, its value would quickly improved products at prices corresponding to progres-
be driven down to the value of goods with a comparable sively falling real costs of production.
cost of production, such as pieces of note paper and pins. On the basis of the foregoing, we must conclude that
Indeed, its value would even be less, because it would the profit motive and the price system of capitalism have
not have the actual physical utility of such goods, and the been responsible for virtually all of the economic prog-
need to carry vast quantities of it to buy other goods ress of the last two hundred years or more. They have
would destroy its usefulness as money. In other words, ensured the maximum possible effort to introduce inno-
under the freedom of competition, the profit motive vations and to extend their application as rapidly as
would soon make paper money absolutely worthless. All possible, with the result that in comparatively short pe-
other goods would be worth an infinite quantity of it. riods of time revolutionary improvements have become
The value of paper money is not destroyed this quickly, commonplace. Because of this and because of the rapid
because its creation is a monopoly privilege of the govern- adaptation they assure to all changes in economic condi-
ment. But even so, as we shall see, the government has tions, they have rendered every crisis, from natural di-
powerful incentives to increase the quantity of paper sasters, to wars, to absurd acts of government, a merely
money at a substantially more rapid rate than the scien- temporary setback in a steady climb to greater prosperity.
tists, inventors, businessmen, and savers and investors
are able to increase the supply of goods.7 The result is Profits and the Repeal of Price Controls
that while the productive work of these most intelligent What we have learned about the free market can be
and ambitious members of society may succeed in an applied to a number of cases in which the free market
average year in increasing the supply and thus tending to does not or for a time did not exist in our country. A brief
reduce the prices of goods by, say, three, four, five consideration of these cases will both illustrate the prin-
percent, or whatever, the government is easily able to ciple of the tendency of the rate of profit toward unifor-
outstrip their performance and increase the quantity of mity and provide a demonstration of the value to be
money and volume of spending in the economic system gained by extending the free market.
by a larger amount, with the result that prices rise instead Consider the case of government farm subsidies. Let
of fall. us imagine that the government stopped buying up farm
*** products to be stored or given away, and at the same time
To summarize the discussion of the price system thus reduced taxes by the amount of money it saved in abol-
far: The desire of businessmen to earn profits and avoid ishing the farm subsidy program.
losses, and to earn higher profits in preference to lower The effect would be a drop in the demand for farm
profits, brings about a tendency toward a uniform rate of products. But since the taxpayers would now have the
profit on capital invested in all the different branches of money previously used to pay the subsidies, there would
industry. The operation of this tendency counteracts, be a rise in the demand for a host of other products—
7 See below, chap. 19, pt. B, sec. 2.
products which the taxpayers judged would satisfy the output by more than is necessary to provide the going
most important of their needs or wants which previously rate of profit, the incentive is created to increase produc-
had had to go unsatisfied, such as an extra room added tion. The incentive is created to increase production all
on to a house, a newer or better car, extra education, and the way to the point that any further increase would have
so on, depending on the needs and desires of the various to be carried out under conditions of such diminishing
individuals concerned. The immediate effect of this shift returns and need to resort to land of inferior quality, that
of demand would be to depress prices and profits in higher costs of production would finally offset the receipt
farming and to raise them in these various other indus- of the artificially higher farm product prices and bring
tries. The further consequence would be a withdrawal of the rate of profit in agriculture down to the general level
capital and labor from farming and their transfer to the in this way. To reach this point, the government would
production of these other goods. have to purchase and store truly immense quantities of
The movement of capital and labor out of farming agricultural commodities. It would not only run out of
would take place until the rate of profit in farming was grain elevators, as it did, but also probably run out of
raised back up to the general level, and the rate of profit caves and the holds of mothballed ships, to which it has
earned on the various goods in additional demand by the actually turned for use as supplementary storage facili-
taxpayers was brought down to the general level. Until ties. And, not to be overlooked, its budget would be
this result was achieved, incentives would exist for a thrown substantially further out of balance.
further movement of capital and labor out of farming and To avoid these consequences, the government is led
into these other fields. When the process was finally to seek ways to limit the increase in production its policy
completed, therefore, the rate of profit earned in farming of farm subsidies makes profitable. Thus, it restricts the
would be on a par with the rate of profit earned every- number of acres that can be planted. It may require that
where else. In accordance with the uniformity-of-profit the growers have a special license in order to grow a crop.
principle, it would simply not be possible for the rate of To a large extent the effect of this policy is to allow
profit in farming to be permanently depressed. inefficient, high-cost producers to go on producing while
It follows from this analysis that in the long run those prohibiting production by more efficient, low-cost pro-
who remained in agriculture would tend to earn, on ducers. In a free market, the low-cost producers would
average, the same level of income they had earned before expand production, drive the price down, and force the
the repeal of the subsidies. Even the incomes of ex-farm- high-cost producers out of business. But this cannot
ers would, on average, come to be on a level comparable happen when the price is prohibited from falling and the
to what they had been initially. This would be the case as government restricts production.8 This added policy of
soon as the former farmers acquired industrial skills on restricting production, of course, represents a blatant
a level comparable to those they had possessed in agri- infringement of the right of people to use their own
culture and so could take appropriate advantage of the property as they see fit. And it has even taken such bizarre
new employment opportunities created by the expansion forms as imposing fines on farmers for growing food to
in the demand for industrial goods. The one permanent feed to their own animals. The rationale for this outrage
difference that would now exist and which would be of is that such food production makes it possible for the
benefit to everyone, farmers and ex-farmers included, farmers in question to avoid buying feed and thus with
would be that the taxation of everyone’s income would the same feed production reaching the market imposes
be smaller and everyone would be enabled to buy more on the government the need to make additional purchases
of the goods he himself desired. Instead of everyone to maintain the price of crops used as feed. Thus individ-
being forced to spend a part of his income, through the ual liberty is sacrificed in order to hold down government
government, for the purchase of farm products to be expenditures which are absurd in the first place. In effect,
uselessly stored or given away, he would be able to spend the government begins by playing the role of a fool and
that part of his income for industrial goods of value and ends by becoming a tyrant.
importance to his life. And those goods would be pro- As a result of farm subsidies, until very recently a
duced by the capital and labor previously employed in major portion of agricultural output was worse than
producing the farm products. wasted—it was used to sustain Communist regimes
*** around the world through being given away to them for
In sharpest contrast to the beneficial effects the uni- nothing under such programs as “Food for Peace,” or in
formity-of-profit principle brings to the abolition of farm exchange for funds provided to the Communist regimes
subsidies, are the further harmful effects it leads to if farm by private banks under loans whose repayment was
subsidies are retained. Insofar as the subsidized prices guaranteed by the U.S. government. In sustaining these
are above the costs of producing additional agricultural regimes, which would otherwise have fallen many years
8 Cf. Henry Hazlitt, Economics in One Lesson, new ed. (New York: Arlington House, 1979), pp. 114–15.
182 CAPITALISM
ago from a lack of food supplies caused by the inherent for expanded investment in the rental housing industry.
nature of socialism, the farm subsidy program perpetu- There would be a building boom in rental housing. As a
ated the need for large-scale defense spending, in order result, the supply of rental housing would be stepped up
to be able to provide security against the permanent and the rents and the profitability of rental housing would
policy of aggression of such regimes. It thereby operated begin to fall and would go on falling until the rate of
to multiply the burden of taxation far beyond its own, profit in rental housing was no higher than the rate of
direct cost. profit in industry generally. The long-run effect of the
A related consequence of the existence of agricultural repeal of rent controls, therefore, would simply be an
surpluses which would otherwise rot, and which the increase in the supply of rental housing. Rents themselves
government’s restrictions on production have served mere- in the long run would be no higher than corresponded to the
ly to diminish, not eliminate, has been the encourage- costs of constructing and operating apartment houses, with
ment of public dependency and unemployment in the profits only enough to make the industry competitive, by
United States. These are results of the food stamp pro- providing the going or average rate of profit.9
gram, which provides large numbers of American citi- Exactly the same effects would follow the repeal of
zens with the ability to obtain free food, and thus acts as price controls on crude oil, natural gas, or any other good.
a major public welfare program, enabling many people There would be a temporary surge in price and profit,
to live without working. followed by expanded production and a reduction in
*** price and profit to the point where the price corresponded
I chose the example of farm subsidies mainly to illus- to the good’s production cost and allowed only enough
trate how the free market reacts when the profitability of profit to make the good’s production competitive. The
an industry is initially rendered low. Farm subsidies, repeal of the price controls on domestically produced oil
however, represent a form of price controls different and oil products in the United States in 1981 provides an
from the kind we shall predominantly be concerned with excellent illustration of this proposition. After a tempo-
in the first half of this book. Farm subsidies are a way the rary surge in its profitability, followed by a major expan-
government achieves artificially high prices. They are an sion in domestic production and fall in the price of oil
illustration of legal minimum prices—that is, prices be- and oil products, the American oil industry ceased to be
low which the government prevents the producers from extraordinarily profitable.
selling. They are comparable in their effects to minimum- Of course, it should not be forgotten that once a price
wage legislation. They cause unsaleable surpluses—which, control is repealed, the dynamic effects of the unifor-
in the case of labor, means unemployment. We will deal mity-of-profit principle take over. As we have seen, if
with such price controls further and at length in the someone wants to make an above-average rate of profit
second half of this book, in the discussion of unemploy- on a free market, he must strive to reduce his costs of
ment and depressions. The kind of price controls that we production and improve the quality of his products, and
want to focus on first, because they are most directly repeatedly succeed in doing this ahead of his rivals. This
relevant to the subject of the dependence of the division means that in the absence of controls, costs and prices
of labor on capitalism, are controls designed to keep tend steadily to fall—if not in terms of a depreciating
prices artificially low—that is, legal maximum prices or paper money, then nevertheless in terms of the time
ceiling prices, namely, prices above which one is not people must spend to earn the money to buy goods. Once
allowed to sell. controls are repealed and a free market established, the
Thus let us take as a second major illustration of the free competitive quest for high profits causes prices to
effects of the repeal of price controls, the consequences fall further and further below the point at which they
that would follow if rent controls were repealed. were controlled, while the quality of goods rises higher
To simplify this discussion, let us assume that the and higher.
entire supply of rental housing in a given locality has It should be obvious that the repeal of rent controls
been under controls. In this case, the first effect of the would act to end New York City’s housing shortage and
repeal of controls would simply be a jump in all rents. As make possible an enormous improvement in the quantity
a result of the jump, however, rental housing would again and quality of housing for the average person in New
become profitable—in fact, as a result of previously York City, and continuing improvements thereafter. It
inadequate building due to rent controls, extremely prof- should be equally obvious that the repeal of price con-
itable. However, it is impossible that the rental housing trols on crude oil and on natural gas, if not sabotaged by
industry should be permanently more profitable than such measures as the government’s physically closing off
other industries. The high rate of profit would be the the sources of an expanded supply of energy, act to set
incentive, and would itself provide much of the means, the stage for growing supplies of these goods and thus
9 I must point out that it is an error to assume that the repeal of rent controls would create any kind of insuperable problems of short-run hardship. Indeed, I will demonstrate later on that even before sufficient time went by to make possible the construction of any additional new housing, the overall effect of the repeal of rent control would be to improve the conditions of more people than it worsened and to impose no greater hardship on those who had to give up their rent-controlled apartments than was already being experienced, and had been experienced for many years, by just as many other people precisely as the result of rent controls. On this point, see below, chap. 7, pt. B, sec. 6, the second-level subsection “The Case for the Immediate Repeal of Rent Controls.”
for a return to America’s traditional abundance, indeed, exempt. Then the effect is simply that the industry’s
growing abundance, of energy supplies. expansion is carried that much further, but not that its rate
In sum, it should already be clear, even at this stage of profit remains permanently above the going or average
of our knowledge, that the problems we have experi- rate. The total exemption from the federal income tax of
enced in these areas have been the result of government bonds issued by state and local governments provides an
controls and that the solution lies with the extension of excellent illustration of the principle. Because of their tax
economic freedom and thus, among other things, of the exemption, these bonds are purchased to the point that
ability of the profit motive and the price system to the rate of return they afford is on a par with the after-tax
operate to achieve their benevolent consequences. More rate of return of bonds that are fully subject to the federal
broadly, the solution lies with the intensification of the income tax.
capitalist elements that have traditionally characterized By the same token, of course, repeal of a tax exemp-
the economic system of the United States, and which tion, once it has been incorporated into the pattern of
have been increasingly restricted. investment, is tantamount to a reduction in an industry’s
Of course, the ability of the profit motive and the price rate of profit. If its effect is to reduce the industry’s rate
system, and other essential elements of capitalism, such of profit below the general rate, then the consequence
as saving and capital accumulation, to achieve continu- will be a withdrawal of capital and a reduction in the size
ous economic progress, should not be thought to be of the industry, until the smaller industry that remains can
hindered in any fundamental way by a possible lack of once again earn the going rate of profit—by charging a
natural resources. Nor should such economic progress be higher price for its product. (If the rate of profit of the
thought to be dangerous or undesirable by virtue of industry is not pushed below the going or average rate,
“harming the environment.” I have already demonstrated because of the presence of some factor such as an in-
in Chapter 3 how capitalism operates continuously to crease in the demand for the industry’s product, the effect
increase the supply of economically useable natural re- will be that the industry will grow less than it otherwise
sources along with the supply of products. In the same would have, and the price of its product will not fall to
place, I have also shown how the inherent nature of the same extent that it otherwise would have.)
production is to make the chemical elements provided by In the 1970s, in the midst of a widely proclaimed
nature, and which constitute the totality of the physical “energy crisis,” the U.S. government, in addition to
world, stand in an improved relationship to man—that is, imposing price controls on oil, acted to further restrict oil
to improve his environment.10 company profits, and thus oil industry investment, by
punitively increasing their rate of taxation precisely by
The Effect of Business Tax Exemptions first reducing and then totally abolishing the customary
and Their Elimination depletion allowance on crude oil. The effect was a further
The uniformity-of-profit principle sheds light on the blow to domestic oil production.
effect of business tax exemptions and their elimination.
For example, for many years prior to 1975, the U.S. oil Additional Bases for the
industry, along with other extractive industries, was able Uniformity-of-Profit Principle
to deduct from its taxable income a depletion allowance Before leaving the uniformity-of-profit principle, it
based on the value of the oil it extracted, and thus to must be pointed out that in addition to changes in the
reduce its overall effective rate of taxation. The effect of selling prices of products resulting from changes in the
the depletion allowance was not to make the oil industry amount of capital invested in an industry, other factors
permanently more profitable than other industries, how- also operate to establish a uniform rate of profit among
ever. the different branches of production. One of these has
It is true that the initial effect of such a tax advantage already been indicated in the discussion of the effects of
is to raise an industry’s after-tax rate of profit relative to repealing or maintaining farm subsidies. There it was
that of other industries. But the higher after-tax rate of pointed out that as agricultural output is increased, unit
profit then results in the attraction of additional capital costs rise as the result of the operation of the law of
to the industry, and itself provides such additional capi- diminishing returns and the need to resort to land of
tal, with the result that the industry’s rate of profit falls inferior quality. The same factors operate on unit costs in
back toward the general, average after-tax level. The the case of mining. And obviously they operate in reverse
effect is that the industry is larger, its production is when it is a question of reducing the production of
greater, and the price of its product is lower. It does not agricultural commodities or minerals. Thus, in cases of
permanently earn a higher rate of profit. this kind, the investment of additional capital operates to
This principle applies even if the industry is totally tax reduce the rate of profit by virtue of bringing about a
10 See above, chap. 3, pt. A, sec. 1 and pt. B, sec. 2, the subsection “Why Economic Activity Necessarily Tends to Improve the Environment.”
184 CAPITALISM
combination of lower selling prices and higher unit costs rience an efflux of capital. The effect will be both to
of production, not simply lower selling prices alone. By reduce the supply of its product and the demand for one
the same token, the withdrawal of capital in such cases or more of the factors of production it uses. Thus, while
operates to raise the rate of profit by virtue of a bringing the selling price of its product tends to rise, the prices that
about a combination of higher selling prices and lower constitute its costs of production tend to fall. Its rate of
unit costs of production, not simply higher selling prices profit, therefore, tends to be restored to the general level
alone. as the result of both of these phenomena.
A second, similar factor, which is of relevance through- It should be realized that this discussion implies that
out the economic system, is a possible rise or fall in the the uniformity-of-profit principle operates even in cir-
prices of the factors of production used in an industry, as cumstances in which it is physically not possible to
the capital invested in the industry, and thus its level of increase the production of a product because one or more
output, increases or decreases. As later discussion will of the necessary factors of production simply does not
show, factors of production such as labor and many raw exist. For example, if there is an increase in demand for
materials exist at any given time in a given supply. The a particular wine, which must be made from grapes that
prices of such factors of production are determined by can be grown only on a small quantity of land on which
the combination of their given supply and the prevailing very special growing conditions exist, the first effect will
demand.11 Thus insofar as changes in capital investment be a rise in the price of the wine and in the rate of profit
change the relationship between the demand for such to be made in producing the wine. As usual, additional
factors of production and their supply, they change the capital will now tend to be invested in producing the
prices of such factors of production. item, but the effect of the additional investment in this
Thus, for example, if the demand for one product rises case will simply be to raise the price of the grapes and
and the demand for another product falls, and if the labor the vineyards. The rate of profit in this case will be
or raw materials used in the production of the products brought down to the general level without an increase in
cannot be transferred from the one to the other, then supply and fall in the price of the product. It will be
changes in the prices of these factors of production will brought down by virtue of the rise in the prices of the
occur. For example, if the demand for a product made of factors of production and in the amount of capital that
iron rises and the demand for a product made of cotton must be invested in order to earn any larger amount of
falls, no part of the supply of cotton can be used to meet profit. The winery will not be able to go on making an
the additional demand that will result for iron ore. Nor above-average rate of profit, because it will have to pay
can the land that produces cotton be used in the produc- a correspondingly higher price of grapes. The vineyard,
tion of additional iron ore. As a result, the effect will be that receives the higher price of the grapes, will not be
a rise in the price of iron and a fall in the price of cotton. able to go on making a higher rate of profit, because the
Similarly, if the demand for a product requiring one type value of the vineyard will increase to the point that its
of labor skill rises while the demand for a product requir- larger amount of profit, earned on the more valuable
ing a different type of labor skill falls, the result will be grape crop, is divided by a correspondingly larger amount
a rise in the wage rate of the one kind of labor and a fall of capital that must be invested in order to purchase such
in the wage rate of the other kind of labor. a vineyard. If, of course, the demand for the wine later
In all such cases, the industry whose product is in falls, the result will be a fall in the price of the grapes and
greater demand and whose rate of profit has been ele- in the value of the vineyard, which will once again tend
vated above the average, will, as before, experience an to establish a rate of profit on a par with the general rate.
influx of capital investment. In these circumstances, the Still another factor working to establish a uniform rate
effect of the additional capital investment will be not of profit is changes in the percentage of capacity at which
only to increase the supply and reduce the selling price plant and equipment are operated, or, for short, changes
of the product, but also to raise the demand relative to in the operating rate of firms. Indeed, it is possible, within
the supply of one or more of the factors of production the limits, that this factor can work even in the absence of
industry uses. This will raise the price of those factors of changes in the price both of the product and of the factors
production and thus the industry’s unit cost of produc- of production used to produce it.
tion. Thus, in this case too, the industry’s rate of profit Whenever there is an increase in demand for the
will fall toward the general level both because of a fall product of an industry which possesses unused plant
in its selling price and a rise in its costs. capacity, the effect is to make that industry operate at a
By the same token, the industry whose product is in higher level of capacity. By the same token, the effect of
decreased demand and whose rate of profit has been a decrease in demand is to cause the industry to operate
depressed below the general level, will, as before, expe- at a lower level of capacity. Even if the price of the
11 See below, the present chap., pt. B, sec. 1.
product does not change, the change in the extent to market would be reduced as well. Likewise, before a
which plant capacity is utilized makes the average profit declining demand goes too far, it may be accompanied
margin in the industry vary in the same direction as the by decisions not to replace plant and equipment other-
change in demand. This is because utilizing plant capac- wise coming due for replacement.
ity at a higher rate spreads such fixed costs as deprecia- Thus, changes in demand may result in changes in the
tion quotas over more units of product and thus reduces rate of profit leading in the usual way to changes in
unit costs. Thus the profit per unit and the average profit investment and a resulting movement of the rate of profit
margin increase. Furthermore, in causing a higher oper- back to the going rate without the necessity of changes
ating rate at unchanged selling prices, the rise in demand in the price of the product.13
also causes a rise in the rate of capital turnover, inasmuch ***
as a larger physical volume of goods sold at the same It must be stressed that the uniformity-of-profit prin-
prices represents greater sales revenues. While sales ciple describes a tendency, never an actually existing
revenues are markedly greater, the size of the capital state of affairs. This is because before a uniform rate of
invested in the plants operating at higher rates increases profit can be achieved in all branches of production, new
only by the necessary increase in working capital—that changes occur, requiring a different pattern of investment
is, the capital invested in such things as inventory and of capital in the economic system if such uniformity is
work in progress. This means that the increase in capital to be achieved. And before the relative size of the various
almost certainly takes place in much smaller proportion industries can be adjusted to conform with that pattern,
than the increase in sales revenues. Thus, on the strength still further changes occur, requiring yet another pattern
both of a higher profit margin and higher capital turnover of investment of capital, and so on without end. Thus, the
ratio, the rate of profit on capital invested in the industry economic system never comes to rest in an actual state
necessarily increases as the demand for its products of final equilibrium, whose existence is an essential
rises.12 Of course, for the same reasons as just given, but condition of the existence of a uniform rate of profit. The
working in reverse, the rate of profit on capital invested economic system is merely tending toward such an equi-
in an industry necessarily falls when a fall in demand librium, which is itself constantly changing.14
causes operation at a lower level of capacity. The final equilibrium toward which the economic
On the basis of such facts, a rise in the demand for a system tends constantly changes because of continuous
product may be accompanied by an above-average rate changes in such phenomena as the state of technology
of profit simply by virtue of a rise in the operating rate and supply of capital equipment, population and its dis-
of the industry, without a rise in the selling prices of its tribution in terms of age and sex, climate and weather
products. In response to this higher rate of profit, addi- conditions, usefulness of various areas for mining, and
tional capital is invested, and the effect of the additional so on.15 The uniformity-of-profit principle is nonetheless
investment is to reduce the rate of profit of the industry, fully real. Its reality is confirmed by the fact that definite
back toward the general level, merely by virtue of the changes must occur in order to prevent its realization.
consequence being a reduction in the rate of capacity Among the most important of such changes, of course,
utilization. Similarly, the withdrawal of capital from an is, as we have seen, the continuous innovation required
industry with a below-average rate of profit can restore to stay ahead of competitors, whose emulation of one’s
the rate of profit merely by virtue of raising the operating earlier improvements would, in fact, drive one’s profits
rate of the plant and equipment that remains. This mech- down to the average rate if one did not continue to
anism of adjustment can exist in an industry which innovate.
normally maintains the same selling prices so long as it
operates within some defined range of capacity, and Permanent Inequalities in the Rate of Profit
which experiences a pronounced tendency toward a rise In addition to the fact that there is constant change in
or fall in its average rate of operations due to changes in the final state of equilibrium toward which the economic
demand. Before the rise in demand is such as to outstrip system tends, there are factors operating to create perma-
its ability to meet it at the prevailing prices of its prod- nent inequalities in the rate of profit even in a state of
ucts, it adds to its capacity and meets the now higher level unchanging final equilibrium. In a sense, inequalities in
of demand with additional capacity. The advantage to the the rate of taxation can be described as such a factor, in
firms which do this is that it forestalls the possibility of that in order to earn equal after-tax rates of profit, the
competitors or potential competitors seizing the oppor- more-heavily-taxed industries will require a higher pre-
tunity of meeting the additional demand. In that case, not tax rates of profit than the less-heavily-taxed industries.
only would the rate of profit of the firms which undertake If a branch of business is subjected to any other form
the expansion come back down, but their share of the of legal disability, in particular, if it is simply made
12
13
14
15 See
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how much. Similarly, if the fall in demand is so substantial that one or more firms find s that the quantity of their products demanded is insufficient to enable them to operate even their most efficient lowest-cost capacity at an adequate rate, while other firms are still using substantially less efficient, higher-cost capacity, then it will be to the interest of such firms to cut prices below the operating costs of others’ less efficient capacity. This will enable their efficient capacity to displace the others’ less efficient capacity. The price cut in these circumstances will be profitable to the firms which make it, because continued operation of high-cost capacity by others is
186 CAPITALISM
altogether illegal, then that fact will operate to make it what rate of profit he can make by investing that million.
earn a permanently higher rate of profit than other branches It will pay to borrow only if the prospective rate of profit
of business. This is because no one will engage in that is somewhat greater than 10 percent.
line of business unless, over and above the going or The rate of profit in this sense, or, as it is often called,
average rate of return, the profits provide compensation the rate of return on capital invested, can be calculated
for the risk of incurring the legal penalties imposed. in any given case simply by adding interest payments
Thus, the illegalization of such activities as gambling, back to profits net of interest, and then dividing by the
prostitution, and narcotics, for which, however regretta- total of the invested capital that is owned by the business
bly, a substantial portion of the population is ready to pay, itself plus the borrowed capital the business uses. By the
has the ironic effect of enabling those who are prepared same token, a rate of profit in the narrower sense can be
to engage in them and who, in addition, are willing to found by dividing the profit net of interest exclusively by
break the law, to earn premium incomes. the invested capital that is owned by the business itself.
Apart from all government intervention, there is also The following example makes these distinctions clear.
the fact that in many cases the profits earned must com- If a business borrows $1 million at a 10 percent rate of
pete with the wages and salaries that the businessmen interest, and already has $1 million of invested capital of
involved could have earned by working elsewhere, as its own, and earns a profit gross of interest of $220
employees. This phenomenon is especially important in thousand, its rate of profit—its overall rate of return on
the case of small, unincorporated business firms, in which the total capital invested of $2 million—is 11 percent. At
much or even all of the physical labor performed is the same time, its rate of profit in the narrower sense of
performed by the owners. When expressed as a percent- profit net of interest, divided only by its own invested
age of the capital invested, the profits of such firms tend capital, is 12 percent.
to constitute a far higher percentage than the profits of We should view the relationship between the rate of
larger-sized firms, in which comparable labor is per- profit in the narrower sense and the rate of interest in the
formed by paid employees. Thus, for example, a drug light of the following: Equity investors and lenders, or,
store chain, with pharmacists and branch managers who in a corporate structure, stockholders and bond and note-
are paid employees, will tend to earn the same rate of holders, come together as classes of partners, each with
profit as the average department store chain, automobile special ownership rights, and jointly invest their capitals
company, or steel company. But a small, independently in enterprises. The lenders agree to receive a fixed and
owned drug store, in which the owner performs the labor limited return on their capitals on condition that the
of a pharmacist and manager, will tend to earn a rate of capital of the equity investors serve as a buffer between
profit that is high enough to include compensation that them and any below-average profits or outright losses
is comparable to what the owner could earn in these which the enterprise as a whole might suffer. The equity
capacities if he worked as the paid employee of a chain. investors agree to allow their capital to serve as such a
The same principle, of course, applies to all other small buffer, and have claim to everything the enterprise may
businesses in which the owner performs labor that else- earn after meeting its contractually fixed obligations to
where is performed by paid employees.16 It is possible the lenders. The total investment in the enterprise may
that because of the satisfaction derived from owning then earn the average rate of profit, an above-average rate
one’s own business, the profits in these cases, while of profit, or a below-average rate of profit, including an
substantially higher in terms of a rate of profit, neverthe- outright loss. As a rule, any above-average rate of profit
less fall somewhat short of fully compensating for the earned on the investment as a whole will accrue to the
wages or salary that could be earned working elsewhere. equity-capital investors; and when considered as a part
*** of the rate of return on the equity capital, will magnify
A permanent inequality in the rate of return on capital this rate of return to the degree that the equity capital
invested can exist between the rate of profit in the nar- represents a smaller percentage of the total capital, i.e.,
rower sense and the rate of interest. to the extent that it is leveraged. To the extent that the
Whenever the rate of profit is spoken of, without investment as a whole fails to earn as much as the average
qualification, it should be understood as reflecting profit rate of profit, the failure is borne first by the equity
gross of interest payments—that is, prior to deduction of investors, who may not only earn no return whatever, but
interest payments. The prospective rate of profit in this may also lose the full amount of their capitals, and only
sense is what determines whether or not it is worthwhile then by the lenders. And this reduction in the rate of return
to pay any given rate of interest. For example, in deciding to the equity capitalists will be magnified to the degree
whether or not it pays to borrow a million dollars at a 10 that the equity capital represents a smaller fraction of the
percent rate of interest, a businessman will wish to know total capital, that is, to the extent that it is leveraged.
16 It is standard practice in contemporary economics to consider the portion of the profits of small businessmen which is comparable to the compensation they could earn as wage earners as though it actually were wages. For a critique of this practice, see below, chap. 11, pt. A,sec. 6.
As these remarks suggest, while the rate of profit gross need do is buy in the cheaper market and sell in the dearer
of interest is the determinant of the rate of interest, it is market. The very fact of doing this, however, acts to
not necessary that the two be equal. It is likely that the reduce the inequality in price. For the additional buying
greater degree of certainty and safety attaching to loan raises the price in the cheaper market and the additional
capital and its return will depress that return somewhat selling lowers it in the more expensive market. The
below the average rate of profit inclusive of interest. process tends to continue until the inequality in price
Indeed, in conditions of rapid economic progress and between the two markets is totally eliminated and a
keen competition in the process of improvement, the rate uniformity of price achieved.
of profit in the narrower sense tends to be significantly The reason that uniform prices among different geo-
and permanently higher than the rate of interest. In such graphical markets are not actually established is mainly
conditions, the general rate of profit on capital as such the existence of transportation costs. The existence of
may be relatively high, for reasons to be explained in these costs means that before a price discrepancy be-
Chapter 16. Yet high rates of profit are available only to tween two markets becomes profitable to exploit, it must
those who are capable of introducing improvements or exceed these transportation costs. These costs, however,
at least rapidly adapting to them. All others, if they are then set the limits which geographical price discrepan-
prudent, will be content to accept a much lower and, for cies do not tend to exceed. Or, to put it positively, the
them, much more secure rate of return, in the form of price of the same good tends to be uniform throughout
interest. the world except for transportation costs between mar-
*** kets.
In the light of the preceding discussion, the frequent (In the case of goods sold by a single seller, such as
complaint that one can borrow money only to the extent those with brandnames or under patent protection, the
that one already has it, appears absurd. Nothing could be principle may take the form that the wholesale price in
more natural or reasonable than that one must have the market that imports tends not to exceed the retail
money in order to borrow money. This is because if one price in the market that exports, plus transportation costs.
is to acquire the funds of others at a fixed, limited rate of So long as the good is publicly available to all comers at
return, one must have the means of ensuring that these the retail level in any given country, its wholesale price
funds and the promised return are protected. In essence, in a free market cannot for long be greater elsewhere by
all loans are margin loans. Only to the extent that the more than the costs of transportation. Thus, for example,
borrower himself possesses capital can he provide a in a free market, while American pharmaceutical manu-
margin of safety on a larger total capital. It is thus no less facturers might charge less for various patented drugs in
absurd to complain that people cannot borrow funds Mexico than in the United States, because of the lower
except to the degree that they already possess funds than incomes and thus smaller demand for drugs in Mexico,
it would be to complain that one cannot speculate on the they would not be able to do so for very long by more
stock exchange beyond the degree that one can provide than corresponded to this variant of the principle.)
the necessary margin. Every entrepreneur must himself The significance of the principle of the tendency
be a capitalist or he must find a capitalist who is willing toward a geographic uniformity of prices is very great.
to be his partner in entrepreneurship. In every venture in Its operation explains, for example, why local crop fail-
which lenders have capital there must also be equity ures in a free market do not result even in significant
capital. To secure more borrowed capital, there must be scarcities, let alone famines. The effect of a failure of the
more equity capital. local grain crop, say, is to begin raising the price of grain
in the local market. Once the local price of grain exceeds
prices in outside markets by more than transportation
2. The Tendency Toward a Uniform Price for the costs, it becomes profitable to buy in those outside mar-
Same Good Throughout the World kets and sell locally. The effect is that the reduction in
A second principle of price determination, similar and the local supply is almost entirely made good by drawing
closely related to the uniformity-of-profit principle, and on the production of the rest of the world. Consequently,
which also plays a major role in coordinating the division instead of a disastrous reduction in the local supply and
of labor, is that in a free market there is a tendency toward an enormous rise in the local price, there is a modest
the establishment of a uniform price for the same good reduction in the world supply and a modest rise in the
throughout the world. world price of grain.
The basis of this principle is the fact that any inequal- A good analogy to what happens is provided by the
ity in the price of the same good between two markets physical principle that water seeks its level. Imagine that
creates an opportunity for profit. In order to profit, all one you have just filled an ice tray—the kind in which water
188 CAPITALISM
is able to flow around and underneath the plastic or metal uniform price for the same good throughout the world
insert that marks off the separate compartments for the has major application to the Arab oil embargo of 1973–
ice cubes. If you now remove water from one compart- 74. The principle shows that if the United States had had
ment of the tray, you will not reduce the water level in a free market in oil when the Arabs imposed their em-
that compartment by the amount of water you take from bargo, our oil supplies could not have been seriously
it. You will reduce the water level in that compartment jeopardized.
and in the whole tray very slightly, because the loss from Let us think back to the time of the embargo, and
the one compartment will be spread over the whole tray. imagine that everything else is the same except that the
In just the same way, if half the wheat crop of France United States has a free market in oil.
were lost, the supply of wheat in France would not fall The Arabs now launch their embargo. The immediate
by half. On the contrary, the supply in France and in the effect is that a large part of the oil supplies of the
whole world might fall by 2 or 3 percent—or however northeastern United States—the major importing region
much of a decline the French loss represented in the and the one dependent on the Arabs—is cut off.
world supply. In a free market, no sooner would this have happened,
Water seeks its level by virtue of the force of pressure. than the price of oil and oil products in the Northeast
It moves from places of higher pressure to places of lower would have begun to rise. Once prices in the Northeast
pressure. Commodity supplies seek their level by virtue came to exceed those in the rest of the country by more
of the attraction of profits. They move from places of than the costs of transportation, supplies would have
lower prices to places of higher prices, in the process moved from the rest of the country to the Northeast. The
equalizing prices as the movement of water equalizes effect would have been largely to replenish supplies in
pressure. the Northeast and to reduce supplies somewhat in the rest
It should be realized that the principle of the tendency of the country. The reduction in imports from the Arabs,
toward a geographical uniformity of prices is not only in other words, would have been spread over the whole
descriptively analogous to a law of physics, but, as far as country instead of being concentrated in the Northeast,
the ability of governments to act is concerned, has the where it threatened to cripple the economy of the region.
same existential status as a law of physics. (And so, In this way, its impact would have been minimized.
incidentally, do all the principles of economics.) 17 That Prices in the Northeast would have been held down by
means it is impossible even for the world’s most power- the inflow of the new supplies, and those in the rest of
ful governments to annul its operation. Governments can the country raised up by the shipments to the Northeast.
frustrate its operation, but even in the cases in which they In fact, the higher level of oil prices in the Northeast
do so, they cannot annul its operation. The existence of and in the country as a whole would have acted as a
the principle is confirmed by the very attempts to frus- magnet to supplies of oil from outside the country. The
trate it, because to frustrate it, definite means must be same motives that would have impelled a Southern or
adopted, which are necessary only because the principle Midwestern oil producer to send additional supplies to
exists, and is working. For example, governments may New York or Boston would also have impelled a Vene-
adopt tariffs, or they may prohibit imports or exports zuelan or Nigerian producer to do so. In fact, additional
altogether, and in that way stop the equalization of prices. imports could have come from the most remote places.
But why must they resort to such measures? The answer As the rise in prices in the Northeast pulled up prices in
is because the principle does exist and is at work even in the rest of the country, it could very well have become
a controlled economy. Controls of a specific kind are profitable to start shipping additional supplies to the West
needed to counter it. There is no difference here between Coast from oil-producing areas like Indonesia, thereby
economics and the example of water seeking its level. freeing more of domestic production for supplying the
We can make ice trays in which each compartment is Northeast.
totally insulated from the others. That does not contradict Indeed, the United States could have gone on benefit-
the principle that water seeks its level. It confirms it, ting from Arab oil! This would have occurred simply as
because the insulation is required only because water a result of expanding the import of refined petroleum
does seek its level, and for some reason one wishes to products made from Arab oil in places not subject to the
stop it from doing so. It is the same way with all economic Arab embargo. For example, if the Arabs continued to
laws and government attempts to frustrate them. supply Spanish refineries, say, and the price of refined
products had risen in the United States, those refineries
Why the Arab Oil Embargo Would Not Have Been would have diverted more of their output to the United
a Threat to a Free Economy States.
The principle that in a free market there tends to be a It thus becomes apparent that within a fairly short time
17 This has already been indicated in connection with the uniformity-of-profit principle. See above, sec. 1, the last part of the subsection “Additional Bases for the Uniformity-of-Profit Principle.”
an embargo by the Arabs against oil shipments to the oil industry at the expense of their oil industry.
United States would have had very little effect on the To understand this point, let us assume that the Amer-
supply of oil in the United States. To the extent that the ican economy had been free of all price controls in 1973
United States had been importing Arab oil, it would, for and that the Arabs had launched their embargo with the
the most part, merely have changed importers, and, for serious intention of cutting off their supply of oil to the
much of the rest, it would even have continued to benefit world. Let us assume that the worst fears people had at
indirectly from Arab oil, in the form of importing refined the time came true and that the Arabs simply stopped
products made from Arab oil in non-Arab countries. selling oil to anyone, in an effort to blackmail the world
The reason the Arab embargo did threaten us was the into doing their bidding.
existence of our price controls on oil and oil products. The effect, of course, would have been a skyrocketing
These price controls had been imposed by President of the price of oil.
Nixon in August of 1971, as part of a temporary general But observe. The Arabs wouldn’t have gotten the
price freeze, and then remained in force after almost all benefit of the higher price, because they wouldn’t have
of the other price controls were removed. Thus, when oil been selling any oil.
supplies to the Northeast were cut off by the embargo, The benefit of the higher price of oil would have gone
price controls prohibited the people in the Northeast from to the non-Arab producers, mainly to the producers in the
bidding up oil prices. The people in the Northeast were United States.
therefore made powerless to bring about the shipment of The American oil companies in that case really would
additional supplies from the rest of the country. In the have made fabulous profits. They might have made
same way, price controls prohibited the people of the profits at a rate fast enough to double their capitals in a
United States as a whole from biding up prices, with the single year, or less. They would have made the kind of
result that it was not possible to bring about stepped-up money the Arabs made.
imports from non-Arab sources. The effect of our con- In the face of the Arabs’ withdrawal from the market,
trols was to cause the reduction in imports from the Arabs a tendency would have set in to reestablish the United
to be experienced with full force at its initial point of States as an oil exporter, because Western Europe and
impact and to make it impossible to obtain replacement Japan would have had to turn to us. However much prices
imports. Our price controls paralyzed us—they made it skyrocketed here, they would have skyrocketed still more
impossible for us to take the actions needed to deal with there. Instead of our high prices pulling oil in, we would
the situation. have begun to ship oil out, in response to their still higher
Indeed, because of our price controls, we were not prices. Billions of dollars would have begun to flow from
only prevented from finding replacement imports for the Western Europe and Japan to the United States, not to
loss of Arab imports, but were forced to lose imports Iran or Saudi Arabia.
from non-Arab sources as well! This happened because With vast profits starting to pour in from the rest of
other countries in the world, such as West Germany, the world and, of course, from American buyers too, huge
became better markets in which to sell oil than the United sums would have become available for every kind of oil
States. As a result, our non-Arab foreign suppliers were and energy project in the United States. It would not have
led to sell more of their oil to those countries and less to taken long, with such profits, for the domestic oil indus-
us. Because of our price controls, we tied our hands in try to have been entirely rejuvenated and established on
the international competition for oil, and made it possible an enormously larger scale than ever before, and who
for countries far poorer than ourselves to outbid us for knows what other new sources of energy along with it.
oil we had normally consumed. Now consider the Arabs. While the American oil
*** producers would have been making money hand over
There is more to say about why a free American fist, the Arabs would have been starving for lack of
economy would have had nothing to fear from an Arab income. In this context, it would have been virtually
embargo. certain that the Arab alliance would soon have broken
In late 1973 and early 1974, the Arabs were apparently up. The less fanatical Arab countries would soon have
threatening to cut off oil supplies to the world. There was resumed the sale of oil in order to cash in on the profits.
near panic over whether they would do so. There seemed Probably, in very short order, all of them would have
to be no solution except either to give in to their demands, begun selling again. So, in fact, the supply of oil in the
whatever they might be, or go to war with them. world would almost certainly not have been drastically
If we had had a free economy, the only lasting effect reduced for very long, despite whatever intentions the
of any embargo the Arabs might have launched against Arabs may originally have had. And, therefore, the United
the rest of the world would have been to strengthen our States would not, in fact, have had to switch for very
190 CAPITALISM
long, if at all, from the role of an oil importer to the Tariffs, Transportation Costs, and the Case
sudden role of an oil exporter. But to whatever extent the for Unilateral Free Trade
Arabs had delayed in resuming the sale of oil, the effect The existence of tariffs modifies the operation of the
of their action would have been to impoverish them- principle that the price of a good tends to be the same
selves while enormously enriching the oil industry in throughout the world in exactly the same way as does the
every other country, especially the United States. existence of transportation costs. Namely, it allows the
In the years that followed, the American oil industry prices of goods to differ between two markets by a wider
would have been bigger and richer. American oil pro- margin, equivalent to the existence of additional trans-
duction and the production of other forms of energy in portation costs—that is, by the sum of transportation
the United States would have been expanded because costs between the two markets plus the amount of the
of the additional profits that American firms had earned. tariff. Now, only when the price of a good in one market
Very possibly, a year or two after the embargo, the comes to exceed its price in another market by more than
price of oil would have fallen below its level in the the sum of transportation cost plus tariff, does it pay to
period before the embargo, because of expanded Amer- buy in the cheaper market and sell in the dearer market.
ican production. The oil industry at that point might This, of course, operates to drive the discrepancy in price
have run at losses for a while. The American firms to the point where it no longer exceeds the sum of
would have been able to cover their losses out of the transportation cost plus tariff.
profits the Arabs had handed them. The Arabs would The fact that tariffs have the same effect on price
not have been able to cover their losses as easily. differentials between markets as do transportation costs,
Consequently, the effect of the whole process would and can be analyzed as the equivalent of additional
have been a larger American oil industry and, quite transportation costs, implies that a country must benefit
possibly, a smaller Arab oil industry. from a policy of free trade even if it adopts that policy
This is what economic freedom would have accom- unilaterally, with its citizens having to go on selling their
plished. goods in countries that continue to maintain tariff bar-
*** riers. For a policy of unilateral free trade is analytically
The question might be raised of just how high oil equivalent in its effects to a fall in inbound transportation
prices could have gone during the Arab embargo if we costs while outbound transportation costs remain the
had not had price controls. It is impossible to answer such same.
a question with any accuracy. Perhaps for a brief period In the nature of the case, the inhabitants of a territory
we might have had very high prices of oil and oil prod- must benefit from the fact that the cost of transporting
ucts. While they lasted, such prices would certainly have goods to them is as low as possible. The fact that it is
represented a hardship for many people, the author of this lower than the cost of transporting goods from them to
book included. But later we would have had lower prices other areas can make no difference. If, for example, they
than we had, thanks to a larger domestic oil industry and were fortunate enough to live in a territory toward whose
energy industry in general. Indeed, the preceding discus- coast the predominant winds blew or the ocean current
sions make clear that the rise could not have been very flowed and which, accordingly, found itself with corre-
great for very long, and that in a short time, oil prices spondingly low inbound transportation costs, they would
would have begun to fall, just as has turned out to be the benefit from that fact, even though inbound transporta-
case since the repeal of the price controls. Furthermore, tion costs were thereby rendered less than outbound
as we will see, even while a high price lasts, the real transportation costs. The fact that it is not equally less
problem is not the high price, but the scarce supply. No costly for their goods to reach others does not take away
one’s hardship is alleviated by a low price for goods he the advantages to them of others’ goods being able to
cannot buy, which is always the effect of price controls. reach them more cheaply. It would be the height of
If we in fact have a scarcity, and consumption must be absurdity on their part to demand that inbound freight be
restricted, then, as will be shown, the high price is rendered artificially more costly, say, by requiring in-
necessary and positively beneficial, because it leads peo- bound ships to carry extra ballast, in order to equalize the
ple to restrict their consumption in the ways that are least transportation costs of inbound and outbound freight.
damaging to themselves. The situation is exactly the same with regard to a
The policy of price controls on oil during the embargo, policy of unilateral free trade or a country having tariffs
therefore, cannot even be said to have sacrificed our lower than the tariffs of the countries with which it trades.
long-run economic well-being to our short-run economic To insist that one’s own country have tariffs so long as
well-being. It sacrificed both our long-run and our short- the countries its citizens sell to have tariffs, or have tariffs
run economic well-being. that are as high as the tariffs of those countries, is to
demand the equivalent of raising inbound transportation tion, over that period. By the rise in price being delayed
charges merely because they happen to be lower than this long, one month’s supplies would have to be made
outbound transportation charges.18 to do the work of two, instead of eleven months’ supplies
doing the work of twelve. The rate of consumption would
have to be cut in half instead of merely by one-twelfth.
3. The Tendency Toward Uniform Prices Over It is the same in principle for all shorter periods during
Time: The Function of Commodity Speculation which the rate of consumption is excessive. Always, an
In a free market there is a tendency toward the equal- excessive rate of consumption in the earlier months must
ization of the price of a good in the present with the be balanced by a more severely reduced rate of consump-
expected price of that good in the future. For example, tion in the later months.
there is a tendency for the price of wheat or crude oil or The existence of speculation on future prices prevents
whichever, today, to be equal to the expected price of such calamities and minimizes all such imbalances in the
wheat or crude oil or whichever next month, six months rate of consumption. Speculators anticipate the future
from now, or next year. This principle applies to any good prices of commodities and buy or sell the commodity in
that is capable of being held in storage. question for the purpose of profiting from every discrep-
The basis of this principle is the familiar fact that any ancy between the present price and the prices they expect
discrepancy in price creates an opportunity for profit, the to exist in the future. In our example, the activity of the
exploitation of which reduces the discrepancy. If, for commodity speculators would serve to bring about the
example, wheat is expected to be more expensive six minimum necessary restriction in the rate of wheat con-
months from now than it is today, then speculators begin sumption. For if they see that in the absence of their
to buy wheat at today’s comparatively low price for the activity prices will reach famine levels in the future, or
purpose of storing it and later selling it at the compara- levels reflecting a severe scarcity, or even any level
tively high price that is expected to exist in the future. whatever that exceeds the present price by more than the
The effect of their action is to raise the price of wheat in costs of storage and the going rate of profit, they begin
the present, and, by enlarging the supply available in the to buy the commodity in question for the purpose of
future, reduce the price of wheat in the future. As a result, profiting from the future high price. Their additional
the present and expected future prices are brought closer buying raises the price of the commodity in the present
together. and thus restricts the rate of its consumption. Later, as
The present and expected future prices will never the future unfolds, the goods in the hands of the specu-
actually be equalized, for two important reasons. First, lators constitute a larger supply and serve to reduce
there are costs of storing any commodity. In addition, prices in comparison with what they would otherwise
since every business must yield the going rate of profit, have been. The activity of the speculators therefore serves
if it is to continue in existence, it is necessary to earn as to transfer supplies from a period in which they are less
good a rate of profit in storing commodities as in any urgently needed, as indicated by their lower price, to a
other line of business. Consequently, the actual relation- period in which they are more urgently needed, as indi-
ship between present and future prices is that they tend cated by their higher price. In this way, it brings about
to differ by no more than the costs of storage plus an the optimum rate of consumption of limited supplies.
allowance for the going rate of profit on the capital that Speculative activity, of course, is not limited to antic-
must be invested in the storage. ipating just future scarcities. Rather, it seeks in general
The practical significance of this principle can be seen to balance consumption and production over time by
in the following example. Assume that the wheat harvest accumulating stocks of commodities and regulating their
is one-twelfth below the size of the average annual rate of consumption. If it is anticipated, for example, that
harvest. It is therefore necessary to stretch what would a future harvest will be larger than originally forecast,
normally be an eleven months’ supply of wheat over and thus that the price of wheat in the future will be lower
twelve months. If the price of wheat did not rise at harvest than originally expected, the activity of the speculators
time, the consumption of wheat and wheat products will bring about a lower price immediately. In anticipa-
would go on at the usual rate, requiring a more severe tion of the lower future price, some of the speculators
restriction of consumption later on. Imagine that the will begin to sell their holdings of the commodity now,
price did not rise until after ten months had gone by, in order to find a more profitable employment for their
during which consumption had occurred at the usual rate. capitals. As a result of their sales, the price begins to fall
In that case, two months would be left to go until the next right away. As a consequence of the lower price, the rate
harvest, and it would be necessary to stretch the remain- of consumption in the present is expanded. In this case,
ing supplies, equal to only one month’s usual consump- the effect of speculative activity is to permit present
18 For an analysis of the actual process of adjustment in wages and prices that would follow the adoption of a policy of unilateral free trade or unilateral tariff reduction, and of the consequences if other countries simply refused to allow the goods of the country in question into their territory while it pursued a policy of free trade, see below chap. 12, sec. 4, the subsection “Unilateral Free Trade and the Balance of Trade.”
192 CAPITALISM
consumption to expand in the knowledge that larger bought at low prices; or, in holding back their supplies in
future production than originally expected necessitates the hope of selling at higher prices, they end up having
the holding of smaller present stocks. to sell at lower prices than they could have obtained by
Much speculative activity occurs on organized com- not holding back.19
modity exchanges. However, only a relatively small ***
number of basic commodities are traded on the ex- It is necessary to point out that the connection between
changes—principally various agricultural commodities present and expected future prices is broken in conditions
and nonferrous metals. For the rest, speculation is largely of increases in production and declines in price. In such
limited to those who are engaged in the actual production conditions, the ability to reduce prices in the present by
or use of the commodity. selling out of accumulated stocks reaches its limit once
It should be realized that every businessman is a those stocks have been reduced to their necessary mini-
commodity speculator when he decides what size inven- mum. At that point, if prospective future prices are lower
tory to hold of his product or materials and whether it is still, no mechanism remains which is capable of driving
a good time to increase or decrease the size of his present prices down any further and thus coming back
inventory. For he is basing his decision on a comparison into correspondence with the prospective future prices.
of present prices and the prices he expects to exist in the (There is no basis for a decline in demand in cases in
future. In the same way, every consumer engages in which the item needs to be used in the present, such as
commodity speculation when he decides to buy more or food. There is also no basis for any general or widespread
less than his normal requirements on the basis of a decline in demand insofar as the falling prices that are
comparison of present prices with the prices he antici- expected to result from increased production will enable
pates in the future. people’s incomes to go further, for this gives them the
The speculative activities of businessmen and con- prospect of being better off in the future. In these condi-
sumers serve to equalize present and future prices in tions, people are in a continually better position to buy.)
additional ways than the one we have considered. For Thus it becomes possible for prospective future prices to
example, if, in anticipation of higher prices, businessmen fall below present prices by almost any amount. This in
simply hold back on selling their inventories, they are fact is regularly the case with respect to agricultural
decreasing the supply available in the present and in- commodities in the months preceding the harvest. Their
creasing the supply available in the future, which, of prospective prices during the coming harvest are almost
course, acts to narrow the discrepancy in price. By the always sharply below their current prices, precisely be-
same token, if businessmen or consumers step up their cause of the inability to make significant further sales out
purchases in the present, in anticipation of higher prices of accumulated stocks, which stand at their low point in
in the future, then, to that extent, their demand for the the period before the harvest. And the very fact that the
item in the future will be less because it will already have stocks do stand at a low point is also responsible for the
been provided for. In this case, a larger present demand prices in the months just prior to the harvest standing at
and smaller future demand act to reduce the discrepancy a high point.
in price. The connection between present and future prices is
Like almost every economic activity that goes beyond established mainly by the accumulation of stocks to take
manual labor, commodity speculation is frequently de- advantage of prospective higher prices in the future.
nounced. Because speculation transmits the higher prices Declines in present prices based on the anticipation of
expected to exist in the future to the present, it is de- lower future prices occur in a context in which the
nounced as the cause of the higher prices. What is over- holding of significant supplies for the future is still
looked in this accusation is that the supplies accumulated necessary, but in which it is possible for the magnitude
as a result of speculation must ultimately be used, and at of the supplies held to be less.
that time they necessarily act to reduce prices—because
either they are put on the market and sold, thereby Rebuttal of the Charge That the Oil Shortages of the
increasing the supply of the commodity, or, by sparing 1970s Were “Manufactured” by the Oil Companies
their owners the need to purchase, they reduce the de- Our knowledge of speculation can be applied to the
mand for the commodity. Moreover, if the speculators charge that the oil shortages of 1973–74 and 1979, were
are mistaken—if they raise the present price and there is “manufactured” by the oil companies. This was an accu-
no independent cause of a higher price in the future— sation which was repeated again and again in the press
they pay the penalty for their mistake: they have bought and on television in those years. The accusation repre-
at high prices and must later sell at low prices; or they sents a classic case of economic ignorance, and is thus
have stocked up at high prices when they might later have well worth analyzing.20
20
19 Indeed,
For further
in 1991,
discussion
the attorneys
of why speculators
general of several
must lose
states
in the
renewed
absence
theofaccusation
an independent
in newcause
lawsuits
of higher
that they
future
brought
prices,
against
see below,
various
chap.
oil companies.
7, pt. A, sec. 3, subsection c, the discussion “Rebuttal of the Accusation that Producers Withhold Supplies to ‘Get Their Price.’”
The proof offered that the oil companies were artifi- in our example of the deficient wheat harvest in which
cially creating the oil shortage was the allegation that the price does not rise. It is only necessary to realize that
their storage depots were full of oil. I remember one price controls not only induce buyers to buy up commod-
television news story in the 1973–74 crisis, filmed at an ities too rapidly for supplies to last, but also induce sellers
oil company tank farm, in which the reporter pointed to to sell them too rapidly. Sellers are led to sell too rapidly
the tanks, said he had personally seen that they were full, because it is more profitable to sell goods at the fixed,
and, therefore, that there could be no real shortage of oil, controlled price in the present rather than in the future.
but just an “artificial” one created by the oil companies. By selling in the present, a seller saves storage costs and
The reporter, his editor, station, and network evidently can earn profit or interest by investing the sales proceeds.
forgot, or did not know, the major news item of the time, If he is going to have to sell at the controlled price, it pays
which was the prospect that in the coming months the him to sell as soon as possible and simply put the money
United States would be deprived of a significant part of in the bank if necessary.22
its customary imports of oil, while having to meet the The only reason that stocks of distillate oil were built
possibility of a long, severe winter. The tanks and storage up in the crisis period was that the government ordered
depots most certainly should have been full, in anticipa- it. Distillate stocks had declined sharply in early 1973,
tion of that terrible prospect. Any fullness of the tanks as the result of price controls, with the result that short-
and depots was not, as the news media claimed, a proof ages began to appear even then. The government feared
of the abundance of oil, but of its prospective scarcity. vastly worse shortages in the winter of 1974: it feared the
(The reader should imagine what it would mean if the prospect of people freezing to death.
day ever came when he thought it necessary to fill every It should be understood that if we had not had price
spare inch of his kitchen with food. His large stockpile controls, any build-up in stocks of oil that would have
would not be a proof of the abundance of food, but of the occurred, would not have caused a shortage, even though
prospective scarcity of food.) it reduced the supply of oil currently available. In the
Apparently, the media were simply unaware of the absence of price controls, the build-up would have raised
need to hold supplies of oil for future sale. For it appears the current price of oil. At higher prices, people would
that they would have been satisfied with the genuineness have economized on their use of oil products to whatever
of the shortage only if their reporters had visited the tank extent it was necessary to reduce current consumption.
farms and found them empty. By that time, however, it Of course, higher prices would also have pulled in sup-
would have been too late: millions would have died from plies from other markets, making the necessary reduction
the lack of oil. in current consumption that much less. As will be shown
The unfortunate fact was, however, that the oil com- in later discussion, anyone able and willing to pay the
pany storage depots and tank farms were not full. The higher current prices would have been able to buy what-
media erroneously inferred from their observation of a ever oil products he wished. There would have been no
large quantity of oil at some tank farms that there must shortage in the sense of people being able and willing to
be a large supply of oil in the country. Their logic was pay the asking price of oil but unable to obtain it. Thus,
the same in principle as that of someone travelling to an even if there had been a build-up of stocks of oil, as the
impoverished country like India and seeing a few ware- media claimed, it could not have caused a shortage of oil
houses full of food, and then concluding that there is a in the absence of price controls.
large quantity of food in the country. In reality, because In charging the oil industry with “manufacturing” the
of price controls, the stocks of crude oil, gasoline, and oil shortage by holding large stocks of oil, the media
residual fuel oil in the United States in the period from displayed ignorance in four respects. First, they were
October 31, 1973, to April 1, 1974—the time of the oil ignorant of the fact that, with the exception of distillate,
crisis—were all substantially less in most months than stocks of oil were not actually large, but significantly
their respective averages had been for that period of the below normal. Second, they were ignorant of what large
year over the preceding five years; distillate fuel (home stocks of oil would have signified had they existed (or,
heating oil) was the only major oil product whose stock in the case of distillate, what the large stock did sig-
had been increased. Overall, that is, if one simply adds nify)—i.e., proof not of abundance, but of prospective
up the number of barrels of crude oil and of the various scarcity. Third, they were apparently ignorant even of the
kinds of oil products, stocks were significantly lower in fact that it is necessary to hold stocks of oil in the first
all but two months, when they were very slightly higher.21 place, for their attitude was, it seems, that so long as oil
The fact that stocks of oil in storage were actually was on hand, there could be no problem of a lack of it.
below average in 1973-74 should not be surprising. Such Fourth, they did not know that in the absence of price
a result is to be expected from price controls. It is implied controls, no accumulation of a stock could cause a short-
21
22 See
For an
George
important
Reisman,
exception
The Government
to the principle
Against
that sellers
the Economy
are led to
(Ottawa,
sell tooIllinois:
rapidly,Jameson
see below,
Books,
the following
1979), pp.
chap.,
29–30,
pt. A,
Table
sec.1.
3, subsection c, the discussion “Price Controls and the ‘Storage’ of Natural Resources in the Ground.”
194 CAPITALISM
age in the current market. rates is accomplished in a different way. It is accom-

In their treatment of the oil shortage, the media func- plished by virtue of the fact that each occupation contin-
tioned on the level of men without the ability to think ually loses members through death or retirement and
conceptually. They proceeded as though they were un- must continually be resupplied with young workers.
able to make distinctions between quantities that are Changes in the flow of young workers into the various
perceptually large, that is, between a tank farm full of oil, occupations produce the same effect as an actual move-
and an adequate national supply. They proceeded as ment of labor between occupations. Where the number
though they were unable to think beyond the range of the of young workers entering an occupation exceeds the
immediate moment, that is, to realize the need to hold number of old workers dying or retiring, the supply of
supplies for future sale. They proceeded as though they labor in that occupation rises. Where the number of
were incapable of understanding connections among young workers entering an occupation is less than the
concrete events, namely, the connection between the number of old workers leaving, the supply of labor in that
prospect of the loss of imports and the need to build up occupation falls.
stocks of oil. They proceeded, in short, as though they Now by the time young people are ready to begin
had never heard of, and were incapable of grasping, a preparing themselves for a career, there are very marked
single principle of economics. Only because they func- differences in their ability and willingness to learn. And,
tioned at this incredibly low mental level, was it possible for this reason, the labor force necessarily assumes a
for the media to assert that the oil shortage was “manu- hierarchical structure, with the tendency toward an equal-
factured” by the oil companies. ization of wage rates being operative only within the
I will have much more to say about this accusation in respective levels of this structure, not throughout the
the pages that follow. I will show that it is correct to say structure as a whole.
that the oil shortage was “manufactured” and “artificial,” Those with the greatest ability and willingness to learn
only if one realizes that it was manufactured by the are potentially capable of performing practically any job.
government, through price controls, not by the oil com- For example, the young man who is capable of learning
panies and their perfectly natural and praiseworthy de- to be a surgeon is also certainly capable of learning to be
sire to earn profits. a printer. In turn, the young man who is capable of
learning to be a printer is also certainly capable of
learning to work on an assembly line. Everyone, in other
4. The Tendency Toward Uniform Wage Rates for words—the potential surgeon, the potential printer, and
Workers of the Same Degree of Ability the potential assembly line worker—is capable of learn-
In a free market there is a tendency toward an equal- ing the work of the assembly line worker. But only the
ization of wage rates for workers of the same degree of potential surgeon and the potential printer are capable of
ability. learning the work of the printer. And only the potential
The basis of the tendency toward equality is the fact surgeon alone is capable of learning the work of the
that men prefer to earn a higher income rather than a surgeon.
lower income, and therefore seek higher-paying jobs in In conformity with the principle contained in this
preference to lower-paying jobs. The movement of labor example, let us think of the young people ready to
into the higher-paying fields and out of the lower-paying prepare for a career as divided into three broad groups:
fields reduces wage rates in the higher-paying fields and those capable of entering the professions, those capable
raises them in the lower-paying fields. The stopping of learning to do skilled work, and those capable of
point is an equality of wage rates. learning to do no more than unskilled work.
This is not to say that forty- or fifty-year-old workers Such a division of the potential labor force necessarily
suddenly give up their work of many years to change to prevents any tendency toward a general equalization of
a brand-new occupation in response to a 5 or 10 or even wage rates. No matter how high the wage rates of the
20 percent difference in wages. No. In view of the costs professions may climb in relation to those of skilled and
and the various other problems such workers would have unskilled labor, it is simply impossible for young people
to incur in the learning of new skills, it would not pay who lack the necessary capacity, to go into the profes-
them to switch occupations except in cases of extremely sions instead of skilled or unskilled labor. Similarly, no
large differences in wages—brought about, for example, matter how high the wages of skilled labor may climb in
by their previous jobs being rendered obsolete through relation to those of unskilled labor, there is, again, no way
technological progress. for the young people who lack the necessary capacity, to
The movement of labor from occupation to occupa- enter the field of skilled labor instead of unskilled labor.
tion in response to less-than-gross differences in wage On the other hand, the wages of skilled labor are limited
in relation to those of professional-level labor. For as dores, and so on. There is a tendency toward a further
soon as the wages of skilled labor begin to exceed those uniformity of wage rates among the various professions,
of professionals, it is possible for young people capable such as doctors, lawyers, scientists, engineers, profes-
of the professions to enter the field of skilled labor. In the sors, and so on. In these cases, too, the original pool of
same way, the wages of unskilled labor are limited in talent flows into the various channels on its level in
relation to those of skilled labor. For as soon as the wages accordance with the wages to be made; and, in flowing
of unskilled labor begin to exceed those of skilled labor, more or less heavily, lowers or raises those wages, thereby
it is possible for young people capable of skilled labor to reducing the discrepancies among them and driving them
enter the field of unskilled labor. toward equality.
It is because of this hierarchical division of the total ***
pool of human talent—of the fact that ability can flow There are, of course, important differences in wages
downward to lower channels, but not upward to higher of a permanent nature even within the three broad groups
channels, so to speak—that we observe in actual life that of workers that I have delineated. At each level, there is
the wages of professionals markedly and permanently a tendency for some particular occupations to earn more
exceed those of skilled workers, while those of skilled than others—for example, for doctors to earn more than
workers, in turn, markedly and permanently exceed those professors, and for stevedores to earn more than clerks.
of unskilled workers. And we observe that the wages of There are also important differences in earnings within
the highest-paid skilled workers cannot get very far each occupation, especially at the professional level. For
ahead of the wages of the lowest-paid professionals, nor example, there are always some doctors or lawyers who
the wages of the highest-paid unskilled workers very far earn five or ten times as much as the average of their
ahead of the wages of the lowest-paid skilled workers. profession, and there are some printers or mechanics who
This explains inequalities in wages. Let us return to earn significantly more than others.
the question of why wage rates for any given level of These differences are due in part to the existence of
ability tend to be equal. further categories of division in human ability. There are
Let us consider the wage rates of a number of skilled those who have the ability and willingness to learn how
occupations, for example, the various building trades, to be a doctor or lawyer, and others who have the ability
such as carpenters, electricians, and plumbers, and other and willingness to learn how to be a great doctor or
skilled occupations, such as printers, draftsmen, mechan- lawyer. In other cases, willingness and ability to learn is
ics, and locomotive engineers. All of these occupations, not the sole criterion of division. Other factors have to
and others of a similar nature, require the same basic be added. For example, in many types of work, especially
level of intelligence and education on the part of the unskilled work, it is necessary to possess a significant
workers. As a result, they are all potentially capable of degree of physical strength. Those who have it are in a
being performed by the same people. All of them, in narrower category than those who do not and, accord-
effect, can be supplied with labor that is drawn from a ingly, tend to be higher paid. In other cases, workers are
pool of human talent on the same basic level. Because of differentiated by the special development of other phys-
men’s preference for a higher income over a lower in- ical or psychological potentials—such as muscular coor-
come, this pool of talent naturally runs more heavily into dination, an ear for music, special visual acuity, and so
those occupations which offer higher wages and less on. In the case of great athletes, opera singers, musicians,
heavily into those which offer lower wages. As a result, and actors—all the really star performers—the combina-
there is a tendency toward an increase in the supply of tion of special characteristics is such as to make the labor
labor in the better-paying kinds of skilled work and a of these persons virtually unique. As a result, when they
decrease in the supply of labor in the poorer-paying kinds are in demand, their earnings do not have any fixed limit
of skilled work. Since the effect of the increases in the in relation to the earnings of others, because no one is
supply of labor in the initially higher-paying fields is to able to increase the supply of what they are offering.
reduce wages in those fields, while the effect of the de- For the rest, the differences in wages within the vari-
creases in the supply of labor in the initially lower-paying ous broad groups are the result of the fact that consider-
fields is to raise wages in those fields, the discrepancies in ations other than money income are associated with each
wages among the different kinds of skilled labor are nar- job. There are such considerations as how interesting or
rowed, and thus these wage rates tend toward equality. uninteresting is the work, how pleasant or unpleasant are
In exactly the same way, there is a tendency toward a the conditions of the work, how safe or dangerous is it,
uniformity of wages among the various unskilled or how regular is the employment, how long and how
low-skilled occupations, such as assembly line workers, expensive is the special preparation required, and, per-
machine tenders, truck and bus drivers, clerks, steve- haps, still other, similar considerations. Considerations
196 CAPITALISM
of this kind explain, for example, why scientists tend to consumers most want him to do. This is true of every
earn less, and tax lawyers more, than is commensurate individual who seeks to take the best-paying job he can
with their respective levels of ability. In the one case, the find at any given level of ability or who seeks to raise his
work itself may be the highest pleasure in life to those level of ability. For what enables any job to pay more is
who perform it; in the other, it is more likely to be only the fact that the consumers want its products suffi-
experienced as painfully dull. As a result, those with the ciently. Let them decide to reduce their demand for its
necessary ability to be scientists are willing to enter the products, and the wages it pays will tend to fall, while if
field even to the point of accepting substantially lower they raise their demand for its products, the wages it pays
wages in comparison with what they could earn else- will tend to rise still higher.
where. By the same token, people would cease to enter In a free market, within the limit of his abilities, each
such a field as tax law as soon as that field no longer person chooses that job which he believes offers him the
offered significant monetary advantages over other fields best combination of money and nonmonetary consider-
they might enter. The principle that emerges is that any ations. In so doing, he simultaneously acts for his own
occupation which offers advantages other than income maximum well-being and for that of the consumers who
tends to offer correspondingly lower wages, while any buy the ultimate products his labor helps to produce.
occupation that imposes special disadvantages of any
kind tends to offer correspondingly higher wages. These Equal Pay for Equal Work: Capitalism Versus Racism
discounts and premiums in wages balance the special The uniformity-of-wages principle must be under-
advantages and disadvantages of the various occupa- stood as implying the existence of a powerful tendency
tions. under capitalism toward equal pay for equal work. De-
In sum, in a free market there are at least three princi- spite the prevailing belief that capitalism arbitrarily dis-
ples of wage determination at work simultaneously. One criminates against such groups as blacks and women, the
is a tendency toward a uniformity of wages for labor of fact is that the profit motive of employers operates to
the same degree of ability. A second is a tendency toward eradicate all differences in pay not based on differences
unequal wage rates for labor of different degrees of in performance. Where such differences persist, they are
ability—primarily intellectual ability, but also other abil- the result of government intervention or private coercion
ities as well. And a third is a tendency toward the inclu- that is sanctioned by the government.23
sion of discounts and premiums in wages as an offsetting Where the profit motive is free to operate, if two kinds
element to the special advantages or disadvantages of the of labor are equally productive, and one is less expensive
occupations concerned. The combined operation of these than the other, employers choose the less expensive,
three principles helps to explain the full range of the because doing so cuts their costs and raises their profits.
various wage rates we observe in actual life. The effect of choosing the less expensive labor, however,
Now, as far as it operates, the principle of the unifor- is to raise its wages, since it is now in greater demand;
mity of wage rates is similar in its consequences to the while the effect of passing by the more expensive labor
uniformity-of-profit principle. That is, it serves to keep is to reduce its wages, since it is now in lesser demand.
the various occupations supplied with labor in the proper This process goes on until the wages of the two kinds of
proportions. Too many people do not rush into carpen- labor are either perfectly equal or the remaining differ-
tering and not enough go into printing, say, because the ence is so small as not to be worth caring about by
very effect of such a mistake is to reduce the wages of anyone.
carpenters and raise those of printers. This acts to delimit As illustration of the fact that even very small differ-
and counteract the mistake. In addition, the operation of ences in wage rates could not be maintained under capi-
this principle gives to consumers the ultimate power to talism, consider the following example. Assume that
determine the relative size of the various occupations. If, white workers of a certain degree of skill are paid $5 per
to continue with the same example, the consumers buy hour. Assume that black workers of identically the same
more printed matter and fewer products made of wood, degree of skill can be hired for just 5 percent less, that is,
then the effect of the change is to cause the demand for for just 25¢ an hour less. Assume that a factory must
printers to rise and that for carpenters to fall. As a result, employ 500 workers of this degree of skill. With a
the wages of printers rise and more young men are 40-hour week, over a 50-week year, this slight difference
induced to become printers, while the wages of carpen- in hourly wage rates results in a saving of labor cost and
ters fall and fewer young men become carpenters. a corresponding extra profit per year of $250,000 if the
It should be realized, as this example of the printers factory owner employs 500 blacks rather than 500 whites
shows, that in seeking to earn the highest wages, the (for 25¢ x 500 x 40 x 50 = $250,000).
individual worker is seeking to do the kind of work the Even in the case of a small establishment employing
23 The substance of the following discussion concerning the opposition between capitalism and arbitrary discrimination has been excerpted, with minor modification, from my pamphlet Capitalism: The Cure for Racism (Laguna Hills, California: The Jefferson School of Philosophy, Economics, and Psychology, 1992). The pamphlet originally appeared as a six-part article inTheIntellectualActivist in 1982.
only 10 workers, the annual saving in labor cost, and thus of the economy, and their attitudes would be transmitted
the extra profit attaching to the employment of blacks, to all other employers, who would seek to emulate their
would be $5,000 (since 25¢ x 10 x 40 x 50 = $5,000)— success. In this way, capitalism virtually guarantees the
enough for the owner to afford a new car every other year victory of rationality over racial bigotry.
or to make significant improvements in his business. This discussion also provides a rebuttal to the accusa-
It is doubtful that there are many employers so bigoted tion that under capitalism the skills and abilities of groups
as to be willing to indulge their personal prejudice in such as blacks are not utilized. For it follows that the
favor of whites at a cost of $250,000 per year, or even unhampered profit motive leads employers to place the
$5,000 per year. The clear implication is that even slight members of all groups in the highest positions for which
differences in wage rates would make the employment their skills and abilities qualify them. Consider the fol-
of blacks in preference to whites virtually irresistible. lowing example. Assume that a skilled lathe operator
Not only would a 5 percent differential in wages not be must be paid $15 per hour, and that black workers who
sustainable, but neither would a 2 percent or even a 1 have been taught this skill in a trade school are presently
percent differential. Every such differential would lead employed as janitors at $5 per hour. The black workers
employers to hire blacks in preference to whites, and would almost certainly be willing to change their jobs for
would thus bring about a further rise in the wage rates of a raise to, say, $10 an hour. Any employer who hired them
blacks and a further fall in the wage rates of whites, until as lathe operators at $10 per hour would thereby add $5
a virtually perfect equality was achieved. to his profits for every hour of their work, as compared
Indeed, profit-seeking employers qua profit-seeking with employing whites. Over the course of a year com-
employers are simply unconcerned with race. Their prin- posed of 50, 40-hour weeks, his extra profit would amount
ciple is: of two equally good workers, hire the one who to $10,000. And this would be on the labor of just one man.
is available for less money; of two workers available for It is obvious that under capitalism, if the skills and
the same money, hire the one who is the better worker. abilities of blacks or any one else are being wasted in
Race is simply irrelevant. Any consideration of race low-skilled, low-paying jobs, it is to the financial self-in-
means extra cost and less profit; it is bad business in the terest of employers to change the situation, indeed, to
literal sense of the term. seek out such workers, and in many cases even to incur
It should be realized that one of the great merits of substantial costs in training them. And it follows that the
capitalism is that by its very nature employers are virtu- greater the extent to which a group’s skill or ability is
ally compelled to be oblivious to race. The freedom of wasted, the greater is the profit to be made by rectifying
competition under capitalism ensures this result. For the situation. For example, if a black with the ability to
even if, initially, the majority of employers were so do the work of a $100,000-a-year company vice presi-
fanatically bigoted as to be willing to forgo extra profits dent is working as a $20,000-a-year clerk, it is even more
for the sake of their prejudice, they would be powerless to the interest of an employer to seek him out and rectify
to prevent a minority of more rational employers from the situation than in the case of the lathe operator work-
earning these extra profits. (“Rationality” in this context ing as a janitor. In this case, the employer could double
means not passing moral judgment against a person on the black worker’s salary to $40,000, and at the same
the basis of his racial membership and not allowing such time add $60,000 to his own profits by employing him
a judgment to outweigh the desire for profit. Such a in a capacity commensurate with his skill and ability.
judgment represents a logical contradiction in that mo- Of course, just as in the initial case, the wages and
rality pertains only to acts open to choice, while a man’s salaries of blacks brought into the more skilled and
racial membership is not open to his choice. The irratio- higher-level jobs would more and more tend to match
nality is then compounded by the sacrifice of one’s own those of the white workers performing these jobs. Be-
objective good—the earning of a profit—for the sake of cause as employers competed for blacks, their wages
the irrational judgment.) Because of their higher profits, would rise, while, in order to be competitive with the
the more rational employers would have a relatively black workers, the white workers would have to accept
greater income out of which to save and expand their reductions. Indeed, once the first few blacks or members
businesses than the irrational majority. Moreover, since of other groups in a comparable situation are brought into
they operated at lower costs, they could afford to charge an occupation in which they were previously unrepre-
lower prices and thus increase their profits still further sented and succeed in proving their ability by actual
by taking customers away from the irrational majority. satisfactory performance, a dynamic effect ensues. The
The result of these factors would be that the more rational breaking of the taboo, followed by the visible proof of
employers would tend to replace the less rational ones in its lack of rational foundation, changes the way in which
economic importance. They would come to set the tone such individuals are viewed. The demand for their ser-
198 CAPITALISM
vices then greatly increases. (The history of major league women at lower wages for the same work as whites or
baseball provides an excellent illustration. Once the taboo men. They thus directly prevent businessmen from find-
on the admission of blacks was broken with the employing the employment of blacks or women in the higher
ment of the very able Jackie Robinson, all barriers to the positions to be unusually profitable—profitable enough
admission of blacks soon fell.) to begin defying traditions and customs based on nothing
In connection with the fact that free competition with more than empty stereotypes.
members of so-called minority groups can entail a fall in Later discussion will show the especially destructive
the wage rates of the average member of the groups effects of minimum-wage and prounion legislation on
already established, most notably, white male workers, blacks, in aborting the very possibility of their gaining
it should be realized that any such reductions in wage significant advancement.26
rates would take place as part of a process operating to ***
raise the real wages—the actual standard of living—of The uniformity-of-profit principle implies that along
the average member of all groups. For it would be with equal pay for equal work, capitalism operates to
accompanied by reductions in the prices of consumers’ supply the members of all groups on equal terms in
goods greater than any reduction in after-tax money their capacity as consumers. As a demonstration of this
incomes experienced by the average member of the fact, assume that blacks had to pay monthly rents just
groups already established. This conclusion is conclu- 5 percent higher than those of whites, while the land-
sively demonstrated in later chapters of this book.24 lord’s costs were the same in both cases. This 5 percent
Of course, none of the above developments can occur premium would constitute a major addition to a land-
if they are stopped by the initiation of physical force. If, lord’s profits. If a landlord’s profit margin—his profit
for example, the local Ku Klux Klan is able to burn down as a percentage of his rents—were normally 10 per-
the factory of an employer who employs blacks instead cent, a 5 percent addition to his rents would constitute
of whites, because it knows it will go unpunished by the a 50 percent addition to his profits. Even if his profit
law; or if local government officials are capable of sud- margin were initially as high as 25 percent, a 5 percent
denly finding all kinds of violations of building, health, addition to his rents would constitute a 20 percent
and safety codes on the part of such an employer, to the addition to his profits.
point of crippling his operations, then employers will not In response to such premium rates of profit, housing
seek to take advantage of the lower wages of blacks, and construction for blacks would be stepped up, and a larger
thus the wages of blacks will not be raised to parity with proportion of existing housing would be rented to them.
those of whites of equal skill. The effect of this increased supply of housing, of course,
Although not motivated by racial prejudice, what is would be to reduce the rental premium paid by blacks.
also capable of aborting the advance of blacks (and And because a mere 1 percent premium would mean
women), particularly at the higher levels of employment, significant extra profits in supplying blacks with hous-
is a system of taxation that takes away the greater part of ing, even a premium of this small size could not be
the additional profits that might be made by defying maintained. Thus, blacks would pay no higher rents than
custom and making the necessary innovations of bring- whites, and obtain housing equal in quality to that ob-
ing them into fields of employment in which they were tained by whites.
previously not represented. Indeed, industries whose prof- Likewise, assume that merchants in black neighbor-
its are limited by the government, such as public utilities, hoods charged higher prices than the same goods would
or whose output is purchased on a cost-plus basis, such bring in other neighborhoods, while the merchants’ costs
as that of defense contractors, have no financial incentive of doing business were the same in both places. The
whatever to make such innovations. And, of course, in higher prices in such a case would constitute a clear
an environment in which destructive government regu- addition to profits. With higher profits to be made in
lations can be unleashed at any time on virtually any black neighborhoods than white neighborhoods, mer-
business, or in which valuable government favors or chants considering the location of new stores would
outright government subsidies can be obtained—in an choose the black neighborhoods. The influx of new
environment, therefore, in which it does not pay to have stores, of course, would lower selling prices in the black
enemies, or to offend any significant group, or, as the neighborhoods; and the process would go on until the
saying goes, in which it does not pay “to rock the boat”— prices and the profits to be made in those neighborhoods
businessmen will not be very quick to make such contro- were no higher than elsewhere. (Regrettably, today it is
versial innovations in employment.25 Ironically, such often the case that retail prices in black neighborhoods
measures as equal-employment-opportunity laws directly are substantially higher than for the same goods in white
rule out the very possibility of employing blacks or neighborhoods and, at the same time, merchants are
24
25
26 Seethis
On these
below,
subject,
points,
chap.see
see
9,below,
pt.
George
C, sec.
chap.
Reisman,
8; 10,
chap.
sec.
Capitalism:
13,
2, the
pt. C,
subsection
sec.
The1;Cure
chap.
“Monopoly
for
14.,
Racism,
pt. B,
Based
sec.
pp. 12–14.
7.
onSee
Minimum-Wage
What
also Capitalism:
is described
andThe
here
Prounion
Cure
is government-inspired
for
Legislation:
Racism, pp.
The
6–8.
Exclusion
bureaucratic
of the
management
Less Able and
taking
the Disadvantaged.”
the place of profit management. On this subject, see Ludwig von Mises, Bureaucracy(1944; reprint ed., New Rochelle, New York: Arlington House, 1969), pp. 64-73. See also below, chap. 9, pt. A, sec. 2, the subsection “Profit Management Versus Bureaucratic Management.”
moving out of the black neighborhoods rather than mov- than they lost whites. This would have been certain to
ing in. This situation is the result of the existence of occur in areas where the population was relatively con-
higher costs of operation in the black neighborhoods— centrated—that is, lived in cities or large towns—and in
caused by such phenomena as higher rates of burglary, which the proportion of blacks was relatively high. In
pilferage, and arson—coupled with the inability in many such areas, a businessman who desegregated would have
cases to raise prices sufficiently to cover such higher been able to count on a relatively large black market to
costs, which inability results from the fact that prices are more than compensate him for his loss of white custom-
limited by competition with stores in surrounding areas. ers. For example, imagine a mass merchandiser, such as
The obvious solution is to reduce the crime rate. Despite Sears, in a Southern town where there were two other
all the rhetoric to the contrary, the economic self-interest such stores. If this store abolished segregation, it would
of the average black is allied with that of the merchants certainly not have lost all of its white customers. Not that
who supply him, not with that of the criminals who many Southern whites were so bigoted that they would
impoverish and destroy the merchants.) have refused to shop there just because the store no longer
*** humiliated blacks. Desegregating, however, would have
Moreover, under laissez-faire capitalism racial segre- enabled this store to gain a large number of black cus-
gation would disappear, even though it would be legally tomers from the other two stores, for the blacks would
permissible on private property. It would disappear be- have flocked to where they were treated as human be-
cause it is fundamentally incompatible with the require- ings. Desegregation would thus have been profitable for
ments of profit-making and because it is irrational. this store.
The businessman seeking profit is vitally dependent This case would have been repeated throughout the
on the patronage of customers. This dependency is ex- South. From practically the first day of freedom from
pressed in such popular sayings as “the customer is king” government intervention and government sanctioned
and “the customer is always right.” Blacks are customers, private coercion, there would have been voluntarily
and, as they rose economically, would be more and more unsegregated stores, restaurants, hotels, and other estab-
important customers. It is absurd to believe that business- lishments. The existence of these unsegregated establish-
men would want to turn customers away by denying ments in their midst would then have acted to change the
them access to their premises or by humiliating them attitude even of those whites who had initially refused to
with such requirements as separate drinking fountains. deal with them. They would have seen with their own
The businessman’s desire for profit makes him put aside eyes that others were not contaminated by contact with
all such malice. It does not matter that he personally may blacks and that they would not be either. Thus, as time
not like blacks. All he has to like is their money. Compe- went on, fewer and fewer whites would have been pre-
tition with other businessmen for the patronage of blacks pared to withdraw their business from establishments
then does the rest. which desegregated. The result would have been that
It might be objected that despite the willingness of businessmen would have had less and less to lose by
businessmen to abolish segregation when doing so is desegregating; and the rising earning power, and thus
profitable, the attitudes of white customers might prevent growing buying power, of blacks would have given them
such action from being profitable. For example, it would more and more to gain. Finally, segregation would have
obviously not be profitable to gain five poor black cus- come to be regarded as eccentric and then have ceased
tomers and lose ten good white ones as a result of to exist altogether.
desegregating. In this way, even such barriers as racially restrictive
Cases such as this could exist, in places such as the covenants in real estate would have been overcome.
deep South of previous generations. But they could exist Property free of such restrictions, and therefore open to
only in an ever-diminishing sphere. Even in the deep a wider market, would have become more valuable than
South of the past, there were many whites who positively property which carried them. Such covenants would
desired equal treatment for blacks, and many more who have fallen into disuse and have been eliminated by
did not oppose it strongly enough to withdraw their voluntary consent.
patronage from a business which desegregated. As a Thus, even in areas such as the deep South, the exten-
result, in the absence of government intervention, and the sion of the economic freedom of capitalism to racial
threat of private violence sanctioned by local govern- matters would have meant a significant measure of im-
ments, there would have been many businessmen in the mediate integration, followed by an accelerating growth
South who would have found that, while they might lose in integration. And it would all have been achieved
some white customers by desegregating, they would by voluntarily, in the pursuit of self-interest, in a spirit of
no means lose all, and would gain more black customers mutual good will.27
27 For an account of the precise nature of all the government intervention that has blocked the benevolent operation of capitalism on behalf of blacks, in their capacity both as wage earners and as consumers, not only in the South but also in the North, see George Reisman,Capitalism: The Cure for Racism, pp. 10–28. See also below, chap. 10, sec. 1, the examples of freedom of opportunity, and chap. 10, sec. 2, the subsection “Monopoly Based on Minimum-Wage and Prounion Legislation: The Exclusion of the Less Able and the Disadvantaged.”
200 CAPITALISM
example, that the price of bread, automobiles, newspa-

5. Prices and Costs of Production pers, restaurant meals, paper clips, and countless other
In a free market the prices of products tend to be goods does not change with every change in demand. A
governed by their costs of production. change in demand must be fairly substantial to raise or
This principle follows directly from the uniformity- lower the price of these goods. In cases in which the
of-profit principle, and we have already glimpsed it in demand changes are not too substantial, they are simply
discussing the long-run consequences of repealing price accompanied by corresponding changes in production,
controls. The uniformity-of-profit principle implies that while the price of the product remains the same.
the prices of products tend to equal their costs of produc- In cases of this kind, it is not correct to say that the
tion plus only as much profit as is required to afford the price of the product is determined simply by supply and
going rate of profit on the capital invested. If prices demand. On the contrary, the price of the product deter-
exceed costs by more than this amount of profit, then mines the quantity of the product the buyers buy, and the
there is a tendency toward expanded production and quantity that the buyers buy determines the quantity the
lower prices (and possibly higher unit costs). If they fail sellers produce and sell.
to exceed costs by as much as this amount of profit, then The prices themselves in these cases are set by sellers
there is a tendency toward reduced production and higher on the basis of a consideration of costs of production. It
prices (and possibly lower unit costs). The stopping point is not that each seller sets his price on the basis of his own
is, as I say, where prices equal costs of production plus costs. But some seller in an industry—usually, the most
the amount of profit required to yield the going rate of efficient large firm and one that is in a position to expand
profit on the capital invested. its production significantly from existing capacity—sets
Now there are two ways that cost of production gov- its price on the basis of a consideration of costs, and the
erns prices. One way is indirectly—through variations in other firms are forced to match its price. The other firms
the supply of the good, as above. The other way is cannot exceed its price, because it has the additional
directly—through the decisions of the sellers of the good production capacity required to supply many of their
in setting their prices. customers if they should try to sell at higher prices. Nor,
Let us consider first the cases in which the role of cost as a rule, can the other firms undercut its price, because
is indirect—for example, all or most agricultural com- it is the lowest-cost, most efficient producer, and sets its
modities. In any given year, the price of wheat, or pota- price accordingly.
toes, or cotton, or whatever, is determined simply by The cost of production on the basis of which such a
supply and demand. Over a period of years, however, the firm sets its price is not primarily its own cost of produc-
price of such a good tends to gravitate about its cost of tion, but the costs of production of its less efficient
production. This is because whenever the price begins to competitors or, if it has no current competitors, the costs
exceed cost by more than what is required to afford the of production of potential competitors. It sets its price in
average rate of profit to the industry, additional capital such a way as to prevent its competitors from earning
will be invested, supply will be expanded, and the price too-high profits, because it does not want them to accu-
and profit will decline. If the price fails to provide the mulate the capital that would enable them to become
average rate of profit to the industry, capital will be more efficient and to expand at its expense. Nor does it
withdrawn, supply will be reduced, and the price and want to invite new firms into its field. It wants to avoid
profit will be restored. What ties price to cost in such a creating a situation in which it makes it possible for
case is variations in supply. others to make inroads into its business, which, once
However, there is a vast category of cases in which started, might lead to its own downfall. It therefore tries
the connection between price and cost is far more direct. to set its price in such a way as to prevent this, which
This is the case of most manufactured or processed means it tries to set its prices not very far above their
goods. In these cases, the sellers typically maintain in- costs—as a maximum. At the same time, of course, it
ventories of their goods and have plant capacity available strives to reduce its own costs of production even further,
to produce more. In such a situation, a rise in demand, so as to be able to expand its own profits and to be able
provided it is not too large, is met out of inventories, and comfortably to meet any price reductions inaugurated by
before the inventory is exhausted, production is stepped competitors that in the meanwhile may have grown more
up from plant capacity held in reserve. Similarly, when efficient. It is only when the demand for the product
a fall in demand occurs, inventory is temporarily allowed becomes so strong that it is not possible to meet it at a
to build up, and production is cut back. Provided the price determined in this way, that the price rises to permit
changes in demand are not of major proportions, there is high profits to all in the field.
little or no change in price. It can be observed, for In the case of manufactured and processed goods,
therefore, the direct determinant of price is cost of pro- we want an ultimate explanation of prices determined by
duction.28 costs, we must explain prices determined by supply and
However, as should already be clear from Chapter 5, demand. This will be our task, at a more advanced level
if we examine costs of production, we find that they are than before, in the next part of this chapter, as we com-
reducible to two things: to the physical quantities of the plete the presentation of the free market’s laws of price
means or factors of production employed to produce a determination.
good and to the prices of those factors of production.29
For example, the cost of producing an automobile equals
the quantity of each type of labor employed in turning PART B
out a car times the wage rates of that labor, plus the
quantity of steel used times the price of that steel, and so ALLOCATION PRINCIPLES
on. Now the prices of these factors of production are
themselves directly determined either by supply and
demand or by cost of production. For example, the wage 1. The General Pricing of Goods and Services in
rates are determined by supply and demand, while the Limited Supply
price of steel is determined by cost of production.30 Now The determination of price by supply and demand
the costs of producing steel and all the other elements of applies to all goods and services whose supply is a given
an automobile whose prices are determined by cost are fact and therefore limited for a longer or shorter period
themselves resolvable in the same way as the cost of of time to come. As we have seen, it also applies indi-
producing an automobile. That is, they in turn are based rectly (via determining the prices that constitute their
on prices directly determined by supply and demand and costs of production) to products whose supply can be
prices directly determined by cost of production. immediately varied in response to changes in demand.
It should be observed that as we keep pushing the It is necessary to consider a kind of catalog of goods
matter back and back, the cumulative role of prices and services in limited supply, in order to understand
directly determined by supply and demand becomes concretely the range of application possessed by the
greater and greater. In the case of our automobile, the principle of supply and demand.
production cost of an automobile ultimately depends on The most important item in this list is, of course,
the wages of auto workers, the wages of steel workers, human labor, which is always limited by the number of
the wages of iron miners, and so on, all of which are people able and willing to work. Furthermore, the labor
determined by supply and demand. And, along the way, of each person is limited by his need for rest and relax-
the prices of some of the materials, such as the copper ation. And, as the general level of real wages—that is,
and zinc the auto companies may have to buy, the raw the quantity of goods a worker can buy with his money
rubber the tire manufacturers buy, the scrap metal the wages—goes up, the fewer are the hours that people are
steel producers need—these prices, too, are directly de- prepared to work. This occurs because to the degree that
termined by supply and demand. Ultimately, therefore, people can earn a higher standard of living from any
as far as it rests on prices, cost of production itself is given number of hours of labor, their need for the addi-
determined entirely by supply and demand. tional real income that extra hours could provide is less
Consequently, when prices are determined by cost of intense. In addition to this, of course, the supply of skilled
production, what they are ultimately determined by is labor is always still further limited, and that of profes-
still supply and demand, but supply and demand operat- sional-level labor even more so; and, at any given time,
ing in a wide context—that is, by supply and demand the supply of labor in each occupation and each location
operating in the context of the labor market and in certain is very narrowly limited.
broad commodity markets, not in the relatively narrow After labor services come materials whose supply is
market of the individual product itself.31 temporarily limited, such as agricultural commodities be-
The analysis of cost of production into elements which tween harvests. Housing and buildings of all kinds are in a
are themselves determined by supply and demand brings state of temporarily limited supply, because considerable
us full circle. We began the analysis of price determina- time is always required before their supply can be increased
tion in Part B of Chapter 5 with a discussion of supply through new construction. Any material, any product what-
and demand, and now we must return to supply and ever, is capable of being in limited supply temporarily, if
demand, in order to explain prices determined on the the demand for it outruns the ability to supply it from
basis of cost of production. For, as we have seen, insofar existing facilities at a price based on cost of production.
as cost of production rests on prices, those prices are Land sites are in the category of goods in limited
ultimately determined by supply and demand. Thus, if supply on a long-run basis, insofar as there is anything
31
29
30
28 As
This
See
Wage
previously
above,
accords
rateschap.
are
with
indicated,
explainable
5,the
pt.views
B,this
sec.
in
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terms
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classical
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and
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economist
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analysis
David
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even
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Supply
in cases
Seeand
and
David
inCost.”
supply
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Ricardo,
they
and demand
are
Principles
imposed
is the
ofarbitrarily
Political
work of the
Economy
by great
laboreconomist
unions
and Taxation,
or governments.
Eugen
3dvon
ed. (London,
Böhm-Bawerk,
For in such
1821),
cases,
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chap.
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ofessential
30
theespecially;
founders
part ofreprinted
the process
Austrian
as vol.
isschool
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Works
restriction
andVery
Correspondence
of the
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are
of David
face
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propounded
Ricardo
a given,demand.
ed.by
Piero
John
Sraffa
Stuart
(Cambridge:
Mill, the lastCambridge
major representative
Universityof
Press,
the British
1962).classical school. Cf. Eugen von Böhm-Bawerk, Capital and Interest,3 vols. (South Holland, Illinois: Libertarian Press, 1959), 2:168–76 especially, but also 2:248-56 and 3:97–115; John Stuart Mill, PrinciplesofPoliticalEconomy, Ashley ed. (1909; reprint ed., Fairfield, New Jersey: Augustus M. Kelley, 1976), pp. 442–68. As previously noted, a lengthy quotation from Böhm-Bawerk, expressing the substance of his views on the relationship between cost of production and prices appears below in chap. 10, sec. 8.
202 CAPITALISM
special or unique about them that makes them superior determining the relative spending for all the different
to other land, such as their superior location or superior consumers’ goods, each with its own requirements for
fertility.32 labor of specific types, the consumers determine how
In a few cases, the products of such land sites are also much is spent in the economy as a whole for each type
in the category of goods in limited supply on a more or of labor in relation to every other type of labor, both in
less permanent basis: for example, wines of a special terms of specific occupations and in terms of wide groups
flavor that can be produced only from grapes grown on of occupations, such as skilled labor versus unskilled
a soil of a very limited extent, or caviar found in sturgeon labor. The same applies to all other goods and services
beds located only in a few places. in limited supply, such as diamonds versus wheat, real
Goods such as paintings and statues by old masters, estate in New York City versus Des Moines, Iowa, and
first editions, rare coins, and so on, are in the category of so on. In this way, the value judgments of the consumers
goods in limited supply on an absolutely permanent ultimately determine the prices of all goods and services
basis, because their production is necessarily past. in limited supply in relation to one another. It is the value
Finally, all second-hand goods are in a state of limited judgments of the consumers that ultimately determine
supply. how much more professional-level labor must be paid
The prices of all goods and services in limited supply relative to skilled labor, and how much more skilled labor
are determined in an essentially similar way in a free must be paid relative to unskilled labor.
market and have a similar significance. One basic deter- In sum, the quantity of money determines the absolute
minant is the quantity of money in the economic system. height of the prices of goods and services in limited
As previously indicated, the quantity of money deter- supply, and the value judgments of the consumers deter-
mines aggregate demand.33 It can do this, of course, only mine their relative heights. The value judgments of the
in determining at the same time the demand for the consumers are, of course, judgments with respect to
various individual goods and services. We will not go too marginal quantities, and one may say that the relative
far wrong if we assume that once the economic system prices of goods and services in limited supply are deter-
becomes adjusted to a change in the quantity of money, mined by their relative marginal utilities, or, in the case
the effect of the change is to change the demand for of factors of production, the relative marginal utilities of
everything more or less to the same degree. For example, their final products to the consumers.35
in the long run, if the quantity of money doubles, and
everything else remains the same (including such things
as the rate at which the money supply increases and is 2. The Pricing and Distribution of Consumers’
expected to go on increasing), the demand for each Goods in Limited Supply
individual good and service in the economic system For our purposes, the most important characteristic of
should also tend to double. With a doubled quantity of the price of a good in limited supply is the fact that in a
money, we should expect that eventually the demand for free market it always tends to be set high enough to level
shoes, baseballs, zinc, skilled and unskilled labor, and all down the quantity of the good demanded—that is, the
other goods and services should all just about double. quantity of it that buyers are seeking to buy—to equality
This means that, in the long run at least, we can regard with the limited supply of it that exists.
the quantity of money as acting more or less equally on For the sake of simplicity, consider the case of a rare
the price of everything.34 wine, for example. It may be that, potentially, millions
The second major determinant of the prices of goods of people would enjoy drinking this wine and would be
and services in limited supply is the value judgments of prepared to buy tens of millions of bottles of it every year.
the consumers with respect to the various goods and But because of the limitation of the special soil on which
services on which they spend the quantity of money. The the necessary grapes can be grown, no more than, say,
value judgments of the consumers determine, in effect, ten thousand bottles of the wine can be produced in an
how the aggregate demand that is made possible by any average year. What happens in this case is that the price
given quantity of money is distributed among the prod- of the wine rises to such a point that the great majority
ucts of the various industries and among all the different of potential buyers are simply eliminated from the mar-
goods and services in limited supply. The value judg- ket. They look at the high price and say to themselves,
ments of the consumers determine, for example, how “This wine is simply too expensive for me, however
much is spent for shoes versus shirts, and indirectly, delicious it may taste.” In fact, in the knowledge that this
therefore, how much is spent for leather versus cloth, would be their decision, the very existence of such a wine
cowhides versus cotton, and grazing land versus cotton would probably never even be called to the attention of
land; similarly for the labor services at each stage. In the great majority of people. As for those who do buy the
32
33
34
35 Submarginal
See
While
above,
the economic
chap.
theland,
discussion
5,such
pt.
system
B,assecs.
at
most
is
thein
1deserts
very
and
process
2,
endespecially
and
of
ofmountains,
adjusting
chap. the
5, pt.
to
subsection
is
B,
a change
limited
sec. 2, from
in
the
“The
the
subsection
aConcept
quantity
mathematical
of
“The
money,
Elasticity
Circularity
pointthe
ofofdemand
view,
Demand,”
of Contemporary
butfor
stands
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andvarious
below,
beyond
Economics’
goods
chap.
the limit
7,
andpt.
of
Concept
services
A,
thesec.
supply
1,
of
isthe
Demand.”
affected
ofsubsection
economically
unevenly.
“The
useable
Cf.
Quantity
vonland.
Mises,
Theory
Its Human
limitation
of Money.”
Action,
in thisSee
pp.
latter
412–14;
alsosense
chap.
idem,
provides
12, sec.
Theit1,
Theory
with
below.
noof
economic
Money and
value,
Credit,
for itnew
has ed.
zero(1953;
marginal
reprint
utility.
ed., Irvington-On-Hudson, New York: The Foundation For Economic Education, 1971), pp. 137–41. Von Mises argues that there are also permanent effects on the relative demands for the various goods and services, and thus on their relative prices.
wine, the high price probably makes almost all of them dropped out of the bidding altogether. At some point, the
restrict the amount of it that they consume. At fifty quantity of gasoline demanded would have been cut back
dollars a bottle, say, even millionaire wine lovers proba- to equality with the 1,000 gallons available. It makes no
bly drink it much less often than they would at, say, ten difference, of course, if instead of conducting an auction,
dollars a bottle. the service station owner had simply set his price where
The case of apartment rentals is essentially the same. such an auction would have set it. In either case, people
In a free market, rents go high enough to level down the who previously were prepared to buy 2,000 gallons of
quantity of rental space demanded to, or somewhat below, gasoline would have found that they could not afford
equality with the limited supply of it that exists. The only more than 1,000 gallons and would have limited their
difference is that in an economy like that of the United purchases accordingly.
States, no one need be excluded from the rental market In fact, things would have gone further than this. A
entirely. Everyone is always able to afford to rent some service station owner not restricted by price controls
space, even if it is only half of a room he must share with would have considered not only the demand of the driv-
someone else.36 ers of the cars presently in line, but also the demand of
Always, a free-market price acts to level the quantity all the drivers of the cars that might have shown up later
demanded of any good or service in limited supply down in the day, or the next day, or any time before his next
to equality with the supply that exists. deliveries were to arrive. He would not have been willing
This characteristic of a free-market price has a major to sell gasoline to someone presently in line if he ex-
implication. It implies that shortages cannot exist in a pected that someone else would show up later willing to
free market, even in cases of the most severely limited pay more. The price he set, in other words, would have
supply. That is because, however limited the supply may corresponded to the price set in an auction market that
be, a free-market price always rises high enough to level extended over time and represented future bidders as
down the quantity demanded to equality with the supply well as present bidders.
available. In a free market, limited supplies do not cause The effect of the owner’s pricing gasoline in this way
shortages, but high prices. At the high price, there is no would have been not only further to reduce the quantity
shortage. demanded on the part of those presently in line, thereby
In order further to prove this point, let us take an reducing the waiting line further, but actually to make
extreme example—one that is very unfair to the free gasoline available at all times at his service station.
market, namely, the case of the gasoline shortage of Since all other service station owners would also have
1973–74. In a variety of ways, the government was been pricing gasoline in the same way, motorists would
responsible for vastly reduced supplies of gasoline, es- soon have realized that gasoline was in fact available
pecially in the Northeast. Let us start with these artifi- whenever they wished it and in whatever quantity they
cially low supplies of gasoline and imagine that at that wished it—provided they were willing to pay the price.
point the government had simply repealed its price con- There would have been no shortage and motorists would
trols on gasoline. have known that they did not have to fear a shortage; they
Whoever went through the experience should think would have ceased to be afraid to drive with less than a
back to the sight of service stations faced with multi- full tank of gasoline. (It should be realized that this is
block-long lines of cars waiting for gasoline. Let us largely a description of what actually happened later on.
imagine a service station that has 1,000 gallons of gaso- Shortages ended in the spring of 1974 because the con-
line in its own tanks and is confronted with a line of cars trols on oil prices were substantially relaxed, and totally
whose drivers are seeking 2,000 gallons of gasoline for eliminated as far as imported oil was concerned.)
their tanks. This is a case of 1,000 gallons of gasoline Of course, in the case of a good like gasoline, a rise in
available, 2,000 gallons demanded. Even in this case, a price to the free-market level not only restricts the quan-
free market would have equalized the quantity demanded tity demanded, and eliminates the need to hoard, but also
with the supply available. If the owner of the gas station pulls in supplies from other geographical areas. As we
had been free to set his own price, he would have set a will see, it also causes oil refineries to step up the
price high enough to make those drivers reduce the production of gasoline at the expense of other petroleum
quantity they demanded by 1,000 gallons. Such a price products, if necessary. And, in the long run, it increases
undoubtedly existed. If the reader doubts this, he should the total production of oil products. In these ways, a free
imagine the gas station owner simply auctioning his market not only balances the demand and supply of
gasoline off to the highest bidders. As the price at the gasoline, but does so at the point of large and, indeed,
auction rose, more and more bidders would have re- continuously growing supplies.
stricted the quantities they bid for, and some would have However, the crucial point here is that even in the case
36 Of course, government intervention can deprive people of the ability to rent space they can afford to rent, by declaring such space to be substandard and its rental illegal. Such government intervention causes homelessness. See below, chap. 10, sec. 2, the subsection “MonopolyBased on Minimum-Wage and Prounion Legislation: The Exclusion of the Less Able and the Disadvantaged.”
204 CAPITALISM
of goods in strictly limited supply, there are no shortages, and sought after by large numbers of bidders or potential
no waiting lines, in a free market. Whoever has the price buyers. Just as in the case of the painting, in all these
is always able to buy as and when he wishes, and as much cases, too, the fact that a price is high enough to level
as he wishes. down the quantity of the good demanded to equality with
*** the limited supply of it that exists is very much to the
There is a further very important point that follows interest of all those buyers who are willing and able to
from our discussion. This is the fact that in the context pay that price. That price is their means of eliminating
of limited supplies, it is not only to the self-interest of the the competition for the good from other bidders or po-
sellers that prices rise when conditions make it necessary, tential buyers not willing to pay as much. It is their means
but, no less, to the self-interest of the buyers. It is simply of being able to secure the good for themselves. In our
not true, as most people seem to believe, that the interests example of the wine, for instance, the price of fifty
of buyers are always served by low prices. On the con- dollars a bottle—if that is the price necessary to level the
trary, it is to the self-interest of buyers of goods in limited quantity demanded down to equality with the supply
supply that prices be high enough to exclude their com- available—is in the interest of everyone who values the
petitors from the market. wine at or above fifty dollars. If the price were any lower,
To grasp this point in the clearest possible way, imag- the wine would be within reach of other potential buyers,
ine an art auction, with two bidders for the same painting. who did not value it so highly, and it would, therefore, to
One of them is willing to go as high as $1,000; the other, that extent, not be available to those who did value it so
as high as $2,000. The man whose limit is $2,000 would highly. In the same way, whatever price of a square foot
certainly like to pay as little as necessary. He would be of rental space, or any other good, is required to level the
glad to pay just $100, or less, if he could. But given the quantity demanded down to equality with the supply
fact that someone else at the auction is prepared to bid available, that price is to the interest of all those who
up to $1,000, it would be very foolish for this man to value that space or that good at that price or any higher
insist on paying any preconceived figure below $1,000. price. If the price were any lower, they would simply lose
If he arbitrarily insisted on bidding any amount below their ability to secure the good for themselves—the good
$1,000, the effect of his action would simply be to allow would be bought up by those not able or willing to pay
the painting to go to his rival. If he bid exactly $1,000, as much, and to that extent it would be unavailable to
and refused to bid any more, he would make it a matter those who did value it sufficiently.
of accident to whom the painting went—if the other ***
bidder bid the $1,000 first, it would probably go to that There are two possible misunderstandings of what I
other bidder. In either case, by refusing to outbid the am saying that I want to anticipate and answer before
other bidder, he would prevent himself from getting the going any further.
painting he wants and which he really values above the First, I want to stress that the ability to outbid others
other bidder’s maximum of $1,000 for the painting. for the supply, or part of the supply, of a good is by no
There is absolutely no difference as far as this man is means the exclusive prerogative of the rich. The fact is
concerned if, instead of his having to appear personally that absolutely everyone exercises this prerogative to the
at an auction and outbid his rivals, the art dealer who extent that he earns an income or has any money to spend
possesses the painting anticipates the strength of his bid, at all. Even the very poorest people outbid others, and
and simply sets a price on the painting in his gallery that the others whom they outbid can include people who are
is high enough to deter other potential buyers and thus to far wealthier than themselves. Of course, this is not true
reserve it for him. From the standpoint of the rightly in a case such as our example of the rare wine, where the
understood self-interests of this man, it is a positively entire supply is obviously consumed by those who are
good thing that the art dealer asks more than $1,000, quite well-to-do.
because if he did not, someone else would buy the But it is true in a case such as rental space, or housing
painting and it would be gone by the time our man got in general, where everyone succeeds in obtaining some
around to trying to buy it. part of the supply. In a case of this kind, a wealthier
The only difference between the cases of the art family will obtain a larger share of the supply than a
auction and the art dealer and that of all other commod- poorer family, but what stops it from obtaining a still
ities in limited supply is simply one of size. Instead of it larger share is the fact that the poorer family outbids it
being a unique painting that is put up for auction or for for part of the supply. For example, a wealthier family
sale and which is of interest to a relatively small number may rent an eight-room apartment, while a poorer family
of bidders or potential buyers, it is more common to have rents only a four-room apartment. The reason that the
millions of units of the same good offered in the market wealthier family does not rent a nine-room apartment is
the fact that the poorer family is able and willing to pay In order to avoid a second possible misunderstanding
more for its fourth room than the wealthier family is able about the interest buyers have in prices being sufficiently
and willing to pay for a ninth room. high, I want to stress that I am not saying that people
This competition, of course, does not take place at an should simply welcome higher prices and be glad to pay
actual auction, but the result is exactly the same as if it them. Obviously, rising prices impose major hardships
did. If, for example, apartments are renting at some given on large numbers of people, and they cannot simply look
figure per room, such as $300 a month, and the poorer on stoically and be glad of their ability to pay those
family decides it can afford a four-room apartment, while prices. However, there are two separate things here that
the wealthier family decides it cannot afford a nine-room must be very carefully distinguished, namely, the fact of
apartment, the implication is that the poorer family val- the rise in prices and the cause of the rise in prices.
ues a fourth room above $300, while the wealthier family Our example of the art auction will serve to make this
values a ninth room below $300. In effect, the poorer distinction clear. Assume that the losing bidder, whose
family outbids the wealthier family for the marginal maximum bid was previously $1,000, is now placed in a
room. If this poorer family wants to be sure of obtaining position in which he is able to bid as high as $1,500. In
its four rooms, it is just as important to it that rents be order to outbid him, our man will now have to bid above
high enough to level the quantity of space demanded $1,500, whereas before he only had to bid above $1,000.
down to equality with the supply available, as it is to the Obviously, this is not a pleasant development for our
richer family. man. But nevertheless it is still to his interest to bid a
If the price were any lower than the necessary equi- price that is sufficiently high to secure him the painting.
librium price, then while some poorer families might be Our man should, indeed, still value the opportunity to
able to afford a fifth room, wealthier families would just outbid his rival. His sorrow should be directed only at
as often be able to afford a ninth room. And as often as that which now makes it more difficult for him to do so.
poorer families succeeded in grabbing off a fifth room at In the same way, even in periods of rising prices
the expense of a wealthier family’s eighth room, a wealthier people should, indeed, still value the opportunity to
family would succeed in grabbing off a ninth room at the outbid their rivals and the fact that sellers set prices high
expense of a poorer family’s fourth room. The same enough to achieve this objective for them. Their anger
results apply to any good that is universally consumed: should be directed only at that which makes it more and
an artificially low price permits the “rich” to expand their more difficult for them to accomplish this overbidding.
consumption at the expense of the “poor” just as often as What they should be angry about is not the existence of
it permits the poor to expand their consumption at the a market economy and the way the market economy
expense of the rich. works but at the presence in the market of a vast gang of
Thus, the setting of prices at levels high enough to dishonest bidders and dishonest buyers, a gang that bids
achieve equilibrium between the quantity demanded and and spends dollars created out of thin air in competition
the supply available is to the rational self-interest of with their earned dollars. As later discussion will show,
everyone, irrespective of his income. Moreover, a har- the source of these dollars created out of thin air is none
mony of interests exists in a free market even in those other than the government. And the dishonest gang con-
cases in which the price totally excludes some people sists of it and of everyone else who demands and receives
from the market for particular goods. It exists on a such fiat money.37
remoter plane. For example, the price of Rembrandt In other words, it is inflation and the pressure-group
paintings excludes the author of this book from the demands for inflation that the victims of rising prices
market for those paintings entirely and without question. should denounce, not the market economy or the oppor-
Nevertheless, it is to my self-interest that if someone tunity it affords them for outbidding their rivals. It is the
must be excluded, it be me, and not an industrial tycoon. entry of newly created money into the economy that they
For if his vastly greater contribution to production did should seek to stop, not the registry of that newly created
not enable him to live at a better level than I do, I would money in the form of higher prices. Instead of, in effect,
be in serious trouble. To put this another way, if an calling for the closing of the market, they should simply
industrial tycoon can have his art collection and other call for an end to the government’s inflation of the money
super-luxuries, then I can have all the food I want, a supply, and thus for the establishment of a fully free
house, an automobile, and so on, and more and better all market—a market free of this as well as the government’s
the time. If I were to be able to compete on equal terms imposition of price controls.
with him for the super-luxuries, he would have no motive ***
to conduct production in such a way that I am assured of On the basis of the way their prices are determined,
all the necessities and lesser luxuries. the distribution of consumers’ goods in limited supply—
37 See below, chap. 12, secs. 1–3, and chap. 19, passim.
206 CAPITALISM
in the sense of who actually ends up with them—always he buys. Like a consumer, a businessman must be willing
tends to take place in a free market in accordance with to pay prices that are high enough to secure him the things
two criteria: the relative wealth and income of the various he wants. This means that he must be willing to pay prices
potential buyers and the relative intensity of their need that outbid what other businessmen are prepared to offer
or desire for the good in question. The wealthier a buyer for the same part of the supply. (It follows that the
is, the more of any good he can afford to buy—obviously. doctrine that self-interest drives employers arbitrarily to
But wealth is not the sole criterion of distribution. Where pay subsistence wages is as absurd as the belief that
two buyers possess the same wealth, the one who needs self-interest drives the bidder at an art auction to offer
or desires a good more intensely will be willing to devote scrap-paper prices for a valuable painting. Employers
a larger proportion of his wealth to its purchase, and he who would arbitrarily decide to pay too-low wages would
will therefore be able to outcompete an equally wealthy simply enable other employers to hire away their labor.
buyer who values the good less intensely. And, of course, The employer who wants labor must be willing to pay
in many cases a buyer who possesses a sufficiently strong wages that are high enough to make that labor too expen-
desire will be able to outcompete a wealthier buyer, sive for all its other potential employers.38)
sometimes even a substantially wealthier buyer. In our The only complication that is introduced by the price
example of the wine, for instance, a wine connoisseur of of a factor of production in limited supply is that it does
relatively modest means might very well be willing to double duty, so to speak. It not only levels down the
pay prices that a millionaire would not. Or, because of quantity of the factor that is demanded to equality with
their relative preferences, some poorer families might the supply available, but, indirectly, the quantity of all
outcompete some wealthier families not just for a mar- the various products of the factor as well.
ginal room, but for an equal-size apartment by devoting Let us consider first a simple case, such as cigarette
a sufficient proportion of their income to rent. tobacco, whose only product is cigarettes. The price of
In a free market, therefore, consumers’ goods in lim- cigarette tobacco not only levels down the quantity of
ited supply are distributed in accordance with purchasing cigarette tobacco that is demanded, but, as a major part
power directed by needs and desires, or, equivalently, in of the cost of producing cigarettes, it carries through to
accordance with needs and desires backed by purchasing the price of cigarettes and also levels down the quantity
power. Everyone consumes these goods in accordance of cigarettes demanded. The price of cigarette tobacco
with a combination of his means and his needs and thus adjusts the demand for cigarettes to the supply of
desires. cigarette tobacco. Observe just how this happens. As the
price of cigarette tobacco rises, the cost of producing
cigarettes rises, which, in turn, raises their price. As the
3. The Pricing and Distribution of Factors of price of cigarettes rises, the quantity of cigarettes de-
Production in Limited Supply manded falls. In fact, it is this fall in the quantity de-
All that we have learned about the prices of con- manded of cigarettes, as their price rises, that necessitates
sumers’ goods in limited supply applies to the prices of a fall in the quantity demanded of cigarette tobacco, as
factors of production in limited supply, that is, to the its price rises. As the price of cigarette tobacco rises,
prices of materials, labor, machinery, and anything else businessmen purchase less of it because they know that
that is bought for business purposes and that is in limited they cannot sell as many cigarettes at the higher prices
supply. that are necessary to cover the resulting higher costs of
The price of a factor of production in limited supply production. In this way, therefore, the price of cigarette
is also determined in such a way that the quantity of it tobacco levels down the quantity demanded both of
demanded is levelled down to equality with the limited cigarettes as well as cigarette tobacco to equality with the
supply of it that exists, just like a consumers’ good in supply of cigarette tobacco available.
limited supply. What pushes the price to the necessary Nothing is changed if we now consider the somewhat
height is, once again, a combination of the self-interests more complicated case of wheat or any other factor of
of the sellers and the buyers. The immediate buyers, production that has a variety of products, such as skilled
directly concerned, are, of course, businessmen. Busi- labor. As the price of wheat rises, the cost of production
nessmen desire a factor of production not for the satis- and prices of all products made from wheat—such as
faction of their own personal needs or wants, but in order bread, crackers, macaroni, whiskey, and wheat-fed cattle
to secure the means of producing goods for profit. Nev- and chickens—also rise. The rise in the prices of wheat
ertheless, it is just as much against the interests of busi- products reduces the quantity of the various wheat prod-
nessmen to try to pay too little for a factor of production ucts demanded, and this reduces the quantity demanded
as it is for a consumer to try to pay too little for something of wheat. Again, as the price of wheat rises, businessmen
38 For elaboration of this vital fact, and of its significance, see below, chap. 14, pt. B, sec. 1 and passim.
cut back their purchases in anticipation of the fact that specific products of wheat or skilled labor. The supply of
they will not be able to sell as many wheat products at the factor must be distributed among its various specific
the higher selling prices necessary to cover the higher products—in order to produce them.
cost of wheat. In this way, therefore, through its effect on This distribution of a factor of production among its
the cost of production and the selling prices of all the various products is the result of a further process of
various wheat products, the price of wheat equalizes not mutual bidding and competition among the consumers.
just the quantity of wheat demanded, but also the quan- Only this time, it is not merely one consumer bidding
tity demanded of all wheat products as a group, with the against another consumer, but the different needs, de-
supply of wheat available. sires, or purposes of one and the same individual con-
There is a further important similarity between what sumers bidding against each other, as well. For instance,
is accomplished by the price of a factor of production in there is a competition for wheat between its use for
limited supply and the price of a consumers’ good in baking bread, its use for making crackers, its use for
limited supply. If we look at the whole range of products making whiskey, feeding meat animals, and so on. There
of such a factor as forming a single group, we can observe is a competition for crude oil between its use for making
the same essential principle of distribution with respect gasoline, its use for making heating oil, and so on. And
to the factor that we previously observed with respect to there is a competition for the labor of each ability group
a consumers’ good in limited supply. Namely, the benefit among all of its various possible employments. Since the
of the factor, as conveyed by its various products, is same individual consumers consume most or all of the
distributed to the various individual consumers in accor- various products of these factors of production, the com-
dance with their relative purchasing power and in accor- petition is, as I say, ultimately largely one between the
dance with their relative desire for products of that type. competing needs, desires, or purposes of the same indi-
For example, the benefit of the supply of wheat is dis- viduals.
tributed to the ultimate consumers in accordance with a In order to grasp the nature and the importance of this
combination of their relative wealth and relative prefer- competition, let us consider the question of why just so
ences for products made of wheat. Other things being many bushels of wheat—to continue with that exam-
equal, richer buyers obtain the benefit of more of the ple—are devoted to each of its specific uses. Why aren’t
supply of wheat than poorer buyers. Not that richer a million bushels, say, withdrawn from making crackers
buyers eat more bread—they probably eat less of it—but and added on to baking bread? The reason this does not
they eat more meat, which requires the use of far more occur is that the consumers of the quantity of crackers
wheat to make possible its production pound for pound requiring the million bushels in question are perfectly
(in the feeding of cattle) than does bread. In the same willing and able to pay a price for the crackers that makes
way, a buyer with a relatively strong preference for wheat it profitable to cracker manufacturers to produce them at
products, such as a buyer who especially likes steak and the current price of wheat. The consumers of the crack-
scotch, is able to obtain a larger share of the benefit of ers, in other words, are willing to allow the producers of
the wheat supply than a buyer of equal wealth who values the crackers to pay the present price of wheat. But
these things less. suppose that a million bushels of wheat were used to
The benefit of the supply of crude oil, skilled and produce additional loaves of bread. In order to find
unskilled labor, and all other factors of production in customers for the additional bread, its price would have
limited supply is distributed to the ultimate consumers in to be reduced. In fact, in a country like the United States,
just the same way. where, as a rule, even the very poorest people can already
Thus far, it is evident that the prices of factors of buy all the bread they desire to eat, the price would
production in limited supply have the same characteris- probably have to be cut so drastically as to induce people
tics and the same significance as the prices of consumers’ to feed the extra bread to pigeons. Conceivably, the extra
goods in limited supply. The great difference between bread might not be saleable at any price. In any case, it
them pertains to the fact that there is an added dimension is clear that the bakers of bread would not be able to buy
to the distribution of the factors of production. Not only any additional wheat except at a lower price of wheat.
is the benefit of a factor of production distributed to And that means that the bread industry, in effect, bids less
different persons, in accordance with their relative wealth for the million bushels of wheat in question than the
and relative preferences, but the factor itself must be cracker industry. The cracker industry gets the wheat by
distributed to different concrete uses in production. Its outbidding the bread industry. And this happens because
benefit goes to the persons only by means of those ultimately the consumers of crackers are outbidding the
specific uses. For example, consumers do not buy the consumers of bread for the benefit of that wheat.
benefit of wheat or skilled labor as such, but the various For the same reasons, the reverse situation does not
208 CAPITALISM
occur either—that is, a million bushels of wheat are not bution of wheat, it was more important for the million
withdrawn from the bread industry and added on to the bushels to be employed in producing crackers that people
cracker industry. For the consumers of the present quan- wanted—as demonstrated by their willingness to pay for
tity of bread are willing to pay prices for that quantity them—than additional bread that people did not want or
that allow the bread industry to be profitable at the wanted less. It was more important for a million bushels to
present price of wheat. But the consumers of crackers be retained in producing bread that was desired than to be
would only be willing to buy a larger quantity of crackers added on to producing crackers that were less strongly
at a lower price. In order for crackers to be profitable at desired—as manifested, this time, in the willingness of
a lower price, the price of wheat would have to be lower. consumers to allow more for wheat used to produce bread
As a result, the only way the cracker industry could buy than for wheat used to produce additional crackers.
an additional quantity of wheat would be at a lower price It is this way in every case. A factor of production in
of wheat than the bread industry is willing to pay for it. limited supply is employed in those uses that can afford
Thus, the bread industry outbids the cracker industry for to pay the highest prices for it. And that is determined by
this particular quantity of wheat. Again, ultimately it is the the willingness of the consumers to pay prices for the
consumers of the one product outbidding the consumers of resulting final products. Every factor of production in
the other product for the benefit of the quantity of wheat in limited supply is distributed to those employments where
question. And since it is the same people who consume both the consumers are willing to allow the most for it in the
products, it is really one kind of need, desire, or purpose of prices of the goods they buy. That is, it is distributed to
the same individuals outcompeting another. those employments which the consumers regard as the
In exactly the same way, any other such transfer of most important to their own well-being.
wheat from one use to another is prevented by the fact It must be stressed that the concept “the most import-
that in its changed employment the quantity of wheat in ant employments of a factor of production” is a variable
question could only be employed profitably at a lower range that expands or contracts with the supply of the
price than in its present employment. In other words, the factor of production available. What it means is the most
present employments outbid the potential changed em- important employments for which the supply of the factor
ployments, and thus they get the wheat. And the reason suffices.39 For example, if the supply of the factor is
they outbid them is because of the fact that the ultimate extremely limited, the most important employments for
consumers are willing to allow more for the use of wheat in which the supply suffices might be as important as life
its present employments than in its changed employments. itself. If the supply is very great, the most important
In this way, the distribution of wheat to its various uses employments can extend downward to include many
is determined by a process of competition among those luxury uses. The case of wheat again provides a good
uses, which in turn reflects a process of competition example. In a country like India, or medieval France,
among the needs, desires, and purposes of one and the devoting wheat to its most important employments means,
same individual consumers. essentially, producing as much bread as possible to ward
We can substitute any factor of production for wheat, off starvation. In a country like the present-day United
and the results will be the same. If we ask why a million States, devoting wheat to its most important employ-
man-hours of unskilled labor are not withdrawn from one ments ranges downward through totally satisfying the
industry and added on to another, the answer again is that desire for products such as bread and pasta, heavily
the consumers are willing to pay product prices in its satisfying the desire for such things as cakes and cookies
present employments that enable businessmen to employ made from wheat, substantially satisfying the desire for
that labor profitably at its going wage rate; if the labor alcoholic beverages made from wheat, and partly satis-
were shifted, however, the consumers would only buy fying the desire for wheat-fed meat.
the resulting products at prices that would require lower A second major principle follows from this discus-
wage rates for their production to be profitable. These sion. Namely, the price of every factor of production in
products, therefore, are unable to compete for the neces- limited supply, and thus the prices of all of its various
sary labor. They are unable because of the choices and products, is determined by the importance attached to the
value judgments of the consumers, which enable the least important of the employments for which its supply
existing employments to outbid them. suffices; that is, by the importance attached to its mar-
A principle which emerges from our discussion is that ginal employments. In our example of wheat, for in-
in a free market a factor of production in limited supply stance, the price of wheat in the present-day United
always tends to be distributed to its most important States is determined by the importance attached to the
employments, as determined by the value judgments of use of wheat in feeding meat animals—its marginal
the consumers themselves. In our example of the distri- employment in the context of our economy. This results
39 Cf. above, the discussion of the meaning of satisfying the most important of our wants, in the discussion of diminishing marginal utility in chap. 2, sec. 4.
from the fact that the price of wheat has to be low enough production in a free market tends to be dealt with in the
to permit its use to be profitable in all of its employments. most rational and efficient manner possible—that is, in
If it is to be used in feeding meat animals, its price has to a way that maximizes gains and minimizes losses.
be low enough to make that use profitable at prices To understand why this is so, imagine that the demand
consumers are willing to pay for wheat-fed meat. How- for one product in the economic system rises, while the
ever, there is only one uniform price of wheat in the same demand for another product falls. For the sake of sim-
market at the same time. As a result, the bread industry plicity, assume for the moment that the two products are
pays no more for wheat than the cattle-raising industry. produced with the same factors of production. Washing
And because the price of bread is determined by its cost machines and refrigerators are a good illustration of such
of production, the price of bread in the United States is products, because both of them require just about the
actually determined not by its own importance, which same overall proportions of skilled and unskilled labor
may be as great as the stilling of hunger, but by the in their production, use largely the same materials, and
relatively low importance attaching to the use of wheat can probably be produced in the very same factories
in producing meat. without great difficulty. If the demand for one of these
Or, to take another example, the price of surgical products increases while the demand for the other de-
instruments, on which countless lives may depend, is not creases, there will probably be little or no change at all
determined by the importance of the needs they serve in the demand for factors of production that cannot be
directly. It is not even determined by the importance matched by an immediate corresponding shift in their
attached to the marginal employments of iron and steel, supply. Essentially, all that occurs in this case is that more
but by the importance attached to the marginal employ- of the same kinds of factors are employed in one capacity,
ments of the ability groups of the labor that produces and less in another. In accordance with a change in
iron, steel, and surgical instruments. For the price of the consumer demand, the production of the one item is
surgical instruments is determined by their cost of pro- expanded while the production of the other item is con-
duction. And the wage rates which constitute that cost tracted. In this case, there is obviously no tendency
are low enough to make the employment of the different toward a change in the prices of the factors of production.
ability groups of labor profitable in their marginal em- But now let us consider a more complicated case,
ployments. To put it another way, the price even of which will bring out an important new principle of the
surgical instruments is no higher in relation to the wages free market. Assume that a change in fashion occurs
of the ability groups of labor employed to produce them which dictates that the average person own one extra
than the marginal products of such labor, which may be wristwatch, and which, at the same time, encourages him
a quantity of razor blades or even magazines or chocolate or her to own one less suit or dress. I choose this example
bars or who knows what. because the labor used to produce clothes cannot be
*** transferred to the production of watches, due to the
To summarize our discussion of factors of production enormous skill differences involved. Here, therefore, we
in limited supply, we have seen that all the principles have a case of changes in the demand for factors of
apply that we developed in relation to consumers’ goods production that cannot be matched by offsetting shifts in
in limited supply, plus two others: First, that factors are their supply. Let us see what happens in such a case in a
distributed to their most important employments through free market.41
a process of the different needs, desires, and purposes of The wage rate of watchmakers and the cost of produc-
the same individual consumers bidding against one an- tion and price of watches, of course, will rise; while the
other. And second, that the prices of the factors are wage rate of garment workers and the cost of production
determined with respect to the least important among the and price of clothing will fall. However, the effects will
employments for which their supply suffices. Determi- not be confined to these initial areas of impact. A rise in
nation of price by cost, we have seen, therefore, ulti- the wages of watchmakers will begin to attract other
mately means determination with respect to the consumers’ workers into the field, say, some workers who would
value judgments concerning the marginal products of have gone into instrument making, optics, jewelry mak-
factors of production.40 ing, and so forth—that is, whatever fields employ labor
of a kind that can be used to make watches. A fall in the
wage rates of garment workers, on the other hand, will
4. The Free Market’s Efficiency in Responding to begin to push some of these workers out of that field and
Economic Change into other fields. As a result, a tendency develops toward
On the basis of the way their prices are determined, widening and diffusing the initial impact of the change
every change in the demand or supply of a factor of in demand.
41
40 Thisresults
The insightthat
is one
will
ofbe
thederived
great contributions
from the present
of Böhm-Bawerk.
case could alsoSee
be derived
above, the
frompresent
the case
chap.,
of opposite
n. 31, and
changes
chap. 2,insec.
the demand
5, the subsection
for products
“Determination
of iron and products
of Valueofby
cotton
Cost of
that
Production.”
was used earlier in connection with establishing additional causes of the tendency toward a uniform rate of profit. See above, the present chap., pt. A, sec. 1, “Additional Bases for the Uniformity-of-ProfitPrinciple.”
210 CAPITALISM
As workers leave fields such as instrument making consumer who buys these various products will cut back
and optics to go into watchmaking, the wage rates and his purchases in the way that hurts him least in his context
thus the production costs and product prices in these and in his judgment. Thus, if he needs eyeglasses, he will
fields will begin to rise. Thus, the rise in demand for certainly go on buying a pair of eyeglasses, but perhaps
watches will raise not only the cost and price of watches, forgo the purchase of a telescope for his hobby, say. If he
but also the cost and price of instruments, optical goods, was previously in a position to buy several pairs of
and so forth—all products that use the same kind of labor eyeglasses and a telescope and some jewelry, then, when
as watchmaking. Conversely, as workers leave the gar- he is confronted with higher prices for all of them, he
ment industry and begin to enter other fields for which may decide to go ahead with the telescope but cut back
they possess the necessary skills, the wage rates, produc- on an extra pair of sunglasses and some jewelry. The
tion costs, and product prices in those fields will begin effect on the quantities demanded of these goods in the
to decline. whole economy is, of course, simply the aggregate of all
The question we want to ask is: what principle deter- such individual decisions. In this way, it can be seen that
mines which industries among those that employ the in a free economy the labor released for watchmaking
same kind of labor as watchmaking actually release will come from its previously marginal employments—
additional labor for watchmaking, and to what extent? that is, from the employments where all the various
And which industries among those potentially capable of individual consumers in the market judge they can best
absorbing the labor released from the garment industry spare it.
actually absorb it, and to what extent? To arrive at the By the same token, the labor released from the gar-
answer, we must realize that at the higher prices of the ment industry will be absorbed in those employments
various goods that use the same kind of labor as watches, which are the most important of the employments for
the consumers will reduce their purchases of those goods. which the supply of that type of labor did not previously
It is these decisions of the consumers to restrict their suffice; that is, it will be absorbed in the most important
purchases, that determine which of the industries release of its previously submarginal employments. This conclu-
labor for watchmaking and to what extent. For example, sion follows from the fact that the workers released will
if the consumers decide to go on buying an unchanged be seeking to earn the highest incomes they can and that
quantity of optical goods at their higher price, but a these incomes will be found in producing those goods for
reduced quantity of jewelry and various instruments, which the consumers are willing to allow the highest
none of the labor will come from the optical goods prices over and above the allowance for the other costs
industry, and all of it will come from the jewelry and entailed in producing them. The displaced garment workers
instrument industries. Obviously, the labor will come will enter whatever fields can absorb them with the least
from these various industries in accordance with what- fall in wage rates. These are the fields whose products
ever proportions the consumers decide to curtail their the consumers are willing to buy in additional quantities
purchases of the various products at their respectively at the least fall in prices. They offer the displaced garment
higher prices. workers the highest wages now available to them. I have
Clearly, what occurs in this case is an indirect bidding not attempted to enumerate these other employments
for the use of labor between the buyers of wristwatches because the skills involved are so common that the labor
and the buyers of all other products employing the same released would probably be absorbed to some degree in
kind of labor. The buyers of wristwatches cause a bidding a vast number of industries. For example, some of the
up of the price of the wider category of labor that pro- former garment workers might end up as office workers,
duces both wristwatches and all the other products I have taxi drivers, metal workers, or who knows what.
named. As a consequence of this intensified bidding for Everything we have seen concerning the source of
labor, the buyers of these other products—jewelry, in- labor for additional watches applies in principle to the
struments, optical goods, and so forth—are confronted source of any factor of production in limited supply for
with higher product prices and so must restrict their an expansion of the production of any good. Always, the
purchases. To the degree that they restrict their pur- process is one of an intensified bidding for the factor by
chases, they release labor to the watch industry and make businessmen acting as agents of the consumers of one or
possible its expansion. more of its particular products against businessmen act-
Now to the extent that the consumers are rational, the ing as agents of the consumers of its other products. This
products whose purchase they discontinue at the higher bidding drives up the price of the factor, the costs of using
prices will be the least important among the ones they it in production, and the prices of all of its various
previously purchased. That is, the consumers will dis- products. Supplies of the factor are always released, in
continue their previously marginal purchases. For each accordance with the choices of the consumers, from the
production of its previously marginal products—from have risen during the embargo. The consumers would
the products where the consumers decide they can best have decided where the reduction in the use of crude oil
spare it. In the same way, everything we have seen was to be effected and to what degree, by the extent to
concerning the absorption of labor released from the which they cut back on their purchases of the various oil
garment industry applies to the absorption of any factor products at the higher prices. Where the use of an oil
in limited supply released from any industry. Always, the product was important, consumers would have paid the
factor is absorbed in the most important of its employ- higher price, and oil would have continued to be used for
ments previously unprovided for, in accordance with the that purpose. Only where the use of an oil product was
judgment of the consumers, as manifested in what they not worth its higher price, would the use of oil have been
are willing to pay the most for. cut back or discontinued. For example, consumers would
The identical reasoning that we have applied to changes have paid a higher price for the gasoline required to drive
in the demand for a factor of production in limited supply to work and for the heating oil required to keep them
applies to changes in the supply of such a factor. If the warm. They would not have been as ready to pay higher
overall supply of a factor should increase, the addition prices for the gasoline required for extra shopping trips
goes to provide for the most important of the employ- or for heating oil to keep their garages warm.
ments of the factor previously unprovided for. For exam- The crucial point is that in a free market the more
ple, an increase in the supply of wheat in the present-day important employments of oil would have outbid the less
United States would be used to expand the production of important ones, and the reduction in the supply of oil
such things as wheat-fed meat and aged whiskey. If the would have been taken out exclusively at the expense of
supply of a factor should decrease, the reduction is taken the marginal employments of oil—that is, at the expense
out on the least important of the employments previously of the least important employments for which the pre-
provided for. In the case of wheat in the context of the viously larger supply of oil had sufficed.
present-day United States, this would mean a reduction But, of course, we did not have a free market. We had
in the production of such things as wheat-fed meat and price controls. Price controls prevented the more import-
aged whiskey. In other words, an increase in the supply ant employments of crude oil from outbidding the less
of a factor goes to the most important of its previously important employments. They prevented the most vital
submarginal employments; a decrease is taken out on its and urgent needs for oil from outbidding the most mar-
previously marginal employments. ginal. For example, during the oil shortage 1973–74 one
The principle that emerges from this discussion is that could read stories in the newspapers about truck drivers
in a free market if a factor of production is in reduced not being willing to deliver food supplies to southern
demand or additional supply, the portion of it that be- Florida for fear of being unable to obtain fuel for the
comes newly available is channelled to the most import- return trip up the length of the Florida peninsula. There
ant of its previously submarginal uses; if the factor of was even a story about the operation of oil rigs off the
production is in additional demand or reduced supply, Louisiana coast being threatened as the result of an
the portion of it that is no longer available is taken from inability to obtain supplies of certain oil products needed
the least important of its previous uses, that is, from its for their continued functioning.
previously marginal uses. In other words, as stated, every Now it is simply insane that such vital activities
change in the demand or supply of a factor of production should suffer for a lack of oil—that even the production
in a free market is dealt with in a way that maximizes of oil itself should be threatened. In a free market, this
gains and minimizes losses; which is to say, it is dealt could never happen. Such vital uses of oil would always
with in the most rational and efficient manner possible. be able to outbid any less urgent employment for all the
oil they required. But under price controls even these
A Rational Response to the Arab Oil Embargo most vital employments were prohibited from outbid-
The above principle has major application to such ding any other employment that could pay the controlled
economic disruptions and pretenses for price controls as price.
the Arab oil embargo. It enables us to understand in yet Price controls simply paralyze rational action. In ef-
another respect how a free market would have minimized fect, they bring together at an auction for the use of oil a
the impact of any reduction in the supply of oil that the trucker needing fuel to deliver food supplies and a house-
Arabs might have been able to impose on us, and would wife needing gasoline to take an extra shopping trip to
minimize any other such disruption that might occur in the supermarket, and they prohibit the trucker from out-
the future. bidding the housewife. They bring together oilmen need-
If we had had a free market, the price of crude oil and ing lubricants for their wells and homeowners seeking
the production costs and prices of all oil products would oil to heat their garages, and they prohibit the oilmen
212 CAPITALISM
from outbidding the homeowners. In a word, price con- sible in each of these alternatives.
trols make it illegal to act rationally. Now each method of production and each variant of
any given method requires some different combination
of factors of production in limited supply. Each of these
5. The Economic Harmonies of Cost Calculations factors of production has its own alternative uses in
in a Free Market various other employments. For example, the bridge
We can now understand even more fully than was requires workers with the special skills required to build
possible earlier how in a free market the production of bridges. These workers could be employed in building
each good is carried on in a way that is maximally bridges elsewhere or in building skyscrapers, or, of course,
conducive to production in the rest of the economic in a variety of lesser jobs. The tunnel requires the special
system. For we are now in a position to understand more skills of sandhogs. These men may first have to be
fully how the concern with costs of production promotes trained, and then a long period of time will go by during
the production of other goods every time it leads to the which they are unavailable to produce a different variety
substitution of lower-priced factors of production in lim- of goods than the bridge builders. Again, different meth-
ited supply for higher-priced ones, such as the use of ods require different combinations of materials that may
unskilled labor where skilled labor was previously re- themselves be in limited supply or require different com-
quired, or the use of a less expensive quantity of alumi- binations of labor skills or limited materials in their own
num where a more expensive quantity of copper was production.
previously required, and so on. All we have to do is keep The point here is that the selection of any given
in mind that the less expensive factors in limited supply method of production has its own unique impact on the
are less expensive because the importance of their mar- rest of the economic system in terms of withdrawing
ginal products to the consumers is less. To substitute less factors of production from possible alternative employ-
expensive factors for more expensive ones, therefore, is ments. The fact that businessmen select the lowest-cost
to make it possible for the consumers to obtain products methods of production means that they try to produce
to which they attach greater marginal importance at the each good with the least overall impairment of the pro-
expense of products to which they attach smaller mar- duction of alternative goods. Because to produce at the
ginal importance. For the more expensive factors are lowest cost means to use that combination of factors of
released to uses of greater importance than those from production in limited supply that has the lowest total
which the less expensive factors are withdrawn. marginal significance in alternative employments.
Thus, the fact that in a free market production is ***
carried on at the lowest possible cost that businessmen Not only is the production of each good harmoniously
can achieve means that the production of each thing is integrated with the production of all other goods in a free
carried on not only with the least possible amount of market, but so too, not surprisingly, is the consumption
labor, but with those specific types of labor and other of each good. As we have seen, insofar as any good is
factors of production in limited supply whose use repre- produced by factors of production in limited supply, its
sents the least possible impairment of the satisfaction of price reflects the competitive bidding of the consumers
alternative wants. of all the products of those factors. For example, the price
We can observe the operation of this principle in every of bread in a free market reflects the competitive bidding
cost calculation that businessmen make. To take some of the consumers of all wheat products for the use of
examples, let us assume that a railway company is con- wheat; the price of gasoline in a free market reflects the
templating the extension of its line across a body of water competitive bidding of the consumers of all oil products
or that an electric company is contemplating the con- for the use of crude oil; and so on. Going still further, the
struction of additional generating capacity. In these cases, price of wheat and wheat products relative to the price of
and in practically every other case, alternative methods oil and oil products reflects the competitive bidding of
of production are possible. The railway could build a the consumers of all wheat products relative to the com-
bridge across the water, it could tunnel under the water, petitive bidding of the consumers of all oil products.
build a ferry, or, perhaps, detour around the body of Indeed, the prices of all factors of production in limited
water. In each instance, a variety of further alternatives supply and of their respective products reflect the relative
are possible, such as where to construct the bridge, what utilities of the respective marginal products to the ultimate
materials and design to use, and so on. In the same way, consumers. The consumer buyers of any of these products,
the electric company could build a coal-powered plant, therefore, when they take account of their prices, are led to
a water-powered plant, an oil or gas-powered plant, or an pay the same regard to the rest of the economic system as
atomic-powered plant. Again, major variations are pos- businessmen when they make cost calculations.
More on the Response to the Oil Embargo pay for it for any lesser purpose. To obtain gasoline for
The above facts about the harmonious integration of getting to work, one would merely have had to outbid
the production and consumption of each good into the other people seeking gasoline for pleasure trips, marginal
rest of the economic system also have application to how shopping trips, and so on.
a free market would have responded to the Arab oil More broadly, since more gasoline can always be
embargo. produced from crude oil made available by producing
If we had had a free market, the response to the less of other oil products, an individual needing gasoline
reduction in the supply of oil would have been based on to get to work would merely have had to outbid other
the exercise of the intelligence and judgment of each and people requiring the use of crude oil for any lesser
every individual businessman and consumer in the eco- purpose than one comparable to that of getting to work.
nomic system. For example, he would have been able to obtain gasoline
As the price of oil and oil products rose, each individ- by outbidding even people far richer than himself who
ual businessman and consumer would have decided where previously used oil to heat their swimming pools, or,
and to what extent to cut back on the use of oil by perhaps, who previously consumed vegetables or flow-
consulting his own individual circumstances. Those bus- ers grown in hothouses with the aid of large quantities of
inessmen would have cut back who had lower-cost alter- oil.
natives available. For example, businessmen with the The specific ways in which oil would have been
alternative of switching to coal or shipping by rail or economized are far too numerous to name. It is impossi-
barge instead of truck would have done so. And more and ble even to learn them all. They would have depended on
more would have done so, more and more rapidly, as the an enormous number of individual circumstances, in
price of oil and oil products rose higher, because the many cases known only to the individuals directly in-
comparative savings in doing so would have become volved, whoever and wherever they might have been.
greater. In the same way, some firms might have concen- The essential fact is that oil would have been econo-
trated their production in fewer days to conserve fuel. mized in ways that affected each individual as little as
Some might have concentrated production more heavily possible. Each individual—businessman and consum-
in plants in warmer parts of the country. Some might have er—would have dealt with the problem in the way best
reduced or stopped production entirely, because of an suited to his own business or personal context, and at the
inability to sell as many goods at the higher prices same time his efforts would have been harmoniously
necessitated by higher costs of fuel and transportation. integrated—through the price of oil and oil products—
The point is that there would have been as many individ- with the like efforts of everyone else. Each would have
ual responses as there were separate business firms and acted on the basis of the price of oil and oil products, and
even subunits within business firms. The response in the circumstances and judgments of each would have
each case would have been based on a consideration of determined just how high those prices would have had to
costs and alternatives in the individual case. go before the quantity of oil and oil products demanded
Similarly, each individual consumer would have de- was levelled down to equality with the reduced supply
cided where and to what extent to cut back on the basis of crude oil available. In other words, in a free market,
of the individual circumstances confronting him. What the oil crisis would have been met by the conscious
would have decided in each case was the importance of planning of each individual, harmoniously integrated
the particular oil product, as determined by the individual with that of every other individual.
consumer’s personal needs and desires dependent on that Of course, this is not what occurred—because of price
product, and the extent of his wealth. For example, no controls. All considerations of individual context were
one to whom time was essential would have been forced dropped. The intelligence and planning of the individuals
to reduce his driving speed. Nor would a wealthy person were paralyzed, as we have already seen. The govern-
have been forced to give up driving his Cadillac. By the ment’s solution was a sledgehammer approach that dis-
same token, no one whose only means of getting to work regarded all individual circumstances and context. It
was an automobile would have gone without gasoline. arbitrarily curtailed the use of oil and oil products for
He would have chosen to go without other things first whole categories of employments. For example, it de-
and to spend the money he saved from somewhere else, clared that the airline industry would operate on 80
to buy the necessary gasoline. Anyone in such a position percent of its previous year’s fuel, that farmers would
would have been assured of all the gasoline he required, have to make do with so much less propane, and that
because he would certainly have been willing and able everyone would have to drive at no more than fifty-five
to pay more for gasoline for the purpose of getting to miles per hour and set his thermostat at no more than
work than most other people would have been willing to sixty-eight degrees. This absurd approach simply ig-
214 CAPITALISM
nored which industries and which specific firms and gasoline, whole trucks and untold man hours to operate
individuals could really afford to cut back on oil, and them would be wasted. It disregarded the fact that ther-
just where. It disregarded such elementary facts as that mostat settings of sixty-eight degrees in some places and
lower truck speeds would require proportionately more for some people can be tantamount to freezing and cause
trucks and man-hours to haul the same amount of pneumonia. But more of such consequences of price
freight, so that to arbitrarily save a few gallons of controls soon enough.
Appendix to Chapter 6: The Myth of “Planned Obsolescence”
A popular fallacy—advanced in full contradiction of customer is far better off, for he pays only half as much
the uniformity-of-profit principle and its implications for per unit of service life of a bulb as he did before. In fact,
economic progress—holds that businessmen engage in he gains at any price below 10 times as much). A price 5
the practice of “planned obsolescence,” that is, they times as high is $6.25. This price times 10 million bulbs
allegedly plan for their products to wear out more rapidly sold, gives sales revenues of $62.5 million. The manu-
than is necessary, in order to create an additional, re- facturers’ total costs are now $1 per bulb times 10 million
placement demand for them.42 According to Vance Pack- bulbs, or $10 million. Profits, therefore, go to $52.5
ard, one of the leading popularizers of this fallacy: “Even million—more than doubling from their present level!
the best of products, of course, wears out sometime. Manufacturers can increase their profits by introduc-
Therefore a company cannot be legitimately criticized ing the longer-lasting product even if its unit cost is
for estimating the death date of its product. It is vulner- higher, provided that the higher cost is less than propor-
able to criticism, however, if it sells a product with a short tionate to the product’s longer life. For example, even if
life expectancy when it knows that for the same cost, or the 10-times-longer-lasting bulb cost 9 times as much to
only a little more, it could give the customer a product produce, or $9, the manufacturers could still increase
with a much longer useful life. In such situations one may their profits substantially. If they offered the bulb at a
properly wonder about the company’s motives.”43 price of $12, which would still represent a saving to the
Despite the prevalence of such beliefs, the fact is that consumers, they could increase their profits by $5 mil-
in all cases in which a more durable product can be lion. They would have sales revenues of $120 million and
produced at the same cost of production as a less durable total costs of $90 million, leaving them with a $30
one, the profit motive acts as an inducement to produce million profit instead of a $25 million profit.
the more durable product. Indeed, the profit motive acts As a rule, the only time it would not pay to introduce
as an inducement to produce the more durable product a longer-lasting good is if it has a higher cost which is
even when its cost of production is substantially greater, more than in proportion to its longer life. For example,
provided that the extra durability is sufficiently great. it would be absurd to introduce a 10-times-longer-lasting
A simple example will demonstrate why this must be bulb which cost 50 times as much to produce. There are
so. Assume that there are two light bulbs costing $1 each exceptions to this rule, however. In some cases, the
to produce. One lasts 10 times as long as the other. The convenience of not having to replace a product as often
manufacturers are presently producing the less durable could be so significant as to outweigh a cost more than
bulb and selling it at a price of $1.25. Assume that they in proportion to its longer life. Thus, a light bulb lasting
are presently selling 100 million of these bulbs per year 10 times as long and which could be profitable only at a
and that if they introduced the longer-lasting bulb, they price of 11 times as much, might be successful simply
would sell only 10 million of them per year. The question because it would save time in changing bulbs, reduce the
must be asked: Is it less profitable to sell 10 million risk of falling from ladders, and so on. On the other hand,
longer-lasting bulbs than 100 million of the present bulbs? an automobile which would last twice as long and which
The supporters of the planned obsolescence doctrine had to be sold at twice the price would not make eco-
believe that the answer is yes. But the answer is no. nomic sense. Such an automobile would require that
At present, the manufacturers have sales revenues of people tie up twice the sum of money (and, if they bought
$125 million—$1.25 per bulb times 100 million bulbs. on credit, pay twice the interest) and not derive any
They have a total cost of $100 million—$1 per bulb times compensating advantage. A 2-times-longer-lasting auto-
100 million bulbs. Their present profit, therefore, is $25 mobile would only make sense if it could be sold profit-
million. Now assume that they introduce the 10-times- ably at a price significantly less than double, perhaps 1.8
longer-lasting bulb. Such a bulb could certainly be sold or even 1.7 times the price of the present car. (Interest
for 5 times as much as the present bulb. (If it is, the rates would play a major role in determining how large
42
43 This
Vanceappendix,
Packard,with
TheWaste
minor Makers,
revision,Giant
is drawn
Cardinal
from the
ed.author’s
(New York:
article
Pocket
of theBooks,
same title
Inc.,
which
1963),
originally
p. 49. appeared in Il Politico 38, no. 3 (September 1973). It appears by permission of the publisher.
the saving had to be.) needs a price rise in excess of 20 percent to come out
What the above examples demonstrate is that not only ahead, while the conditions of the case permit a price rise
consumers but also manufacturers derive a gain from the as high as 100 percent. Suppose the manufacturer’s sales
introduction of longer-lasting products, provided only volume is reduced to a third of its initial level, as a result
that such products are not disproportionately more ex- of his introducing a product which lasts 3 times as long.
pensive to produce. The fact that manufacturers might The potential upper limit of his price increase is now 200
sell a smaller number of units of longer-lasting goods percent. But all he needs to come out ahead is a price
because of the reduced need to replace them, is altogether increase of 40 percent—40 percent more on a third of his
irrelevant. Any profits which they must forgo as a result initial volume will give him the same profits he made on
of reduced volume can easily be made up in the price of the other two-thirds, if his initial profit margin was 20
the quantity they continue to sell, together with a major percent. Similarly, if his volume is cut to a fourth of its
increase in their profits. To understand the principle initial level, as a result of quadrupling his product’s life,
involved, it is only necessary to realize two things. First, then while the upper limit of the price rise goes to 300
as an upper limit, the price of the longer-lasting product percent, the manufacturer only needs a price rise in
can be raised approximately in proportion to its greater excess of 60 percent to come out ahead.
durability. Second, only a relatively small price increase If we change the assumed profit margin to 10 percent,
is required to make up for the profits lost on the quantity then a mere 10 percent rise in price restores profits when
no longer produced. Any price in between these limits volume is cut to a half of its initial level, a 20 percent rise
represents both a saving to the consumer and additional restores profits when volume is cut to a third of its initial
profits to the producer. level, and so on. With a 5 percent profit margin, a 5
To make this clear, let us return to our example of the percent rise in prices restores profits when volume is cut
light bulbs. If the present light bulb is sold for $1.25, a to a half, and a 10 percent rise in prices restores profits
10-times-longer-lasting one could be sold at a potential when volume is cut to a third of its initial level, and so
upper limit of $12.50. At any price lower than $12.50, on. The upper limits by which prices might be raised in
the consumers have a clearcut gain. While the manu- these cases, however, continue to be 100 percent, 200
facturer’s volume is cut to one-tenth of its initial level, percent, and ever more, to the degree that volume is cut
the profit he loses is only 25¢ on each bulb. Since he no as a result of the introduction of longer-lasting products.
longer sells 9 bulbs for every one which he continues to The principle which emerges is the following. The
sell, he must be compensated to the extent of $2.25 in the consumers are willing to pay an increase in price equal
price of the longer-lasting bulbs. If the longer-lasting to as much as one less than the multiple of durability
bulb costs $1 to produce, then the manufacturer needs a times the product’s initial price. (For example, if the
price of only $3.50 to make as much profit on one-tenth product is made 10 times more durable, the consumers
the quantity of bulbs as he did on the initial quantity. At are willing to pay an increase in price equal to 9 times
any price greater than $3.50, his profits increase. Any the product’s initial price.) To come out even, however,
price greater than $3.50 and less than $12.50 thus repre- the manufacturers require a price increase equal merely
sents a gain to both the consumers and the producers. (If to one less than the multiple of durability times the
the longer-lasting bulb costs $9 to produce, the manufac- product’s initial profit margin—for example, 9 times 20
turer must have a price greater than $11.50 to come out percent, 9 times 10 percent, or 9 times 5 percent. Between
ahead.) a multiple of the initial price and an equal multiple of the
Consider wider illustrations. Profits are only a small initial profit margin is an enormous field for mutual gain
percentage of sales—5 percent, 10 percent, on rare occa- to both consumer and producer. This field is so great that
sion 20 percent. Assume profit is 20 percent of sales—for any necessary writeoffs of existing plant and equipment
example, a manufacturer has costs of 80, profits of 20, could easily be compensated for along with profits for-
and sales of 100. If his physical volume were to be cut in gone on lost volume.44
half, while his unit cost and selling price remained the Perhaps the best and simplest way to regard longer-
same, he would have costs of 40, profits of 10, and sales lasting products in comparison with less-durable prod-
of 50. His profits could be restored to 20, however, if he ucts is in terms of the comparative costs of producing
could raise his price by 20 percent, thus raising his sales equivalents. If one better light bulb lasts 10 times as long
revenues from 50 to 60. If the halving of his sales volume as a present light bulb, it is the equivalent of 10 of the
is the result of a doubling of his product’s life, there can present light bulbs. If the cost of production of both types
be no doubt about his ability to raise his price by 20 of bulb is $1, then what we have is a $1 cost of production
percent—the upper limit by which he could raise it is 100 versus a $10 cost of production of the same equivalent.
percent. Observe. In this case, the manufacturer only If the cost of production of the better bulb is $9, then we
44 For a demonstration of this fact, see my above-referenced article from which the present discussion is drawn, pp. 485–86.
216 CAPITALISM
have a case of $9 versus $10 as costs of production of the the physical volume of goods sold. In fact, in all these
same equivalent. The issue of whether or not manufac- cases, any profits lost as a result of diminished volume,
turers will introduce longer-lasting products can thus be could more than be made up by a relatively modest rise
seen to reduce to the question of whether or not they in price on the remaining volume. Consumers would
prefer lower-cost methods of production to higher-cost benefit at the same time, because they would save the
methods of production. They will introduce longer-last- expense of buying unnecessary units.45
ing products whenever the longer-lasting products rep- Despite the fact that the profit motive leads business-
resent a reduction in the cost of producing equivalents. men to try to produce the highest-quality, longest-lasting
And they will do so with a rapidity and enthusiasm in products per dollar of cost, it can, of course, be the case
direct proportion to the cost reductions to be achieved. that over time the quality of products deteriorates and
To ask if GE would introduce a 10-times-longer-lasting their life shortens. This is because the beneficial effect of
light bulb, or GM a 2-times-longer-lasting car, having the the profit motive can be outweighed by the contrary
same unit cost of production as the present light bulb or effect of government interference. For example, proun-
car, is to ask the equivalent of: Would GE introduce a ion legislation can deprive firms of the ability to fire
light bulb costing one-tenth as much to produce? Would careless workers. Taxation can deprive them of the funds
GM introduce a car costing half as much to produce? The to buy the quantity and quality of the labor, materials,
answer to both questions is obviously yes. and machinery they would otherwise employ in produc-
Thus far, I have deliberately understated the case. I ing a given quantity of goods. Above all, price and wage
have assumed that the reduction in the quantity of a good controls can lead to a deterioration in the quality and life
demanded would be in full proportion to its greater of products by creating shortages of means of production
durability. In fact, this would usually not be so. If a and by eliminating all the normal, competitive incentives
10-times-longer-lasting light bulb or a 2-times-longer- to high-quality production.46 The essential point is not
lasting automobile can be sold at less than 10 or 2 times that deterioration in the quality and life of products
the price, the quantity demanded will not fall to a tenth cannot exist, but that the profit motive always acts to
or a half, but to some amount greater than a tenth or a improve the quality and lengthen the life of products
half. (Indeed, in some cases, the quantity of the good insofar as it is allowed to operate.
demanded might even increase, if the demand for it is ***
sufficiently elastic.) The reason, of course, is that in terms It is conceivable that the objection might be raised to
of a unit of service life the good is made less expensive the preceding analysis that it is mistaken in assuming that
and thus tends to be used in larger quantity. This tendency manufacturers of more-durable products are in a position
of the quantity demanded to fall less than in proportion substantially to increase the prices of such products and
to the product’s greater life would be powerfully rein- thus make up for any reduction in physical volume they
forced in every case in which the producer of the longer- might suffer. The objection might be made that freedom
lasting product was faced with competitors producing of competition would quickly put prices at the same level
the shorter-lived product. In all cases of this kind, the as they were to begin with. The answer to this objection
firm introducing the more durable product would have is that under capitalism whoever introduces a significant
the entire existing market of its competitors as a potential improvement in production normally enjoys patent pro-
field for its own expansion. It thus might very well tection, which would secure his ability to obtain the
succeed in increasing its physical volume by a substantial higher price for a sufficient period of time to make the
multiple. improvement worthwhile.
The fact is that business does not produce less-durable The doctrine of planned obsolescence is merely one
goods in preference to more-durable goods, but the con- more groundless assault on the profit motive and the
trary. Nor does it foist undesired fashion changes on the pursuit of self-interest. If it does not represent “planned
public, or dribble out over time improvements which it error”—that is, outright malice—it represents such a
has the ability to introduce all at once. These beliefs rest degree of thoughtlessness as to constitute reckless disre-
on the fallacy that profitability depends exclusively on gard of facts and logic.
45
46 Forthese
On elaboration
destructive
on these
effects
points,
of price
see ibid.
controls see below, chap. 7, passim.
Notes
1.The rate of profit on capital invested should not be confused 13. Of course, the absence of price changes is possible only if
with the concept of profit margin. A profit margin is profit taken the changes in demand are within certain limits. If increases in
as a percentage of sales revenues, not capital invested. Because demand are so great as either completely to outstrip the ability
of technical factors centering on the periods of time which must of the industry to meet them from existing capacity, or to require
elapse between outlays of capital and receipts of sales revenue, the use of older, substantially less efficient, higher-cost capac-
different industries tend to earn permanently unequal profit ity, product prices must rise. It is only a question of by how
margins, even though they tend to earn equal rates of profit on much. Similarly, if the fall in demand is so substantial that one
capital invested. Thus, for example, a retail grocery business, or more firms finds that the quantity of their products demanded
which has a substantial portion of its capital invested in mer- is insufficient to enable them to operate even their most efficient
chandise of the kind that is sold within days of purchase, or lowest-cost capacity at an adequate rate, while other firms are
even on the very same day, may have annual sales revenues still using substantially less efficient, higher-cost capacity, then
equal to five times its capital. A steel mill, on the other hand, it will be to the interest of such firms to cut prices below the
may have annual sales revenues that are merely equal to its operating costs of others’ less efficient capacity. This will
capital. An electric utility may have annual sales revenues that enable their efficient capacity to displace the others’ less effi-
are equal to only half of its capital. Because of these very cient capacity. The price cut in these circumstances will be
different rates of capital turnover—i.e., ratio of sales to capi- profitable to the firms which make it, because continued oper-
tal—namely 5:1, 1:1, and 1⁄2:1, very different profit margins ation of high-cost capacity by others is thereby made unprofit-
must exist if equal rates of profit on capital invested are to exist. able, with the result that the price-cutting firms secure substantial
Thus, the profit margin in the retail grocery business would additional business that is profitable to them. See below, p. 436,
have to be just 2 percent; that of the steel mill, 10 percent; and for the application of this point to a critique of the doctrine of
that of the electric utility, 20 percent, in order for all of them to pure and perfect competition and the Marshallian doctrine of
earn a rate of profit on capital invested of 10 percent. the representative firm.
2. Cf. Ludwig von Mises, Socialism (New Haven: Yale Univer- 14. Cf. Ludwig von Mises, Human Action, 3d ed. rev. (Chicago:
sity Press, 1951), p. 535; reprint ed. (Indianapolis: Liberty Henry Regnery Co., 1966), p. 245.
Classics, 1981). Page references are to the Yale University Press 15. Ibid.
edition; pagination from this edition is retained in the reprint 16. It is standard practice in contemporary economics to con-
edition. sider the portion of the profits of small businessmen which is
3. See Ayn Rand, Capitalism: The Unknown Ideal (New York: comparable to the compensation they could earn as wage
New American Library, 1965) pp. 15–16. earners as though it actually were wages. For a critique of this
4. See above, p. 118, n. 80, for a reference to the fact that the practice, see below, pp. 459–462.
validity of this principle has found important recognition within 17. This has already been indicated in connection with the
the U.S. government. uniformity-of-profit principle. See above, p. 185.
5. At that time, $10,000 represented approximately 500 ounces 18. For an analysis of the actual process of adjustment in wages
of gold. To estimate the equivalent in terms of today’s money, and prices that would follow the adoption of a policy of
one should multiply 500 oz. of gold by the currently prevailing unilateral free trade or unilateral tariff reduction, and of the
price of gold. consequences if other countries simply refused to allow the
6. For elaboration and related discussion of these points, see goods of the country in question into their territory while it
below, pp. 206–214. pursued a policy of free trade, see below, pp. 535–536.
7. See below, pp. 925–927. 19. The fact that speculators must lose in the absence of an
8. Cf. Henry Hazlitt, Economics in One Lesson, new ed. (New independently caused rise in the demand for and price of the
Rochelle, N. Y.: Arlington House, 1979), pp. 114–115. commodity they speculate in is confirmed by the following
9. I must point out that it is an error to assume that the repeal supply-and-demand diagram. The diagram shows that initially,
of rent controls would create any kind of insuperable problems in the absence of speculators, the price of a commodity is p0,
of short-run hardship. Indeed, I will demonstrate later on that resulting from the demand DD and the supply SS. The general
even before sufficient time went by to make possible the public buys the entire supply, equal to quantity 0A, at the price
construction of any additional new housing, the overall effect
of the repeal of rent control would be to improve the conditions P
of more people than it worsened and to impose no greater S
hardship on those who had to give up their rent-controlled D′
apartments than was already being experienced, and had been D
experienced for many years, by just as many other people p1 _ _ _ _ _ _ _ _
________
precisely as the result of rent controls. On this point, see below,

pp. 252–254. p0
10. See above, pp. 63–66 and 90–91. D′
11. See below, pp. 201–202.
12. See above, n. 1 of this chapter, for an explanation of the S D
relationship between the rate of profit on the one side, and the 0 Q
rate of capital turnover and the profit margin on the other. B A
218 CAPITALISM
p0. Now speculators appear on the scene, and when their part of the process is an artificial restriction of the supply in the
demand is added to that of the general public, the total demand face of a given demand.
for the commodity rises from DD to D′D′. The result is that the 31. As previously indicated, this analysis of the relation be-
price rises from p0 to p1. At the higher price, the general public tween cost of production and supply and demand is the work
reduces its purchases from the full supply, 0A, to the part of the of the great economist Eugen von Böhm-Bawerk, one of the
supply represented by 0B. The speculators buy up the part of founders of the Austrian school of economics. Very similar
the supply represented by AB. If the speculators bought the ideas are also propounded by John Stuart Mill, the last major
quantity AB all at once, they would have to pay a price of p1 for representative of the British classical school. Cf. Eugen von
it. In the absence of an increase in demand on the part of the Böhm-Bawerk, Capital and Interest, 3 vols. (South Holland,
general public, the speculators would then have to sell back Ill.: Libertarian Press, 1959), 2:168–176 especially, but also
their supply at a price of p0, if they sold it back all at once. The 2:248–256 and 3:97–115; John Stuart Mill, Principles of Polit-
fact that they would probably buy the quantity AB in increments ical Economy, Ashley ed. (1909; reprint ed., Fairfield, N. J.:
and sell it back in increments changes nothing fundamental, Augustus M. Kelley, 1976), pp. 442–468. As previously
because the purchase and sale of each increment is described noted more than once, a lengthy quotation from Böhm-
by exactly the same analysis. In addition, there is the further Bawerk, expressing the substance of his views on the rela-
problem of a likely movement of the quantity supplied to tionship between cost of production and prices appears
somewhere to the right of the line SS, in response to the rise in below, on pp. 414–416.
price. For further discussion of why speculators must lose in 32. Submarginal land, such as most deserts and mountains, is
the absence of an independent cause of higher future prices, see limited from a mathematical point of view, but stands beyond
below, pp. 224–225. the limit of the supply of economically useable land. Its limita-
20. Indeed, in 1991, the attorneys general of several states tion in this latter sense provides it with no economic value, for
renewed the accusation in new lawsuits that they brought it has zero marginal utility.
against various oil companies. 33. See above, pp. 152–169 passim, especially p. 158, and
21. See George Reisman, The Government Against the Econ- below, pp. 219–220. See also below, pp. 503–505.
omy (Ottawa, Ill.: Jameson Books, 1979), pp. 29–30, Table 1. 34. While the economic system is in process of adjusting to a
22. For an important exception to the principle that sellers are change in the quantity of money, the demand for the various goods
led to sell too rapidly, see below, pp. 225–226. and services is affected unevenly. Cf. von Mises, Human Action,
23. The substance of the following discussion concerning the pp. 412–414; idem, The Theory of Money and Credit, new ed.
opposition between capitalism and arbitrary discrimination has (1953; reprint ed., Irvington-on-Hudson, N. Y.: The Foundation
been excerpted, with minor modification, from my pamphlet for Economic Education, 1971), pp. 137–141. Von Mises argues
Capitalism: The Cure for Racism (Laguna Hills, Calif.: The that there are also permanent effects on the relative demands for
Jefferson School of Philosophy, Economics, and Psychology, the various goods and services, and thus on their relative prices.
1992). The pamphlet originally appeared as a six-part article in 35. See above, p. 169.
The Intellectual Activist in 1982. 36. Of course, government intervention can deprive people of
24. See below, pp. 367–371, 584–585, and 663–664. See also the ability to rent space they can afford to rent, by declaring
Capitalism: The Cure for Racism, pp. 6–8. such space to be substandard and its rental illegal. Such govern-
25. On these points, see George Reisman, Capitalism: The ment intervention causes homelessness. See below, pp. 384–385.
Cure for Racism, pp. 12–14. What is described here is govern- 37. See below, pp. 503–526 and 895–963 passim.
ment-inspired bureaucratic management taking the place of 38. For elaboration of this vital fact and of its significance, see
profit management. On this subject, see Ludwig von Mises, Bu- below, pp. 613–618 and 618–664 passim.
reaucracy (1944; reprint ed., New Rochelle, N. Y.: Arlington 39. Cf. above, pp. 49–50.
House, 1969), pp. 64–73. See also below, pp. 304–305. 40. This insight is one of the great contributions of Böhm-
26. On this subject, see below, pp. 382–385. Bawerk. See above, p. 52 and the present chap., n. 31.
27. For an account of the precise nature of all the government 41. The results that will be derived from the present case could
intervention that has blocked the benevolent operation of cap- also be derived from the case of opposite changes in the demand
italism on behalf of blacks in their capacity both as wage earners for products of iron and products of cotton that was used earlier
and as consumers, not only in the South but also in the North, in connection with establishing additional causes of the ten-
see George Reisman, Capitalism: The Cure for Racism, pp. dency toward a uniform rate of profit. See above, p. 184.
10–28. See also below, pp. 375–376 and 382–385. 42. This appendix, with minor revision, is drawn from the
28. This accords with the views of the great classical economist author’s article of the same title which originally appeared in Il
David Ricardo. See David Ricardo, Principles of Political Politico 38, no. 3 (September 1973). It appears by permission
Economy and Taxation, 3d ed. (London, 1821), chap. 30 espe- of the publisher.
cially; reprinted as vol. 1 of The Works and Correspondence of 43. Vance Packard, The Waste Makers, Giant Cardinal ed. (New
David Ricardo, ed. Piero Sraffa (Cambridge: Cambridge Uni- York: Pocket Books, Inc., 1963), p. 49.
versity Press, 1962). 44. For a demonstration of this fact, see my above-referenced
29. See above, p. 168. article from which the present discussion is drawn, pp. 485–486.
30. Wage rates are explainable in terms of supply and demand 45. For elaboration on these points, see ibid.
analysis even in cases in which they are imposed arbitrarily by 46. On these destructive effects of price controls see below, pp.
labor unions or governments. For in such cases, an essential 219–264 passim.
CHAPTER 7
THE DEPENDENCE OF THE DIVISION OF LABOR ON

CAPITALISM III: PRICE CONTROLS AND ECONOMIC
CHAOS
caused, almost invariably, by the government. In fact, a

PART A
good definition of inflation is, simply: an increase in the
quantity of money caused by the government. A virtually
PRICE CONTROLS AND equivalent definition is: an increase in the quantity of
SHORTAGES money in excess of the rate at which a gold or silver
money would increase. These two definitions are virtu-
ally equivalent, because without government interfer-
1. Price Controls and Inflation ence in money over the course of our history, the supply
K nowledge of the dependence of the division of

labor on capitalism deepens profoundly with an
understanding of the destructive consequences of price
of money today would consist mainly or even entirely of
precious metals and fully backed claims to precious
metals. The increase in the supply of such a money would
controls, which are the subject matter of the present almost always be quite small and at all times would be
chapter. severely limited by the high costs of mining additional
quantities of the precious metals. Rising prices as a
Price Controls No Remedy for Inflation chronic social problem are a consequence of the govern-
Price controls are advocated as a method of control- ment’s overthrow of the use of gold and silver as money
ling inflation. People assume that inflation means rising and putting in their place irredeemable paper currencies
prices and that it exists only when and to the extent that whose quantity can be increased without limit and virtu-
businessmen raise their prices. It appears to follow, on ally without cost.
this view, that inflation would not exist if price increases ***
were simply prohibited by price controls. Because it is necessary to approach the subject of
Actually, as we shall see later in this book, in Chapters price controls with clear ideas about why prices chroni-
12 and 19, this view of inflation is utterly naïve. Rising cally rise in the world around us, it is necessary to
prices are merely a leading symptom of inflation, not the anticipate here some of the discussion of later chapters
phenomenon itself. Inflation can exist, and, indeed, ac- and to show in no uncertain terms that the quantity theory
celerate, even though this particular symptom is pre- of money—viz., the increase in the quantity of money—
vented from appearing. Inflation itself is not rising prices, is the only valid explanation of the phenomenon.1
but an unduly large increase in the quantity of money, The truth of the quantity theory of money follows
1 The quantity theory of money is elaborated at length in chap. 12, sec. 1. The demonstration that it is the only possible valid explanation of a sustained, significant rise in prices occupies the whole of pt. A of chap. 19.
220 CAPITALISM
from the best known principle in the theory of prices, spent in every year of its existence, thereby raising
which is that prices are determined by demand and aggregate demand and spending in the economic system
supply and vary directly with demand and inversely with to a correspondingly higher level. Indeed, the more rap-
supply. By demand in this context is to be understood the idly new and additional money enters the economic
willingness combined with the ability to spend money, system, the more rapidly the previously existing quantity
and by supply, the existence of goods combined with the of money tends to be spent, because people progressively
willingness to sell them. Demand manifests itself in the lose the desire to hold balances of such money.5 (For
spending of money; supply, in the quantity of goods example, who wants to hold Argentine pesos? Who wants
sold.2 to hold U.S. dollars as much today as a generation ago?)
When people complain of “inflation,” what they have Aggregate demand and spending thus begin to rise more
in mind is not an isolated rise in some prices here and than in proportion to the increase in the quantity of
there, offset by a fall in prices elsewhere, but a rise in money. The rise in aggregate demand is what bids up the
prices in general, that is, a rise in the general consumer prices of all goods and services in limited supply, and is
price level. The general consumer price level is the what enables price increases initiated by sellers, whether
weighted average of all consumer prices. businessmen or labor unions, to take place as a repeated
It follows from the law of supply and demand that the phenomenon. In the absence of the rise in aggregate
general consumer price level can rise only if the aggre- demand, price increases initiated by sellers would reduce
gate demand (the total spending) for consumers’ goods the amount of goods and services that could be sold. This
rises, or the aggregate supply (the total quantity sold) of loss of sales volume, and the mounting unemployment
consumers’ goods falls. Indeed, the general consumer that goes with it, would soon put an end to such price
price level can be conceived of—as it was by the classical increases.6
economists—as an arithmetical quotient, with demand Once the truth of the quantity theory of money is
(spending) as the numerator and supply (quantity of recognized, the government’s responsibility for rising
goods sold) as the denominator, for the average of the prices follows immediately. Under the conditions of the
actual prices at which things are sold is, literally, nothing last seventy-five years or more, the government has had
more than the total spending to buy them divided by the virtually total control over the quantity of money. It has
total quantity of them sold. In effect, in any given year, deliberately brought about its rapid increase. Since the
some definite mass—however measured—of houses, cars, inauguration of the New Deal in 1933, the quantity of
soap, matches, and everything else in between, exchanges money in the United States has been increased by more
against some definite overall expenditure of money to than 58-fold, from little more than $19 billion to well
buy them, and the result, the arithmetical quotient, is the over $1,100 billion at the end of 1993. Since 1955, the
general consumer price level.3 rate of increase has shown a pronounced tendency to
Rising prices in the United States are obviously not accelerate, despite the absence of any major war. Today,
the result of falling supply, since supply has been grow- rates of increase are considered “normal” and even “mod-
ing in practically every year. The same is true of the est” that a generation ago would have been considered
countries of Western Europe, Japan, and even many of huge.7
the Latin American countries. There can be no question,
therefore, but that the rise in prices in these countries can Inflation Plus Price Controls
be the result only of an increase in aggregate demand. The imposition of price controls to deal with inflation
Moreover, in the few cases in which supply appears to does not stop inflation. Rather it combines with inflation
have fallen, such as Chile and Uruguay in the late 1960s to produce a different and worse set of consequences than
and early 1970s, the rise in prices was enormously out of would inflation alone. It is as illogical—and as self-de-
proportion to any possible decrease in supply in those structive—as would be an attempt to deal with expanding
countries. In those countries above all, demand grew.4 pressure in a boiler by means of manipulating the needle
An increase in aggregate demand is the result of an in the boiler’s pressure gauge. The last two chapters have
increase in the quantity of money in the economic sys- shown, in effect, that prices are equivalent to an instru-
tem. When new and additional money enters the eco- ment panel on the basis of which everyone plans his
nomic system, whether it is newly mined gold in a economic activities and which enables the plans of each
country using gold as money, or newly created paper individual to be harmoniously adjusted to the plans of all
currency or checkbook money, as in the present-day other individuals participating in the economic system.
United States, that money will be spent, and those who When price controls are imposed, the gauges on this
receive it in the sale of their goods and services will instrument panel are frozen. Not only do the gauges no
respend it. The additional money will be spent and re- longer record the fact of inflation, which still continues
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and probably accelerates because the government need explain a shortage of it is a price control, not a scarcity.
no longer fear rising prices, but the gauges also no longer It is a price control that prevents the price of a scarce
reflect any other aspects of the state of supply and de- good from being raised by the self-interest of the buyers
mand, which people must be able to take into account if and sellers to its free-market level and thus reducing the
their actions are to be coordinated with one another. quantity of the good demanded to equality with the
Thus, economic activity under the division of labor be- supply of the good available.
comes discoordinated and chaos ensues. It follows, and Of course, if a price control on something exists, and
every page of this chapter will confirm it, that a govern- a scarcity of it develops or grows worse, the effect will
ment which imposes price controls is in process of de- be a shortage, or a worsening of the shortage. Scarcities
stroying the economic system of its own country. can cause shortages, or worsen them, but only in the
context of price controls. If no price control existed, the
development or worsening of a scarcity would not con-
2. Shortages tribute to any shortage; it would simply cause the price
We have seen that the price system of capitalism—the to be higher.
free market—constitutes a rational, ordered system of It should be realized that a shortage can exist despite
social cooperation; indeed, that it is a truly awe-inspiring a great physical abundance of a good. For example, we
complex of relationships in which the rational self-inter- could easily develop a severe shortage of wheat in the
est of individuals unites all industries, all markets, all United States even with our normally very abundant
occupations, all production, and all consumption into a supplies, or even much larger supplies. This is because
harmonious, progressing system serving the well-being the quantity of wheat demanded depends on its price. If
of all who participate in it. the government were to roll back the price of wheat
All of this is what price controls destroy. sufficiently, it would create a major increase in the quan-
The one consequence of price controls that is the most tity demanded—not only a larger quantity demanded for
central and the most fundamental and important from the export, but a larger quantity demanded for raising cattle
point of view of explaining all of the others, and which and broilers, making whiskey, and perhaps for many
most directly threatens the ability to produce under the other employments for which one does not presently
division of labor, is the fact that price controls cause think of using wheat, because of its price. In other words,
shortages. no matter how much wheat we produced, we could have
A shortage is an excess of the quantity of a good a shortage of it, because at an artificially low price we
buyers are seeking to buy over the quantity sellers are could create a demand for an even larger quantity.
willing and able to sell. In a shortage, there are people It should be held in mind, therefore, that shortages are
willing and able to pay the controlled price of a good, but not a matter of scarcity or abundance. Scarcity need not
they cannot obtain it. The good is simply not available to cause them; abundance is no safeguard against them.
them. Recalling the gasoline shortage of the winter of Shortages are strictly the result of price controls. Price
1974 should make the concept real to everyone who controls are the only thing that allows scarcities to cause
experienced it. The drivers of the long lines of cars all shortages; and they create shortages even when there is
had the money that was being asked for gasoline and no scarcity, but abundance.
were willing, indeed, eager, to spend it for gasoline. Their Indeed, the true relationship between scarcities and
problem was that they simply could not obtain the gaso- shortages is the reverse of what is usually believed.
line. They were trying to buy more gasoline than was While scarcities per se do not cause shortages, shortages
available. cause scarcities. That is, no matter how abundant are the
The concept of a shortage is not the same thing as the supplies with which we begin, we have only to impose
concept of a scarcity. An item can be extremely scarce, price controls, create shortages, and we will soon bring
like diamonds, Rembrandt paintings, and so on, and yet about growing scarcities. As an example of this, consider
no shortage exist. In a free market, as we saw in the last the fact pointed out in the last chapter that in the oil crisis
chapter, the effect of such a scarcity is a high price. At oilmen needing oil products to keep their wells running
the high price the quantity of the good demanded is were prohibited from outbidding homeowners needing
levelled down to equality with the supply available, and oil to heat their garages. It is obvious what such a
no shortage exists. Anyone willing and able to pay the situation is capable of doing to the subsequent supply of
free-market price can buy whatever part of the supply he oil.
wishes; the height of the market price guarantees it, The fact that it is shortages that cause scarcities will
because it eliminates his competitors. It follows that be a recurring theme of this chapter.
however scarce a good may be, the only thing that can In a free market shortages are a virtual impossibility.
222 CAPITALISM
The closest thing that exists to them is that sometimes which fields can be made to yield from one-third to
people may have to wait in line for the next showing of two-thirds more oil over their lives by the adoption of
a popular movie. The typical case in a free market is that such methods as thermal or chemical flooding, some-
a seller is in a position to supply more than his present times known as “tertiary recovery.” At the same time, in
number of customers. There are very few stores or fac- restricting the profits from the lower-cost oil deposits,
tories in a free market that are not able and eager to do price controls held down both the incentives to discover
more business. Even goods and services in limited supply and develop new such deposits and the capital necessary
are priced in such a way that the sellers are usually able to the oil companies for expanded oil operations of any
and willing to do more business. For example, the wine type. Thus, it should not be surprising that following the
shops have some reserve inventory of the rare wines. repeal of price controls on oil in 1981, a major surge in
Landlords have a certain number of vacancies. There is domestic drilling and production occurred—despite the
even some limited degree of unemployment in most fact that the government imposed a confiscatory “wind-
occupations. This is because, in a free market, the prices fall-profits tax” that deprived the oil companies of a
of goods and services in limited supply are set somewhat major part of the benefit of the repeal of the price
above the point that would enable the sellers to sell out controls. For now domestic oil production became more
entirely and the workers to be 100 percent employed. The profitable.
reason prices are set in this way is because the sellers, Rent controls on housing that has already been con-
including the workers, believe that by waiting before structed provide a similar example of the destruction of
they sell, they can find better terms. They are holding out, supply. As inflation drives up the operating costs of
waiting for the right customers or the right job. housing—namely, such costs as fuel, maintenance, and
minor repairs—more and more landlords of rent-con-
trolled buildings are forced to abandon their buildings
3. Price Controls and the Reduction of Supply and leave them to crumble. The reason is that once the
The preceding discussion showed how price controls operating costs come to exceed the frozen rents, contin-
create shortages by artificially expanding the quantity of ued ownership and operation of a building become a
a good demanded. To the degree that the controlled price source merely of fresh losses, over and above the loss of
is below the potential free-market price, buyers judge the capital previously invested in the building itself.
that they can afford more of the good with the same This destruction of the housing supply starts with the
monetary wealth and income. They judge that they can housing of the poor and then spreads up the social ladder.
carry its consumption to a point of lower marginal utility. It starts with the housing of the poor because the operat-
In this way, the quantity of the good demanded comes to ing costs of such housing are initially so low that they
exceed the supply available, whether that supply is scarce leave relatively little room for economies. For example,
or abundant. there are no doormen to eliminate and therefore no
Price controls also reduce supply, which intensifies doormen’s salaries to save. Also, the profit margins on
the shortages they create. such housing (that is, profits as a percentage of rental
revenues) are the lowest to begin with, because the land
a. The Supply of Goods Produced and the buildings are the least valuable and therefore the
In the case of anything that must be produced, the amount of profit earned is correspondingly low. As a
quantity supplied falls if a price control makes its pro- result, the housing of the poor is abandoned first, because
duction unprofitable or simply of less than average profit provides the least buffer between rising operating costs
itability. and frozen rents.
It is not necessary that a price control make production
unprofitable or insufficiently profitable to all producers b. The Supply of Goods in a Local Market
in a field. Production will tend to fall as soon as it A price control reduces supply whenever it is imposed
becomes unprofitable or insufficiently profitable to the in a local market and makes that market uncompetitive
highest-cost or marginal producers in the field. These with other markets. In such a case, the local market is
producers begin to go out of business or at least to operate prevented from drawing in supplies from other areas, as
on a smaller scale. was the Northeast and the United States as a whole
For example, the price controls on oil held down the during the Arab oil embargo.
supply of oil. They did not totally destroy the supply of
oil, but they did discourage the development of high-cost The Natural Gas Crisis of 1977
domestic sources of supply. They also made the more In exactly the same way, in the winter of 1977, price
intensive exploitation of existing oil fields unprofitable, controls on natural gas prevented areas of the United
States that were suffering freezing weather from bidding percent. Over the following two years, the dollar contin-
for additional supplies from the producing regions in the ued to fall in terms of foreign currencies and in 1973 was
South and Southwest. Natural gas shipped across state formally devalued a second time. The fall in the dollar’s
lines was controlled by the Federal Power Commission foreign exchange value meant a lower price of dollars in
at a maximum of $1.42 per thousand cubic feet. Natural terms of marks, francs, and other currencies. Since the
gas sold within the states where it was produced, and thus prices of our goods were frozen, a lower price of dollars
outside the jurisdiction of the FPC and free of price meant that all of our goods suddenly became cheaper to
controls, was selling at $2.00 per thousand cubic feet, foreigners. As a result, they began buying in much larger
with lower costs of transportation besides. It was there- quantities—especially our agricultural commodities. As
fore much more profitable to sell natural gas in the states they began buying, domestic buyers were prevented by
where it was produced, such as Texas and Louisiana, than price controls from outbidding them for the dwindling
in such states as New Jersey or Pennsylvania. supplies. As a result, vast accumulated agricultural sur-
Indeed, in the absence of government controls over pluses were swept out of the country, and domestic food
the physical distribution of supplies, price controls would supplies were threatened, which is why prices skyrocketed
have resulted in still less gas being shipped outside the each time the controls were taken off.
producing states and more being sold inside, in accor-
dance with the difference in price and profitability. This Price Controls as a Cause of War
process would have gone on until enough additional gas The fact that price controls jeopardize supplies in
was retained within the markets of the producing states markets that export leads to embargoes against further
to make its price in those markets actually fall below the exports, as occurred in this country in the summer of
controlled interstate price by an amount equal to the costs 1973, when we imposed an embargo on the export of
of transportation; only at that point would it have paid various agricultural commodities. In addition, price con-
producers to ship their gas out of state. The shortage in trols in markets that must import make such markets
the rest of the country, of course, would have been helpless in the face of embargoes imposed by others, as
correspondingly more severe. As I say, government con- we were made helpless in the face of the Arab oil em-
trols over the physical distribution of natural gas pre- bargo. It follows that to the degree that countries impose
vented this outcome; the government simply forced the price controls, they must fear and hate each other. Each
gas producers to sell a major part of their output in the such country must fear the loss of vital supplies to others,
interstate market. But the government’s allocation for- as the result of excessive exportation, and the deprivation
mulas did not take into account the extremely cold winter of vital supplies from others, as the result of their embar-
of 1977, and its allocations proved inadequate to keep goes and its helplessness to cope with them. Each such
people from the threat of freezing. Price controls then country makes itself hated by its own embargoes and
prevented the people of the affected regions from obtain- hates the countries that impose embargoes against it. Our
ing the additional supplies they urgently needed.8 embargo on agricultural products in 1973 did not endear
us to the Japanese. And there was actual talk of military
The Agricultural Export Crisis of 1972–73 intervention against the Arabs. Simply put, price controls
A price control not only prevents a local market from breed war. A free market is a necessary condition of
drawing in supplies from elsewhere, but it can also cause peace.
a local market that normally exports, to export exces-
sively. In this case, as supplies are drawn out, the price c. The Supply of Goods Held in Storage
control prevents the people in the local market from A price control reduces supply whenever it is imposed
bidding up the price and checking the outflow. on a commodity of the kind that must be stored for future
This phenomenon occurred in the United States in use. The effect of a price control in such a case is to
1972 and 1973. Our price controls on wheat, soybeans, encourage a too rapid rate of consumption of the com-
and other products made possible an unchecked expor- modity and thus to reduce supplies available for the
tation that jeopardized domestic consumption and led to future. As we have seen, buyers are led to buy too rapidly
an explosion of prices each time the controls were taken by the artificially low price, and sellers are led to sell too
off, in President Nixon’s succession of on-again, off- rapidly, since the fixity of the controlled price does not
again “phases” of price controls. enable them to cover storage costs and earn the going rate
In this instance, the fall in the value of the dollar in of profit in holding supplies for future sale.
terms of foreign currencies played a critical role. When If the buying public and the professional speculators
President Nixon imposed price controls in August of were unaware of the impending exhaustion of supplies,
1971, he also took steps to devalue the dollar by 10 the effect of sellers placing their supplies on the market
8 For a further, related discussion of the effects of price controls on natural gas, see George Reisman, The Government Against the Economy(Ottawa, Illinois: Jameson Books, 1979), pp. 130–32.
224 CAPITALISM
right away would be to depress the current market price for the existence of shortages. The public hoards in
below the controlled price. This process would go on anticipation of shortages caused by the price controls.
until the current market price fell far enough below the The public’s speculative demand cannot even be blamed
controlled price, so that once again it would have suffi- for hastening the appearance of a shortage. That too must
cient room to rise in the months ahead to be able to cover be blamed on price controls, because in the absence of
storage and interest costs. The resulting structure of the controls the additional demand of the public would
prices would guarantee the premature exhaustion of sup- simply raise prices; at the higher prices, the rise in the
plies. quantity of goods demanded would be cut back; prices
An elaboration on the example of the deficient wheat would rise to whatever extent necessary to level down the
harvest will make these points clear.9 Assume that in a quantity demanded to equality with the supply available.
year of normal wheat supplies, the price of wheat begins Speculation on the part of the suppliers of goods is
at $1.00 per bushel in the harvest month, when supplies likewise blameless for the existence of shortages. Con-
are most abundant, and then rises a few cents per month, trary to popular belief, price controls do not give suppli-
to cover the costs of storage and interest, and reaches a ers a motive to withhold supplies, but, as we have seen,
peak of $1.20 in the month immediately preceding the an incentive to unload them too rapidly.
next harvest. Now assume that when the harvest is one There is, of course, an important exception to the
month’s consumption below normal, the price of wheat principle that price controls give sellers an incentive to
should begin at $1.30 in the harvest month and gradually sell their supplies too rapidly. This is the case in which
ascend to something over $1.50 in the month preceding the sellers are able to look forward to the repeal of the
the following harvest, in order to reduce the quantity of controls. In this case, a price control makes it relatively
wheat demanded to equality with the smaller total supply unprofitable to sell in the present, at the artificially low,
available. Assume further that a price control limits the controlled price, and more profitable to sell in the future,
price of the deficient wheat crop to no more than $1.20 at the higher, free-market price. In this case, sellers do
in any month. In this case, when the deficient crop comes have a motive to withhold supplies for future sale.
in, its value cannot remain even at $1.20 for very long, Even in this case, however, it is still the price control
because it has no prospect of ever getting above $1.20; that is responsible for the existence of any shortage that
as a result, it will be sold more heavily. It will tend to be develops or intensifies. In this case, the price control
sold until the price in the harvest month is driven down discriminates against the market in the present in favor
to $1.00, and from there the price will gradually ascend of the market in the future; it prevents the market in the
in the succeeding months toward $1.20. This structure of present from competing for supplies with the market in
prices will encourage the same rate of consumption as the future. Furthermore, in the absence of a price control,
prevailed in years of normal supplies, and will threaten any build-up of supplies for sale in the future would
famine conditions at the end of the crop year. simply be accompanied by a rise in prices in the present,
which would prevent the appearance of a shortage, as we
Hoarding and Speculation Not Responsible have seen repeatedly in previous discussion.
for Shortages Finally, it should be realized that the withholding of
Under conditions such as those described above, the supplies in anticipation of the repeal of a price control
buying public sooner or later becomes aware of the fact does not imply any kind of antisocial or evil action on
that supplies will run out. At that point, demand skyrock- the part of the suppliers. Price controls, as we have seen,
ets, as the buyers scramble for supplies. As soon as this lead to inadequate stocks of goods; in many cases, it is
occurs, and it may be very early, the larger supplies that probable that the build-up of stocks in anticipation of the
sellers are encouraged to place on the market under price repeal of controls merely serves to restore stocks to a
controls are not sufficient to depress the market price more normal level. Even if the build-up of stocks does
below the controlled price, because they are snapped up become excessive, its effect later on, when the stocks are
by the speculative buying of the public, which is aware sold, is merely to further reduce the free-market price in
of the shortage to come. (In our example of wheat, the comparison with what that price would otherwise have
whole supply would tend to be carried off at the con- been. In any event, all ill-effects that may result are
trolled price of $1.20 per bushel as soon as the public entirely the consequence of price controls.
becomes aware of the inevitable shortage of wheat to
come.) The consequence of the speculative buying of the Rebuttal of the Accusation That Producers With-
public is that the item disappears from the market right hold Supplies to “Get Their Price”
away; it is hoarded. The preceding discussion applies to the accusation
The hoarding of the buying public is not responsible that producers withhold supplies in order to “get their
9 Cf. above, chap. 6, pt. A, sec. 3.
price.” This accusation was levelled against the oil com- stocks they could spare, so that when the first set of
panies during the oil crisis and, again, during the natural sellers returned to the market they would find their
gas crisis. It will undoubtedly be levelled anew if price normal market already partly supplied, and thus would
controls are imposed in the future. end up having to sell at prices lower than they could have
Once more, the fact is that price controls generally received had they not attempted to raise prices in the first
cause sellers to sell too rapidly, and not to hold even place. The only way the speculative withholding of sup-
normal stocks. Where the anticipation of the controls plies can be profitable in a free market is when it takes
being removed does lead to the withholding of supplies, advantage of a prospective rise in price that is indepen-
the fault is not that of the sellers, but of the existence of dently caused, which, of course, means, not caused by
controls in the present. It is simply absurd to tell produc- the speculators themselves.10
ers that soon they will be permitted to sell at the free-mar- In the specific case of the oil crisis the withholding of
ket price while for the present they must pay fines or go supplies turned out to be entirely mythical. Reports of
to jail if they attempt to sell at as good a price. Respon- large numbers of fully loaded tankers standing offshore
sibility for the withholding of supplies in such a case lies to “get their price” had no more foundation in fact than
with those who impose price controls and whose support the stories about full tank farms and storage depots.11 As
of price controls makes their imposition possible. For no concerns the natural gas crisis, the charge was ultimately
other result can be expected. To blame the producers and withdrawn by one of the principal original accusers,
the profit motive in such a case is comparable to blaming President Jimmy Carter’s then Interior Secretary Cecil
the rocks and the laws of physics for the damage done by D. Andrus. According to The New York Times, the secre-
a delinquent who throws the rocks against windows. In tary “said today that a series of studies had produced no
acting to make profits, the producers are doing nothing evidence that oil companies were withholding natural
more than acting in accordance with their nature—their gas from offshore leases. . . . The interior secretary in-
moral nature as rational beings who wish to live by sisted today that he had had no part in raising those
means of production and exchange. charges and contended instead that they were initially
Although this did not happen in the oil or gas crisis, leveled by reporters. . . . Mr. Andrus also made it clear
and is unlikely ever to happen so long as the great today that the question of withholding was now closed.
majority of businessmen remain ignorant of sound eco- ‘I’m not going to continue to chase a rabbit,’ he said.”12
nomic theory and lack moral courage, it would be per-
fectly proper if sellers really did withhold supplies to “get Price Controls and the “Storage” of Natural
their price”—that is, not merely to take advantage of the Resources in the Ground
higher free-market price they expect to follow the govern- Price controls have a particularly destructive effect on
ment’s removal of controls, but to withhold supplies in a the supply of natural resources. Unlike products, natural
deliberate attempt to force repeal of the controls. Such a resources in the ground are imperishable and have zero
withholding would be a kind of strike; more correctly, it storage costs. This means that it is possible to consider
would be a refusal to work under conditions of forced reserving their use to much more remote periods of the
labor. By putting an end to price controls, it would be an future than is the case with regard to products. The
action in the public interest in the true sense of the term. consequence is that under price controls a tendency
It should be realized in connection with this discus- exists to withhold natural resources from current exploi-
sion, that in a free market the speculative withholding of tation even though their current exploitation might be
supplies is not a means by which sellers can arbitrarily profitable. The reason is that their future exploitation—
enrich themselves. It is not possible, as widely believed, following the repeal of price controls—is expected to be
for sellers arbitrarily to raise prices by withholding sup- sufficiently more profitable to justify waiting. In this
plies and then to sell the supplies they have withheld at way, price controls on natural resources act to bring about
the higher prices they themselves have caused. Any a twofold restriction of supply: they prevent the devel-
attempt to do this would necessarily cause losses to the opment or exploitation of high-cost deposits by making
sellers who tried it. First of all, when these sellers put them unprofitable and they postpone the development or
their supplies back on the market, they would push prices exploitation of low-cost deposits by making their devel-
back down by as much as they had first increased them, opment or exploitation in the present less profitable than
and in the meanwhile they would have incurred addi- it will be in the future.
tional costs of storage and have had to forgo the profits The question may be raised of why price controls
or interest they could have earned by selling sooner. In would not encourage the more rapid exploitation of
addition, so long as the high prices lasted, other sellers low-cost natural resources if the controls were expected
would be encouraged to place on the market whatever to exist permanently. To answer this question, it is only
11
12
10 For
New
On these
the
York
rebuttal
points,
Times,of
see
April
those
John
28,
fallacies
Stuart
1978,Mill,
see
pp. above,
1,
Principles
D9. chap.
of6,
Political
pt. A, sec.
Economy,
3, the subsection
Ashley ed.“Rebuttal
(1909; reprint
of theed.,
Charge
Fairfield,
that Large
New Jersey:
Stocks of
Augustus
Oil Proved
M. Kelley,
the Oil Shortage
1976), pp.of706–709.
the 1970s Was ‘Manufactured’ by the Oil Companies.”
226 CAPITALISM
necessary to realize what “permanently” would have to uncontrolled products. For example, if the price of milk
mean in this context. “Permanently” would have to refer is controlled, but cheese is not, then the production of
to a period of at least a decade and, more probably, at cheese will be more profitable than the production of
least a generation. For suppose the effect of a price milk. As a result, raw milk will be used more heavily to
control is to hold the real value of a resource to half of produce cheese, and less milk will be available for drink-
what it would be in the absence of controls. This means ing. In other words, the supply of milk for drinking will
the owners of the resource can look forward to the fall. In view of the continuing popularity of rent control,
prospect of a doubling of its real value whenever controls it is worth pointing out that exactly the same principle
are repealed. Since they incur no storage costs of any applies specifically to apartment houses. Apartment houses
kind by waiting, even if they had to wait twenty-five years can be viewed as a factor of production with multiple
for price controls to be repealed, their gain would work possible uses, namely, use as rental housing or use as
out to something on the order of 3 percent per annum condominium or cooperative housing. If rent controls are
compounded. Such a rate of return, in real terms (which imposed, then landlords will convert their housing to
means, adjusted for losses in the purchasing power of condominiums or co-ops if they are free to do so, because
money), is by no means insignificant in a period of the effect of rent controls is to reduce the profitability of
inflation, when it is common for many or most invest- using apartment buildings for rental housing in compar-
ments to show losses in real terms.13 In such conditions, ison with that of using them for condominium or coop-
it might pay to wait even for the prospect of a consider- erative housing. Of course, their decision to do so evokes
ably lower positive real rate of return. Of course, if price the same kind of outbursts of self-righteous irresponsi-
controls undervalue a resource less severely, the induce- bility and irrationalism that we observed a few para-
ment to postpone exploitation is less powerful. But it graphs back in connection with the blame heaped on
does not take very much undervaluation to make the producers for withholding supplies in the face of price
owners of the resource prefer to wait five or ten years for controls and the prospect of imminent relief from the
the repeal of a control if they have to. price controls.
On the basis of these considerations, it is not surpris-
ing that the repeal of the price controls on crude oil was e. Price Controls and the Prohibition of Supply
followed by a substantial increase in the supply of low- Sometimes, the question is raised as to what argument
cost oil as well as by additional supplies available only one could give to a consumer to convince him to be
at higher costs. against price controls; especially what argument one
could give to a tenant to convince him to be against rent
d. The Supply of Particular Types of Labor and controls. Our discussion of how price controls reduce
Particular Products of a Factor of Production supply indicates a very simple argument to give to any
A price control reduces supply if it is applied to the consumer against any price control. This is that if he
wages of any particular occupation or to the wages paid wants something, he must be willing to pay the necessary
by any particular industry while wages in other occupa- price. It is a natural law—a fact of human nature—that a
tions or industries are left free. In these cases, the workers good or service can only be supplied if supplying it is
in the controlled occupation or industry simply leave to both worthwhile to the suppliers and as worthwhile as
take better-paying jobs at uncontrolled wages elsewhere; any of the alternatives open to them. If the price is
and new workers do not enter the occupation or industry. controlled below this point, then it is equivalent to a
The controlled occupation or industry is made uncompeti- prohibition of supply. To command, for example, that
tive and loses its labor force. For example, if the govern- apartments be supplied at rents that do not cover the costs
ment were to control just the wages of steel workers, say, of construction and maintenance, and the going rate of
the effect would be that steel workers would start going profit, is equivalent to commanding that buildings be
into other industries in response to higher, uncontrolled built out of impossible materials like air and water rather
wages in those industries. Young workers would stop than steel and concrete. It is to command construction in
becoming steel workers. Exactly the same would happen contradiction of the laws of nature. In the same way, to
if the government controlled just the wages of carpenters, command that oil be sold less profitably in New York
say. than in Hamburg, say, or that natural gas be sold less
A price control reduces supply whenever it applies to profitably in Philadelphia than in Houston, is equivalent
some products of a factor of production, but not to other to commanding that these materials become drinkable
products of that factor. In this case, the production of the and that water become burnable, for it is no less an act in
controlled products is curtailed, because it is more prof- contradiction of the nature of things.
itable to use the factor of production to produce the Now it is simply absurd for a consumer who wants a
13 The explanation of why inflation reduces or altogether eliminates the real rate of return on capital is provided below. See chap. 19, pt. B, secs. 5 and 6.
good, to support a measure which makes its supply the investment of sufficient additional outside capital.
impossible. And that is what one should tell him. That is When the reduced profitability of these industries is
what the consumers themselves should tell the legislators understood to be permanent, or when the policy of the
as soon as the latter become busy trying to enact price regulatory agencies inflicts actual losses on them in
control laws for the consumers’ alleged benefit. These terms of making it impossible for them to replace worn-
would-be benefactors of the consumers prohibit the con- out equipment at the higher prices caused by inflation,
sumers from making it worthwhile for businessmen to then these industries go into actual decline. They do not
supply them. They destroy the businessmen. In doing so, have the means of replacement, and their owners with-
they destroy the consumers’ ability to find agents to act draw capital to whatever extent they are able in the form
on their behalf. Such legislators are capable of reducing of taking dividends.
the consumers to the point where if they want anything, We are already very far along in this process. Areas
they will have to produce it themselves, because price such as New York City and much of the state of Florida,
controls will make it unprofitable for anyone to supply it for example, have been skirting for many years on the
to them. Already, rent control has “benefitted” tenants to edge of power disasters. Almost every year there is a
the point that it is has become increasingly necessary if question of whether generating capacity will be adequate
one wants an apartment to own it oneself: one must buy to meet the demand in such places. So-called brownouts,
a “co-op” or a condominium. Price controls made it and even blackouts, are not uncommon. Problems of this
extremely difficult, and at times absolutely impossible, kind would undoubtedly be far more common and severe
to buy oil or natural gas. If the legislators go on “bene- if it were not for the relatively depressed state of the
fitting” the consumers long enough with their price con- American economy in recent years.
trols, they will benefit them all the way back to the The situation of an inadequate supply of power is the
economic self-sufficiency that was the leading character- result of the restricted profitability of the utilities, caused
istic of feudalism. They will have destroyed the division by price controls. It is compounded, of course, by the
of labor. ecology movement’s policy of harassment of energy
producers. Both causes have prevented the construction
The Destruction of the Utilities and the of sufficient additional generating capacity to keep pace
Other Regulated Industries with demand.14
It may be thought that price controls on genuine At the present time, the traditionally regulated indus-
monopolies, such as government-franchised electric util- tries, such as the electric utilities, the railroads, and
ities, are an exception to the principle that price controls telephone service, are the principal victims of price con-
reduce, indeed, prohibit, supply. In fact, they are not. On trols, along with rental housing in various towns and
the contrary, they have been an excellent illustration of it. cities. Although the situation by and large is probably
In the absence of inflation these controls are largely much improved in comparison with that of the late 1970s,
without effect, for then they do not actually impose when conditions in these industries appeared more criti-
below-market prices. At such times, they are set at a level cal—and the oil and natural gas industries were in a state
that, if anything, is almost certainly higher than would of growing crisis as well, thanks to price controls—these
have prevailed in a free market. This is the case because industries are still capable of being destroyed by price
they are set high enough to provide the going rate of controls. And, since the rest of the economic system is
profit, and then some, to legally protected monopolists, vitally dependent on them, their destruction would be
whose costs of production are almost certainly above the disastrous for the entire economy.
costs of production that would prevail in a free market Indeed, despite the improvements brought about in
with its legally open competition. But when they exist in the 1980s under the Reagan administration, one must still
conjunction with inflation, the price controls on these regard the future with a high degree of pessimism. The
monopolies begin to operate as genuine price controls. public’s state of knowledge of economics has not signif-
This occurs because inflation drives up the production icantly improved. Thus, the causes of the improvements
costs of the monopolies, while the regulatory authorities in the situation are not understood. Even those who were
either refuse to allow rate increases or allow only insuf- responsible for the improvements—through such mea-
ficient rate increases. In this way, the utilities, and all the sures as the repeal of the price controls on oil, the easing
other regulated industries, become unprofitable. At first, of “environmental” restrictions, and the abandonment, at
they merely cease to grow rapidly enough, because their least for the time being, of the policy of accelerating
reduced profitability throttles their ability to generate inflation—apparently do not know enough to take credit
additional capital—that is, they lack the profits to plow for their good work, despite the fact that it would be very
back and they lack the profits to provide an incentive to much to their political advantage to do so. Instead, the
14 Indeed, as previously pointed out, the hysteria of the ecology movement has caused the government of the state of New York to deprive its citizens of the benefit of an actually existing, brand new major atomic power plant—the Shoreham plant on Long Island, which it caused to be dis mantled. See above, chap. 3, n. 8.
228 CAPITALISM
improvements are regarded as essentially accidental and firmly resolved to go on a diet just as soon as he lost
are more or less taken for granted. twenty pounds, or an alcoholic who was firmly resolved
Thus, the continued existence even of the remaining to stop drinking just as soon as he sobered up. Of course,
price controls holds out the specter of growing power these are not perfect analogies, because the overweight
shortages, a disintegrating railroad network, and deteri- person and the alcoholic at least know the causal connec-
orating telephone service. The potential for destruction tions and are evading them. In the case of the government
is especially great in the case of electric power, where officials and the intellectuals responsible for rent control,
the effects of price controls are compounded by the most of them do not even know the causal connection.
actions of the ecology movement. So long as these indus- They are too ignorant even to be guilty of evasion in this
tries are subject to price controls, and so long as the particular instance.
potential exists for significant inflation, all of these in- The confusion of our public officials extends to the
dustries are capable of being reduced to the level of point that when they are confronted with the fact that the
rent-controlled housing in the slums of New York City. repeal of a price control would actually end a shortage,
The only difference will be that if they suffer comparable they then deny the very reality of the shortage: they view
devastation, they will carry down with them the rest of the shortage as “artificial” or “contrived.” For example,
the economic system. These problems will become ap- during the natural gas crisis the then Governor of Penn-
parent if and when a policy of accelerating inflation is sylvania, Milton Schapp, declared before television news
resumed. cameras that if price controls were lifted and the gas
shortage came to an end through the appearance of
additional supplies, the very appearance of the additional
4. Ignorance and Evasions Concerning Shortages supplies would prove that the shortage had been “con-
and Price Controls trived.” The governor simply did not know that a higher
The fact that price controls are the cause of shortages price increases supply by enabling a local market suc-
has been known to all economists at least since the time cessfully to compete for supplies with other markets,
of Adam Smith. Nevertheless, this elementary knowl- and, of course, that it leads to an expansion of the total
edge is either unknown or simply evaded by the great supply by making production more profitable. He also
majority of today’s presumably educated political and did not know that the supply available for vital purposes
intellectual leaders. can be increased by enabling those purposes to out-
These people do not have any idea of the connection compete marginal purposes, and that the elimination of
between price controls and shortages. In their view, shortages eliminates the need to hoard supplies, which
shortages are the result of some kind of physical defi- supplies then also appear on the market.
ciency in the supply or of an innate excess of needs. They
simply do not have any knowledge of the role of price in Inflation and the Appearance of High Profits
balancing demand and supply. As a result, it is common In an important respect, the ignorance that surrounds
to hear them blame shortages on such things as poor the effect of price controls is made possible by the fact
crops, an alleged depletion of natural resources, even that that inflation raises the apparent or, as economists say,
old standby the “greed” of consumers. Their level of the nominal rate of profit that businesses earn. It does not
knowledge is typified by a provision of the rent control increase the real rate of profit—the rate in terms of the
law that governed New York City for many years. Ac- actual physical wealth that business firms gain—(in fact,
cording to this law, rent controls could not be lifted until quite the contrary), but it does increase the rate of profit
the vacancy rate in apartments had first climbed to a expressed in terms of the depreciating paper money.
certain substantial level. In other words, only when the To understand what is involved, it must be realized
shortage that rent controls created and maintained was that the costs which enter into the profit computations of
over, could rent controls be lifted. business firms are necessarily “historical”—that is, the
The same point of view was expressed by a former outlays of money they represent are made prior to the
mayor of New York, Abraham Beame, when still in sale of the products. This follows from the fact that
office. When asked to comment on an economic regen- production always takes place over a period of time.
eration plan for New York City that had urged the repeal Materials and labor must usually be bought weeks or
of rent control, he “refused to endorse the rent control months before the resulting products are ready for sale,
proposal, saying, ‘we still have a vacancy rate of less than and sometimes even further in advance. Machinery and
5 percent and we still have a housing shortage.’”15 factory buildings are bought many years, even decades,
To find a parallel for this kind of reasoning, one would before their contribution to production comes to an end.
have to find a badly overweight person, say, who was Thus the costs of business enterprises in producing their
15 New York Times, January 29, 1977, p. 22.
products represent outlays of money made weeks, months, are placed in a position in which, after paying taxes, they
years, or even decades earlier. are actually worse off as the result of the rise in the
Now to whatever extent inflation occurs, the sales nominal rate of profit.
revenues of business firms are automatically increased: A good illustration of these facts is the case of a
the greater spending that inflation makes possible is hypothetical merchant who normally buys $100 worth of
simultaneously greater sales revenues to all the business goods on January 1 and sells them at the end of the year
firms that receive it. Since costs reflect the given outlays for $110. If a rapidly increasing quantity of money in-
of earlier periods of time, the increase in sales revenues creases total spending in the economy by 10 percent over
caused by inflation necessarily adds a corresponding the year, this merchant will tend to sell his goods for $121
amount to profits. instead of $110, that is, also by 10 percent more. Conse-
A slightly different way to grasp the same basic idea quently, his nominal profit will be increased from $10 to
is to realize that the total outlays business firms make for $21. However, the same increase in the quantity of money
productive purposes at any given time are a reflection of and volume of spending that enlarges our merchant’s sales
the quantity of money in existence at that time, while the revenues and profit also raises the replacement cost of
sales revenues they will subsequently take in for the his inventory. Instead of being able to replace his inven-
products resulting from those outlays, will be a reflection tory for $100, as he was able to do in the past, he will
of the quantity of money in existence later on. It follows now have to replace it at a cost of $110. Thus, the whole
that the more rapidly the quantity of money grows, the increase in the merchant’s profit is purely nominal, not
greater must be the ratio of sales revenues to costs of real. While his profit rises from $10 to $21, fully $10 of
production and to capital previously invested. This, of this additional profit is required merely to replace inven-
course, implies a corresponding rise in the general rate tory at higher prices. This leaves the merchant with $11
of profit on capital previously invested. The rate of profit that he can use for other purposes. But these $11 will
in the economy is raised to progressively higher levels probably buy no more than $10 used to buy, because the
the more rapidly the quantity of money, spending, and increase in the quantity of money and volume of spend-
sales revenues rise. ing has probably raised the prices of the things the
It cannot be stressed too strongly, however, that the merchant can buy outside of his business. Thus, the $21
rate of profit that rises is purely nominal, that is, it is profit the merchant now has represents no more in terms
strictly in terms of money. All that is happening is that of actual wealth and ability to buy goods than the $10
the more rapidly money is increased, the faster is the rate profit he used to have.
at which money is gained. If there are different monies, Indeed, as I have said, our merchant will actually be
increasing at different rates, then the nominal rate of worse off as a result of his higher nominal profit. Be-
profit is higher in the monies that increase more rapidly. cause, apart from other reasons that will be presented
For example, it is higher today in U.S. dollars than in later in this book, he must pay additional taxes on the
Swiss francs, and higher in Argentine pesos than in U.S. additional nominal profit, and must restrict his consump-
dollars. (The same principle and example apply to inter- tion or new investment in order to do so.16 To understand
est rates, since the most important determinant of interest this point, assume a tax rate of 50 percent on profits.
rates is the rate of profit that can be earned by investing Thus, initially, when our merchant made $10 in profit, he
borrowed money in business.) paid $5 in taxes and had $5 left to himself, which he could
The rise in the nominal rate of profit does not imply either consume or add to his business. When his profit
any increase in the real rate of profit, that is, the rate of rises to $21, his taxes rise to $10.50. Of the $10.50 left
gain in actual wealth, because the same rise in spending over, fully $10 are required to replace inventory at higher
that raises sales revenues and profits in the economy also prices. Therefore, the merchant is left with a mere 50¢
raises the level of prices. The extra profits are almost all that he can consume or use to expand his business,
necessary to meet higher replacement costs of inventory whereas he initially had $5, and at a lower level of prices
and plant and equipment, and the rest are necessary to as well.
meet the higher prices of consumers’ goods that the Exactly the same principles as apply to the profit of
owners of businesses were previously able to buy in their our hypothetical merchant apply to the profits of all
capacity, say, as stockholders receiving dividends. In- real-life merchants, and to the profits of businessmen in
deed, the real rate of profit firms earn actually falls while general, because the same kind of increase in nominal
the nominal rate of profit rises. One major reason it does profits as occurs on inventories also occurs in the case of
so is because the additional nominal profits, while mainly depreciable assets, such as buildings and machinery.17
necessary for the replacement of assets at higher prices, It is in this light that the consequences of the attitude
are taxed, as though they were real profits. Thus firms that profits are “too high” must be considered. The fact
16
17 For abelow,
See discussion
ibid. In
of the case
various
of inventories,
ways in which
there
inflation
is somereduces
relief inthe
that
real
it is
rate
possible
of profit,
forsee
businesses
below, chap.
to choose
19, pt.
to B,
calculate
sec. 5. their costs for tax purposes on the basis of the cost of the inventory acquired last rather than first—i.e., the so-called Lifo system (last in, first out) rather than the customary “Fifo” system (first in, first out). In the case of fixed assets, however, there is no such palliative.
230 CAPITALISM
is that in the context of inflation the seemingly high rates operations are encumbered with endless bureaucratic
of profit that firms earn represent a decline in real profits regulations, then it has no incentive or even possibility
and, quite possibly, the total elimination of real profits. to be efficient.18 It is absurd to blame an industry’s
In such circumstances, to argue that because a rate of inefficiency on anything but government interference; in
profit is high by historical standards it is high in any a free economy, profit and loss incentives and the free-
meaningful sense, is to display the utmost ignorance. To dom of competition operate steadily to increase effi-
limit an industry’s profits in any way in such circum- ciency.
stances is simply to invite its destruction. The ignorance that underlies the destruction of our
But precisely that is what is being done or has been economic system is made possible by a protective shell
done to the electric utilities, the railroads, the telephone of envy and resentment. People take the attitude that
companies, and the oil and natural gas industries. And it somehow the utilities, the landlords, the oil industry, or
is what has been done to the rental housing industry in whoever, are “already rich enough,” and that they’ll be
New York City for over half a century. For many years, damned if they’ll let them get any richer. So, on with the
for example, the government of New York City was price controls. That is the beginning and the end of their
proud of the fact that it guaranteed to landlords under rent thinking on the subject, and they just don’t care to think
control the right to earn a 6 percent rate of return on their any further. They are eager to accept high nominal profits
initial investments, made, in most cases, before World as a confirmation of their view that the industries con-
War II. Six percent, reasoned the city officials, was a cerned are “rich enough,” and to let it go at that.
“fair” rate of return. What honest landlord could want However, the simple fact is that none of these indus-
more? The city officials neglected the fact that since the tries is rich enough, and in preventing them from becom-
landlords’ original investments were made, replacement ing richer, or even staying as rich as they are, people
costs had increased many times over and that a 6 percent foolishly harm themselves. None of these industries is
return on the construction costs of decades earlier had to rich enough for the simple reason that we really do not
represent a disastrously losing proposition. have enough power plants, enough good apartment build-
Amazingly, when landlords began to stop keeping up ings, or enough oil wells and oil refineries. Speaking for
their properties as a result of such loss-making condi- myself, as a consumer, I must say that I would like the
tions, they were the ones accused of “milking” their power companies, the landlords of New York City, the
properties—as though the city or the tenants had origi- oil industry, and so on, all to be worth many more billions
nally constructed the buildings and the landlords were than they are presently worth. I would benefit from that
now trying to squeeze out of them whatever they could. fact. If the utilities had more power plants, my supply of
(And then, as punishment, the city refused to grant rent electricity would be better assured and I would not be
increases even when called for by its own criterion of subject to the power interruptions that I am now subject
providing a 6 percent return.) The simple truth is that the to. If the landlords of New York City had more and better
city government of New York, with the support and buildings, tenants and possible prospective tenants, such
participation of hundreds of thousands of ignorant ten- as myself, would be able to have a better apartment. If
ants, has milked the rental housing industry to the point the oil industry had more wells and refineries, I would
of virtually totally destroying it. Today, in New York have a more abundant and secure supply of oil products.
City, the point has been reached where if one wishes a If one thinks about it, I believe, nothing could be more
place to live, one must buy it. As already pointed out, the absurd than consumers in a capitalist economy attacking
same fate may well be in store for other, more important the wealth of their suppliers. That wealth serves them—
industries in this country that labor under price controls. they are the physical beneficiaries of it. All of the wealth
of the utilities, the landlords, the oil companies—where
The Destructionist Mentality is it? It is in power plants and power lines, apartment
What is at root in these cases of wholesale industrial buildings, oil wells and oil refineries. And whom does it
destruction is not ignorance alone, but a mentality that actually, physically, serve? It serves the consumers. It
makes itself ignorant. It is a mentality that shows up in serves us—all of us. We have a selfish interest in the
the cavalier assumption that the problems an industry preservation and increase of that wealth. If we deprive
experiences as the result of price controls, rising costs, an electric utility of a power plant, we deprive ourselves
mounting taxes, and harassment by the ecology move- of power. If we deprive our landlords of more and better
ment are all somehow the result of “its own inefficiency.” buildings, we deprive ourselves of apartments. If we
This mentality is unaware that inefficiency is itself an deprive the oil industry of wells and refineries, we de-
inevitable consequence of government interference. If an prive ourselves of gasoline and heating oil.
industry is deprived of the prospect of profits, if its This harmony of interests between the consumer and
18 See Ludwig von Mises, Bureaucracy(1944; reprint ed., New Rochelle, New York: Arlington House, 1969), passim.
the producer under capitalism is one of the great, pro- ever point the control on the nominal rate of profit was
found insights of von Mises.19 Because of it, even if finally abandoned, they would have had to pay higher
businessmen become cowardly and do not fight for their prices than if the control had never been imposed, be-
own interests, we, as consumers, must fight for them, and cause prices would then have had to rise on the basis of
thereby for ourselves. For we have a selfish interest in a decrease in supply as well as on the basis of an infla-
being able to pay prices that make it profitable for tion-caused increase in demand.
businessmen to supply us. It is to our self-interest to pay In confirmation of the fact that little or nothing has
utility rates, rents, oil prices, and so on, that enable the been learned since 1974, the identical line of argument
producers in these fields to keep their facilities intact and was raised against the oil companies in the fall of 1990,
growing, and that make them want to supply us. And I when they increased the prices of their refined products
must say, in view of the principles we have already on the basis of the sharply higher current price of crude
learned, that we do not have to worry about being charged oil, which had been caused by Iraq’s invasion of Kuwait.
unfairly in a free market, because any high profits that Fortunately, the critics were not able to impose price
might be made from us are simply the incentive and the controls on the oil industry in 1990, as they had in 1971.
means to an expanded supply, and are generally made
only because of special efficiency on the part of the The Campaign Against the Profits of the
producers who earn them. Oil Companies
In early 1974, every release of a quarterly earnings
A Defense of Inventory Repricing report by an oil company was an occasion for The New
In early 1974, when inflation was proceeding more York Times to run a story headlined as a staggering
rapidly than now, supermarkets began to raise the prices increase in oil company profits. Day after day, one would
of the goods already on their shelves, which had initially read a headline in that newspaper that the profits of oil
been marked with lower prices. Because the stores had company X were up 60 or 70 percent or more over the
purchased those goods at prices which had not yet risen, same quarter the year before. This rise in profits was
it was assumed that it was some kind of monstrous constantly mentioned in conjunction with the rise in the
injustice for them to charge higher prices. The higher price of gasoline and other petroleum products, which
prices, it was argued, merely bloated the profits of the had also risen on the order of 60 or 70 percent over the
supermarkets and were the cause of a higher cost of same period of time. It was constantly implied—by The
living for consumers. New York Times, by Time magazine, and by a host of
What those who spread this argument chose to ignore television news commentators—that the rise in oil com-
was that the replacement costs of the merchandise had pany profits was responsible for the rise in the price of
risen and that if the supermarkets had not raised their oil products. And because the rise in these prices was
prices, they would not have had the means of replacing presented as the cause of practically the whole problem
their inventories. They would have been in exactly the of inflation, the impression was created that the oil
same position as our hypothetical merchant if he had not companies were out to destroy the country with their
raised his prices.20 Assume that our merchant held to his insatiable greed for profits. By the same token, of course,
old prices and thus continued to take in only $110, while the oil companies were depicted as eminently deserving
his replacement cost rose from $100 to $110. His nomi- to be throttled with price controls.
nal profit that year, based on historical cost, would have The evasions, distortions, and misrepresentations in
remained at $10 and, after paying taxes, he would still this case were enormous. I think they are worth going
have had $5. The only problem would have been that into because they are a classic illustration of how the
even if he allowed absolutely no dividend for his own supporters of price controls argue and what they are
consumption, he would have had no more than $105 capable of.
available for replacing his inventory, while the sum he First of all, the supporters of controls evaded two facts
required for replacement was $110. He would have had that should have been known to everyone: They evaded
to reduce the size of his operations. Exactly this would the fact that the rise in the price of oil products in the
have been the position of the supermarkets if they had United States was the result of a rise in the world price
been unable to raise their prices in anticipation of higher of crude oil brought about by the Arab embargo and the
replacement costs. Arab-sponsored cartel, that is, that it was the result of a
It follows that the consumers who wanted cheap goods rise in the oil companies’ costs of obtaining imported oil.
at the supermarkets’ expense would have gotten fewer In addition, they evaded the fact that since August of
goods and, if this process were kept up long enough, 1971 the prices of oil and oil products produced or sold
eventually no goods at all. And, paradoxically, at what- in the United States had been totally controlled by the
20
19 See above,
Ludwigthis
vonsec.,
Mises,
the subsection
Socialism(New
“Inflation
Haven:andYale
the Appearance
University Press,
of High
1951),
Profits.”
pp. 40–42, 500–504; reprint ed. (Indianapolis: Liberty Classics, 1981). (Page references are to the Yale University Press edition; pagination from this edition is retained in the reprint edition.) See also, below, chap. 9, pt. A, sec. 1, which greatly elaborates on the points just made.
232 CAPITALISM
U.S. government, and were currently controlled at levels The profits on foreign-exchange holdings were sim-
far below the world-market prices of these goods; in- ilar. The oil companies are largely international and hold
deed, at levels which, until the end of the crisis period, such currencies as Swiss francs and German marks, as
did not even allow the oil companies to pass on more than well as U.S. dollars. During the oil crisis, the price of the
a part of the higher cost of imported oil. The truth is that dollar fell in terms of these currencies. This meant that
our price controls made the importation of foreign oil the francs and marks held by the oil companies were
highly unprofitable, which is one of the major reasons suddenly equivalent to a larger number of U.S. dollars.
we suffered from a shortage of oil at the time. Further- This increase in the dollar value of their foreign-ex-
more, while The New York Times and the other news change holdings was included in the reported profit gains
media were spewing headlines about the enormous rise of the oil companies.
in oil company profits, they neglected to mention that the The rest of the increase in oil company profits was the
profits of the oil companies on oil production within the result of higher profits on foreign operations other than
United States increased only on the order of about 6 profits on inventory or currency holdings, and higher
percent during the crisis period. This was in line with the profits on other lines of business, such as the chemical
increase in the physical volume of domestic production business, in which a number of oil companies were
in the period. Profits on domestic production did not and involved and which had a good year at the time. All of
could not have increased any more than that because the these facts about the sources of higher profits were
selling prices of the oil companies were all rigidly con- simply ignored.
trolled by the government, in line with their costs of The second dishonesty of the media was that they did
production. not point out that even with the 60 or 70 percent in-
The real facts, therefore, are that during the oil crisis crease—from whatever sources—the profits of the oil
the American market was a very unprofitable market for companies were only restored to the same level in rela-
the importation of foreign oil and a not very profitable tion to sales revenues at which they had existed in 1968.
market for the production of domestic oil or oil products. It was not pointed out that the intervening years had been
Nevertheless, the news media constantly pointed to a poor ones for the oil industry and that the sharp percent-
sharp rise in oil company profits and claimed that it was age increase in its profits was largely the result of mea-
responsible for the rise in prices. suring the increase against an unusually low base. I
To be sure, there was a substantial increase in oil remember one case in particular, in which the headline
company profits on a percentage basis. Technically, the in The New York Times blared “2-Month Earnings Soar
media were correct in reporting profit increases of 60 and at Occidental.”21 It turned out, if one read the article very,
70 percent or more. But in representing these profit very carefully, and did some arithmetic that the reporter
increases as the cause of higher American oil prices, the and the editor had apparently not bothered to do, that the
media committed four distinct acts of dishonesty or soaring earnings represented an increase in profits from
misrepresentation. about seven-tenths of 1 percent of sales revenues to about
First, the media neglected to inform the public that 51⁄2 percent of sales revenues, which latter figure was still
these higher profits were not earned on the production or below normal for the oil industry in previous years. Of
sale of oil or oil products in the United States. In many course, with this type of misrepresentation, it would be
cases, over half the rise in profits came from inventory possible to write headlines about infinite increases in
profits on stocks of oil and oil products held abroad, profits. All one would need would be to find firms that
where price controls did not apply, and from profits on earned some profits in the current period but which had
foreign-exchange holdings. The inventory profits were earned zero profits or incurred losses in the period with
the same in principle as the jump in profits of our hypo- which it was compared. The percentage increase would
thetical merchant or of the supermarkets that raised prices be infinite.
in anticipation of higher replacement costs. These inven- Closely related to this kind of dishonesty was a further
tory profits earned abroad reflected nothing more than misrepresentation. In all of the countless times that the
that the oil companies possessed some inventories ac- news media mentioned 60 to 70 percent increases in
quired before the rise in the world-market price of crude profits in conjunction with 60 or 70 percent increases in
oil, and were able to sell the inventories at the higher product prices in the petroleum industry, they never once,
prices corresponding to the higher replacement price of to my knowledge, mentioned that profits are only a small
crude oil. The extra profits earned on the inventories percentage of prices—5 percent, 10 percent, rarely much
merely served to enable the oil companies to maintain more than 10 percent. This applies both to the petroleum
their level of operations, just as was the case with the industry and to practically every other industry. Accord-
supermarkets. ingly, it was never pointed out that any given percentage
21 New York Times, April 11, 1974, pp. 49, 55.
increase in profits must necessarily represent a much simply left to the reader to perform the necessary long
smaller percentage increase in prices. If profits are ini- division in order to compute profits as a percentage of
tially 10 percent of a price, a 70 percent increase in profits sales revenues. Likewise, while the percentage increase
does not equal a 70 percent increase in price, but only a in profits over the previous year was carried in headlines,
7 percent increase in price. If, as in the case I mentioned, only occasionally, in an almost offhand reference, would
profits are initially seven-tenths of 1 percent of the price, one find a mention of the actual nominal rate of profit on
even a 1,000 percent increase in profits would not mean capital invested. And, while the rate of increase in the
some kind of fantastic increase in price, but a rise merely consumer price level was featured prominently, it was
on the order of a few percent. Thus, even if the oil never mentioned in connection with nominal profit rates,
companies had earned their higher profits in the United so that one would know what to make of those rates.
States, which they did not, and even if those higher One would also read statements, buried deep in arti-
profits had been the cause of a rise in oil prices, which cles denouncing oil company profits, that, according to
they were not, they could not have been of any signifi- oil company officials or other sources, the rise in profits
cance as a cause of higher oil prices. Nevertheless, by the was largely the result of inventory profits earned abroad
news media’s constant conjunction of their roughly equiv- and gains on foreign-exchange holdings. The statements
alent percentage increases, it was made to appear that the were never disputed. They were simply ignored, as being
rise in profits of the petroleum industry is what accounted of no significance. And, of course, it was certainly re-
for the rise in the prices of petroleum products. ported in the press that all of the prices charged by the
Finally, just as the media regularly associated the oil companies were controlled by the government and
percentage increases in profits with the percentage in- that the Arabs had brought about a radical increase in the
crease in the price of oil products, they just as studiously world price of crude oil, which, of course, meant higher
avoided ever mentioning the rate of profit on capital in costs to the oil companies. Yet, these two facts of fixed
connection with the rise in the consumer price index. prices and radically higher costs, facts which were obvi-
Such a connection would have shown that the oil industry ously incompatible with the oil industry being very prof-
was far from being very profitable in real terms. The itable, were simply ignored in the articles reporting the
reasons are as follows. During the oil crisis, the consumer profit increases, as I pointed out earlier.
price level was rising at an annual rate of 13 percent, The kind of distortions committed in the media’s
while the United States’ most profitable, most successful treatment of the profits of the oil companies will almost
major oil company was earning only 18 percent a year certainly be committed in the future, in attempts to
on its capital. This meant that while $100 invested in that impose or continue controls on other industries. The
company would grow to $118 in a year, it would take reader should be on guard against them and should hold
$113 at the end of the year to buy what the $100 had in mind, in addition to the need for nominal profits to
bought at he beginning of the year. This meant that the allow for the replacement of assets at higher prices, such
real rate of gain of the owners of that company was less further important matters as the source of the alleged
than 5 percent a year—it was $5 divided by $113. A real profits under attack, their size in relation to sales reve-
rate of profit of less than 5 percent for the country’s most nues, the basis of comparison used in showing their
profitable, most successful major oil company is quite change, and the relation between percentage changes in
low. And, of course, most oil companies were earning them and percentage changes in selling prices.
substantially lower real rates of profit. Any oil company In connection with the distortions present in recent
whose nominal rate of profit was below 13 percent, say, attempts—that is, in 1992 and 1993—to blame the sharp
8, 10, or 12 percent, was actually losing money in real rise in the cost of medical care over the last decades on
terms! But, as I say, one never found the media dealing the high profits made on a few patented drugs, the reader
with the real rate of return of the oil companies. should also keep in mind the substantial losses incurred
It may be asked where I obtained my knowledge of in the numerous unsuccessful research and development
the facts I have cited. The answer, strangely enough, is efforts that take place. He should also realize that the
the general news media themselves, especially The New attacks made on the large size of the pharmaceutical
York Times. The facts appeared there. They simply re- companies’ outlays for advertising and promotion ignore
ceived no stress, or they weren’t integrated. They were the fact that much of the outlays for promotion represent
buried in a mass of articles whose headlines and general the distribution of large quantities of free samples of new
tenor created exactly the opposite impression. Or they medications to physicians, who in turn give the samples
appeared at different times, in different stories. For ex- to their patients without charge. Thus, alongside the
ample, as I have indicated, figures were reported show- accusation that the pharmaceutical industry charges too
ing dollar totals of profits and sales revenues; it was much for its products, this accusation turns out to repre-
234 CAPITALISM
sent an attack on the pharmaceutical industry for giving shortage. But that is absolutely absurd. It was not the oil
away too many of its products for free. Finally, the reader companies that were responsible for too low a price, but
should realize that the attacks made on the pharmaceuti- the government, with its price controls. The government
cal industry for spending large sums on the development stood ready to fine or possibly even imprison anyone
of new drugs that do the same job as already existing selling oil or oil products at prices that would have
drugs sold by other firms, represent the contradiction of eliminated the shortage.
attacking the industry both for the high profits to be made The interests of justice, however, require that I show
from successful drugs and for the competitive quest that not only that the oil companies could not have caused the
serves to bring those high profits down by means of shortage, but also that they were not responsible for
others being able to offer competing alternatives. Such anything acting to raise the price of oil in the absence of
attacks are attacks on the very nature of the profit system. price controls.
Observe. The oil companies were not responsible for
How the U.S. Government, Not the Oil Companies, the nationwide and worldwide increase in aggregate
Caused the Oil Shortage demand that acted to drive up all prices, including, of
Let us try to keep in mind all that we have learned course, the price of oil. Nor were the oil companies
about shortages, and look further at the ignorance and responsible for any decrease in the world supply of oil.
evasions displayed during the oil shortage. I am concen- Both were exclusively the result of government actions.
trating on the oil shortage because it had such a dramatic All governments, that of the United States included, were
effect on practically everyone in the United States and is and are bent on reckless expansions of the money supply
so illustrative of all of the problems associated with price that act to raise the demand for everything and the price
controls, including the kind of inappropriate mental atti- of everything. And it was governments that were respon-
tudes that are connected with them. sible for the restriction in the supply of oil—not only the
There were two very popular explanations of the oil governments that are members of the international oil
shortage that went around at the time, both of which tried cartel or that participated in the Arab embargo, but also
to blame it on the oil companies rather than on price the U.S. government.
controls. According to one of these explanations, the oil The U.S. government, acting largely under the influ-
companies had created the shortage in order to be able to ence of the ecology movement, restricted the supply of
obtain permission to build the Alaskan oil pipeline, which oil in the following ways: (1) It prevented exploration for
had been delayed for many years by the lawsuits of the and development of oil reserves in vast areas of territory
ecology movement. According to the second explana- arbitrarily set aside as “wildlife preserves” or “wilder-
tion, the oil companies had created the shortage in order ness areas.” It even delayed the development of the vital
to eliminate the independent gas stations, to which they North Slope Alaskan oil fields for many years, on the
were reportedly observed denying supplies. grounds of alleged concerns over the “environmental”
The first observation which must be made against effects of the pipeline required to transport the oil to
both of these claims is that they do not see that shortages Alaska’s south coast. (2) It prevented the development
can result only from a price that is too low and must of offshore wells on the continental shelf. (3) It pre-
disappear as the price rises. To repeat once again, no vented the construction of other oil and gas pipelines, of
matter how physically limited is the supply of a good or new refineries, oil storage facilities, and facilities for
how urgent the demand for it, no shortage can possibly handling supertankers. Where it did not totally prohibit
exist at the price established in a free market. For the these activities, it greatly increased their cost by creating
free-market price will be high enough to level the quan- enormous delays—a policy that was enthusiastically joined
tity of the good demanded down to equality with the by the other levels of government. (For example, the plan
supply that exists—all the while, of course, acting to for an oil pipeline from Southern California to Texas was
expand the supply that exists. Even if one could estab- abandoned, with a loss of over fifty million dollars,
lish—which one certainly cannot—that the oil compa- because the necessary permissions could not be obtained
nies had conspired to reduce the supply of oil, still, one from the more than seven hundred and fifty federal, state,
could not blame them for the shortage. Had they reduced and local government agencies involved.) (4) The U.S.
the supply of oil, they would have sold it at a higher price, government imposed price controls on oil. (5) It acted
and at the higher price there would have been no short- further to restrict oil company profits, and thus oil indus-
age. In order to blame the oil companies for the shortage, try investment, by punitively increasing their rate of
one would have to show that he oil companies deliber- taxation through first reducing and then totally abolish-
ately charged too low a price for their oil. That would be ing the customary depletion allowance on crude oil. (6) It
the only conceivable way that they could have caused the deterred investment in the oil industry through threats of
antitrust actions forcing the breakup of existing compa- production over and above the amount by which they
nies, and through threats of nationalization. actually did reduce it, by a further amount equal to the
In addition, the U.S. government was responsible for sum of the reduced supply and increased demand for oil
an enormous artificial increase in the demand for oil, caused by the policies of the U.S. government.
over and above the increase caused by its policy of Furthermore, in the absence of our price controls, any
inflation. It caused this artificial increase in demand in rise in the price of oil achieved by the cartel would have
the following ways: (1) Since the mid-1960s, it con- worked to the advantage of the American oil industry at
trolled the price of natural gas, thereby undermining the the expense of the oil industry in the countries belonging
growth of that industry. The demand for fuel that nor- to the cartel. This alone would have been enough to
mally would have been supplied by natural gas therefore frustrate the plans of the cartel. For in this case, the effect
overflowed largely into an expanded demand for petro- of the cartel’s restriction of supply would have been to
leum, which is its closest substitute for most purposes. hand the American oil industry the profits and the capital
(2) Under the influence of the ecology movement, the required for an expansion of supply. The cartel would
government prevented the construction of atomic power then either have had to allow the price of oil to fall or else
plants and restricted the mining of coal, policies which it would have had to restrict its own production still
it continues to pursue. In these ways too, it forced, and further, which would have meant that the American oil
continues to force, the demand for fuel to rely more companies would have earned the high price of oil on a
heavily than necessary on oil supplies. (3) Again under larger volume of production and have had still greater
the influence of the ecology movement, the government profits available for expansion, thereby creating still
forced electric utilities to shift from the burning of coal worse problems for the cartel in the future.
to the burning of oil and it forced automobile manufac- It should be obvious that it is impossible for any cartel
turers to produce engines requiring far higher gasoline to succeed that is confronted with a major competitor
consumption per ton-mile.22 able to profit from its policies and expand his production.
In sum, the government and the ecology movement The Arab cartel was able to succeed only because the
have done everything in their power to raise the demand U.S. government did its utmost to prevent the cartel’s
for and restrict the supply of oil. competition—the U.S. oil industry—from earning high
It should be realized that it was only these actions of profits and expanding. Although it was certainly not their
the U.S. government that made possible the dramatic rise intent, in imposing and then perpetuating price controls
in the price of oil. The U.S. government bears a far on oil and oil products, a majority of the highest elected
greater responsibility than the Arab cartel. It is the party officials in the United States—three presidents (from
that made it possible for the cartel to succeed. All that the Nixon to Carter) and a majority of the members of the
cartel did was to take advantage of the artificial increase U.S. House and Senate during those three administra-
in demand and restriction of supply brought about by the tions—behaved as though they owed their election to
U.S. government. Had the U.S. government not restricted voters in the member countries of the Arab cartel—as
the expansion of the domestic petroleum industry and though they were elected in places like Saudi Arabia and
forced up the demand for oil, the supply reductions Iran rather than in states and districts within the United
carried out by the cartel would not have had such a States. For it was certainly not an American constituency
significant effect on the price. Because in that case, such that their actions served, but the interests of the Arab
supply reductions would have been at the expense of far cartel.
less important wants than actually turned out to be the In the absence of the U.S. government’s destructionist
case. With the larger domestic supply of oil and compet- policies, the Arab cartel would probably never even have
ing fuels that a free market would have produced, the been formed in the first place, because the conditions
marginal utility of any given amount of oil would have required for its success would have been totally lacking.
been far less. The loss of any given amount of oil by It is not accidental that following the repeal of our price
virtue of the supply reductions carried out by the cartel controls on oil in 1981 and the easing of price controls
would therefore have been much less serious. As a result, on natural gas and the “ecological” restrictions on the
the cartel would not have been able to raise the price development of oil reserves, the price of oil dramatically
nearly as much by virtue of any given amount of supply declined, despite all efforts to prevent it on the part of the
reduction. In such circumstances the cartel members OPEC cartel. If the United States were to abolish all the
would probably not have found it worthwhile to reduce remaining controls on the production of energy, the
the supply at all. In order to achieve a rise in the price of OPEC cartel would be completely broken, and the real
crude oil of the magnitude that actually occurred, the price of energy would resume the descent it enjoyed from
cartel members would have had to reduce their own the start of the Industrial Revolution until the enactment
22 Reported improvements in fuel economy are largely the result of compelling manufacturers toproducesmaller,lighter-weightcars.
236 CAPITALISM
of price controls in 1971. Such a policy, of course, would group, whichever individual firm succeeds in improving
entail removing the prohibitions on the construction of production ahead of its rivals will almost certainly gain
atomic power plants and the restrictions on the strip at their expense. For example, if one particular refiner
mining of coal. It would also entail the privatization of improves his efficiency and cuts his costs, he will have
the vast landholdings of the federal and state govern- higher profits and will thus be able to accumulate addi-
ments in Alaska and the other Western states and of the tional capital. It will almost certainly pay him to use his
continental shelf, so that oil and gas reserves could be additional capital to expand his production, and to create
freely developed. a market for his additional production by lowering his
In sharpest contrast to the actions of the U.S. govern- prices. His lower costs will still enable him to have high
ment, at every step of the way the oil companies sought, profits even at lower prices, and his lower prices will both
and have continued to seek, to expand the production of attract new customers to the industry and take away some
crude oil and oil products in order to keep pace with the customers from rivals who cannot afford to sell at such
growing demand for oil. They have consistently sought low prices. Exactly the same considerations, of course,
to develop new sources of supply, such as the Alaskan apply to the producers of crude oil.
and offshore fields, and to construct new refineries and For these reasons, it was no accident, but logically
improved harbor facilities. In other words, they have necessary, that the oil companies have all along sought
done everything in their power to keep the price of oil to expand their production. It was the operation of these
and oil products as low as economically possible. Any very principles that brought the oil industry into exis-
other policy would have been against their interests. tence in the first place and developed it from virtually
This last point must be stressed. In a free market, the nothing into the productive giant it later became and still
oil companies’ profit motive is tied to achieving as great is today.
a supply and as low a price as possible. Consider first the To argue, therefore, that the oil companies were re-
interests of the firms that are predominantly petroleum sponsible for the oil shortage is an absurdity compounded
refiners. Their capital is invested primarily in refineries, by a triple injustice. It is an absurdity in that, as we have
pipelines, tankers, delivery trucks, and the like, rather seen, it implicitly accuses the oil companies of charging
than in deposits of crude oil in the ground. These firms too low a price for their oil. This is something they would
clearly have an interest in the greatest possible supply never do. And the critics of the oil companies, who
and lowest possible price of crude oil. For the price of constantly accuse them of seeking to charge prices that
crude oil is their cost. These firms have the same interest are too high, should have a sufficient respect for logic not
in an abundant supply and low price of crude oil that to accuse them simultaneously of causing shortages by
every producer has in an abundant supply and low price charging prices that are too low. (Of course, the critics
of his raw material. do not know that they are guilty of a contradiction,
By the same token, consider the interests of the pro- because they have no idea either of what causes shortages
ducers of crude oil. Their interests lie with the greatest or what determines the price of oil.) The accusation
possible efficiency of refining operations and the lowest embodies a triple injustice in that it evades: (1) the fact
possible price of refined petroleum products. Because that it was the government’s price controls that kept the
the lower the prices of refined products, the greater the price too low and so created the shortage, (2) the fact that
quantity of them demanded and therefore the greater the the government and the ecology movement did practi-
quantity demanded of crude oil: the price of crude oil can cally everything they could to restrict the supply and
benefit by part of any cost savings in refining. This expand the demand for oil, and (3) the fact that by the
mutual tension between the interest of refiners and pro- nature of the profit motive the oil companies have always
ducers of crude oil makes it necessary for each group to worked to expand the supply of oil and reduce its price.
try to improve its own production. If the existing produc- To argue in addition that the oil companies created the
ers of crude oil lag behind, they can expect competition shortage for the purpose of being able to build the Alas-
from the refiners, who can develop their own supplies of kan pipeline is to pile on still further absurdities. The
crude oil or expand their existing crude oil operations. If obvious truth—given the price controls—is that the con-
the existing refiners lag behind, they can expect compe- struction of the pipeline would have mitigated the short-
tition from the producers of crude oil, who, for their part, age somewhat, had it not been so long delayed. To argue
can undertake refining operations or expand their exist- that its construction was the motive for the shortage is not
ing refining operations. only to display the utmost ignorance about the causation
In addition, both groups can expect competition from of shortages and callous indifference to the most elemen-
total outsiders if they fail to exploit any significant op- tary questions of justice, it is also to display a lack of
portunity for improvement. And, of course, within each comprehension of the law of causality in relation to the
physical world. Because according to this argument, the I must point out that if it were not for the controls and
pipeline was something that only the oil companies the shortage, the oil companies and the independents
wanted; the consumers of oil products, allegedly, could would have enjoyed a perfectly harmonious, mutually
have gotten along quite well without the pipeline. Oil profitable relationship, as they always did in all the years
products, according to the mentality behind this argu- before the controls and the shortage. An oil company
ment, simply come from oil companies. The oil compa- benefits from the existence of independent stations will-
nies, it is believed, are perfectly capable of producing oil ing to sell its gasoline, and has absolutely no reason to
products without oil fields or oil pipelines. The oil com- try to undermine them, but every reason to try to promote
panies desire oil fields and oil pipelines, one gets the them. Its benefit is that it can sell more gasoline without
impression, not because they are necessary to produc- having to supply the capital necessary to buy or build gas
tion—production is causeless—but in order to disturb the stations. Even if the oil company owns some of its own
caribou and the grizzly bears and to pollute the air. gas stations, it still benefits from selling to indepen-
This denial of the elementary physical connection dents—in just the same way that a company like Häagen
between products and the means of producing them, I Dazs or Carnation benefits by being able to sell its ice
must point out, is not an isolated phenomenon confined cream through retail outlets it does not own. The benefit
to the arguments about the Alaskan oil pipeline. It is is wider marketability of the product. An oil company
simply a further manifestation of the same mentality we benefits by selling to independent stations even if they
have already encountered in consumers who denounce are in direct competition with stations it owns, because
the wealth of their suppliers—consumers who will be it is better that it supply the competing stations than that
damned if they’ll let the utility that supplies them own some other oil company do so—if that happened, it
the power plants necessary to do so, or their landlord own would still have the same competition, but it would sell
a decent building. This mentality pervades the whole less gasoline. In the absence of price controls, even the
ecology movement. It is the mentality of all of its mem- physical scarcity of oil would not have stopped the oil
bers insofar as they both prevent the development of companies from selling to the independents. They would
energy supplies and denounce the producers of energy have been glad to sell whenever an independent was in
for not producing enough.23 a position to pay a price higher than their own stations
*** could afford.
Let us turn to the second version of the argument that
the oil companies were responsible for the shortage: the The Conspiracy Theory of Shortages
claim that they created it for the purpose of eliminating I cannot help noting that this whole argument about
the independent gas stations by denying them supplies. the oil companies being out to eliminate the independents
It may very well be the case that the oil companies did (or even just being out to build the Alaskan pipeline), and
cut off or discriminatorily reduce supplies to the inde- allegedly staging a nationwide, worldwide crisis to do it,
pendents, as widely reported. My own personal experi- introduces a strange element into the discussion. That is
ence does not confirm this, but I am willing to believe the element of alleged secret plots, dark conspiracies,
it—not because it was reported in the press, but because evil forces, and all the rest of that syndrome.
it would have been a logical consequence of the shortage. Strange to say, this kind of argument is much more
Given the existence of the oil shortage, every oil com- prevalent than one might imagine. It is present in implicit
pany that owned gas stations had the following choice: form whenever anyone asserts that a shortage, whether
either it could reduce supplies to its own gas stations, of oil or anything else, is “contrived.” This view of things
where its own capital was invested and stood to suffer is not only ignorant of all the consequences of price
loss if the stations had to close or restrict operations; or controls, but it implies the existence of a secret conspir-
it could reduce supplies to gas stations owned by others, acy. It assumes that price controls themselves create no
where it was other people’s capital that was invested and problems, but that the problems are created by the evil
would suffer loss. Naturally, if an oil company—or any- of private firms who combine together secretly and arbi-
one else—is confronted with the choice of having to lose trarily to produce the consequences we have seen can
its own capital as a result of some absurd government result only from price controls.
action, or allowing the loss to fall on the capital of In view of all that we have proved about shortages in
someone else, it will choose the latter. And there is no general and about the oil shortage in particular, I believe
moral reason why it should not. It is no one’s moral I am justified when I say that these arguments really
obligation to offer up his wealth to the government’s deserve no greater intellectual respectability than the fear
destructionist policy so that he may suffer his “fair share” some unfortunate people have of Martians or the evil eye.
of the damage it inflicts. Certainly, they should not be taken seriously by the
23 It is closely associated with what I described earlier as the Eloi mentality. See above, chap. 3, pt. B, sec. 6, the subsection “The Destructive Role of Contemporary Education.”
238 CAPITALISM
media or by public officials, as, unfortunately, they have barbershops and the like are engaged in “price control”—
been. It is the intellectual and moral responsibility of the they confine their attacks to large firms, like steel com-
media and the public officials to stop engaging in slander panies and oil companies, where they can count on envy
based on ignorance and fear, and to acquire the enlight- and the existing hostility to big business—but that is the
enment provided by economic science. logic of their position.
The viciousness of this doctrine is that it evades and
Rebuttal of the Charge That Private Firms
seeks to obliterate the fundamental and radical distinc-
“Control” Prices
tion between private action and government action.24
A rather vicious argument has been advanced as a Private citizens, and this, of course, includes private
justification for the imposition of price controls. This is corporations, have no authority to resort to physical force
the argument that private firms already “control” prices, against other people. If they do, they are in violation of
only they “control” them in their own selfish interest. the law and will be punished. Private action, therefore,
Instead, it is urged, the government should control prices, is essentially voluntary in character—that is, it can only
for it will do so in the “public interest.” occur by peaceful means, with the mutual consent of all
This argument was repeatedly presented in television involved. Government action is totally different. The
commercials during the campaign for the 1976 Demo- government has legal authority to resort to physical
cratic presidential nomination by one of the leading force—e.g. to arrest, fine, imprison, and even execute
contenders, Representative Morris Udall. Representative people. All government actions rest on this authority.
Udall repeatedly asserted that he believed that instead of There is no such thing as a law (or a ruling, edict, or
the price of oil being “controlled” by the oil companies, decree) that is not backed by the threat of physical force
in their selfish interest, it should be controlled by the to assure compliance.
president (i.e., Morris Udall), in the public interest. Let us see what difference these facts make to whether
The reason that Representative Udall and others be- prices are set by private firms or by the government.
lieve that private firms “control” prices is that they can When prices are set by private firms, they are set with
observe the producers of manufactured or processed regard to the mutual self-interest of the buyer and seller,
goods, and also retailers and many wholesalers, engaged including the need to take into account the threat of
in the setting of prices. For example, these businessmen competition or potential competition. Thus, a seller must
(or their employees, acting under their instructions) can ask prices that are not only high enough to enable him to
be observed sending out price catalogs and price lists, stay in business and make the best possible profit he can,
and also posting prices on signs and writing them on tags. but, simultaneously, that are low enough to enable his
To set prices in this way is, according to Representative customers to afford his goods and too low for other
Udall and others, to “control” prices. The essential char- sellers or potential sellers to try to take away his market.
acteristic of a controlled price, on this view, is that When the government sets prices, its prices are backed
someone sets it. It is considered secondary and inconse- by the threat of physical force, and are necessarily against
quential who sets it—whether a private businessman or the mutual self-interests of buyers and sellers. The gov-
a government official. Indeed, since prices do not create ernment invariably tries to sacrifice either the seller to
themselves, it is difficult to understand how, on this view, the buyer (by imposing prices that are too low), or the
any price can avoid being described as “controlled.” buyer to the seller (by imposing prices that are too high).
The distinction seems to be that a price is not consid- In the one case, it succeeds in destroying the sellers,
ered controlled if it is formed in markets so broad—like leaving the buyers without suppliers. In the other case, it
the organized exchanges for common stocks and com- succeeds in destroying the buyers, leaving the sellers
modity futures—that it is difficult to trace from precisely without customers (or the workers without employers).
whom any given price quotation emanates; such price This is the difference that is made by whether prices
quotations have the appearance of being formed inde- are set by private firms or by the government. This is the
pendently of any definite individual. If, on the other difference that Congressman Udall’s usage of the term
hand, price quotations emanate regularly from the same, “price control” evades and seeks to obliterate.
easily identifiable source—such as a steel mill’s pub- Private firms do not and cannot control prices because
lished price at which it stands ready to ship steel, or a they have no power to resort to physical force. Only the
candy store’s sign announcing the price at which it stands government can control prices—i.e., only the govern-
ready to sell candy bars—the price is declared to be ment can use force to set prices in violation of the mutual
“controlled.” (Often, the word “administered” is used as self-interests of buyers and sellers. Price control means
a synonym for “controlled.”) The supporters of this idea not the setting of prices, but the setting of prices by the
rarely mention the fact that they believe candy stores and government.25
24
25 Cf. above,
For a rebuttal
chap.
of the
1, pt.
closely
B, sec.
related
2, thecharge
subsection
that a“The
free economy
Rational Versus
lacks freedom
the Anarchic
of competition
Concept and
ofFreedom.”
freedom of entry, see below, chap. 10, sec. 1. For further discussion of the concepts offreedom and freedom of competition and a refutation of the related tissue of fallacies t hat constitute the doctrines of “oligopoly,” “monopolistic competition,” and “pure and perfect competition,” and of the charge that a free economy lacks “price competition,” see below, chap. 10, sec. 10. See also the discussion of the concept of freedom in chap. 1, pt. B, sec. 2, above.
such a monopolist drives away his present customers, he

PART B
can find new ones only at lower prices. A protected legal
monopolist who has any sense, therefore, will not do this.
FURTHER EFFECTS OF PRICE He will value his customers, because he knows that he
CONTROLS AND SHORTAGES cannot afford to lose them without harming himself. But
under price controls and shortages, the seller is free to
regard his customers as absolutely valueless—as being
1. Consumer Impotence and Hatred Between instantaneously replaceable by others drawn from wait-
Buyers and Sellers ing lines or waiting lists without any loss to himself.
Once price controls result in shortages, their destruc- By the nature of the case, shortages lead sellers to
tive effects are greatly increased. The combination of regard customers not only as valueless, but as a positive
price controls and shortages not only deprives the con- nuisance—as a source of trouble and expense, not a
sumer of the power to make it profitable for sellers to source of livelihood. This occurs because, in fact, under
supply the goods he wants, but of all economic power of a system of shortages and waiting lines, that is just what
any kind over the seller. Instead of being a valued cus- customers become. Under such a system, when a seller
tomer, whose patronage or lack of patronage makes a renders a customer some service or goes to some expense
difference to the seller’s profit or loss, the buyer is on his behalf, he is no longer doing it for the sake of
reduced to the status of absolute insignificance, totally at gaining or keeping the customer’s business and thereby
the seller’s mercy. His position is much worse, in fact, earning his own livelihood, because having the customer’s
than if he were dealing with a protected legal monopolist. business no longer depends on performing the service or
Consider. If a shortage exists, and a buyer is dissatis- incurring the expense. The seller can have the customer
fied with his supplier, he dare not leave him, because he anyway, or, if not that customer, then any one of ten or a
has nowhere else to go. In a shortage, even if there are hundred or a thousand other customers. If the seller is to
many other suppliers of the same good, each of them has continue to provide the service or incur the expense for
his own waiting line or waiting list, and, as a result, the the sake of the customer, he can only do so out of a sense
dissatisfied customer of any one supplier cannot count of altruistic duty, not out of the sense that in serving the
on actually being supplied by any other supplier. The customer he serves himself.
other suppliers, therefore, do not represent a real alterna- Thus, price controls and the shortages they create take
tive for him in a shortage. Consequently, no matter how the profit out of serving the customer and the loss out of
many sellers of a good there may be, price controls and not serving him. They break the harmonious union of the
shortages place each of them in the position of being the self-interest of buyer and seller that prevails in a free
only one. In addition, just as in the case of a protected market and replace it with an altruistic relationship be-
legal monopolist, these sellers are immune from poten- tween the two. In this relationship, the customer is re-
tial competition. (The threat of potential competition, in duced to impotent pleading for the customary service and
a free market, would keep in check the occasional sellers customary quality that the seller no longer has any eco-
who were in the position of being sole suppliers.) Poten- nomic motive to supply. Indeed, all of the seller’s mo-
tial competition is ruled out because the industry is tives, both economic and noneconomic, now work in the
forced to operate at a rate of return that is not competitive, direction of reducing the quality of his product and the
and perhaps even at an outright loss. As a result, no service associated with it.
outside firm would want to enter such an industry.26 The seller’s economic motive lies with reducing qual-
The situation for the customer is worse than if he were ity and service because by doing so he reduces his costs
dealing with a protected legal monopolist, because under and perhaps his own labor, and he does not have to fear
price controls and shortages, the seller who surpasses a any reduction in his revenues. For the same reason,
customer’s limits of tolerance and succeeds in driving employees feel free to work less hard in serving custom-
him away does not lose anything by doing so. This is ers. Their poor performance no longer threatens their
because for each customer who is driven away, there is employer’s revenue, and so he is no longer motivated to
a multitude of others eager to take his place. The seller make them produce high quality products and to treat
simply sells to someone else who otherwise would not customers properly. (Thus, even under price controls,
have been able to buy or not buy as much as he desired. there is a tendency for customers to get what they pay
This goes beyond the conditions faced by a protected for. To the extent that they pay prices below the potential
legal monopolist, because such a monopolist does not free-market prices, they tend to receive products that are
have a reserve of unsupplied potential customers willing below the level of the products they would have received
to buy on just as good terms as his present customers. If in a free market.)
26 As will be seen, under universal price controls, it is possible for the controls to build in a substantial rate of profit. Even so, potential competition would not be a factor, becausein the context of universal price controls, the shortages are so severe that even if new suppliers could enter any given industry, the effect would not be to eliminate the shortage faced by the customers of that industry. At the same time, the effect would be to make shortages elsewhere in the economic system more severe. On these points, see below, this chapter, pt. C, sec. 2.
240 CAPITALISM
The fact that price controls inflict actual harm on the number when they should have ended with an even
sellers, and the fact that this harm is inflicted for the number, or vice versa.)
avowed purpose of benefitting the buyers, introduces a The shortage of gasoline did not last long enough to
noneconomic element into the attitude of many sellers. make hatred between motorists and service station atten-
They see themselves as being sacrificed for the benefit dants become a regular feature of life. With the ending
of their customers, and they may actually come to hate of the oil shortage in the spring of 1974, normal relations
their customers as a result of it. In some cases it is were restored, and the conditions of early 1974 were soon
possible that they may derive actual pleasure from the largely forgotten. A more enduring and, therefore, prob-
reduction in quality and service that they impose on their ably more significant example is afforded by the rela-
customers. tions between landlords and tenants in places like New
Price controls and shortages, in fact, launch a spiral of York City, which has had almost continuous rent control
mutually reinforcing hatreds between buyer and seller. since early in World War II. In New York City mutual
The buyer arbitrarily demands the quality and service he hatred between landlords and tenants is commonplace. It
is accustomed to, even though he is not paying the has become the norm. Nothing is more frequent than
necessary price any longer. The seller has no economic complaints about things landlords do not do, unless it is
reason to comply with these demands, but, on the con- complaints about things they are trying not to do. For
trary, has both economic and psychological reasons not example, depending on the particular circumstances,
to. The buyer then views the seller as an omnipotent landlords do not provide, or are trying to avoid providing,
tyrant whom he must beg for favors or threaten with such services as doormen, painting, repairs, and even
reprisals in order to obtain what he wants. The seller heat. Tenants regard all of these things as theirs by right,
views the buyer as a hysterical petty chiseler seeking and hate the landlords for not supplying them or trying
values without payment. To the degree that the accus- not to supply them. Landlords, on the other hand, often
tomed quality and service are not forthcoming, the buy- regard the tenants as people who want to live without
ers become more shrill and insistent in their demands, paying the proper rent. And, in many cases, while they
and the sellers become correspondingly more resistant. watch the real value of their investments shrink to zero,
This principle—of deterioration of quality and service they observe tenants able to afford expensive automo-
accompanied by mutual hatred between buyer and seller— biles and adopt a style of life that is above their own—
was illustrated to some extent in the gasoline shortage of made possible by the low, controlled rents they pay. In
early 1974. Suddenly, service station attendants who had such circumstances, there are landlords who derive pos-
always cleaned windshields and eagerly volunteered to itive enjoyment from such things as providing no heat,
check under the hood ceased to do so. Whereas before as well as save money by it.
they had always been courteous and polite, seeking to Of course, it should be realized that there are also
encourage as much repeat business as possible, they now many cases—and undoubtedly a far greater number—in
became surly and rude. The customer, who had always which the controls simply make it impossible for a land-
been king at the gas station, as everywhere else, suddenly lord to provide many things, even if he wants to for the
became a useless pest waiting in line to have his tank sake of keeping up his building, such as a new boiler or
filled and causing unnecessary labor to gas station atten- wiring system or any major repair or improvement. The
dants. The breakdown of the normal harmony of interests controls often make these things impossible by leaving
between buyer and seller, and its replacement with open the landlord with too little capital to make the necessary
hostility, was strikingly illustrated in a New York Times’ investments. In the long run, controls must produce a
“Quotation of the Day.” (I quote first the statement progressive elimination of services even if landlords
quoted by The Times and then its description of the have the best will in the world.
person and circumstances surrounding the quotation. I
omit the individual’s name, in order to spare him possible How Repeal of Rent Controls Would Restore
embarrassment.) “‘If he’s that stupid, he waits in line an Harmony Between Landlords and Tenants
hour and doesn’t know the rules, I let him get to the The hatred between landlords and tenants would dis-
pump—and then I break his heart.’— . . . a service sta- appear in a rental market that was free of controls. Such
tion attendant in Elizabeth, N.J., where gasoline ration- a market would restore economic power to the tenants:
ing rules went into effect yesterday.”27 (For the benefit it would give tenants the power to make landlords serve
of readers who may be unfamiliar with the circum- them out of self-interest.
stances, what the attendant let unsuspecting motorists Consider how a free market would bring this about.
wait in line an hour to find out was that they were there The first effect of the establishment of a free rental
on the wrong day: their license plates ended with an odd market would be a jump in the previously controlled
27 New York Times, February 5, 1974.
rents. This jump in rents would eliminate the shortage of pay more for more expensive models that they don’t
rental housing. Immediately, even before any increase in really need or want than they would have had to pay in
the supply of rental housing could occur, the rise in rents a free market for the models they really do want. For
would level the quantity of living space demanded down example, someone seeking a sixteen-inch black-and-white
to equality with the limited supply that exists. In fact, the television set may end up having to buy a nineteen-inch
quantity of living space demanded would be reduced to color set, because that’s all that’s available. At the same
a point somewhat below the supply that exists: landlords time, the buyers who do want the better models find they
would have some vacancies on their hands at free-market are not as good any more.28
rents. Precisely these vacancies are what would restore This process is a corollary of the decline in quality and
to tenants their economic power over landlords. At free- service discussed in the previous section. And as soon as
market rents, each tenant would be able to choose from a shortage becomes severe enough, quality and service
a large number of apartments available in his price range. are cut to the point that buyers are offered models that
If he did not like the service his present landlord gave would never appear in a free market in any price range.
him, he would simply move when his lease expired. He What happens is that sellers are led to cut corners in order
would not be in the position of having to regard his to make relatively small savings to themselves and which
present apartment as the only one in the world, and feel have a great impact on the buyers. For example, situa-
obliged to stay no matter how bad conditions in it be- tions can exist in which it is advantageous to a seller to
came. By the same token, his landlord would no longer save a few cents in manufacturing costs that later im-
be able to count on easily replacing him. At free-market poses many dollars in repair costs on the buyer. The harm
rents, his landlord would not have a waiting list of inflicted on the buyers does not cause the sellers any
potential tenants, but vacancies on his hands. If he were economic loss, because at the controlled price there is a
to act in such a way as to make too many tenants move, surplus of buyers eager to buy even a very inferior
he would either be unable to replace those tenants or he product.
would have to reduce his rents below the general market In the same way that price controls and shortages
in order to attract replacements. In this way, a landlord make it impossible for a consumer to select his model on
who did not satisfy his tenants would suffer financial the basis of cost, they also make it impossible for a
loss. The landlord’s self-interest would once again make businessman to select his methods of production on the
him want to gain and keep tenants. Landlords would once basis of cost. For one or more of the factors of production
again begin to compete with each other in terms of he requires may simply be unobtainable, because a price
improved quality and service. They would have to, be- control has created a shortage of it. Under price controls,
cause they would need tenants once again, while tenants businessmen must select those methods of production for
would no longer need any particular one of them. which the means happen to be available, and not neces-
sarily those which have the lowest costs. The inability to
find the right factors of production, of course, also fre-
2. The Impetus to Higher Costs quently results in a decline in the quality of products as
A major consequence of price controls and shortages well, and should be viewed as a further and major cause
is that they increase costs by means of creating various of declining quality. The very deterioration of quality and
inefficiencies. service is itself a powerful source of higher costs both to
For example, in those cases in which goods come in businessmen and consumers, as I have already indicated.
a variety of models and price ranges, such as television If, for example, a machine is produced or serviced in an
sets, cars, lawn mowers—most goods—they create an inferior way, then even if its price remains the same, it
incentive for producers to eliminate the more economical will cause higher costs of maintenance and repair and
models while cutting corners in the production of the may have to be replaced sooner. The same obviously
more expensive models. The reason this occurs is that, applies to many consumers’ goods. If a television set lasts
on the one hand, the buyers are able and willing to pay only half as long and has to be repaired twice as often, it
the higher prices of the more expensive models rather is a lot more expensive to own, even though its price
than do without the good altogether, and, on the other remains the same.
hand, corner cutting can generally be carried out more Shortages of supplies and the mere threat of shortages
easily and with less serious results on the upper end of a themselves directly raise the costs of production. The
product line than on the lower end. The process is actu- effect of a shortage of a factor of production is to delay
ally a disguised way of raising prices and restoring production. This causes the capital invested in all the
profits. But it is a very uneconomic way of doing so, other, complementary factors of production that depend
because, as a result of it, many buyers end up having to on it, to have to be invested for a longer period of time
28 These
roughly
results
halveare
them
reinforced
on the high-priced
by the fact that
models.
the more
Thiseconomical
too tends to cause
models,
thebeing
discontinuance
more popular
of low-priced
and therefore
models
selling
ahead
faster,
of high-priced
tend to carry
models.
lower profit margins in a free market than do the higher priced models. For example, $1 million of capital invested in a fast-moving inventory of low-priced models may generate $2 million of sales revenue in a year, while the same sized capital invested in a slow-moving inventory of high-priced models may generate only $1 million of sales revenue in a year. In order to earn the same rate of profit on capital, say, 10 percent, when invested in either inventory, it is only necessary to have a 5 percent profit margin on the low-priced models, while a 10 percent profit margin is required on the high-priced models. If price controls are imposed and costs rise by any given percentage, the reduction in profit margins will be more severe in the case of the low-priced models. For example, a 5 percent rise in costs will just about totally eliminate profits on the low-priced models, while it will
242 CAPITALISM
than would otherwise be necessary. For example, a short- because it makes the incurrence of extra costs the way to
age of building-nails causes capital to be invested in raise profits. It thereby totally perverts the profit motive
half-finished houses and in piles of lumber for an unnec- from being the driving force of greater efficiency to
essary period of time. Since interest must be paid on being a driving force of greater inefficiency.
capital for the full time it is invested, the effect of all such By their very nature, price controls pervert the opera-
delays is to raise the interest cost of production. Simi- tion of the profit motive. One must charge to their ac-
larly, the mere anticipation of shortages of supplies leads count not only all of the actual inefficiencies they create,
businessmen to hoard supplies of all types. This requires but all of the potential improvements in efficiency they
that production be carried on with a larger capital invest- prevent. Price controls create a situation in which it is no
ment—in the additional stocks of supplies and in facili- longer necessary to reduce costs or improve quality in
ties for storing them. And this, of course, in turn, means order to raise profits. In a free market, the price every
extra interest costs and extra costs on account of the firm receives is the very best it can obtain under the
storage facilities. Finally, there is the loss of the valuable prevailing state of the market. A firm has the legal right
time of executives in searching for sources of supply and to ask a higher price than this in a free market, but does
in performing all the paperwork required to comply with not ask such a price because it would drive away too
the government’s price controls and any associated reg- many customers: its customers would turn to competi-
ulations, such as rationing. tors, and new competitors would probably appear; or,
It should be noted that shortages and the threat of even if there were no close competitors, its customers
shortages also directly raise costs to consumers. Con- would simply buy too much less of its type of product to
sumers too suffer effects analogous to wasted investment make a further rise in price worthwhile.
and the need for more investment. For example, consum- Thus, in a free market, a firm must accept the fact that
ers who could not obtain gasoline could not use their cars its price is limited by forces beyond its control. In order
or enjoy their country homes until such time as they to increase its profits, it cannot simply raise its price—it
could obtain gasoline. To that extent, the money they had must reduce its costs of production or improve the quality
spent for these complementary consumers’ goods repre- of its products to attract new buyers. That is final. There
sented a kind of wasted investment. In addition, of course, is simply no other choice. But under price controls, the
consumers too are led to hoard supplies and thus to tie price a firm receives is not something that is imposed
up larger sums of money in stocks of goods and, quite upon it by an unyielding external reality, to which it has
possibly, incur additional costs on account of acquiring no choice but to adapt its own conduct. The price it
extra storage facilities—for example, extra home freez- receives can be changed in its favor—if only it can
ers, if there should be the threat of a food shortage. prevail upon the officials in charge of the price controls
Finally, one must mention the wasted man-hours spent to relax them, or if it can find ways of evading them.
in waiting lines during every shortage, which, while not Thus, the firm’s focus necessarily switches. Instead of
a money cost, are nonetheless a real hardship and burden being focused on reducing costs and improving quality
and can well be at the expense of actual working time. as the ways of increasing profits, it becomes focused on
To some extent, the rise in production costs that price ways to have the price controls relaxed or to evade them.
controls and shortages bring about may come out of This alone represents a radical change in the way a firm
profits. But it certainly does not always do so—as, for directs its talents and energies.
example, when it is a case of concentrating on the pro- Furthermore, as we have seen, firms lose the incentive
duction of more expensive models that have correspond- to reduce costs or improve quality. Price controls and the
ingly higher controlled prices. Moreover, it is possible shortages they create place these things beyond a firm’s
for most or even all of the rise in costs not to come out power. Even if it wanted to, a firm has no power to reduce
of profits—at least, not out of nominal profits. For the its costs or improve its quality when shortages prevent it
government may very well follow a policy of allowing from obtaining the appropriate means of producing its
prices to rise insofar as the producers can prove a rise in products or cause the quality of those means to deterio-
costs. This was the case to a large extent in World War rate. But, of course, even if it had the power, there is
II. During World War II, most defense contracts were simply no reason under price controls and shortages for
written on a cost-plus basis—that is, the government paid a firm to reduce its costs or improve the quality of its
defense contractors their costs plus a percentage of their products. There is no reason to improve the quality of its
costs as profit. The same principle seems often to have products, because its customers will snap up goods of
been applied in setting the price controls on civilian lower quality than it now offers. It has no reason to reduce
goods. This procedure, it should be realized, is tanta- its costs (except at the expense of quality) in an environ-
mount to the positive encouragement of extra costs, ment in which customers are eager to pay prices that
would cover substantially higher costs and in which, offering other distributors the prospect of correspond-
besides, it has little or no prospect of profiting from any ingly higher profits. For all distributors must sell at the
improvements in efficiency it might achieve. same price, while their costs may be significantly above
This last is the situation of every price-controlled firm or below the average on the basis of which that price is
in a period of inflation, insofar as its suppliers are still set. In order to deal with this problem, the government
free to raise their prices or to impose higher costs by must assign to each distributor his “fair share” of low-
virtue of declines in the quality of their products or cost and high-cost goods, or force the distributors to
services. Such phenomena will raise the costs and de- agree to some scheme of mutual compensation.
stroy the profitability of a firm that must operate under This sort of situation existed in the oil industry when
price controls, no matter what it does to control its costs it was under price controls. Oil produced from wells that
by means of becoming more efficient. To the extent that had been in operation prior to the imposition of price
it succeeds in retarding the rise in its costs through greater controls in August of 1971, was classified as “old oil”
efficiency, the price-control authorities will use that very and controlled at a price of $5.25 a barrel. Oil produced
fact to deny its need for a price increase. The only effect from wells brought into production subsequent to that
of achieving greater efficiency in such a situation is to date was called “new oil” and was controlled at approx-
postpone the day that one is permitted to obtain relief by imately twice that price. Those firms that were supplied
raising one’s prices. In other words, normal cost reduc- mainly with “old” oil were forced to compensate the
tions, based on improvements in efficiency, simply cease firms that had to rely mainly on “new” oil, or on imported
to pay, even if they are still within the firm’s power to oil, which, since early 1974, was not subject to controls
make. The only cost reductions that pay under price at all and (prior to the Iranian revolution of 1979), sold
controls are the ones that can be made effortlessly, namely, for about $14.50 a barrel. The compensation arrange-
cost reductions at the expense of quality—the kind of ment resulted from the fact that all the oil companies had
cost reductions that would not pay in a free market. to sell at essentially the same prices to consumers, and
In sum, price controls and shortages thoroughly per- the consumer prices were based on an average of the
vert or destroy the operation of the profit motive. In place price of old, new, and imported oil. Under this arrange-
of profit incentives to improve quality and reduce costs, ment, some oil companies were forced to turn over
they make it possible to profit by means of reducing hundreds of millions of dollars, called “entitlements,” to
quality and allowing costs to rise. For they destroy the other oil companies.
resistance of buyers to declining quality and to higher The entitlement system was not only administratively
prices to cover higher costs. Indeed, they often necessi- chaotic, but actually represented an expropriation of the
tate declining quality and positively encourage higher wealth of American oil companies for the benefit of the
costs insofar as they entail cost-plus pricing. Arabs. Under it, the profits that were made by refiners
that bought “old” oil at $5.25 a barrel were transferred
The Administrative Chaos of Price Controls largely to those refiners that bought Arab oil at $14.50 a
It should be realized that the willingness of the gov- barrel. This meant that money that should have gone to
ernment to allow higher controlled prices on the basis of purchase American oil was instead used to finance the
higher costs of production introduces a significant com- purchase of Arab oil. It was literally a system for keeping
plication into the administration of price controls. The money out of the hands of American producers and
complication arises because different parts of the supply putting it into the hands of the Arabs.29
of the same good will have different costs of production.
As a result, the government must set a number of con-
trolled prices on the identical good, depending on the 3. Chaos in the Personal Distribution of
particular cost of production incurred to produce the Consumers’ Goods
particular batch of goods in question. This procedure is In the last chapter, we saw that, in a free market,
generally accompanied by further procedures, all of which consumers’ goods in limited supply are distributed to the
help to make price controls an administrative nightmare. individual consumers in accordance with a combination
What the government does is to allow producers to of their relative wealth and income, on the one side, and
sell to distributors (or to further processors) at varying the relative strength of their needs and desires for the
prices, corresponding to their varying costs. The distrib- goods, on the other.30 Price controls and shortages totally
utors, however, are required to sell to the ultimate con- disrupt this principle of distribution. What they substitute
sumers at a uniform price, based on an average of the is not another principle, but merely the rule of the ran-
varying costs to them as a group. By itself this procedure dom, of the arbitrary and the accidental—the rule of
would threaten some distributors with financial ruin while chaos.
29
30 For aabove,
See more forceful
chap. 6,demonstration
pt. B, sec. 2. of this point, see below, this chap., this pt., sec. 6, the subsection “How Repeal of Our Price Controls on Oil Reduced the Price Received by the Arabs.”
244 CAPITALISM
One should think back to the gasoline shortage and profitability of sending supplies to it. All that they have
consider what determined the distribution of gasoline. It to do is find an additional supply of the good to send.
was a matter of luck and favoritism. Gasoline went to What this situation makes possible, in essence, is that
those who happened to be on the spot when deliveries producers can send their goods practically anywhere, in
were made to gas stations, or who had the time to waste widely varying proportions, and it doesn’t matter to
waiting hours in line or following gasoline delivery them. If they send too little to some areas, the price
trucks around. It went to those who happened to be controls in those areas prevent prices and profitability
friendly with service station owners or the employees of from rising and halting the drain. Meanwhile, in the areas
service stations. Both the wealth and the needs of the into which they are sending too much, shortages prevent
buyers were made irrelevant. The country’s most produc- prices and profitability from falling and stemming the
tive businessmen were placed on an equal footing with inflow. In a word, the geographical distribution of a good
welfare recipients: the value of their higher incomes was simply becomes random and chaotic, disconnected from
simply nullified. It was just a question of who arrived the consumers’ needs and purchasing power.
first or who had the right friends. By the same token, Consider the following case, based on the experience
people whose very livelihood depended on gasoline were of the gasoline shortage. The price control on gasoline
in no better position to obtain it than people wanting it created a shortage in the whole northeastern region of the
for the most marginal purposes. Again, it was just a United States. Almost every state and locality in that
question of who got there first or who had the right region had its own individual shortage. In this context, it
friends. largely ceased to matter to the oil companies how their
Rent-controlled apartments are distributed in just the gasoline was distributed among the various areas in the
same way. If meat were placed under price control, it region. Suppose, for example, that they sent a million
would not be long before it too was distributed in this gallons less a month to New Jersey and a million gallons
way. The distribution of any good subjected to price more a month to Connecticut. It didn’t matter to them.
controls becomes chaotic just as soon as the controls The price of gasoline in New Jersey and the profitability
produce a shortage. of sending it there could not rise even if New Jersey
received hardly any gasoline at all. Price controls pre-
vented it. At the same time, the price of gasoline in
4. Chaos in the Geographical Distribution of Connecticut and the profitability of sending it there could
Goods Among Local Markets not fall—until the shortage in Connecticut was totally
We already know that price controls prevent an area eliminated. Of course, just the reverse could have oc-
that has an urgent need for a product from obtaining it by curred. A million gallons less a month could have been
bidding up its price in competition with other areas. sent to Connecticut, and a million gallons more a month
When price controls are joined by shortages, a further could have been sent to New Jersey. Price control would
major element of chaos is introduced. Under the combi- have prevented any rise in the price and profitability of
nation of price controls and shortages, not only is the sending gasoline to Connecticut; and, so long as it ex-
price of a good prevented from rising, but also, paradox- isted, the shortage would have prevented any fall in the
ically, it is prevented from falling. price and profitability of sending gasoline to New Jersey.
Where a shortage exists, an increase in the supply of This indeterminacy introduced by price controls ex-
a good, or a decrease in the demand for it, does not reduce plains how some areas can suffer relatively mild short-
the price; it merely reduces the severity of the shortage. ages, and other areas very severe shortages, and how
Where a shortage exists, an additional supply merely their positions can easily be reversed. The significance
makes it possible for someone to buy at the same—con- of this is that price controls not only create shortages, but
trolled—price who previously could not do so; likewise, make it a random matter how the burden of those short-
a decrease in demand merely means a reduction in the ages is distributed. In the gasoline shortage, for example,
number of those contending for the supply who must go it would have been possible for the various areas to share
away empty-handed. The price does not fall in such the burden of the overall shortage in any proportions. All
circumstances because it is already too low, as a result of might have suffered more or less equally, or some partic-
price control. ular areas might have borne almost the entire shortage,
The significance of the fact that prices can neither rise while others suffered almost none at all, or any interme-
nor fall is that if price controls and shortages exist in diate situation might have existed. The actual chaos that
various local markets, producers are in a position to sell did exist fully accords with this principle.
a larger quantity in every such market without any reduc- Precisely how the burdens are distributed is the result
tion in the price in that market or, therefore, in the of accident. In the gasoline shortage, the main accidental
factor was that the Northeast happened to be the region supply. The essential point is that under price controls
most heavily dependent on imports, and so it bore the far and shortages, movements in supply have no effect on
greater part of the nationwide burden—given the fact that price and profitability until a local shortage is totally
price controls prevented the people of the region from eliminated, at which point the local price and profitabil-
bidding up the price of gasoline and thus making the ity will begin to fall and the further movement of supplies
shipment of replacement supplies profitable. Within the to that area will stop. Short of that point, massive move-
Northeast, further accidental factors played a role, such ments of supply are possible in response to very small
as the very time of the year when the controls were differences in profitability. Anything that can create such
imposed. To understand this last point, imagine that the differences can cause such movement.
controls are imposed in the summertime. In the summer,
there is a large demand for gasoline in many resort areas.
As a result, the wholesale price of gasoline in these areas 5. Chaos in the Distribution of Factors of Produc-
is at a seasonal high in relation to the wholesale price in tion Among Their Various Uses
many city areas. It is high enough to cover such special The discussion of random geographical distribution
summertime costs as may be entailed in having to bring applies equally to the distribution of factors of produc-
in supplies from more distant refineries than is necessary tion in limited supply among their various uses. If a
at other seasons, when the local demand in the resort shortage exists of all the different products that a factor
areas is smaller. The imposition of controls freezes this of production is used to produce, then there is a ready
seasonal price relationship and carries it forward to the and waiting market for more of each such product. More
fall and winter, when there is a different pattern of of each such product can be sold without causing any
demand, and when there should be a different set of reduction in its price or profitability, until the shortage of
gasoline price relationships to reflect it. Given the per- that particular product is totally eliminated. All that it is
petuation of the summertime price relationships, what necessary for producers to do is find a way of getting
happens is that gasoline continues to be heavily supplied more of any such product to the market.
to the summer resort areas—perhaps to the point of In this situation, the allocation of a factor of produc-
pushing the price there somewhat below the level per- tion among its various uses becomes utterly chaotic. A
mitted by the controls. As a result, no shortage whatever factor of production can be withdrawn from the produc-
exists in these resort areas. The entire shortage is concen- tion of any of its products and added on to the production
trated in the cities. If the controls are imposed in the of any other of its products. The price and profitability
wintertime, instead of the summertime, then, of course, of the product in reduced supply cannot rise to halt the
the reverse situation develops. decrease in supply. The price and profitability of the
Further chaos in distribution can be caused by such product in expanded supply cannot fall to stop the in-
things as small bureaucratic adjustments in the price crease in supply, until its particular shortage has been
controls. For example, it is quite possible that after the totally eliminated.
controls are imposed, the officials in charge may make Again, the oil shortage provides an excellent illustra-
some minor adjustments here and there, such as for the tion of the principle. During the oil shortage there was a
purpose of rectifying the kind of seasonal problems I shortage of all the different oil products: gasoline, heat-
have just described. In doing this, they can unleash major ing oil, jet fuel, propane, kerosene, etc. In these circum-
movements in supply which they may not be aware of stances, it essentially ceased to matter to the oil refineries
causing. Imagine, for example, that they decide to per- what they produced. If they took a million barrels of
mit, say, a penny a gallon rise in the price of gasoline in crude oil away from the production of gasoline and added
one particular major city. If this small rise makes this it on to the production of heating oil, they could sell the
particular city a relatively more profitable market than additional heating oil with absolutely no reduction in its
other markets, the various distributors will want to sell price or profitability, because of the shortage of heating
more heavily in this city; and as long as a shortage exists oil. And if they did the reverse—if they took a million
in the city, they can do so without any reduction in the barrels of crude oil away from the production of heating
newly increased price and profit margin. The effect will oil and added it on to the production of gasoline—they
be that this particular city will tend to be supplied very could sell the additional gasoline with absolutely no
heavily, perhaps to the point of totally eliminating its reduction in its price or profitability, because of the
local shortage, while supplies will simply disappear from shortage of gasoline. Of course, the price and profitabil-
other markets to the same extent. ity of the product being cut back could not rise—its price
Frankly, it is impossible to know all the different was controlled.
factors that might suddenly unleash major movements in The result was that the production of the various oil
246 CAPITALISM
products was made random and chaotic. Practically any cial steps to assure the supply of heating oil, and there-
combination of products was possible. The only limits after the burden of the oil shortage fell more heavily on
were those set by the possible total elimination of partic- gasoline and the other petroleum products.)
ular shortages. For example, gasoline production might As in the case of geographical chaos, bureaucratic
have been expanded at the expense of heating oil produc- adjustments in the controls can cause sudden major shifts
tion up to the point where the gasoline shortage came to in supply among the various products of a factor of
an end and any further increase in the supply of gasoline production. By making the production of any one partic-
would have forced a reduction in its price. At that point, ular product of a factor of production somewhat more
the whole burden of the combined shortage of gasoline profitable than the others, for example, the officials
and heating oil would have been borne by heating oil. Or, administering the controls can bring about a sudden
of course, the reverse could have occurred. Heating oil expansion in its production up to the point of totally
production might have been expanded at the expense of eliminating its particular shortage, while, of course, cor-
gasoline production up to the point of eliminating the respondingly worsening the shortages of other products
shortage of heating oil and throwing the whole burden of of the factor in an unpredictable way. And if they sud-
the combined shortage on gasoline production. denly reduce the profitability of a particular item, they
Either of these extremes or any intermediate situation can make the supply of it disappear and other items show
was possible, and not just with regard to gasoline and up in its place, again, in an unpredictable way.
heating oil, of course, but with regard to all oil products. Anything that produces even slight changes in the
Any of them might have been produced up to the point relative profitability of the various products of a factor
of no shortage, or any of them might have suffered a of production, whether a bureaucratic change in the
drastic reduction in production. Moreover, the position price-control regulations, or anything else, can produce
of the various products could suddenly have been re- major changes in supply when shortages exist. As just
versed—with the relatively abundant ones suddenly be- one example, imagine that the uncontrolled price of some
coming short, and the short ones suddenly becoming of the chemical additives used to make gasoline changed.
relatively abundant. Furthermore, if we add in the exis- If the prices of these chemicals rose, the profitability of
tence of geographical chaos, the situation could have gasoline might suddenly be reduced below that of other
been different in different parts of the country at the same oil products. Since the price of gasoline could not rise as
time—for example, a severe shortage of gasoline and its supply was cut back, while the price of other oil
little or no shortage of heating oil in New Jersey and just products would not fall as their supply was increased, it
the opposite in Connecticut. would now pay to shift as much crude oil as possible
The chaos that existed during the oil shortage fully away from gasoline production to the production of all
accords with this description. And the same kind of other oil products. Conversely, if the price of the chem-
random, accidental factors determined what actually did ical additives fell instead of rose, then gasoline produc-
occur as in the case of geographical chaos. For example, tion would suddenly become more profitable, and a
the time of the year when the controls happened to be massive increase in gasoline production would probably
imposed played an important role in determining to what occur at the expense of the production of all other oil
extent the overall oil shortage fell on heating oil or on products.
gasoline. Controls imposed in the summertime tend to A principle that emerges from this discussion is that
cause relatively abundant supplies of gasoline and a price controls and shortages create tremendous instabil-
severe shortage of heating oil. This is because they ity in supply. The supply of everything subjected to
impose the freeze at a time when the price of gasoline is controls is subject to sudden, massive, and unpredictable
high in relation to the price of heating oil, with the result shortages.
that it is profitable to go on producing gasoline and not
profitable to step up the production of heating oil even Hoarding
after the summer ends. The chaos in supply caused by controls has a further
Conversely, controls imposed in the wintertime tend important consequence, one that I have already noted in
to cause a relatively abundant production of heating oil other connections, but which deserves some additional
and a severe shortage of gasoline. Since our controls elaboration and stress here. This is the fact that shortages
were originally imposed in August of 1971, it is not and the fear of shortages cause hoarding. If a person
surprising that the first major petroleum product to de- cannot count on being able to buy something when he
velop a shortage was heating oil, which occurred in the wants it, because, overnight, it may disappear from the
late winter and early spring of 1973, months before the market, then he had better try to buy it when he can, so
Arab embargo. (Subsequently, the government took spe- that he will have it available when he needs it. The effect
of this is that price controls and shortages artificially example, as we saw, the man who wants a sixteen-inch
expand the demand for everything even more. Price black-and-white television set may end up having to buy
controls not only expand the quantity of goods demanded a nineteen-inch color set, because there is a shortage of
by virtue of artificially holding down prices, but also by the sixteen-inch sets and he cannot obtain one; so he
virtue of creating shortages and then the need to hoard, settles for this substitute.
to cope with the shortages. The demand price controls This principle applies not only to close mutual substi-
create for the purpose of hoarding is a demand that does tutes, such as different models of the same good, but also
not exist even potentially in a free market—i.e., it is not to goods which are totally dissimilar in their nature and
even a submarginal demand—because it would serve no function. For example, if our prospective buyer of a
purpose whatever in a free market. But under price television set cannot find any model television set that
controls and shortages, hoarding becomes a matter of satisfies him, he will eventually decide to buy some other
survival and greatly adds to demand. kind of good. He may decide to buy a suit or to apply the
The effect of this is that the irrationality of price sum he wanted to spend for a television set to the pur-
controls goes beyond even what I have previously de- chase of a better car or to any one of thousands of things
scribed. In the second part of the last chapter, I explained or combinations of things. In this way, the money that
how price controls prevent the most vital and urgent price controls prevent from being spent in one channel is
employments of a factor of production from outbidding diverted to another channel.
its most marginal employments. I explained, for exam- This diversion of demand, it should be realized, takes
ple, how they prevented truckers delivering food sup- place almost immediately. For example, even if our
plies from outbidding housewives wanting gasoline for prospective television set buyer decides to add the price
marginal shopping trips; how they prevented the opera- of the set to his savings, in the hope of being able to find
tors of oil rigs needing oil products from outbidding the set later on, still, the demand for other things will rise
homeowners seeking oil to heat their garages. Actually, almost immediately. This is because he will almost cer-
the situation is even worse. Under price controls, the tainly deposit his savings in a bank, which will lend them
most vital and urgent employments of a factor of produc- out. As a result, a borrower will be put in the position of
tion are prevented from outbidding not only its most being able to buy something with the money our man had
marginal employments, but, from the standpoint of a free wanted to use for a television set.
economy, employments that could not even qualify as The effect of this diversion or spillover of demand
submarginal; that is, employments for hoarding pur- depends on whether or not price controls apply to the
poses. second-choice goods that people turn to. If these goods
Under price controls and shortages it is entirely pos- too are controlled, then the effect tends to be a worsening
sible for people to be unable to get to work, to be without of the shortages of these goods. I will not elaborate on
food, or even to freeze to death, not only because they this consequence, however, until we begin our discussion
are prohibited from outbidding the marginal employ- of universal price controls, in the next part of this chapter.
ments of the oil, or whatever factor of production it may If price controls do not apply to the second-choice goods,
be, but because products are being hoarded by other then the effect of the spillover of demand is simply to
people in fear of this very kind of possibility happening drive the prices of uncontrolled goods still higher and to
to them. The consequence is that price controls and make the profitability of their production in comparison
shortages not only sacrifice men’s well-being and very to that of the controlled goods still greater.
lives to the unearned, fleeting gains of other men, but, This principle concerning the effects of the spillover
very largely, to a hoarding demand created by price of demand in a partially price-controlled economy has a
controls themselves. In effect, men are sacrificed to the number of important implications.
controls themselves.
Why Partial Price Controls Are
Contrary to Purpose
6. Shortages and the Spillover of Demand First, the principle shows that “selective” or partial
The effect of a shortage of any particular commodity price controls, that is, price controls imposed merely on
is to cause the unsatisfied demand for that commodity to certain goods only, are contrary to any rational purpose
spill over and add to the demand for other commodities. the government might have in imposing them.31 The
We have already had a glimpse of this principle earlier government imposes controls on the goods which it
in this chapter, in our discussion of people ending up believes are the most vital. It imposes the controls be-
having to buy more expensive models of goods as the cause it believes they will enable people to obtain these
result of the unavailability of less expensive models. For goods who otherwise could not have obtained them
31 I am indebted to von Mises for this point and for the example used to illustrate it. See Ludwig von Mises, HumanAction, 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 762–64; Socialism, pp. 532–34; Planning For Freedom, 4th ed. enl. (South Holland, Ill.: Libertarian Press, 1980), pp. 73–75.
248 CAPITALISM
because of too high a price. The government leaves particular group of prices from rising. The fact is that
uncontrolled those goods whose production it considers such controls hold down the prices of some goods only
to be relatively unimportant. The effect of this policy, by making the prices of other goods rise all the more.
however, is to destroy the production of the very goods Indeed, the effect of partial price controls is actually
the government regards as vital, while encouraging the to raise the general price level. Partial controls have this
production of the goods it considers unimportant. This effect, because while they leave aggregate demand and
occurs because the price controls restrict or altogether spending unchanged, they reduce the efficiency of pro-
destroy the profitability of producing the controlled goods. duction and, therefore, the aggregate amount of produc-
At the same time, the shortages the price controls create tion and thus supply. We have seen that they can destroy
cause demand to spill over into the markets for the vital industries, such as the electric power industry and
uncontrolled goods and thereby make their production the oil industry, on which the production of all other
still more profitable. industries depends. In the course of destroying an indus-
For example, the government might control the price try, they reduce the quality of its products and the service
of milk on the grounds that it is a vital necessity, and leave associated with them, thereby raising maintenance and
uncontrolled the price of ice cream and soft drinks on the replacement costs for the buyers of the products. We saw
grounds that they are trivial “luxuries,” not worthy of its also that controls cause resort to unnecessarily expensive
attention. The effect of this policy is to reduce the prof- models and methods of production, and lead to a system
itability of milk production in comparison with these and of cost-plus pricing. And we have seen that they create
all other uncontrolled goods. As a result, it brings about utter chaos in the geographical distribution of the prod-
a fall in the production of milk; this, together with the ucts of a controlled industry and in the combination of
increase in the quantity demanded of milk resulting from the various products that such an industry produces; this
its too low price, creates a shortage of milk. The effect disrupts all subsequent production that depends on these
of the shortage of milk is to cause the unsatisfied demand industries, and thus reduces aggregate supply. In all these
for milk to spill over into the markets for uncontrolled ways, therefore, partial price controls actually raise the
goods, including, of course, ice cream and soft drinks, general price level.
whose relative profitability is then further enhanced.32
The effect of the government’s action, therefore, is to The Absurdity of the Claim That Price Controls
destroy the production of milk, which it regards as nec- “Save Money”
essary and vital and wants people to have, and to promote A third, closely related implication is that the support-
the production of such goods as ice cream and soft drinks, ers of price controls are badly mistaken in claiming that
which it considers unimportant. any particular price control “saves people money,” and
Clearly, it would be less illogical if the government in arguing that the repeal of any given control will “cost”
imposed controls on the things it considered unimportant people this or that amount of money. This may be true in
and whose production it did not mind seeing destroyed, the short run for some individuals, who are lucky enough
and left free the production of goods it considered vital. to obtain the goods they desire at below-market prices.
Nevertheless, governments do not do this, and again and But it is never true in the aggregate. In the aggregate, a
again—in the early stages of a war, for example—they control saves people money only in the sense of making
impose controls that undermine the production of neces- them spend less for the controlled goods. At the same
sities, while the so-called ash-tray industries and the time, it makes them spend more for the uncontrolled
night clubs and the cabarets flourish. For temporarily at goods. In the aggregate, they do not spend any less
least, these lines of business are left uncontrolled, on the money. They do, however, receive fewer goods. Clearly,
grounds of being unimportant, and are therefore able to whatever saving or gain some buyers may have by virtue
benefit from the spillover of demand caused by the of controls is always at the expense of a greater loss to
shortages of necessities. other buyers.
Indeed, in view of the fact that controls tend to destroy
How Price Controls Actually Raise Prices the controlled industries, the only kind of long-run “sav-
A second implication of the principle that shortages ing” they can achieve for anyone, including the people
cause a spillover of demand and a rise in the prices of who might temporarily gain from them, is a rather bizarre
uncontrolled goods is that selective or partial controls one. It consists in preventing a person from spending the
cannot hold down the general price level. The expecta- money he wants to spend for the goods he wants to buy.
tion that they can is based on the erroneous belief that the In this sense, the drivers who could not obtain gasoline
problem of inflation consists in the rise of this or that at the controlled prices “saved money” on gasoline.
group of prices and can be solved by prohibiting a Instead of having the gasoline they desperately wanted
32 The additional expenditure on the uncontrolled goods is equal to the funds that the sellers of milk are prevented from receiving by virtue both of the artificially low, controlled price of milk and the reduced production of milk.
and which they valued far above the controlled price, They are partial controls not only in the sense that they
they had money left over to spend on other things which apply only to specific goods, but also in the further sense
they wanted much less. Such savings are obviously ab- that they apply only to part of the supply even of these
surd and contrary to purpose. They are comparable to goods. For example, in New York City all housing com-
making a person save money by not buying food or pleted since January 1974 is totally exempt from rent
medicine, or anything he values more, so that the may controls. Prior to August 1971, all housing completed
have money for something he values less—if he is alive since February 1947 had been free of controls, and
to spend it. Yet this is the only kind of “saving” that certain still earlier housing, considered “luxury hous-
controls can achieve in the long run, and it is the only ing,” had also been exempted. (All this previously un-
kind of saving they achieve right from the very beginning controlled housing is now subjected to controls in the
for whoever suffers from the shortages they create. form of government limitations on annual rent increases.)
As will be shown in the next part of this chapter, total Perhaps even more important has been the fact that while
or universal controls—price controls on all goods—may rents have been controlled in New York City, they have
be said to “save people money” in an even more bizarre generally been uncontrolled in the surrounding suburban
way than partial controls. By virtue of creating a shortage counties and in most of the rest of the country. Nor have
of everything, and thus making money simply unspend- the prices of houses been controlled anywhere.
able, universal controls enable people to save money in As a result of the fact that rent control has had only
the sense of having it available for such purposes as partial application, large numbers of people in New York
papering their walls or lighting their fires with it. And as City have been able to escape its effects. Those who
production declines under universal controls, and the could afford them have been able to find uncontrolled
volume of spending that can take place at the controlled apartments or, in many cases, buy houses, co-ops, or
prices accordingly drops further, the money that people condominiums in the city. Those who could not afford to
“save” in this absurd way grows greater. live in New York City have been able to find places to
It follows from our discussion that in the aggregate live outside the city.
the repeal of price controls would not cost people any-
thing. If universal controls exist and are repealed, people i. Internal Passports and Compulsory
would spend more money, but this greater spending Assignment of Boarders
would represent an exchange of otherwise useless paper Before considering further the effects of the diversion
for valuable goods, whose production would be greatly of demand caused by partial rent controls, it will be well
increased as a result of the repeal of the controls. If partial to project the consequences of controls applied to all of
controls exist and are repealed, then the effect is a shift these alternatives. In other words, let us project the
in the pattern of spending away from the previously consequences of a fully price-controlled housing market
uncontrolled goods to the newly uncontrolled goods. The on a regional and national scale. We will see that some
prices of the former would tend to drop while the prices of the potentially most disastrous effects of rent controls
of the latter would tend to rise. But since the effect of the have been avoided because of the relatively limited
repeal is an increase in total production and supply, the scope of the controls.
general price level must tend to fall. For the same total If the entire housing market were controlled, housing
demand with a larger total supply means a lower price would be artificially cheap in all of its forms and every-
level. The repeal of any partial control, therefore, must where. The quantity demanded of all types of housing
always tend to reduce the general price level by virtue of would therefore exceed the supply. This would be true
its effect of increasing production. It is only the repeal of all across the country. As a result, there would be a
a control, therefore, not the imposition of a control, that shortage of living space and no way around it. People
can truly be said to save people money. would simply be unable to find space in New York City,
and they would be unable to find it in the surrounding
Applications to Rent Controls counties or anywhere else in the country. There would be
The principle that shortages cause the unsatisfied people desperate for living space with absolutely no way
demand for controlled goods to spill over into the market to obtain it. They would need apartments and houses but
for uncontrolled goods and to raise their prices has spe- with no better chance of finding them than they had of
cial application to rent controls as they have existed in finding gasoline at the height of the gasoline shortage.
places like New York City over most of the period in What might happen in such circumstances? The an-
which they have been in force. swer is two things worth thinking about: The government
Such rent controls are partial price controls in an even would contemplate the restriction of the internal freedom
more restricted sense than we have considered up to now. of migration. And it would contemplate the assignment
250 CAPITALISM
of boarders to private homes and apartments. ments at artificially low rents. We know that this fact,
As to the first point, it would soon become obvious coupled with the lack of capital on the part of landlords
that in the circumstances of a pervasive housing short- that results from restricted profits, causes the quality of
age, the influx of additional people into any area would such housing to decline, in the process unleashing a spiral
have the effect of making the local housing shortage of mutually reinforcing hatreds between tenants and
worse. Each area would therefore become anxious to landlords. Ultimately, as the costs of operating buildings
keep out as many new arrivals as possible on the grounds continue to rise, because of inflation, the effect of rent
of their worsening the local housing shortage. Each area control is to cause widespread abandonments of build-
would try to set up barriers to in-migration and try to ings by their owners. Such abandonments have been
prevail upon the federal government to keep people going on for many years in New York City. As a result of
where they were. As to the second point, the argument rent control, there are growing areas in New York City—
would be made that people cannot be left to sleep in the in the South Bronx, for example—that have been re-
streets and that in the “housing emergency,” or whatever duced to the status of a primitive village, with people
it might be called, it was necessary for those fortunate living without electricity and having to fetch their water
enough to have space, to share it with those not fortunate from public fire hydrants. (Such facts are reported every
enough to have space. so often in The New York Times.)
This state of affairs has actually existed in many As for the uncontrolled rental housing, we know that
countries. For example, it was no accident, but precisely the shortage of rental housing that is under controls
for reasons such as these, that the government of Soviet causes the unsatisfied demand for such housing to spill
Russia deliberately restricted the number of inhabitants over and enlarge the demand for uncontrolled rental
of its various cities and controlled the internal movement housing. This phenomenon and its consequences must be
of the Russian population through a system of internal examined more closely.
passports.33 The Communist sympathizers and apolo- The controls on rents bring space within the reach of
gists who boasted about how inexpensive housing was in people who otherwise could not have afforded it. That is
the Communist countries—extremely limited and wretched their purpose and that is what they achieve. But to
housing, it should be noted—did not realize that pre- whatever extent the controls make it possible for some
cisely this was what created a nationwide housing short- people to obtain space who otherwise could not have
age in those countries. They did not realize that the low obtained it, they simultaneously reduce the space that is
rents they were so proud of virtually necessitated restric- available for other people, who could have afforded to
tions on the internal movement of people—even apart rent that space in a free market. These other people, of
from all other factors working in the same direction in course, must then make their demand for space in a
the Communist countries. In addition, of course, as the market that is less well supplied. The result is that rents
result of the low rents and the consequent housing short- on uncontrolled space in the area rise.
age, families could not take their privacy for granted in As far as the market is concerned, in addition to
the Communist countries. Millions of families were forced causing a diversion of the demand for housing, partial
to live in communal apartments. Often, two families had rent controls are equivalent to a reduction in the supply
to share a single room, separated from each other only of rental housing. They take part of the rental housing
by a curtain—just as depicted in the movie Ninotchka. stock off the market by giving it to people who could not
Fortunately, in the areas of the United States where afford the market rents. This leaves less of a supply of
rent control has existed, such as New York City, people rental housing for the market and, consequently, in-
have been able to escape such disastrous effects, because creases rents on the diminished supply that is available
the controls have been confined to a very limited part of for the market.
the overall housing market. But, even so, the conse- Perhaps the best and clearest way to understand these
quences have been severe. points is to think once again of the conditions of an
auction. So imagine that an auctioneer is holding up two
ii. How Rent Controls Raise Rents units of the same good. Imagine further that there are
Let us pass over quickly the consequences of partial three bidders for these units. One bidder, imagine, is
rent controls as they affect the part of the housing supply willing to bid a maximum of $300 for one of these units,
subjected to them, and then focus on the consequences if necessary. Another bidder is willing to go as high as
as they affect the part of the housing supply that is left $200, if necessary. The third bidder, assume, can afford
free of controls. to bid no more than $100—that is his maximum limit in
We know that controls create a shortage of the housing the bidding. In a free market, the price at which these two
to which they apply because people scramble for apart- units will be sold will be above $100 and below $200.
33 Because the Soviet Union was always nothing more than an illegitimate extension of Russia—the Russian Empire—I follow the practice of referring to it simply as Russia or Soviet Russia, though in view of the recent breakup of this empire, it is sometimes necessary to distinguish Russia from the former Soviet Union as whole.
The price will have to be above $100 to eliminate the eliminated from the market who could have afforded
weakest bidder. It will have to be below $200, in order market rents as determined by the full supply of rental
to find buyers for both units. It will tend to be the same housing. These people cannot afford market rents as
for both buyers because there is usually no way to dis- determined by the artificially reduced supply of rental
criminate between them. Let’s assume the actual price housing that results from rent control. Just as in the
turns out to be $150: too high for the weakest bidder, yet auction example, when deprived of the supply that would
low enough for both of the other bidders. have been available to them in a free market, their
The weakest bidder has been excluded from this mar- unsatisfied demand is made to spill over into a competi-
ket. What must happen if we begin to feel sorry for him? tion with buyers who are able to outbid them for the
Suppose people begin to feel so sorry for him that they reduced supply.
get a law passed that orders the auctioneer to give him Obviously, the larger is the proportion of the housing
one of the units of the supply at a price he can afford— stock under rent control, the higher must be the rents on
say, $50. In that case, he gets his unit at $50. But now, as the correspondingly diminished supply that remains for
a result of this, instead of the auctioneer having two units the open market. If this principle is understood, it should
to auction off in the market, he has only one; the supply not be surprising that, for example, New York City,
available for the market has fallen. And this one unit will which has the largest proportion of rental housing under
now have to sell at a price somewhere above $200 and controls of any major city in the United States, also has,
below $300—say, $250. It has to be high enough now to for that very reason, the highest rents in the nation on
eliminate the middle bidder instead of the weakest bid- housing that is available for the open market.
der. All that has happened is that one party has gotten part ***
of the supply at an artificially low price and has caused The fact that partial rent controls act to raise rents on
the price on the remaining supply to go high enough to the uncontrolled part of the housing supply is reinforced
eliminate another party. The party eliminated could have by the fact that they increase the costs of providing rental
afforded the market price if it were determined by the full housing. This occurs because the existence of controls
available supply. But he cannot afford the market price on some housing today implies that the housing that is
as determined by the artificially reduced supply. De- presently free of controls may later on be brought under
prived of the supply that would have been available to controls. The threat of being brought under rent controls
him in a free market, his demand is diverted into a in the future makes it necessary for landlords of presently
competition with the other remaining bidder, which com- uncontrolled buildings to recover their investments more
petition, in the nature of the case, he must lose. rapidly. For example, instead of looking forward to re-
This auction example does not differ in any essential covering their investments over a fifty-year period, say,
respect from the case of partial rent controls. Partial rent the threat of rent control being imposed may make them
controls give part of the supply of housing to some want to recover their investments over a ten-year period,
people at below-market rents. To whatever extent these or even a five-year period, to be safe. This represents a
people could not have afforded as much space in a free great jump in the costs of providing new rental housing, and
market as they obtain under rent control, they leave that helps to explain why high rents on uncontrolled buildings
much less space available in the uncontrolled market. do not result in corresponding new construction.
Consequently, rents in the uncontrolled market must rise Insofar as rent control comes to be regarded as a
that much higher—in order to level down the quantity regular institution, to be imposed at any future time the
demanded to equality with the reduced supply that is left government may desire, the effect is to make today’s
for the market. For example, if the total rental housing tenants in uncontrolled buildings pay for the spoils of
supply in a city is one million rooms, and rent control tomorrow’s prospective beneficiaries of rent control.
results in giving half of those rooms to people who could This artificial increase in the costs of new housing, it
not have afforded them at free-market rents, then rent should be realized, is also one of the reasons why today’s
control correspondingly deprives other people of those so-called luxury housing is often inferior in many re-
rooms who could have afforded them at free-market spects to housing constructed in earlier decades. The
rents. In the process it makes the rents on the uncon- reason is that it is not genuine luxury housing, but rather
trolled half-million rooms rise so high that that dimin- cheap housing that must be rented at luxury rates in order
ished number of rooms is all that people will be willing to offset the prospective losses that are expected to be
and able to rent in the uncontrolled segment of the caused by rent controls in the future.
market. In other words, rent control makes the open-mar- ***
ket rents balance demand and supply at a supply of half Ironically, even if, however unlikely, rent controls
a million rooms instead of a million rooms. People are were not expected to be extended to housing that is
252 CAPITALISM
currently free of them—indeed, if they were expected open market rents that it brings is also accompanied by
ultimately to be repealed—partial rent controls would further substantial reductions in the costs of providing
still prevent the premium rents on uncontrolled housing new rental housing, apart from that of a longer period of
from being eliminated by means of the construction of depreciation and correspondingly smaller annual depre-
new housing. In a free market, it is true, rents tend to ciation charges. The decline in open-market rents on
equal the costs of constructing and maintaining housing newly constructed buildings and thus in the market value
plus only as much profit as is required to yield the going of such properties is accompanied by a decline in the
rate of profit. Under partial rent controls, however, the amount of taxes that such buildings must pay at the
rents on the uncontrolled portion of the market tend prevailing rates of property tax. Further declines in prop-
permanently to exceed this level, and exceed it the more, erty tax on such buildings can occur by virtue of a fall in
the larger is the proportion of the housing stock under property tax rates, which is made possible by the rise in
controls. It is not only that the larger the portion of the rents and property values, and thus property tax collec-
housing stock under controls, the smaller is the supply tions, in the case of the housing that had previously been
remaining for the market, which is sufficient reason for controlled.
the rents on the uncontrolled supply to be correspond- It is implicit in what I have just said, incidentally, that
ingly high. But also the premium profits which such rents another of the destructive effects of rent control is a rise
might be thought to offer for the construction of new in property tax rates. This results from the destruction of
housing are largely nullified by the consequences of the the rent-controlled properties’ ability to pay rising taxes
potential repeal of rent control no less than by the pros- in pace with inflation. Thus, the rates are increased on
pect of the extension of rent control. Consider. If the the properties left free of controls and on owner-occupied
supply of uncontrolled housing were increased to the housing. Also, as the property tax declines as a source of
point that the rents on such housing were no higher than revenue, local sales taxes and income taxes are imposed.
costs plus an allowance for the going rate of profit, the They too, and all the unpleasantness that accompanies
danger would exist that if rent controls were ever re- them, must be laid at least in part at the door of rent
pealed, rents in the open market would then be driven control.
below cost plus the going rate of profit. For the repeal of
rent controls would throw back on the market all of the iii. The Case for the Immediate Repeal of Rent Controls
housing diverted from the market to tenants paying below- The fact that partial rent controls increase the rents on
market rents. If open-market rents were already no more uncontrolled housing is not recognized by the general
than equal to cost plus the going rate of profit, this public. The result is that the higher do partial controls
increase in the supply available for the market would drive rents, the more necessary do people believe rent
drive them below that point. controls to be; the more desperately do they cling to the
Thus, so long as they are in force, partial rent controls existing controls and the more eager they are to urge the
raise rents on uncontrolled housing, whether landlords ex- extension of the controls. They fear that the repeal of the
pect them to be extended to the uncontrolled housing or to existing controls would raise all rents to the level of the
be removed from the housing to which they presently apply. presently uncontrolled rents, and they believe that the
It follows from the preceding discussion that when uncontrolled rents are enormous because they are not
partial rent controls are repealed, not only do rents in the controlled.
open market fall, but the construction of new housing Our discussion shows that the best solution to the
becomes much more profitable at any given level of problems created by rent controls would be the im-
open-market rents. For the repeal of the partial controls mediate and total abolition of rent controls, accompa-
reduces the threat of new housing later on being sub- nied by constitutional guarantees against their ever
jected to controls, and thus extends the period of time being reimposed. This would both immediately reduce
over which investments in housing can be recovered. At rents in the open market and bring about the greatest
the same time, the repeal eliminates any fear hanging and most rapid possible increase in the supply of rental
over the market concerning the possible adverse effects housing.
of repeal on profitability. Thus, unless the decline in open Calling for the immediate abolition of rent control
market rents is quite drastic, the effect of the repeal of raises the question of what is to become of many of the
partial rent controls is not only lower open-market rents, people who presently live in rent-controlled apartments
but also a surge in the construction of new housing at and who would have to move if rent control were all at
those lower rents. once repealed. (In order to have some term to describe
*** these people, let us refer to them as the “beneficiaries”
The repeal of partial rent controls and the decline in of rent control—provided it is understood that they are
beneficiaries in a short-run sense only, and not genuine the previously controlled apartments. Let us try to figure
beneficiaries.) out who they would be and where they are now. These
Our previous discussion provides the answer to the are people who could afford their own apartments in the
question of what would happen to these people. In es- city at $150 a month, but not at $250 a month. At $250 a
sence, the answer is that they would simply have to month, they find it necessary to share apartments (or
change places with an equally large but generally unrec- single rooms), to live with relatives, or to live in remote
ognized class of victims of rent control. areas of the city or out of town altogether. In other words,
Two facts about the immediate repeal of rent control they find it necessary to do all of the things the benefici-
must be kept in mind: not only would it raise rents to the aries of rent control might have to do if rent control were
beneficiaries of rent control, but also, as we have seen, it repealed. Perhaps some readers of this book may know
would simultaneously reduce rents in the open market, some of these victims of rent control, though they prob-
because the space presently occupied by the beneficiar- ably have not thought of them in that light before. The
ies of rent control would be added to the supply in the victims are young people who must live with roommates,
open market. young couples who must live with in-laws, families that
What would happen in response to these changes in cannot afford to live in the city, and so on. These people
rents is two related sets of developments, the one affect- represent the class of rent-control victims, though they
ing the beneficiaries of rent control, the other the victims. are almost all unaware of that fact and see no connection
Let us consider the effects on the beneficiaries first. between rent controls and their own plight. They are fully
In the face of a jump in their rents, some of the as numerous as the class of rent-control beneficiaries,
beneficiaries of rent control might have to share apart- and they are already suffering the same kind of hardships
ments or even single rooms with other people, in order as the rent-control beneficiaries would suffer if rent
to economize on rent. Others might have to move in control were repealed.
with relatives. Still others might decide to move to In fact, these victims of rent control are suffering
remoter areas of the city, where rents were cheaper, or vastly more hardship than the beneficiaries of rent con-
to leave the city altogether. It should be observed that trol would suffer. For if rent control were repealed, the
none of the former beneficiaries of rent control would total supply of housing would quickly begin to expand
have to sleep in the street as the result of the rise in the and its quality would improve. In places like New York
rents they had to pay; they would simply have to City, the supply would increase almost overnight, be-
occupy less space or live in less favorable locations. cause the abandonment of buildings would cease, and
These points must be stressed, in view of the hysteria many previously abandoned buildings would be restored.
that is often evoked in projecting the allegedly dire The hardship of the former beneficiaries of rent control
fate of these people as the result of the repeal of rent would be temporary, because rental housing would once
control.34 again become an expanding, progressing industry. As
Now consider the fact that the apartments vacated by time went on, more and more of the former beneficiaries
the former beneficiaries of rent control would not remain of rent control would be better off than they ever could
empty, but would practically all be occupied. For the have been under rent control. In the long run, everyone
rents on those apartments, though too costly for the would be better off. The real answer to the question of
rent-control beneficiaries, would represent a decline in what would happen to the present beneficiaries of rent
the rents charged in the open market, and would thus control if rent control were repealed, therefore, is this: In
come within the reach of new tenants. To use the same the short run and at the very worst, they would suffer no
figures as in our auction example earlier in this discus- more, and probably less, than what the victims of rent
sion, assume that initially a beneficiary of rent control control have already been suffering for many years. In
was paying a controlled rent of $50, while rents in the the long run, what would happen to them is simply more
open market were $250. Now, with the repeal of rent and better housing.
control and the addition of the previously rent-controlled Furthermore, it should be stressed that in the long run,
apartments to the supply available in the market, rents in the very idea of someone being a beneficiary of rent
the market fall from $250 to $150. A rent of $150 is too control is a self-contradiction. The gains of the benefici-
expensive for the former rent-control beneficiaries. But aries of rent control are made possible by the consump-
it represents a reduction in rents in the open market and tion of their landlords’ capital. The tenant who is able to
brings apartments within reach of people who could not afford a better car, say, or an extra vacation, because of
afford them at the $250-a-month rents caused by partial the artificially low rent he pays, is buying that car or
rent controls. vacation at the expense of part of a new apartment
Let us focus on the new tenants who would occupy building somewhere, and ultimately he is buying it at the
34 Of course, the government is capable of forcing people to sleep in the streets, by prohibiting landlords from providing housing in the limited size and quality people can afford. Where they are local, such prohibitions are accompanied by a spillover effect of their own, which makes conditions worse in areas free of such restrictions. See below, the discussion of theexclusion of the less able and the disadvantaged by government monopoly legislation, in chap. 10, sec. 2.
254 CAPITALISM
expense of the upkeep of the very building in which he produced in 1980, the prices of oil products were set on
lives. The day comes when he wants to move and finds the basis of an average cost of crude oil of approximately
no decent place to move to, because he and millions of $22 per barrel. Roughly speaking, the prices of oil prod-
others like him have consumed the equivalent of all the ucts were set high enough to cover not only this weighted
new apartment buildings that should have been built. For average cost of crude oil, but all the other costs of
they have consumed their landlords’ capitals and de- producing and distributing oil products and a more or less
stroyed the incentives for building. Finally, the day comes competitive rate of profit on the capital invested in
when they have consumed the equivalent of a new boiler refining and distribution. Such product prices did not
or wiring system or plumbing system that their own differ radically from prices that would have existed had
building needs, and their landlord has neither the means the free market price of crude oil been $22 per barrel.
nor the incentive to try to replace it. Then they live in In order to see how this arrangement benefitted the
cold, in darkness, and without running water. This is Arabs and how its repeal brought back billions of dollars
already the fate of tens of thousands of people in Harlem a year to our oil industry that had been diverted to their
and in the South Bronx, as I have indicated. There is no oil industry by price controls, all we have to do is think
reason why it could not happen to all rent-controlled through the consequences of repealing our controls. Fol-
housing in the country, given further inflation and more lowing repeal of our controls, the price of domestically
time. The only “gains” from rent control are the gains of produced oil immediately had to rise above $10 a barrel.
consuming the capital invested in housing and then being But the effect also had to be that the price of imported
left without housing. People do it because the housing oil, and, therefore, the price received by the Arabs, fell
belongs to the landlords, not to them. But in the long run, below $34 a barrel. To understand just why, imagine for
the loss is theirs, because they are the physical benefici- the moment that the price of domestically produced oil
aries of the stock of housing. When they destroy the simply rose all the way to $34—the same price as the
property of the landlords, they destroy the property that Arabs had been receiving. If that happened, the cost of
serves them. producing oil products would have had to be based on an
average price of $34 a barrel of crude oil rather than on
How Repeal of Our Price Controls on Oil Reduced the previous average of $22 a barrel. The prices of oil
the Price Received by the Arabs products would therefore have had to be raised corre-
A further application of the principle that partial con- spondingly. But observe. At such higher prices, the quan-
trols raise prices of goods that are free of controls con- tity of oil products that could be sold would have been
cerns oil prices. It follows from this principle that our less, and, therefore, the quantity of crude oil that could
price controls on oil, which were in force from 1971 to be sold would also have been less. The only way to
1981, raised the price received by the Arabs, and that counteract this loss in sales would be if the prices of oil
their repeal immediately operated to reduce the price products did not rise by so much. The only way that that
received by the Arabs. It follows further that a major was possible was if the average price of crude oil did not
effect of repeal was to undo the diversion of billions of rise by so much. But this implied that the price received
dollars a year away from our oil industry to the Arab oil by the Arabs actually had to fall. For in a free market our
industry. The effect of this, in turn, was an expansion in oil must sell for just as much as theirs; yet, we have just
the American oil industry and a still further drop in the seen that their price of $34 was too high for an average
world price of oil received by the Arabs. In other words, cost of crude oil—it would significantly have reduced
it follows that the dramatic decline in the world price of the quantity of oil products and thus of crude oil that
oil experienced in the 1980s can be directly traced to the could be sold. Thus, our price could not have met theirs
repeal of price controls on oil in the United States. at $34 a barrel. Our price and their price had to come
In 1980, domestically produced crude oil in the United together at some lower average figure.
States was controlled at an average price of approxi- Observe further. In order for the same quantity of
mately $10 per barrel. Imported crude oil was uncon- crude oil to be sold in this country as was sold prior to
trolled and sold at about $34 per barrel, which was the the repeal of price controls, it would have been necessary
price the Arabs received. Since the spring of 1974, the for the Arabs’ price to meet ours at $22 a barrel—the
prices of the various oil products produced in the United previous average price of crude oil. For any higher price
States, such as gasoline, heating oil, and so forth, had than $22 required a rise in the price of oil products, which
been controlled on the basis of the weighted average of had to reduce the quantity of oil products that could be
the uncontrolled price of imported oil and the controlled sold in this country and therefore the quantity of crude
price of domestically produced oil. Since about half of oil that could be sold in this country.
our crude oil was imported and half was domestically Indeed, one may raise the question of why the effect
of repeal was not actually to leave the price of oil and finally repealed) as consisting essentially of two
products unchanged in the United States and simply units: the half produced in the United States and the half
reduce the price of Arab crude oil and raise the price of produced outside, by OPEC and other foreign suppliers.
our crude oil to the previous average price of $22. The The U.S. government compelled the half produced in the
reason these results did not occur was because one of the United States to be sold at a below-market price and thus
effects of decontrol was a reduction in oil imports into more or less considerably to come within the reach of
the United States. The price of $34 for imported oil otherwise submarginal buyers, leaving correspondingly
prevailed throughout most of the world. The price of less of the supply of domestically produced crude oil
imported oil could not fall to $22 here while it was any available for the market. In effect, it compelled Exxon,
higher elsewhere. What happened was that as the price Chevron, and Texaco to sell their unit of oil to the
of imported oil fell in this country, in the direction of $22, submarginal buyer for less than $100, which left only one
less of it was sent here and more of it was sent to other unit of supply available for the market, namely, the unit
markets. The result was that the United States reduced produced by Qadafi, the Ayatollah Khomeini, and Saddam
its import of oil and the price of imported oil settled at Hussein, which unit could then be sold for a price of
an amount above $22. For a time, bolstered by cutbacks between $200 and $300. That was the essence of the
in their own production, the Arabs were able to maintain situation. More precisely, in reducing the supply of Amer-
the world price at $29 per barrel. ican oil that a free market would have made available to
But subsequently, in the face of the pressure of grow- American buyers, it forced American citizens into a
ing supplies of crude oil produced in the United States, competition for the remaining supply of oil in the market,
the world price of oil collapsed, despite all efforts of the a needless competition that many American citizens
Arab-led OPEC cartel to maintain it. necessarily lost, and from which America’s enemies in
Thus, temporarily, the consequence of repeal was a the Middle East greatly profited.
rise in the average price of crude oil in the United States As I have indicated, such a policy might have been
and a rise in the price of petroleum products in the United understandable if the U.S. government had been run by
States. But the rise in price to American consumers was officials in the service of Libya, Iran, and Iraq. What its
much less than the rise in price to American producers; existence actually demonstrated, of course, was not that
much of the rise in price received by our oil companies our officials were traitors in the service of foreign pow-
was financed by a fall in the price received by the Arabs ers, but that they were men and women who, while
and other foreign suppliers. For example, when the price intending to serve the American people, were intellectu-
of crude oil temporarily settled at $29 per barrel, the cost ally unqualified to do so and, as a result, wreaked great
base of oil products for American consumers was in- harm upon them.
creased by $7 per barrel (from $22 to $29), while the ***
price received by our oil companies was increased by $19 Given such incredible ignorance and destructiveness
per barrel (from $10 to $29). The rise in price received on the part of the U.S. government, it should not be
by our oil companies was financed in part by a $5 drop surprising to learn of a further unnecessary tragedy in-
in the price received by the Arabs and the other foreign flicted on many American oil producers when the price
suppliers (from $34 to $29).35 control on domestically produced crude oil was finally
Furthermore, as shown, this rise in domestic prices repealed. Not content with simply repealing its price
was merely a short-run effect, for oil production in the control and desisting from further acts of destruction
United States became substantially more profitable. Do- against the oil industry, the U.S. Congress, acting on
mestic oil production immediately begin to expand, and malice and greed, decided to confiscate a major part of
as it did so, the world price of oil began to fall sharply. the profits of American oil producers that resulted from
Temporarily it declined to as low as $10. Currently, their ability to receive a higher price of crude oil. In 1981,
despite years of continued inflation, the price is approx- it enacted the so-called windfall-profits tax on crude oil
imately $18 per barrel.36 as an accompaniment of the decontrol of oil prices. This
*** was an act of malice in that its deliberate, overriding
The preceding analysis can be presented in simpler,

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CAPITALISM

TJS Books, Laguna Hills, California

Bookstores, please call (877)-843-3573 to order.

Photocopying of excerpts from TJS Books editions is licensed through the

Library of Congress Control Number: 2009900111

Manufactured in the United States of America

CHAPTER 1. ECONOMICS AND CAPITALISM 15

CHAPTER 2. WEALTH AND ITS ROLE IN HUMAN LIFE 39

CHAPTER 3. NATURAL RESOURCES AND THE ENVIRONMENT 63

CHAPTER 4. THE DIVISION OF LABOR AND PRODUCTION 123

CHAPTER 5. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM I 135

CHAPTER 6. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM II:

CHAPTER 7. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM III:

CHAPTER 8. THE DEPENDENCE OF THE DIVISION OF LABOR ON CAPITALISM IV:

CHAPTER 9. THE INFLUENCE OF THE DIVISION OF LABOR ON THE INSTITUTIONS

CHAPTER 10. MONOPOLY VERSUS FREEDOM OF COMPETITION 375

CHAPTER 12. MONEY AND SPENDING 503

CHAPTER 13. PRODUCTIONISM, SAY’S LAW, AND UNEMPLOYMENT 542

CHAPTER 14. THE PRODUCTIVITY THEORY OF WAGES 603

CHAPTER 15. AGGREGATE PRODUCTION, AGGREGATE SPENDING, AND THE

CHAPTER 16. THE NET-CONSUMPTION/NET-INVESTMENT THEORY OF PROFIT AND INTEREST 719

CHAPTER 17. APPLICATIONS OF THE INVARIABLE-MONEY/NET-CONSUMPTION ANALYSIS 809

CHAPTER 18. KEYNESIANISM: A CRITIQUE 863

CHAPTER 19. GOLD VERSUS INFLATION 895

CHAPTER 20. TOWARD THE ESTABLISHMENT OF LAISSEZ-FAIRE CAPITALISM 969

A BIBLIOGRAPHY OF WRITINGS IN DEFENSE OF CAPITALISM 991

LIST OF FIGURES xxxv

LIST OF TABLES xxxvii

1. Procapitalist Economic Thought, Past and Present 1

Marshallian Neoclassical Economics: The Monopoly Doctrine and Keynesianism 7

3. Overview of This Book 9

CHAPTER 1. ECONOMICS AND CAPITALISM

PART A. THE NATURE AND IMPORTANCE OF ECONOMICS

2. Further Major Applications of Economics 16

Solving Politico-Economic Problems 16

Implications for Ethics and Personal Understanding 17

Economics and Business 18

Economics and the Defense of Individual Rights 18

1. The Philosophical Foundations of Capitalism and Economic Activity 19

2. Capitalism and Freedom 21

Freedom and Government 21

Freedom as the Foundation of Security 22

The Indivisibility of Economic and Political Freedom 23

The Rational Versus the Anarchic Concept of Freedom 23

The Decline of Freedom in the United States 26

The Growth of Corruption as the Result of the Decline of Freedom 26

3. Capitalism and the Origin of Economic Institutions 27

4. Capitalism and the Economic History of the United States 28

5. Why Economics and Capitalism Are Controversial 31

The Assault on Economic Activity and Capitalism 31

The Prevailing Prescientific Worldview in the Realm of Economics 32

Economics Versus Unscientific Personal Observations 32

Economics Versus Altruism 33

Economics Versus Irrational Self-Interest 34

Economics Versus Irrationalism 35

6. Economics and Capitalism: Science and Value 36

CHAPTER 2. WEALTH AND ITS ROLE IN HUMAN LIFE

1. Wealth and Goods 39

2. Economics and Wealth 41

3. The Limitless Need and Desire for Wealth 42

Human Reason and the Scope and Perfectibility of Need Satisfactions 43

Progress and Happiness 45

The Objectivity of Economic Progress: A Critique of the Doctrines of Cultural Relativism