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FREE MARKET ECONOMICS:A BASIC READER

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Free Market

A Basic ReaderCompiled by Bettina Bien Greaves

5 O (J W13MJEW 33JJ ft ^

THE FOUNDATION FORECONOMIC EDUCATION, INC.

IRVINGTON- ON -HUDSON, NEW YORK 10533

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ACKNOWLEDGMENTS

Thanks are due the more than 50 authors, living and dead, whosethoughts and efforts made this volume possible. Special appreci-ation is given the individuals and publishers who originally grantedpermission to the Foundation for Economic Education (referred to inthis basic reader as FEE) to reproduce the many titles appearinghere from its early pamphlets and other publications—Ideas on Lib-erty, The Freeman and Notes From FEE. Hopefully all persons andorganizations who contributed have been adequately recognized inthe footnote identifying each essay. However, any omissions or er-rors which may have occurred must be laid at the door of the com-piler.

ABOUT THE PUBLISHER

The Foundation for Economic Education is a nonpolitical,nonprofit, educational institution. Its senior staff andnumerous writers are students as well as teachers of thefree market, private ownership, limited government ra-tionale. Sample copies of the Foundation's monthly studyjournal, The Freeman, are available on request.

Published 1975ISBN-0-910614-56-3

Copyright 1975 by Bettina Bien GreavesPrinted in U.S.A.

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PREFACE

The 81 readings in this BASIC READER have beenselected to accompany and to supplement FREEMARKET ECONOMICS: A SYLLABUS. They are ar-ranged here in broad subject categories so thatthey form in effect a "course of study" in and ofthemselves. A substantial understanding of freemarket economics may be gained by reading thisvolume systematically from beginning to end.However, anyone seriously interested in a full andlogical explanation of the theories illustrated bythese readings should also refer to the SYLLABUS.

The compiler of this anthology studied for manyyears with the leading spokesman of the so-called"Austrian School of Economics," Ludwig vonMises, and acknowledges a tremendous intellec-tual debt to him personally as well as to his manyworks. Several excerpts from his writings are in-

cluded in this collection, along with those by manyother authors. Each reading was chosen to helpexplain or to illustrate some aspect of the theory offree market economics.

The majority of these readings have been re-printed from The Freeman, the monthly journal ofThe Foundation for Economic Education (FEE).This may be explained not only by the compiler'slong association with FEE (since 1951) but alsoby the fact that FEE, since its founding in 1946,has been one of the major consistent publishers ofmaterials dealing with the free market, individualfreedom, private property and the detrimental ef-fects of governmental intervention.

A glossary of terms used here and in the SYL-LABUS appear in the back of this volume.

Bettina Bien Greaves

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TABLE OF CONTENTS

Preface iii

General Introduction

1. Economics for Boys and Girls 1Leonard E. Read

What Is Economics?2. Something for Nothing? 4

Mark C. Schinnerer3. The Broken Window 5

Henry Hazlitt4. The Individual In Society 6

Ludwig von Mises

The Nature of the Individual—Values and Actions5. The Biology of Behavior 10

Roger J. Williams

6. The Only Kind of People There Are 15Roger J. Williams

7. The Unknown Quantity 17Madelyn Shepard Hyde

8. Freedom's Theory of Value 18Leonard E. Read

Private Property and Exchange

9. Property 20James Madison

10. Letter to His Stepbrother 21Abraham Lincoln

11. Property Rights and Human Rights 22Paul L. Poirot

12. Who Conserves Our Resources? 25Ruth Shallcross Maynard

13. The War on Property 29Paul L. Poirot

Social Cooperation and the Market

14. Free Will and the Market Place 35Frank Chodorov

15. I, Pencil 40Leonard E. Read

Prices, Pricing

16. Cost-Pius Pricing 43Paul L. Poirot

17. Charging "All The Traffic Will Bear!".... 44Leonard E. Read

18. How Should Prices Be Determined? 46Henry Hazlitt

Savings, Tools and Production

19. Letter to His Grandson 51Fred I. Kent

20. Technological Status 53John W. Campbell

21. Where Karl Marx Went Wrong 58Samuel B. Pettengill

22. The Great Mistake of Karl Marx 60Benjamin F. Fairless

23. The Role of Savings 62Brian Summers

24. Tools 64Jasper E. Crane

25. The Liberation of Women 67Bettina Bien Greaves

26. Industrialism: Friend or Foe? 70V. Orval Watts

27. The Economic Role of Saving andCapital Goods 74

Ludwig von Mises

The Entrepreneur and the Profit and Loss System28. If Men Were Free to Try 77

John C. Sparks

29. "For the Good of Others" 78Leonard E. Read

30. Food From Thought 79Charles W. Williams

31. Windfall Profits 83Robert G. Anderson

vii

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VIII CONTENTS

32. The Elite Under Capitalism 85Ludwig von Mises

33. Profits 90Hans F. Sennholz

34. Why Speculators? 94Percy L. Greaves, Jr.

Labor, Wages and Employment

35. Bargaining 99Paul L. Poirot

36. Collective Bargaining Wrong inPrinciple 103

John W. Scoville

37. How Wages Are Determined 104Percy L. Greaves, Jr.

38. Jobs For All 114Percy L. Greaves, Jr.

39. Wages and Productivity 115W. M. Curtiss

40. Competition, Monopoly and the Role ofGovernment 117

Sylvester Petro41. The Economics and Politics of MY JOB 122

Ludwig von Mises

Money, Credit and Banking42. MiUion Dollar Dream 126

Employers' Assn. of Chicago

43. Not Worth a Continental 127Pelatiah Webster

44. The Value of Money 132Hans F. Sennholz

45. The Gold Problem 136Ludwig von Mises

46. How Much Money? 139Percy L. Greaves, Jr.

47. Back to Gold? 145Henry Hazlitt

48. Eternal Love 149Lawrence Noonan

Competition, "Big Business," and Monopoly49. The Cow in the Apartment 152

Burton Rascoe50. Freedom to Shop Around 153

Hart Buck

51. Six Misconceptions About ConsumerWelfare 154

Joel Dean

52. Is Economic Freedom Possible? 157Benjamin A. Rogge

53. The Phantom Called "Monopoly" 162Hans F. Sennholz

54. Advertising 169Israel M. Kirzner

Interregional Trade

55. The Candlemakers' Petition 176Frederic Bastiat

56. Free Trade: Domestic/Foreign 177Dean Russell

57. On Foreign Trade 181David Ricardo

58. Foreign Investment vs. Foreign Aid 183Henry Hazlitt

59. Restrictions on International Trade 191W. M. Curtiss

60. The Failure of International CommodityAgreements 195

Karl Brandt

History of Economic Thought

61. The Formation and Function of Prices... 201Hans F. Sennholz

62. The Consumer Theory of Prosperity 204John Stuart Mill

63. Of the Demand or Market for Products.. 207Jean Baptiste Say

64. Marx's View of the Division of Labor.... 212Gary North

65. The Fallacy of "Intrinsic Value" 216Gary North

66. The Man Who Answered Marx 219Dean Lipton

Capitalism/The Hampered Market/Socialism

67. A King of Long Ago 222Lewis Love

68. The Communist Idea, 1 223Karl Marx and Friedrich Engels

69. The Communist Idea, II 223Earl Browder

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CONTENTS IX

70. A Lesson in Socialism 224Thomas J. Shelly

71. The Tale of the Little Red Hen 225W. A. Paton

72. The Beetle and the Centipede 226W. A. Paton

73. Not Yours to Give 227David Crockett

74. Intervention Leads to Total Control 231Gustavo R. Velasco

Economic History75. Food Control During Forty-six

Centuries 239Mary G. Lacy

76. How to End Poverty 248Dean Russell

77. American Communism 253Percy L. Greaves, Jr.

78. Facts About the "IndustrialRevolution" 257

Ludwig von Mises

79. Progress or Regress? 261Hans F. Sennholz

Summary

80. Hello! 264Joan Wilke

81. Free Market Disciplines 265

Leonard E. Read

Glossary 269

Index 285

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General Introduction

1. ECONOMICS FOR BOYS AND GIRLS

Leonard E. Read

Train up a child in the way heshould go: and when he is old,he will not depart from it.

PROVERBS 22:6

Time and again we have been asked to devise eco-nomic instruction for the youngsters, the thoughtbeing that it's the oncoming generation thatcounts. And, just as often, we have shaken ourheads, pleading ignorance of how to go about it.

Trying to devise economic lessons for grownupshas seemed difficult enough, for only now and thenis there an adult who shows any interest in oraptitude for the subject. But we have tried, andover the years of trial and error, it has seemed thatour best approach to adults is to leave them aloneuntil they seek such instruction or light as we maycome to possess. In other words, our job, as we nowsee it, is to concentrate on improving our own un-derstanding and practice of freedom, with faiththat others will be attracted precisely to the extentthat we are able to show self-improvement.

Thus, we are constantly striving to better under-stand and explain and apply the economics of spe-cialization and the division of labor, freedom intransactions, the marginal utility theory of value,and reliance on the orderliness of the free marketas a guide to creativities and exchange.

Is there a way to present such complex ideas tochildren so that they might be attracted toward the

*Notes from FEE, September 1965

free market way of social behavior? Perhaps. Butfirst, let us consider our raw material, the young-sters we would teach.

There are those who contend that every babystarts life as a little savage; that he is equipped,among other things, with organs and muscles overwhich he has no control, with an urge for self-preservation, with aggressive drives and emotionslike anger, fear, and love over which he likewisehas practically no control, and that in the processof growing up, it is normal for every child to bedirty, to fight, to talk back, to disobey, to evade."Every child has to grow out of delinquent be-havior." So runs this argument. For my part, how-ever, I take small comfort in this Freudian view ofthe genesis of the human race. I would much preferto think of the child as a budding plant with all thepotential for beauty and happiness which such agrowing organism portends. In each case, ofcourse, there may be from the adult point of view,apparent disorganization, lack of coordination, anddisharmony. Yet, the potential for harmony andbeauty is there.

Whether the child be considered a brutal bar-barian or a budding beauty, the challenge is to helphim emerge from a state of ignorance as to hisrelationship with others and into harmony with theuniversal laws which govern the human situation.The child is an extension of the parent's responsi-bility, and that responsibility includes pointing thechild in the direction of sound economic under-

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GENERAL INTRODUCTION

standing. I shall hint at, but by no means exhaust,the possibilities:

If You Drop Something, Pick it Up

This is easily taught, especially by parents whoobserve this dictum themselves. It is elementarytraining in assuming a responsibility for one's ownactions, that is, of not burdening others with one'sbehaviors. A child who takes this simple first stepin self-control—should the steps continue and be-come habitual—will likely, when attaining adult-hood, look to himself rather than to the rest of usto bail him out of economic difficulties brought onby his own mistakes. He will, more than likely, notbe a burden on society.

A genuine mastery of self-control tends to de-velop a rare and valuable faculty: the ability to willone's own actions. Such a person will not be tempt-ed to shift his position by reason of pressures,fickle opinions, popular notions, and the like. Hewill become his own man.

Picking up what you drop has its reward in or-derliness of mind. When it becomes second nature,it is a joyous habit and on occasion leads to pickingup after others. Projected into adult life, this showsup as a charitable attitude—in the Judeo-Christiansense—one's personal duty toward the less fortu-nate.

If You Open a Door, Close It

This is a sequel to the above; it is merely anotherpractice that confirms the wisdom of completingeach of life's transactions.

An inevitable dualism bisects nature, so that eachthing is a half, and suggests another thing to make itwhole; as spirit, matter; man, woman; subjective, ob-jective; in, out; upper, under; motion, rest; yea, nay.1

For child training, I would add: drop, pick up;open, close; and others.

If You Make a Promise, Keep It

Social chaos has no better ally than brokenpromises. Children not brought up to keep theirword will be the authors of treaties written not tobe observed; they'll run for office on bogus plat-forms, cancel gold contracts, use the politicalmeans to expropriate property; they'll sell theirsouls to gain fame or fortune or power. Not onlywill they fail to be honest with their fellow men;they will not even heed the dictates of their own

conscience. On the other hand, children broughtup to keep their promises will not go back on theirbond, come hell or high water. Integrity will betheir mark of distinction!

Whatever You Borrow, Pay Back

This is an extension of promise keeping. An ad-herence to these admonitions develops a respectfor private property, a major premise in sound eco-nomic doctrine. No person, thus brought up, wouldthink of feathering his own nest at the expense ofothers. Welfare statists and social planners are notborn of this training, that is, if the training reallysinks in. True, a socialist will honor debts incurredin his own name but will disregard any indebted-ness he sponsors in the name of "the public." Hehas not been brought up to understand that theprinciple of compensation applies "across theboard."

Play the Thank-You Game

It will take a brilliant parent and a mighty per-ceptive child to get anywhere with this one. I canset forth the idea but not how to teach it. The idea,once grasped, is simple enough, yet so evasive that,in spite of the 33,000 years since Cro-Magnonman, it was only discovered a bare century ago:The value of a good or service is determined notobjectively by cost of production, but subjectivelyby what others will give in willing exchange. Eco-nomic science has no more important concept thanthis; the free market has no other economic genesisthan this subjective or marginal utility theory ofvalue. Indeed, it is most accurately identified asthe free market theory of value.

To repeat an illustration used earlier: Whenmother exchanges 30$ for a can of beans, shevalues the beans more than the 30$ and the grocervalues the 30$ more than the beans. If mother val-ued the 30$ more than the beans, she wouldn'ttrade. If the grocer valued his beans more than the30$, he wouldn't trade. The value of both the 30$and the beans (excluding other considerations) isdetermined by the two subjective judgments. Theamount of effort exerted (cost) to obtain the 30$or to acquire the beans has nothing to do with thevalue of either the beans or the 30$.

I repeat, the value of any good or service is de-termined by what it will bring in willing, not forc-ible or unwilling, exchange.2 When the 30$ is ex-changed for the beans, the grocer concludes the

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1. ECONOMICS FOR BOYS AND GIRLS

transaction with "Thank you," for, in his judg-ment, he has gained. There is precisely the samejustification for the mother to say, "Thank you,"for, in her judgment, she has gained. It wouldn'tbe at all amiss to describe this as "the thank-youway of economic life."

This concept of value, be it remembered, waspracticed off and on by the common man ages be-fore economic theorists identified it as the effica-cious way of mutually advancing economic well-being. And, by the same token, the child can betaught to practice it before he can possibly graspthe theory. In exchanging toys or marbles or jacksor whatever with another, can he not play thethank-you game? Can he not be taught to expressthe same "thank you" himself as he expects fromhis playmate? That something is wrong with thetrade if this is not the case? That both have gainedwhen each says, "Thank you"? Accomplish thiswith a boy or girl and you have laid the ground-work for sound economic thinking.

Do Nothing to a Playmate You Wouldn'tEnjoy Having Him Do to You

Moral philosophy is the investigation into andthe study of what's right and wrong. Economics isa division of this discipline: the study of right andwrong in economic affairs.

The free market is the Golden Rule in its eco-nomic application, thus free market economics isdependent on the practice of the Golden Rule.

That the Golden Rule can be phrased andtaught so as to be completely perceived prior toadolescence is doubtful. Its apprehension requires

a moral nature, a faculty rarely acquired earlierthan teen-age—in many instances, never!

But the effort to teach the Golden Rule to boysand girls will, at a minimum, result in a better ob-servation of it on the parent's part. Children—high-ly impressionable—are far more guided by parentalconduct than by parental admonishments. Thus,the attempt to teach this fundamental principle ofmorality and justice, resulting in highly exemplarybehavior, may lead the child first to imitation andthen to habitual observance and practice.

Writing the above, which only hints at how boysand girls may get off to a good start in economicthinking, has supplied the missing explanation tosomething I have known for several years: womenare more hopeful prospects than men in the con-test between free market and authoritarian ideas!In our seminar activities, we have found the distaf-fers better students than the mill run of males, aswell as more idealistic and less compromising.Beyond this, it is the mothers, rather than thefathers, in whose care the citizens of tomorrow arelargely committed. It is primarily the mothers whowill refine the methods for getting boys and girlson the track of sound thinking.

But mothers or fathers, it is the parents who areresponsible for the generations to come and whoalso are responsible for the kinds of people who as-sist in teaching their children.

Notes1 Excerpted from Compensation by Ralph Waldo Emerson.2TVA, Post Office, and a thousand and one other deficits,

are paid for by forcible exchange. Moon specialists are paid byforcible, not willing, exchange. This goes, also, for all govern-mental subsidies.

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What is Economics?

2. SOMETHING FOR NOTHING?*

Mark C. Schinnerer

The writer of this editorial practices what hepreaches. I know because I am well acquaintedwith him and his career. He has always given atleast as much, and usually more, than he expectedto receive. He is a stalwart American citizen. It isfortunate for all of us when men like Mark Schin-nerer occupy important positions of leadership,especially in education. Dr. Schinnerer is a valuedmember of the National Advisory Council forScholastic Magazines.

—John W. StudebakerChairman, Editorial Board

This is about economics. This is about the teachingof economics, not directed just to teachers of eco-nomics, but to all teachers. It is directed to allteachers because the job that needs to be done can-not be done by just the teachers of economics.

There is a colossal oversupply of people in mycountry who either never discovered some of thebasic principles of economics or think that theeconomic laws have been repealed. We hear muchwailing that the schools have failed in this regardand the cry is for required courses in economics.We have failed—in school and out—but the answeris not in required courses. The answer, in my opin-ion, lies in a continuous effort to inculcate in chil-dren, from kindergarten through high school, somebasic and very simple facts.

There are three things which almost anyonecan be brought to understand and if these three are

•Clipping of Note No. 61 (FEE, 1954).lastic Magazines, January 6, 1954

Reprinted from Scho-

ingrained, we can leave the more complicated prin-ciples to the experts.

1. You can't get something for nothing. Toomany think they can. That is the basis of gamblingand most speculation. Giving a higher mark inschool than is earned is proving that the studentcan get something for nothing. That is bad busi-ness. When parents urge no homework, they some-how expect something for nothing. One gets out ofschool work about what he puts into it. Only para-sites get something for nothing.

2. You can't spend more than you have and re-main solvent. The longer such a system is followed,the more impossible it becomes to keep afloat.Know anyone who trades in a mortgaged car on anew one and has both a newer car and a biggermortgage? The woods are full of such people. It isbad economics. It's somewhat like drug addiction.This applies equally to a person, a business, or agovernment.

3. You cannot equalize ability by a handicapsystem. It is wrong to expect as much from a young-ster with a low I. Q. as is expected from a young-ster with a high I. Q. It is also wrong to set uphandicaps so that they come out even. Leave thatfor the exclusive use of the racing stewards. Com-petition still has a place in America, thank good-ness, and I don't want it any other way.

In every school day, there are numerous inci-dents in each student's school experience whenthese three fundamentals are present. Just re-peatedly bringing them to the pupil's conscious-ness will work wonders. If all our people ac-cepted these three economic axioms and lived bythem, we would live in an economic paradise.

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3. THE BROKEN WINDOW

Henry Hazlitt

It is often sadly remarked that the bad economistspresent their errors to the public better than thegood economists present their truths. The reason isthat the bad economists are presenting half-truths.They are speaking only of the immediate effect ofa proposed policy or its effect upon a single group.The answer consists in supplementing and correct-ing the half-truth with the other half.

But the lesson will not be driven home, and thefallacies will continue to go unrecognized, unlessboth are illustrated by examples. Let us begin withthe simplest illustration possible: let us, emulatingBastiat,1 choose a broken pane of glass.

A young hoodlum, say, heaves a brick throughthe window of a baker's shop. The shopkeeperruns out furious, but the boy is gone. A crowdgathers, and begins to stare with quiet satisfactionat the gaping hole in the window and the shatteredglass over the bread and pies. After a while thecrowd feels the need for philosophic reflection.And several of its members are almost certain toremind each other or the baker that, after all, themisfortune has its bright side. It will make businessfor some glazier. As they begin to think of this theyelaborate upon it. How much does a new plateglass window cost? Fifty dollars? That will bequite a sum. After all, if windows were never brok-en, what would happen to the glass business?Then, of course, the thing is endless. The glazierwill have $50.00 more to spend with other mer-chants, and these in turn will have $50.00 moreto spend with still other merchants, and so adinfinitum. The smashed window will go on provid-ing money and employment in ever-widening cir-cles. The logical conclusion from all this would be,if the crowd drew it, that the little hoodlum whothrew the brick, far from being a public menace,was a public benefactor.

•Clipping of Note No. 95 (FEE, 1959). Excerpted from Eco-nomics in One Lesson (Harper, 1946)

Now let us take another look. The crowd is atleast right in its first conclusion. This little act ofvandalism will in the first instance mean morebusiness for some glazier. The glazier will be nomore unhappy to learn of the incident than an un-dertaker to learn of a death. But the shopkeeperwill be out $50.00 that he was planning to spendfor a new suit. Because he has had to replace awindow, he will have to go without the suit (orsome equivalent need or luxury). Instead of havinga window and $50.00, he now has merely a win-dow. Or, as he was planning to buy the suit thatvery afternoon, instead of having both a windowand a suit, he must be content with the windowand no suit. If we think of him as a part of the com-munity, the community has lost a new suit thatmight otherwise have come into being, and is justthat much poorer.

The glazier's gain of business, in short, is merelythe tailor's loss of business. No new "employment"has been added. The people in the crowd werethinking only of two parties to the transaction, thebaker and the glazier. They had forgotten the po-tential third party involved, the tailor. They forgothim precisely because he will not now enter thescene. They will see the new window in the nextday or two. They will never see the extra suit, pre-cisely because it will never be made. They seeonly what is immediately visible to the eye.

So we have finished with the broken window.An elementary fallacy. Anybody, one would think,would be able to avoid it after a few moments'thought. Yet the broken-window fallacy, under ahundred disguises, is the most persistent in thehistory of economics. It is more rampant now thanat any time in the past.

NoteFrederic Bastiat, 1801-1850, French economist, statesman,

writer.

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4. THE INDIVIDUAL IN SOCIETY

Ludwig von Mises

The words freedom and liberty signified for themost eminent representatives of mankind one ofthe most precious and desirable goods. Today it isfashionable to sneer at them. They are, trumpetsthe modern sage, "slippery" notions and "bour-geois" prejudices.

Freedom and liberty are not to be found in na-ture. In nature there is no phenomenon to whichthese terms could be meaningfully applied. What-ever man does, he can never free himself fromthe restraints which nature imposes upon him. Ifhe wants to succeed in acting, he must submitunconditionally to the laws of nature.

Freedom and liberty always refer to interhumanrelations. A man is free as far as he can live andget on without being at the mercy of arbitrary de-cisions on the part of other people. In the frameof society everybody depends upon his fellow citi-zens. Social man cannot become independentwithout forsaking all the advantages of social co-operation.

The fundamental social phenomenon is the divi-sion of labor and its counterpart—human coop-eration.

Experience teaches man that cooperative actionis more efficient and productive than isolated ac-tion of self-sufficient individuals. The natural con-ditions determining man's life and effort are suchthat the division of labor increases output per unitof labor expended. These natural facts are: (1) theinnate inequality of men with regard to their abilityto perform various kinds of labor, and (2) the un-equal distribution of the nature-given, non-humanopportunities of production on the surface of theearth. One may as well consider these two facts asone and the same fact, namely, the manifoldnessof nature which makes the universe a complex ofinfinite varieties.

•FEE, 1952. Extracted and reprinted with permission of thepublisher from 1st ed. of Human Action (Yale, 1949)

Innate Inequality

The division of labor is the outcome of man'sconscious reaction to the multiplicity of naturalconditions. On the other hand, it is itself a factorbringing about differentiation. It assigns to thevarious geographic areas specific functions in thecomplex of the processes of production. It makessome areas urban, others rural; it locates the vari-ous branches of manufacturing, mining, and agri-culture in different places. Still more important,however, is the fact that it intensifies the innateinequality of men. Exercise and practice of spe-cific tasks adjust individuals better to the require-ments of their performance; men develop some oftheir inborn faculties and stunt the development ofothers. Vocational types emerge, people becomespecialists.

The division of labor splits the various processesof production into minute tasks, many of whichcan be performed by mechanical devices. It is thisfact that made the use of machinery possible andbrought about the amazing improvements in tech-nical methods of production. Mechanization is thefruit of the division of labor, its most beneficialachievement, not its motive and fountain spring.Power-driven specialized machinery could be em-ployed only in a social environment under thedivision of labor. Every step forward on the roadtoward the use of more specialized, more refined,and more productive machines requires a furtherspecialization of tasks.

Within Society

Seen from the point of view of the individual,society is the great means for the attainment ofall his ends. The preservation of society is an es-sential condition of any plans an individual maywant to realize by any action whatever. Even therefractory delinquent who fails to adjust his con-duct to the requirements of life within the societal

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4. THE INDIVIDUAL IN SOCIETY

system of cooperation does not want to miss any ofthe advantages derived from the division of labor.He does not consciously aim at the destruction ofsociety. He wants to lay his hands on a greaterportion of the jointly produced wealth than the so-cial order assigns to him. He would feel miserableif antisocial behavior were to become universal andits inevitable outcome, the return to primitive in-digence, resulted.

Liberty and freedom are the conditions of manwithin a contractual society. Social cooperation un-der a system of private ownership of the means ofproduction means that within the range of themarket the individual is not bound to obey and toserve an overlord. As far as he gives and servesother people, he does so of his own accord in orderto be rewarded and served by the receivers. He ex-changes goods and services, he does not do com-pulsory labor and does not pay tribute. He is cer-tainly not independent. He depends on the othermembers of society. But this dependence is mu-tual. The buyer depends on the seller and the seUeron the buyer.

Self-Interest

The main concern of many writers of the nine-teenth and twentieth centuries was to misrepre-sent and to distort this obvious state of affairs. Theworkers, they said, are at the mercy of their em-ployers. Now, it is true that the employer has theright to fire the employee. But if he makes use ofthis right in order to indulge in his whims, he hurtshis own interests. It is to his own disadvantage ifhe discharges a better man in order to hire a lessefficient one. The market does not directly preventanybody from arbitrarily inflicting harm on his fel-low citizens; it only puts a penalty upon such con-duct. The shopkeeper is free to be rude to his cus-tomers provided he is ready to bear the conse-quences. The consumers are free to boycott a pur-veyor provided they are ready to pay the costs.What impels every man to the utmost exertion inthe service of his fellow men and curbs innate ten-dencies toward arbitrariness and malice is, in themarket, not compulsion and coercion on the part ofgendarmes, hangmen, and penal courts; it is self-interest. The member of a contractual society isfree because he serves others only in serving him-self. What restrains him is only the inevitable nat-ural phenomenon of scarcity. For the rest he is freein the range of the market.

In the market economy the individual is free toact within the orbit of private property and the

market. His choices are final. For his fellow menhis actions are data which they must take intoaccount in their own acting. The coordination ofthe autonomous actions of all individuals is ac-complished by the operation of the market. Societydoes not tell a man what to do and what not to do.There is no need to enforce cooperation by specialorders or prohibitions. Non-cooperation penalizesitself. Adjustment to the requirements of society'sproductive effort and the pursuit of the individual'sown concerns are not in conflict. Consequentlyno agency is required to settle such conflicts. Thesystem can work and accomplish its tasks withoutthe interference of an authority issuing specialorders and prohibitions and punishing those whodo not comply.

Compulsion and Coercion

Beyond the sphere of private property and themarket lies the sphere of compulsion and coercion;here are the dams which organized society hasbuilt for the protection of private property and themarket against violence, malice, and fraud. This isthe realm of constraint as distinguished from therealm of freedom. Here are rules discriminatingbetween what is legal and what is illegal, what ispermitted and what is prohibited. And here is agrim machine of arms, prisons, and gallows andthe men operating it, ready to crush those whodare to disobey.

It is important to remember that governmentinterference always means either violent action orthe threat of such action. Government is in the lastresort the employment of armed men, of police-men, gendarmes, soldiers, prison guards, andhangmen. The essential feature of government isthe enforcement of its decrees by beating, killing,and imprisoning. Those who are asking for moregovernment interference are asking ultimately formore compulsion and less freedom.

Liberty and freedom are terms employed for thedescription of the social conditions of the individ-ual members of a market society in which thepower of the indispensable hegemonic bond, thestate, is curbed lest the operation of the marketbe endangered. In a totalitarian system there isnothing to which the attribute "free" could be at-tached but the unlimited arbitrariness of the dic-tator.

There would be no need to dwell upon this ob-vious fact if the champions of the abolition ofliberty had not purposely brought about a seman-

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8 WHAT IS ECONOMICS?

tic confusion. They realized that it was hopelessfor them to fight openly and sincerely for restraintand servitude. The notions liberty and freedom hadsuch prestige that no propaganda could shake theirpopularity. Since time immemorial in the realm ofWestern civilization liberty has been considered asthe most precious good. What gave to the West itseminence was precisely its concern about liberty,a social ideal foreign to the oriental peoples. Thesocial philosophy of the Occident is essentially aphilosophy of freedom. The main content of thehistory of Europe and the communities foundedby European emigrants and their descendants inother parts of the world was the struggle for lib-erty. "Rugged" individualism is the signature ofour civilization. No open attack upon the freedomof the individual had any prospect of success.

New Definitions

Thus the advocates of totalitarianism choseother tactics. They reversed the meaning of words.They call true or genuine liberty the condition ofthe individuals under a system in which they haveno right other than to obey orders. They call them-selves true liberals because they strive after sucha social order. They call democracy the Russianmethods of dictatorial government. They call thelabor union methods of violence and coercion "in-dustrial democracy." They call freedom of thepress a state of affairs in which only the govern-ment is free to publish books and newspapers.They define liberty as the opportunity to do the"right" things, and, of course, they arrogate tothemselves the determination of what is right andwhat is not. In their eyes government omnipotencemeans full liberty. To free the police power fromall restraints is the true meaning of their strugglefor freedom.

The market economy, say these self-styled liber-als, grants liberty only to a parasitic class of ex-ploiters, the bourgeoisie; that these scoundrels en-joy the freedom to enslave the masses; that thewage earner is not free; that he must toil for thesole benefit of his masters, the employers; that thecapitalists appropriate to themselves what accord-ing to the inalienable rights of man should belongto the worker; that under socialism the worker willenjoy freedom and human dignity because he willno longer have to slave for a capitalist; that social-ism means the emancipation of the common man,means freedom for all; that it means, moreover,riches for all.

These doctrines have been able to triumph be-cause they did not encounter effective rational crit-icism. It is useless to stand upon an alleged "nat-ural" right of individuals to own property if otherpeople assert that the foremost "natural" right isthat of income equality. Such disputes can neverbe settled. It is beside the point to criticize non-essential, attendant features of the socialist pro-gram. One does not refute socialism by attackingthe socialists' stand on religion, marriage, birthcontrol, and art.

A New Subterfuge

In spite of these serious shortcomings of the de-fenders of economic freedom it was impossible tofool all the people all the time about the essentialfeatures of socialism. The most fanatical plannerswere forced to admit that their projects involve theabolition of many freedoms people enjoy undercapitalism and "plutodemocracy." Pressed hard,they resorted to a new subterfuge. The freedom tobe abolished, they emphasize, is merely the spuri-ous "economic" freedom of the capitalists thatharms the common man; that outside the "eco-nomic sphere" freedom will not only be fullypreserved, but considerably expanded. "Planningfor Freedom" has lately become the most popularslogan of the champions of totalitarian govern-ment and the Russification of all nations.

The fallacy of this argument stems from thespurious distinction between two realms of humanlife and action, the "economic" sphere and the"noneconomic" sphere. Strictly speaking, peopledo not long for tangible goods as such, but for theservices which these goods are fitted to renderthem. They want to attain the increment in well-being which these services are able to convey. Itis a fact that people, in dealing on the market, aremotivated not only by the desire to get food,shelter, and sexual enjoyment, but also by man-ifold "ideal" urges. Acting man is always con-cerned both with "material" and "ideal" things.He chooses between various alternatives, no mat-ter whether they are to be classified as material orideal. In the actual scales of value, material andideal things are jumbled together.

Preserving the Market

Freedom, as people enjoyed it in the demo-cratic countries of Western civilization in theyears of the old liberalism's triumph, was not a

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4. THE INDIVIDUAL IN SOCIETY 9

product of constitutions, bills of rights, laws, andstatutes. Those documents aimed only at safe-guarding liberty and freedom, firmly establishedby the operation of the market economy, againstencroachments on the part of officeholders. Nogovernment and no civil law can guarantee andbring about freedom otherwise than by supportingand defending the fundamental institutions of themarket economy. Government means always coer-cion and compulsion and is by necessity the op-posite of liberty. Government is a guarantor of lib-erty and is compatible with liberty only if its rangeis adequately restricted to the preservation of eco-nomic freedom. Where there is no market econ-omy, the best-intentioned provisions of constitu-tions and laws remain a dead letter.

Competition

The freedom of man under capitalism is an ef-fect of competition. The worker does not dependon the good graces of an employer. If his employ-er discharges him, he finds another employer. Theconsumer is not at the mercy of the shopkeeper.He is free to patronize another shop if he likes. No-body must kiss other people's hands or fear theirdisfavor. Interpersonal relations are businesslike.The exchange of goods and services is mutual; itis not a favor to sell or to buy, it is a transactiondictated by selfishness on either side.

It is true that in his capacity as a producerevery man depends either directly, as does the en-trepreneur, or indirectly, as does the hired worker,on the demands of the consumers. However, thisdependence upon the supremacy of the consum-ers is not unlimited. If a man has a weighty reasonfor defying the sovereignty of the consumers, hecan try it. There is in the range of the market a verysubstantial and effective right to resist oppression.Nobody is forced to go into the liquor industry orinto a gun factory if his conscience objects. Hemay have to pay a price for his conviction; thereare in this world no ends the attainment of whichis gratuitous. But it is left to a man's own decisionto choose between a material advantage and thecall of what he believes to be his duty. In themarket economy the individual alone is the su-preme arbiter in matters of his satisfaction.

Capitalist society has no means of compelling a

man to change his occupation or his place of workother than to reward those complying with thewants of the consumers by higher pay. It is pre-cisely this kind of pressure which many people con-sider as unbearable and hope to see abolished un-der socialism. They are too dull to realize that theonly alternative is to convey to the authorities fullpower to determine in what branch and at whatplace a man should work.

In his capacity as a consumer man is no less free.He alone decides what is more and what is lessimportant for him. He chooses how to spend hismoney according to his own will.

The substitution of economic planning for themarket economy removes all freedom and leaves tothe individual merely the right to obey. The author-ity directing all economic matters controls all as-pects of a man's life and activities. It is the onlyemployer. All labor becomes compulsory labor be-cause the employee must accept what the chiefdeigns to offer him. The economic tsar determineswhat and how much of each the consumer mayconsume. There is no sector of human life in whicha decision is left to the individual's value judg-ments. The authority assigns a definite task to him,trains him for this job, and employs him at theplace and in the manner it deems expedient.

The "Planned" Life Is not Free

As soon as the economic freedom which the mar-ket economy grants to its members is removed, allpolitical liberties and bills of rights become hum-bug. Habeas corpus and trial by jury are a shamif, under the pretext of economic expediency, theauthority has full power to relegate every citizenit dislikes to the arctic or to a desert and to assignhim "hard labor" for life. Freedom of the press isa mere blind if the authority controls all printingoffices and paper plants. And so are all the otherrights of men.

A man has freedom as far as he shapes his lifeaccording to his own plans. A man whose fate isdetermined by the plans of a superior authority, inwhich the exclusive power to plan is vested, is notfree in the sense in which the term "free" was usedand understood by all people until the semanticrevolution of our day brought about a confusion oftongues.

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The Nature of the Individual-Values and Actions

5. THE BIOLOGY OF BEHAVIOR*

Roger J. Williams

The prevalence of student rebellions throughoutthe world makes one wonder just how effectivelymodern education relates to real human problems.To approach the problems of generic man from abiological standpoint may be far too superficial inthis scientific age with its tremendous advancesin technology; yet, could not the general weaknessof human science be the basis for the comment byRobert Frost: "Poets like Shakespeare knew moreabout psychiatry than any $25-an-hour man"?

Biologically, each member of the human familypossesses inborn differences based on his brainstructure and on his vast mosaic of endocrineglands—in fact, on every aspect of his physical be-ing. Each of us has a distinctive set of drives—forphysical activity, for food, for sexual expression,for power. Each one has his own mind qualities:abilities, ways of thinking, and patterns of mentalconditions. Each one has his own emotional setupand his leanings toward music and art in its variousforms, including literature. All these leanings aresubject to change and development, but there iscertainly no mass movement toward uniformity.No one ever "recovers" from the fact that he wasborn an individual.

When a husband and wife disagree on the tem-perature of the soup or on the amount of bed cov-erings, or if their sleep patterns do not jibe, thisis evidence of inborn differences in physiology. Ifone child loves to read or is interested in scienceand another has strong likings for sports or for art,

•From The Freeman, April 1971. Reprinted by permission fromSaturday Review, January 30, 1971. Copyright 1971, SaturdayReview, Inc.

this is probably due to inborn differences in make-up. If two people disagree about food or drink, theyshould not disregard the fact that taste and smellreactions often widely differ and are inherited. Ifwe see a person wearing loud clothing without ap-parent taste, we need to remember, in line with theinvestigations of Pickford in England, that eachindividual has a color vision all his own; some maydeviate markedly from the pack.

The inborn leanings of Mozart were evident byage three, and he began composing when he wasfour. Capablanca was already a good chess player—good enough to beat his father—when at age fivehe played his first game. For many centuries, In-dian philosophers have recognized innate in-dividuality, which they explain on the basis ofexperience in previous incarnations.

Biology has always recognized inborn individ-uality. If this inborn distinctiveness had not alwaysbeen the rule in biology, evolution could neverhave happened. It is a commonplace fact in biologythat every living organism needs a heredity and asuitable environment. Unfortunately, in the mindsof most intellectuals biological considerations havebeen pushed aside.

Professor Jerry Hirsch, a psychologist at the Uni-versity of Illinois, has protested in Science that"the opinion makers of two generations have liter-ally excommunicated heredity from the behavioralsciences." This neglect of the study of heredityhas effectively produced a wide gap between biol-ogy and psychology. Biology deals with livingthings, and psychology is logically an importantphase of biology.

Bernard Rimland, director of the Institute for10

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5. THE BIOLOGY OF BEHAVIOR 11

Child Behavior Research in San Diego, in review-ing my book, You Are Extraordinary in AmericanPsychologist, wrote: "Since between-group differ-ences are commonly a small fraction of the enor-mous, important, and very interesting within-group (individual) difference, psychology's focuson average values for heterogeneous groups rep-resents, as Williams indicates, a chronic case ofthrowing out the babies with the bath water.'Throwing out the babies' is bad enough, but wepsychologists have the dubious distinction of mak-ing this error not only repeatedly but on purpose."

Social solidarity exists and social problems arepressing, but we cannot hope to deal with thesesuccessfully by considering only generic man, thatis, average values for heterogeneous groups. Weneed a better understanding of men.

A Firm Foundation

The basic problem of generic man is how toachieve "life, liberty, and the pursuit of happi-ness." The writers of our Declaration of Indepen-dence were on solid ground, biologically speaking,when they took the position that each human be-ing has inalienable rights and that no one has, byvirtue of his imagined "royal blood," the right torule over another. In their emphasis on mankindas individuals, Jefferson and his co-authors werecloser to biological reality than are those of ourtime who divorce psychology from biology andcenter their attention on that statistical artifact,the average man.

Because each of us is distinctive, we lean indifferent directions in achieving life, liberty, andthe pursuit of happiness. Happiness may come toindividual people in vastly different ways, and sothe human problem of achieving life and the pur-suit of happiness resolves itself, more than it iscomfortable to admit, into a series of highly indi-vidual human problems. We need to take this con-sideration into account in attempting to build anadvanced society.

In understanding the scope of human desires,it is worthwhile to consider briefly the problemsthat real—as opposed to theoretical—people face.These may be grouped under four headings: 1)making a livelihood; 2) maintaining health; 3) get-ting along with others; and 4) getting along withone's self. These four categories, singly or in com-bination, cover most of the familiar human prob-lems—marriage and divorce, crime, disease, war,housing, air and water pollution, urban congestion,

race relations, poverty, the population explosion,the all-pervading problem of education, and thebuilding of an abundant life.

The importance of approaching the problem ofmaking a livelihood from the individual's stand-point lies in the fact that in our complex societya multitude of ways exist—an estimated 23,000—inwhich people can make a living. People are not byany means interchangeable parts in society. Whilesome might function well in any one of a largenumber of capacities, many others might be highlyrestricted in their capabilities and yet be extremelyvaluable members of society. The idea that it is alla matter of education and training cannot possiblybe squared with the hard biological facts of inbornindividuality. This perversion of education perpet-uates the banishment of heredity—an ever presentbiological fact—from our thinking. Fitting togetherpeople and jobs is just as real and compelling asfitting shoes to people. People sometimes sufferfrom ill-fitting shoes; they suffer more often fromill-fitting jobs.

The maintenance of health—both physical andmental—involves individual problems to such adegree that it is difficult to exaggerate their role.Ever since the days of Hippocrates it has beenknown in a vague way that "different sorts of peo-ple have different maladies," but we are only be-ginning to learn how to sort people on the basisof their inborn individual characteristics. When wehave become expert in this area, vast progress willresult, particularly in the prevention of metabolicand psychosomatic diseases, i.e., those not result-ing from infection. As long as we dodge the biolog-ical fact of inborn individuality, we remain rel-atively impotent in the handling of diseases thatarise from within individual constitutions.

The problem of getting along with others is avery broad one, in which individual problems arebasic. If husbands and wives and members of thesame family always get along well together, wewould have some reason to be surprised whensquabbles break out within business, religious, orpolitical groups. If all these kinds of squabbleswere nonexistent, we would have a basis for beingsurprised at the phenomenon of war.

Distinctive Qualities

While self-interest and differences in trainingare vital factors in these common conflicts, anotherfactor should not be overlooked: the inborn indi-viduality of the participants. There is a mass of

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12 THE NATURE OF THE INDIVIDUAL—VALUES AND ACTIONS

evidence to support the thesis that every individ-ual, by virtue of his or her unique brain structureand peripheral nervous system, is psychologicallyconditionable in a distinctive manner. Thus, a per-son's unique nervous system picks up distinctivesets of impulses, and because his interpretive ap-paratus is also unique he learns different thingsand interprets the world in a distinctive manner.Even if two individuals were to have exactly thesame learning opportunities, each would think dif-ferently and not quite like anyone else. This is thebasis for the observation by Santayana: "Friend-ship is almost always the union of a part of onemind with another; people are friends in spots."

In spite of our attempts to do so, individualminds cannot be compared on a quantitative basis.The minds of Shakespeare and Einstein cannot beweighed one against the other; there were manyfacets to the minds of each. At birth the two mindswere equally blank, but as they matured, each saw,perceived, and paid attention to different aspectsof the world around it. Each was conditionable ina unique way.

Each Mind Unique

The recognition of the uniqueness of humanminds is essential to human understanding. By de-veloping expertness in this area, psychology willeventually become far more valuable. In an ad-vanced society with a growing population andcloser associations, it is obviously essential thatwe learn better how to get along with each other.When we are unaware of the innate differencesthat reside within each of us, it becomes very easyto think of one who disagrees with us as a "nitwit"or a "jerk," or perhaps as belonging to the "lunaticfringe." When we appreciate the existence of in-nate differences, we are far more likely to be un-derstanding and charitable. Strife will not be auto-matically eliminated, but tensions can be de-creased immeasurably.

Individual problems are at the root of the prob-lem of crime. Many years ago, James Devon placedhis finger on the crucial point. "There is only oneprinciple in penology that is worth any considera-tion: It is to find out why a man does wrong andmake it not worth his while." The question, "Whydoes a particular man commit crime?" is a cogentone; the question, "Why does man turn to crime?"is relatively nonsensical.

Since all human beings are individual by nature,they do not tick in a uniform way nor for the same

reasons. Broadly speaking, however, many doubt-less turn to crime because society has not providedother outlets for their energies. If we could find asuitable job for every individual, the problem ofcrime would largely vanish. The problem of crimeis thoroughly permeated with individual problems;it cannot be blamed solely on social conditions, be-cause as the studies of Sheldon and Eleanor Glueckhave shown, highly respected citizens *may comefrom areas where these conditions are the worst.

A Race of Individuals

Racial relations would ease tremendously if wefaced squarely the biological facts of individual-ity. If we were all educated to know that all whitesare not the same, that all Negroes do not fit in thesame pattern, that all Latins are not identical, thatall American Indians are individuals, and that allJews do not fit a stereotype, it would help us totreat every member of the human race as an in-dividual.

It is no denial of the existence of racial problemsto assert that individual problems need to bestressed more than they are. For individualNegroes and individual whites, the pursuit of hap-piness is by no means a uniform pursuit. Doubt-less, although there are whites and Negroes whowould think they had reached utopia if they had adecent shelter and were assured three meals a day,this would not satisfy millions of others for whomstriving and a sense of accomplishment are para-mount. "The Negro problem" or "the white prob-lem"—depending on one's point of view—is shotthrough with a host of individual problems.

Learning to live with one's self is certainly anindividual problem, and will be greatly eased byrecognition of inborn individuality. Much unhappi-ness and many suicides can be traced to misguideddesire to be something other than one's self. Eachof us as an individual has the problem of findinghis way through life as best he can. Knowing one'sself as a distinctive individual should be an impor-tant goal of education; it will help pave the roadeach of us travels in his pursuit of happiness.

Dangers of Oversimplification

Why have these facts of individuality not beengenerally accepted as a backdrop in every con-sideration of human problems? For one thing,many people, including scholars, like being gran-diose and self-inflationary. To make sweeping pro-

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5. THE BIOLOGY OF BEHAVIOR 13

nouncements about "man" sounds more impres-sive than to express more limited concerns. Sim-plicity, too, has an attractiveness; if life could bemade to fit a simple formula, this might be re-garded as a happy outcome.

One excuse for excommunicating inheritancefrom the behavioral sciences for two generationshas been the fact that inheritance in mammals isrecognized by careful students as being exceeding-ly complex and difficult to interpret. It is true thatsome few characteristics may be inherited throughthe operation of single genes or a few recognizableones. But other characteristics—those that differ inquantity—are considered to be inherited in obscureand indefinable ways commonly ascribed to mul-tiple genes of indefinite number and character.These multiple-gene characteristics include, toquote the geneticists Snyder and David, "the moredeep-seated characters of a race, such as form,yield, intelligence, speed, fertility, strength, devel-opment of parts, and so on." To say that a partic-ular characteristic is inherited through the medi-ation of multiple genes is to admit that we arelargely ignorant of how this inheritance comesabout.

"enormous" differences since the investigations ofLashley more than twenty years ago, are made dis-tinctive by the same mechanisms that make for dif-ferences in organ weights. The size, number, anddistributions of neurons in normal brains varygreatly; this is biologically in line with the unique-ness of human minds. The further elucidation ofthis type of inheritance should help to focus moreattention on heredity.

If this line of thought is valid it makes evenmore ridiculous the invitation issued by the FordFoundation to the biological sciences to stay out ofthe precinct of human behavior. The expression"behavioral science" came into being many yearsago as a result of the formulation of the Ford Foun-dation-supported programs. Biochemistry andgenetics, for example, were kept apart from the"scientific activities designed to increase knowl-edge of factors which influence or determine hu-man conduct."

What can be done to bridge the gap betweenpsychology and biology? More importantly, howcan we develop expertise in dealing with the hu-man problems that plague us but at present go un-solved?

Identical Twins?

Recently, some light has been thrown on thisproblem by experiments carried out in our lab-oratories. These experiments involved armadillos,which are unusual mammals in that they com-monly produce litters of four monozygous ("iden-tical") quadruplets that are necessarily all malesor all females.

By making measurements and studying sixteensets of these animals at birth, it became evidentthat although they develop from identical genes,they are not identical at all. Organ weights may dif-fer by as much as twofold, the free amino acids inthe brain may vary fivefold, and certain hormonelevels may vary as much as seven-, sixteen-, oreven thirty-two-fold. These findings clearly suggestthat inheritance comes not by genes alone but bycytoplasmic factors that help govern the size oforgans (including endocrine glands) and the cellu-lar makeup of the central nervous system. "Iden-tical" twins are not identical except with respectto the genes in the nucleus of the egg cell fromwhich they developed.

One of the most interesting suggestions arisingout of this study is the probability that individualbrain structures, which have been known to have

Differential Psychology

A broad, long-range, and practical strategy forlearning how to deal more effectively with humanproblems is to explore, problem by problem, theinborn human characteristics that are pertinent toeach one. Differential psychology, for example,needs to be intensified and greatly expanded; thiscan probably be done most effectively in connec-tion with a series of problem-centered explorations.

Some of the specific problem-areas that requirestudy from the standpoint of how inborn charac-teristics come into play are: delinquency andcrime, alcoholism, drug addiction, unemployabil-ity, accident proneness, cancer, heart disease, ar-thritic disease, mental disease, and broadest of all,education. Each of these problems could be vastlybetter understood as the result of interdisciplinarystudy of the influences of inborn characteristics.Such study would include differential psychologywhen applicable, combined with extensive and in-tensive biochemical and physiological examina-tions, for example, of blood, saliva, urine, andbiopsy materials. To expedite these investigations,automated equipment and computer techniqueswould be used extensively to help interpret thecomplex data.

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14 THE NATURE OF THE INDIVIDUAL—VALUES AND ACTIONS

It is not likely that these explorations will findthat some individuals are born criminals, othersalcoholics, etc. Once we recognize the unique lean-ings that are a part of each of us, we will see how,by adjusting the environment, these leanings canbe turned toward ends that are socially construc-tive. Every inherited factor can be influenced by anappropriate adjustment of the environment. Allthis should not be made to sound too easy; it maybe more difficult than going to the moon, but itwill be far more worthwhile.

One of these specific problems—alcoholism—hasbeen of special interest to me. After about twenty-five years of study, I am convinced that inbornbiochemical characteristics are basic to this dis-ease, but that expert application of knowledgeabout cellular nutrition (which is not far off) willmake it scientifically possible to prevent the dis-ease completely and to correct the condition if theapplication of corrective measures is not too longdelayed.

Inborn inherited characteristics have a directbearing on the current revolt against the Establish-ment. If biology had not been banished from be-havioral science, and if students and other intellec-tuals were well aware of the biological roots of

their existence, it would be taken for granted thatconformity is not a rule of life.

If all that we human beings inherit is our hu-manity, then we all should be reaching for thesame uniform goal: becoming a thoroughly repre-sentative and respectable specimen of hom*o sapi-ens. There is rebellion against this idea. Revolterswant to do "their thing." The revolt takes on manyforms because many unique individuals are in-volved.

If nonconformity had a better status in the eyesof the Establishment (and it would have if ourthinking were more biologically oriented), ex-hibitionism would be diminished and the desire ofeach individual to live his own life could be fos-tered in a natural way.

Human beings are not carbon copies of one an-other. Students and others who are in revolt havefound this out. Perhaps without fully recognizingit, they are pleading for a recognition of inbornindividuality. This is essentially a legitimate plea,but it can take the form of disastrous anarchy. Apeaceful means of helping resolve the ideologicalmess we are in is to recognize heredity by havinga happy marriage of biology and behavioralscience.

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6. THE ONLY KIND OF PEOPLE THERE ARE*

Roger J. Williams

If Socrates were resurrected, I suspect he wouldcall attention again to what was written about 25centuries ago: Know thyself; if you know a lotabout other things and are ignorant of yourself,this is ridiculous.

We in this advanced and scientific age havenever taken Socrates seriously on this point. Imaintain that we are being ridiculous; we seek toplan and yet are not informed about ourselves forwhom we plan. Of course, we know somethingabout ourselves, but science has never undertakena serious job of understanding people—a multidis-ciplinary undertaking. We have not tackled the jobof understanding ourselves with one-tenth of thefervor we have shown in our research in outerspace.

One of the most important facts about ourselveswe have not grasped: All of us are basically andinevitably individuals in many important and strik-ing ways. Our individuality is as inescapable asour humanity. If we are to plan for people, wemust plan for individuals, because that's the onlykind of people there are.

In what ways are we individuals? First as toour bodies. These ways are tangible and not sub-ject to argument. Each of us has a distinctive stom-ach, a distinctive heart and circulatory system.Each of us has a distinctive muscular system, dis-tinctive breathing apparatus, and an endocrine sys-tem all our own. Most surprising and significantperhaps, each of us has a distinctive set of nervereceptors, trunk nerves, and a brain that is distinc-tive in structure and not like other brains.

We are individuals also with respect to ourminds. We do not all think with equal facility aboutthe various things that can be thought about. Ein-

•From The Freeman, January 1969. Slightly condensed andpublished by permission from an address before the AmericanInstitute of Planners at Hot Springs, Arkansas, July 12-19, 1968

stein was an extremely precocious student of math-ematics, but on the other hand, he learned lan-guage so slowly that his parents were concernedabout his learning to talk. William Lyon Phelps,the famous English professor at Yale, on the otherhand, confessed that in mathematics he was "slowbut not sure." There are at least forty facets tohuman minds. Each of us may be keen in someways and stupid in others.

The importance of this individuality in mindswould be hard to exaggerate. Because of it two ormore people agree with each other only in spots,never totally. The grandiose idea that all workersof the world can unite and speak and act as a unitis wholly untenable because of individuality in theminds of the individual workers. Nor can all cap-italists unite, and for the same reason. Neither canall Negroes, all Latins, all Chinese, all Jews, allEuropeans, or all English-speaking peoples.

It is often assumed that people disagree onlybecause of self-interest and differences in theireducation. They also disagree because their mindsdo not grasp the same ideas with equal facility.Sometimes an individual has a specific ideawhich seems to him perfectly clear and potent. Tohim it seems certain that once this idea is ex-pressed it will gain automatic acceptance. Practi-cal trial shows, however, that it does not. To otherindividuals, because the patterns of their mindsare different, this supposedly clear and potent ideamay appear foggy, dubious, or even unsound.

Failure to recognize individuality in minds iswidespread and is a revelation of the fact that weare ignorant about the people for whom we plan.

"Environmental Determinism"

I do not know that anyone else has ever ex-pressed it this way, but on a long walk with Al-dous Huxley about a year before he died, hedecried to me the fact that the prevailing philos-

15

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16 THE NATURE OF THE INDIVIDUAL—VALUES AND ACTIONS

ophy today may be described as "environmentaldeterminism." Environment is assumed to be theonly factor in our lives; inborn individuality in bodyand mind are completely neglected. According tothis philosophy, every child who is placed in a slumenvironment becomes a delinquent and a criminal.This, from the work of the Gluecks at Harvard andothers, is manifestly untrue. Neither is it true thatevery child who is furnished with plenty becomesfor this reason an honorable and upright citizen.

Our "social studies" and "social science" teach-ing in all our schools and universities is permeatedwith environmental determinism which shows nointerest in the crucial facts of individuality andquite inevitably tends to destroy all moral respon-sibility. A delinquent cannot help being a delin-quent, we are told. Society should take all theblame. A criminal is that way because society hasmade him so, so society is to blame. This is blatantoversimplification in the name of social science!It disregards how human beings are built—theirfundamental nature—and can by its short-sighted-ness lead to a breakdown of our civilization.

What I have been saying does not in any sensedeny the importance of environment. Environ-ments are what we can control, and to study howto improve them is the essence of planning. Butwe, the people, are not putty; we are individuals,and we need to be understood.

Individuality is Crucial

To me it seems certain that the facts of individ-uality need to be taken into account. There arethree areas, related to planning, in which I havesome special knowledge. In all these areas individ-uality is crucial.

Take for instance the area of nutrition andhealth. It would be relatively easy to produce eco-nomically in factories a "man-chow" which wouldsupposedly be the perfect food for the averageman. Laboratory experiences as well as wide ob-servations show, however, that this "man-chow"idea is completely unrealistic. It will not work. Be-cause of biochemical individuality we do not alllike the same foods nor can we thrive on the samemixture. Many human beings are so built that theyderive a substantial part of the satisfaction of lifeout of eating. Taking variety and choices fromthem would be depriving them of their pursuit ofhappiness. The best food planning devised involvessupermarkets where thousands of kinds of foods ingreat variety are available.

The Food and Drug Administration in Washing-ton has, at least until very recently, done its plan-ning on the basis of the hypothetical average manand has sought to regulate the marketing ofmedicinal substances, vitamins, and the like on thisbasis. This cannot work because of the hard factsof biochemical individuality. Real people—individ-uals—do not react in a uniform manner either todrugs or to nutritional factors such as amino acids,minerals, and vitamins.

No planning in the area of nutrition and healthcan work on a long range basis unless the facts ofindividuality are taken into account. If we plan forpeople, we must plan for individuals, because thatis the only kind of people there are.

Another area of planning in which I have somespecial knowledge is that of education. I have re-cently completed my fiftieth year as a teacher.While I have in mind no pet schemes for reorga-nizing schools or universities, I have had for yearsa growing consciousness that no successful long-range planning can be done unless we recognizefully that every mind is a distinctive one and thatevery young person is endowed with peculiar apti-tudes which need to be recognized, developed, andused. One of the worst lacks in modern educationis the failure of youngsters to know themselves andto recognize their own strengths as well as weak-nesses. Education for the hypothetical averagechild is no good. We must plan for individual chil-dren; that's the only kind there are.

Closely related to the problem of planning ed-ucation is planning to curb crime, violence, racialhatred, and war. As Clement Attlee aptly pointedout years ago, the roots of war are to be found inthe minds and hearts of men. The late Robert Ken-nedy pointed out when he was Attorney-Generalthat peaceful relations between people cannot beenforced with guns and bayonets.

In my opinion, we will get nowhere in planningto curb violence by thinking in terms of the city ofDallas killing John F. Kennedy, the city of Mem-phis killing Martin Luther King, or the city of LosAngeles killing Robert Kennedy. Of course, socialfactors enter into violence, but there are importantindividual factors, too.

No informed person can think that curbingcrime and violence is a simple problem. Because itis difficult, it is all the more important that weseek out—thoroughly—the root causes. I maintainthat a great weakness which we exhibit in thismodern scientific age is ignorance about ourselves.

Finally, let me say that our love of liberty and

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7. THE UNKNOWN QUANTITY 17

freedom is based upon this individuality. If we allhad the same kinds of stomachs, the same kinds ofmuscles, nerves, and endocrine glands, the samekinds of brains, planning would be simple. Wewould all like exactly the same things. We wouldall be satisfied to read the same books, have the

same amusem*nts, eat the same food, and go to thesame church. In short, we would all live happily inthe same rut.

Planning is not that simple. We must plan forindividuals—that's the only kind of people there

are.

7. THE UNKNOWN QUANTITY*

Madelyn Shepard Hyde

Perhaps one of the best arguments against at-tempts to equalize the fruits of human labor undera collectivist society is the infinite variety of hu-man nature. It should be obvious that each person'sdesires and aspirations defy measurement—in bothquality and quantity—by any other person. Andsince it is impossible to equate what cannot bemeasured, the collectivist society must fail in thisannounced objective.

It is perfectly possible, of course, to divide apound of steak equally between two persons. Thatis a task requiring only a pound of steak, a set ofscales, and a knife—and someone to do the dividing.It is also possible to decree that the two individualsshall have a certain number of leisure hours eachday. But it is quite another matter to measure therelative value that two persons will place uponsteak and upon leisure, for one is certain to bemore fond of steak—or leisure—than the other. Whatsatisfies the soul of one person may have little orno appeal to another—certainly not to the samedegree.

Now suppose the purveyor of equality realizesthat equal portions of steak will not accomplish

•Clipping of Note No. 44 (FEE, 1951)

this equality which he has set out to attain. Hemight then undertake to divide the steak unequallyby weight, and to reapportion the total number ofleisure hours, so that both individuals would besatisfied to exactly the same degree. By whatmeans could he determine what quantity of leisurefor one is equal to a certain quantity of steak forthe other? At this point, he will have to abdicatefrom his collectivist throne, realizing that he has noscale by which he can measure any value for anyother person.

If it is impossible for a third party to solve eventhis one simple equation for two persons, it is fan-tastic to believe that he could solve the infinitelymore complex problem of equally satisfying all thedesires of all the people. This egalitarian objectivecould be attained only if all people wanted thesame quantities of all things in life. But they donot. Our forefathers sought to preserve the free-dom of each individual to pursue, to the best of hisability, the satisfaction of his own particular set ofdesires—known only to himself. They had the wis-dom to realize that in designing a society in har-mony with this variation in human wants they wereworking with, rather than against, a principle ofnature.

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8. FREEDOM'S THEORY OF VALUE

Leonard E. Read

Those of us who wish to assist in a reversal of thepresent trend away from individual liberty must,among other refinements of the mind, understand,believe in, and be able to explain the subjectivetheory of value, as forbidding as that term sounds.Except as we understand and apply this correcttheory of value, individual liberty is out of thequestion.

The possessions one accumulates are a reflec-tion of his values. What a man owns—what is hisown—is what he is. One's personality and propertyreflect his subjective values.

But few of us care to live in isolation. We preferto exchange ideas and goods and services withothers. And the problem is to work our strictlypersonal values into a price or value structure forpurposes of peaceful trade. The question to beanswered is, how does the subjective theory of val-ue determine the market price?

Here it is: The exchange value of any loaf ofbread, of any painting, of any day's work, or of anygood or service is whatever another or others willoffer in willing exchange.

When Mrs. Smith swaps a shawl for Mrs. Jones'goose, the value of that shawl is that goose andvice versa. Yet, each lady gains in her own (sub-jective) judgment. Were this not a fact, neitherwould have willingly exchanged.

Value can make no sense except as it is sub-jectively determined, that is, as utility or gain isjudged by self. Gain or value cannot be determinedfor anyone by another. What has value for one mayhave more or less value to someone else: there arethose who prefer a chinchilla coat to a college ed-ucation and vice versa, a freedom library to a va-cation and vice versa, the theater to a TV per-formance and vice versa, ad infinitum.

Assume that I am an artist and do a painting

•From The Freeman, October 1967

each month. Unfortunately for me, no one wants"a Read." The value of my work? Zero! Now,assume that a change occurs in the minds of buy-ers (in each instance, subjective); "Reads" becomea popular whim to the point that each will bring$1,000. The value of my work? $1,000! For thesake of this illustration, there was no change in thequality of the paintings. Buyers changed theirminds and, thus, the value of my work.

It is perfectly plain that the practice of subjec-tive evaluations is the practice of individual lib-erty or, if you prefer, personal freedom of choice.

It is also easily demonstrable that freedom of thepress, freedom of religion, freedom of speech, free-dom of assembly are impossible in the absence ofeconomic freedom.1

This correct theory of value is opposed by theobjective theory, that is, by arrangements wheresomeone else, by some standard of evaluationother than your own, attempts to determine thevalue of goods and services to you. An understand-ing of the fallacious objective theory and an abilityto identify it in its many manifestations helps toaccent the importance and the validity of the sub-jective theory in practice.

Prior to 1870 no one had formulated the sub-jective theory. Nor was it invented. Three econo-mists—Menger, Jevons, and Walras—from differentcountries and without collaboration, formulatedthe theory almost simultaneously. Their enlighten-ment came by merely observing how commonpeople behave—produce and exchange—in theabsence of governmental or other interference.Thus, before 1870 when there was no understand-ing of the subjective theory, objective methods ofarriving at value predominated.

The classical example of the objective theory ofvalue is the labor theory of value. This theorymerely affirms that value is determined by cost ofproduction or, stated another way, by the amount

18

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8. FREEDOM'S THEORY OF VALUE 19

of energy expended. While some classical econo-mists knew the theory to be wrong, they were notcertain as to what was right.

Pursuing the labor theory to its logical and ab-surd conclusion, a mud pie would have the samevalue as a mince pie, provided that they were pro-duced by equal expenditures of energy. If a pearldiver came up with a pearl in one hand and a peb-ble in the other, they would be of equal value!

Of course, people will not exchange as much fora mud pie or a pebble as for a mince pie or a pearl.So, how does this theory find expression in prac-tice? Simply use the power of government to takefrom the mince pie makers and give to the mud piemakers! Karl Marx gave the formula: "from eachaccording to his ability, to each according to hisneed."

However, even the Russians no longer are strict-ly addicted to the labor theory of value. Yet, theylargely rely upon objective standards of one kindor another. That is, self-determination is at a mini-mum; the government arbitrarily prices nearlyeverything. Willing exchange is not the mode; in-dividual freedom of choice is substantially taboo;the subjective theory is less used in Russia thanelsewhere.

Note that there is no freedom of the press, ofspeech, of religion, of assembly in Russia. It is be-cause economic freedom is denied; and economicfreedom is impossible unless subjective value judg-ments are respected.

One of the most important points to keep inmind is that the amount of effort exerted or the

cost of production does not determine exchangevalue. It is determined by individual evaluations ofpersonal utility. The market price or value is some-where within the range of these evaluations.

We who are interested in individual liberty and,thus, in the observance of subjective value judg-ments, must know that the objective theory isantithetical to our welfare, and we should be ableto identify its many practices, regardless of howcleverly disguised they are.

Actually, we need only keep our eyes on unwill-ing as distinguished from willing exchanges. Allunwilling exchanges rest on objective and not onsubjective value judgments.

Would you willingly exchange your income orcapital for farmers not to grow tobacco, to rebuildsomeone else's downtown, to put men on themoon, to underwrite power and light for the peopleof the Tennessee Valley, to pay people not towork? If your answers are negative, you can takethe political applications of the objective theoryfrom there. Examples abound by the thousands.2

It is a gross understatement of the case to saythat freedom rests on the practice of the subjec-tive theory; subjective value judgments, when hon-ored, are freedom!

Notes•See "Freedom Follows the Free Market" by Dean Russell,

The Freeman, January, 1963.2See Encyclopedia of U.S. Government Benefits (Union

City, N. J.: William H. Wise and Co., Inc., 1965). This tomeof more than 1,000 pages lists over 10,000 benefits.

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Private Property and Exchange

9. PROPERTY*

James Madison

This term, in its particular application, means"that dominion which one man claims and exer-cises over the external things of the world, inexclusion of every other individual."

In its larger and juster meaning, it embraceseverything to which a man may attach a value andhave a right, and which leaves to every one elsethe like advantage.

In the former sense, a man's land, or merchan-dise, or money, is called his property.

In the latter sense, a man has a property in hisopinions and the free communication of them.

He has a property of peculiar value in his re-ligious opinions, and in the profession and prac-tice dictated by them.

He has a property very dear to him in the safetyand liberty of his person.

He has an equal property in the free use of hisfaculties, and free choice of the objects on whichto employ them.

In a word, as a man is said to have a right to hisproperty, he may be equally said to have a prop-erty in his rights.

Where an excess of power prevails, property ofno sort is duly respected. No man is safe in hisopinions, his person, his faculties, or his posses-sions.

Where there is an excess of liberty, the effect isthe same, though from an opposite cause.

Government is instituted to protect property ofevery sort; as well that which lies in the variousrights of individuals, as that which the term par-

•March 27, 1792. From Letters and Other Writings of JamesMadison, Vol. IV, pp. 478-480

ticularly expresses. This being the end of govern-ment, that alone is a just government which im-partially secures to every man whatever is his own.

According to this standard of merit, the praise ofaffording a just security to property should besparingly bestowed on a government which, how-ever scrupulously guarding the possessions of in-dividuals, does not protect them in the enjoymentand communication of their opinions, in whichthey have an equal, and, in the estimation of some,a more valuable property.

More sparingly should this praise be allowed toa government where a man's religious rights areviolated by penalties, or fettered by tests, or taxedby a hierarchy.

Conscience is the most sacred of all property;other property depending in part on positive law,the exercise of that being a natural and unalien-able right. To guard a man's house as his castle,to pay public and enforce private debts with themost exact faith, can give no title to invade a man'sconscience, which is more sacred than his castle,or to withhold from it that debt of protection forwhich the public faith is pledged by the very natureand original conditions of the social pact.

That is not a just government, nor is propertysecure under it, where the property which a manhas in his personal safety and personal liberty isviolated by arbitrary seizures of one class of citi-zens for the service of the rest. A magistrate issu-ing his warrants to a press-gang would be in hisproper functions in Turkey or Indostan, under ap-pellations proverbial of the most complete despo-tism.

That is not a just government, nor is property20

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10. LETTER TO HIS STEPBROTHER 21

secure under it, where arbitrary restrictions,exemptions, and monopolies deny to part of itscitizens that free use of their faculties and freechoice of their occupations which not only consti-tute their property in the general sense of the word,but are the means of acquiring property strictlyso called.

What must be the spirit of legislation where amanufacturer of linen cloth is forbidden to bury hisown child in a linen shroud, in order to favour hisneighbour who manufactures woolen cloth; wherethe manufacturer and weaver of woolen cloth areagain forbidden the economical use of buttons ofthat material, in favor of the manufacturer of but-tons of other materials!

A just security to property is not afforded by thatgovernment, under which unequal taxes oppressone species of property and reward another spe-cies; where arbitrary taxes invade the domesticsanctuaries of the rich, and excessive taxes grindthe faces of the poor; where the keenness andcompetitions of want are deemed an insufficientspur to labor, and taxes are again applied by anunfeeling policy, as another spur, in violation ofthat sacred property which Heaven, in decreeing

man to earn his bread by the sweat of his brow,kindly reserved to him in the small repose thatcould be spared from the supply of his necessities.

If there be a government, then, which prides it-self in maintaining the inviolability of property;which provides that none shall be taken directly,even for public use, without indemnification to theowner, and yet directly violates the property whichindividuals have in their opinions, their religion,their passions, and their faculties—nay, more,which indirectly violates their property in theiractual possessions, in the labor that acquires theirdaily subsistence, and in the hallowed remnantof time which ought to relieve their fatigues andsoothe their cares—the inference will have beenanticipated that such a government is not a pat-tern for the United States.

If the United States mean to obtain or deservethe full praise due to wise and just governments,they will equally respect the rights of propertyand the property in rights; they will rival the gov-ernment that most sacredly guards the former, andby repelling its example in violating the latter, willmake themselves a pattern to that and all othergovernments.

10. LETTER TO HIS STEPBROTHER

Abraham Lincoln

Pioneer life was hard for a man with two chil-dren but no woman to care for them, nor to helpwith the chores at home. Thus Thomas Lincolnremarried about a year after the death (1818) ofhis first wife, Nancy Hanks, Abrahams mother.The new "mother" was a widow, Sarah BushJohnston, with three youngsters of her own. Ac-cording to historians, Abraham Lincoln's step-brother, John D. Johnston, five years Lincoln'sjunior, turned out to be shiftless and lazy. The fol-lowing letter was written to his young stepbrotherwhen Lincoln was 39 years old and a U. S. Con-gressman from Illinois.

•Reproduced from the original manuscript with slight chan-ges only in style and form

Washington, December 24, 1848Dear Johnston: Your request for eighty dollars I

do not think it best to comply with now. At thevarious times when I have helped you a little, youhave said to me, "We can get along very wellnow," but in a very short time I find you in thesame difficulty again. Now this can only happen bysome defect in your conduct. What that defect is,I think I know. You are not lazy, and still you arean idler. I doubt whether since I saw you, youhave done a good whole day's work, in any oneday. You do not very much dislike to work; and stillyou do not work much, merely because it does notseem to you that you could get much for it. Thishabit of needlessly wasting time, is the whole diffi-culty; and it is vastly important to you, and still

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22 PRIVATE PROPERTY AND EXCHANGE

more so to your children, that you should breakthis habit. It is more important to them, becausethey have longer to live, and can keep out of anidle habit before they are in it, easier than they canget out after they are in.

You are now in need of some money; and what Ipropose is, that you shall go to work, "tooth andnails," for somebody who will give you money forit. Let father and your boys take charge of thingsat home—prepare for a crop, and make the crop;and you go to work for the best money wages, or indischarge of any debt you owe, that you can get.And to secure you a fair reward for your labor, Inow promise you that for every dollar you will, be-tween this and the first of next May, get for yourown labor, either in money, or on your own indebt-edness, I will then give you one other dollar. Bythis, if you hire yourself at ten dollars a month,from me you will get ten more, making twentydollars a month for your work. In this, I do notmean you shall go off to St. Louis, or the leadmines, or the gold mines in California, but I [mean

for you to go at it for the best wages you] can getclose to home in Coles County. Now if you will dothis, you will be soon out of debt, and what is better,you will have a habit that will keep you from get-ting in debt again. But if I should now clear you out,next year you would be just as deep in as ever. Yousay you would almost give your place in Heaven for$70 or $80. Then you value your place in Heavenvery cheaply, for I am sure you can with the offer Imake you get the seventy or eighty dollars for fouror five months work. You say if I furnish you themoney you will deed me the land, and, if you don'tpay the money back, you will deliver possession.Nonsense! If you can't now live with the land, howwill you then live without it? You have alwaysbeen [kind] to me, and I do not now mean to be un-kind to you. On the contrary, if you will but followmy advice, you will find it worth more than eighttimes eighty dollars to you.

Affectionately your brother,A. Lincoln

11 . PROPERTY RIGHTS AND HUMAN RIGHTS*

Paul L. Poirot

It is not the right of property which is protected,but the right to property. Property, per se, has norights; but the individual—the man—has three greatrights, equally sacred from arbitrary interference:the right to his life, the right to his liberty, the rightto his property. . . . The three rights are so boundtogether as to be essentially one right. To give aman his life but deny him his liberty, is to take fromhim all that makes his life worth living. To give himhis liberty but take from him the property which isthe fruit and badge of his liberty, is to still leavehim a slave.

U.S. Supreme Court JusticeGEORGE SUTHERLAND

•FEE, 1952, as excerpted from the July 1952 Monthly Letterof the National City Bank and the October 1952 GuarantySurvey of the Guaranty Trust Company

Tricky phrases with favorable meanings and emo-tional appeal are being used today to imply a dis-tinction between property rights and human rights.

By implication, there are two sets of rights—onebelonging to human beings and the other to prop-erty. Since human beings are more important, it isnatural for the unwary to react in favor of humanrights.

Actually, there is no such distinction betweenproperty rights and human rights. The term prop-erty has no significance except as it applies tosomething owned by someone. Property itself hasneither rights nor value, save only as human in-terests are involved. There are no rights but hu-man rights, and what are spoken of as propertyrights are only the human rights of individuals toproperty.

Expressed more accurately, the issue is not oneof property rights versus human rights, but of the

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11. PROPERTY RIGHTS AND HUMAN RIGHTS 23

human rights of one person in the community ver-sus the human rights of another.

Those who talk about two sets of rights appar-ently want to discriminate between property in-come and labor income—with the implication thatthe rights to rental and investment income are in-ferior, as a class, to the rights to income fromwages and salaries. Actually, this is an unwar-ranted assumption. It must be evident that allpersons have rights which are entitled to respect.Safeguarding such rights is essential to the well-being of all. This is the only just principle. Thus,the problem is not to establish priorities on humanrights in the community, but rather to determinewhat the respective rights are in the particularcases under dispute. This is the real problem inhuman relations, and it is one that calls for theexercise of wisdom, restraint, and true administra-tion of justice under law.

What Are "Property Rights"?

What are the property rights thus disparaged bybeing set apart from human rights? They areamong the most ancient and basic of human rights,and among the most essential to freedom and pro-gress. They are the privileges of private ownership,which give meaning to the right to the product ofone's labor—privileges which men have always re-garded instinctively as belonging to them almostas intimately and inseparably as their own bodies.

The ownership of property is the right for which,above all others, the common man has struggled inhis slow ascent from serfdom. It is the right forwhich he struggles today in countries emergingfrom feudalism. The sense of this right is so deep-rooted in human nature, so essential as a stimu-lant of productive effort, that even totalitarianregimes have been unable to abolish it entirely.

It is a mistake to belittle the importance ofproperty rights. Respect for these rights is basic toorganized society, and the instinct of individuals toacquire property is at the root of all economic pro-gress. Unless people can feel secure in their abil-ity to retain the fruits of their labor, there is littleincentive to save and to expand the fund of capital—the tools and equipment for production and forbetter living. The industrial development of thiscountry, which has given us the highest standardof living in the world and has made possible amiracle of production in war and peace, is depen-dent upon the observance of property rights. Whois going to work and save if these rights are notrecognized and protected?

The right to own property means the right to useit, to save it, to invest it for gain, and to transmitit to others. It means freedom from unreasonablesearch and seizure and from deprivation withoutdue process of law or without just compensation.It might also be fairly taken to imply a limitationupon taxation because "the power to tax involvesthe power to destroy." For a like reason, it shouldimply assurance against governmental dilution ofthe money whereby the government takes propertywhich otherwise could be claimed by wage andsalary checks and other credit instruments. Further,it should insure against other measures so bur-densome or restrictive as to prevent the employ-ment of savings in legitimate productive enterprisewith a reasonable prospect of gain. Violation ofany of these rights can nullify, in whole or in part,the right to property.

The Bill of Rights in the United States Constitu-tion recognizes no distinction between propertyrights and other human rights. The ban againstunreasonable search and seizure covers "persons,houses, papers, and effects," without discrimina-tion. No person may, without due process of law,be deprived of "life, liberty, or property"; all areequally inviolable. The right of trial by jury is as-sured in criminal and civil cases alike. Excessivebail, excessive fines, and cruel and unusual pun-ishments are grouped in a single prohibition. Thefounding fathers realized what some present-daypoliticians seem to have forgotten: A man withoutproperty rights—without the right to the product ofhis own labor—is not a free man. He can exist onlythrough the generosity or forbearance of others.

These constitutional rights all have two char-acteristics in common. First, they apply equally toall persons. Second, they are, without exception,guarantees of freedom or immunity from govern-mental interference. They are not assertions ofclaims against others, individually or collectively.They merely say, in effect, that there are certainhuman liberties, including some pertaining toproperty, which are essential to free men andupon which the state shall not infringe. . . .

What Are "Human Rights"?

Now what about the so-called human rights thatare represented as superior to property rights?What about the "right" to a job, the "right" to astandard of living, the "right" to a minimum wageor a maximum workweek, the "right" to a "fair"price, the "right" to bargain collectively, the "right"

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24 PRIVATE PROPERTY AND EXCHANGE

to security against the adversities and hazards oflife, such as old age and disability?

The framers of the Constitution would havebeen astonished to hear these things spoken of asrights. They are not immunities from governmentalcompulsion; on the contrary, they are demands fornew forms of governmental compulsion. They arenot claims to the product of one's own labor; theyare, in some if not in most cases, claims to theproducts of other people's labor.

These "human rights" are indeed different fromproperty rights, for they rest on a denial of thebasic concept of property rights. They are not free-doms or immunities assured to all persons alike.They are special privileges conferred upon somepersons at the expense of others. The real distinc-tion is not between property rights and humanrights, but between equality of protection fromgovernmental compulsion on the one hand anddemands for the exercise of such compulsion forthe benefit of favored groups on the other.

The "Right" to a Job

To point out these characteristics of the so-calledhuman rights is not to deny the reality nor belittlethe importance of the social problems they repre-sent. Some of these problems are real and impor-tant. They are also complex, and in this furtherrespect they are different from the rights guaran-teed by the Constitution.

There is no great difficulty nor danger in declar-ing that certain individual rights shall not be tam-pered with by the government—and in adhering tothat principle. It is quite another matter to say thatthe government shall seize the property or curtailthe freedom of some of its citizens for the benefit,or the supposed benefit, of others. To adopt thisview is to cast both the government and the citi-zen in radically new roles, with far-reaching effectson economic behavior, political practices, and in-dividual character.

Consider, for example, the so-called right to ajob. This is a fine-sounding phrase that evokes anemotional response. It creates a mental image ofan unemployed worker and his family sufferinghardship through no fault of their own. No onewould deny the reality nor the seriousness of that,especially when the unemployed worker is multi-plied by millions. To find the best remedy, how-ever, is a difficult matter, and it is not made easierby file use of such misleading catchwords as the"right" to a job. One man's "right" to a job im-plies an obligation on the part of someone else to

give him a job. Who has any such obligation?An economy of private enterprise functions by

means of voluntary contracts entered into for thesake of mutual advantage. Jobs arise from suchcontracts. The obligation to fulfill his contract isthe only right any person can have to a job. Bothsides of the contract have to be fulfilled. The em-ployer's job—his side of the contract—is to antici-pate what the consumers will want in the marketplace. His capacity to offer jobs to employees de-pends upon how well he understands the marketpattern of consumer preferences. He has no rightof control over the market. There is a limit to hiscapacity to provide jobs. And in the final analysis,an employee's so-called right to a job is determinedby what consumers think the product or service isworth to them.

As with the "right" to a job, so with the other so-called human rights. These are not rights in the con-stitutional sense of respect for privacy; they are,instead, social programs which the governmenthas undertaken or has been asked to promote.These programs, unlike true rights, are selective,coercive, complex, and experimental. Hence, theyneed to be carefully considered each on its ownmerits with due regard to the serious threats theymay involve to the real and basic human rightsthat have enabled free men to build a society withthe highest level of material well-being everachieved anywhere.

Triple Threats to Private Property

On the economic side, the gravest threat is thatproductive enterprise will be so burdened and im-peded by high taxes, prohibitions, red tape, andcontrols that industry will stagnate. Without theproducts of industry, social programs of any kindbecome empty promises. New political powersand functions increase the cost of government anddrain manpower from farms and factories into ad-ministrative bureaus. The great bulk of the moneyfor benefit payments to favored groups must betaken from those who produce by putting forththeir own efforts or by investing their savings. Min-imum-wage rates wipe out the entire lower rangeof job opportunities in the business world. Only thegovernment, with the power to tax, can pay morefor labor than it is worth. Maximum-hour laws fur-ther limit the opportunity to be productive. Artifi-cially pegged prices and wage rates interfere withthe normal market process of gearing productionto the maximum satisfaction of consumer wants.

On the political side, the increase of power mul-

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12. WHO CONSERVES OUR RESOURCES? 25

tiplies the opportunities for the abuse of power andthe harm that can be done by such abuse. Hightax rates expose taxpayers and collectors tostrong temptations. The disbursem*nt of billionsof dollars in public funds opens new avenues forfavoritism and corruption. This system of politicaldistribution of the wealth of a nation encouragesgovernment by pressure groups, with the favorsflowing toward the groups with the most votes.Demands for more liberal benefits On the one handand for tax relief on the other converge upon thepublic treasury. Deficit financing and currencydepreciation tend to become national habits whichfeed upon the savings of individuals and wipe outthe means of production and progress.

On the human side, the individual citizen dis-covers that it is increasingly difficult to get aheadby enterprise and thrift—increasingly profitable tojoin in the scramble for governmental favors andhandouts. The sense of relationship between ser-vices rendered and payment received grows weak-er. Personal-initiative and self-reliance give way toan attitude of: let the government do it. Free citi-zens tend to degenerate into wards of the state.

These are not imaginary effects, but real ones.They are visible here and now. They are the conse-quences of placing social programs, mislabeled"human rights," above the real human rights, dis-paragingly called "property rights," which under-lie the productive strength of free men.

12. WHO CONSERVES OUR RESOURCES?*

Ruth Shallcross Maynard

"Who should conserve our resources?" If a pollwere taken, a large majority probably would an-swer: "Our federal and state governments." And ifone were to ask why this view is so widely held, hewould find among other "reasons" the following:

(1) that the free market is chaotic, gives profitsto the few, and is unmindful of the great "waste"of our diminishing limited resources;

(2) that "people's rights" are above "private orspecial interests" and only the government canproperly serve the public interest;

(3) that government has access to more funds;(4) that government has the power and facilities

to obtain all the necessary data and to do the re-search needed for the best "scientific" decisions onresource conservation;

(5) that the price system does not operate in theinterests of conservation because of the "unre-strained pursuit of self-interest";

(6) that the concentration of power in some cor-porations further threatens our dwindling re-sources and must be regulated by government.

•From The Freeman, July 1962

These "reasons," of course, do not indicate howa government agency would go about attemptinga solution to the conservation problem—this is al-ways just assumed—but consider them briefly:

(la) The free market is anything but chaotic.Competing natural market forces reflect in pricesthe wishes of both buyers and sellers—millions ofindividuals, separately accountable and responsi-ble for their own actions in their own field of eco-nomic activity. All persons seek their own advan-tage when allowed a choice, but in the free marketa producer cannot profit unless he pleases con-sumers better than his competitor does. Since hemust think of efficiency and lowered costs in orderto survive, it is false to assume that he alone profitsfrom the use of natural resources from which aremade the products wanted by consumers. All gainwho use the resulting products.

(2a) Can there be "people's rights" superior tothe rights of individuals? All individuals have spe-cial and private interests and rights. Therefore,the "people" cannot have rights except individual-

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26 PRIVATE PROPERTY AND EXCHANGE

ly; and the right to life carries with it the right tomaintain it by private and special means.

(3a) The government has no funds that have notbeen taken from the people by force, whereasmany a large private undertaking has come forthfrom voluntarily contributed funds. In fact, the en-tire industrial development in this country hasbeen a continuous example of this voluntary wayof creating the facilities for production by givingthe consumer what he wants at the price he is will-ing to pay in competition.

(4a) Offhand it would seem that a governmentmight have access to more data about scarce re-sources than would a private enterpriser. But gov-ernment cannot bring forth the detailed informa-tion so vital to sound decision. The kind of de-tailed knowledge needed simply isn't "given to any-one in its totality," as Hayek has pointed out.1

"Knowledge of the circ*mstances of which wemust make use never exists in concentrated or inte-grated form," he states, "but solely as dispersedbits of incomplete and frequently contradictoryknowledge which all the separate individuals pos-sess." Yet, producers need such information beforethey can decide how to act. The chief communica-tor of this knowledge is free price movements. Ifthe price of a given resource continues upward,this tells producers all they need to know about itsincreasing scarcity and signals them to conserve it,to use it sparingly and for the most valuable prod-ucts. Advocates of government planning neverseem to grasp how this works, for they are con-stantly tampering with market forces, distortingthe delicate price signals that could otherwiseguide them. Thus, government planners must relyon using general data obtained by crude pollingmethods which are unreliable for action in specificeconomic areas and are out of date before they canbe collected, analyzed, and summarized. More-over, such studies cannot tell the government con-troller as much as free price movements tell indi-viduals acting in a particular market as buyers orsellers.

(5a) The role that prices play in the free econo-my is so little understood that many people be-lieve government must set prices lest they reflectonly the "selfish interests" of the producers. Theprice system not only tells producers and consum-ers when scarcity of a product exists (pricesrise) or when it has become more plentiful (prices

drop); it also supplies the incentive to act in theinterests of conservation by seeking a substitutefor the high-priced scarce material. Competitiveprices allocate scarce resources to those whowill pay more (not those who have more, as is al-leged) for the right to try to serve consumers ef-ficiently and profitably.

(6a) If concentration of power in corporationsis too great to be permitted, what about the ulti-mate concentration of power in a government in-stitution beyond the regulation of market forces?Government is unaccountable in the sense that itis not obliged to please consumers in order to stayin business. If it does not show a profit, its lossescan be covered by tax money. Big corporations canbehave in monopolistic fashion only if they enjoygovernment privileges of some kind. Potential com-petition, substitution, and elasticity of demandforce them to keep prices close to the competitivelevel.2

When Government Controls

The foregoing arguments, however, do not touchupon the basic problem involved in the conserva-tion of resources. Let us assume that Congresspasses a conservation law setting up "The FederalBureau of Conservation." Tax money must then beappropriated for this Bureau. The director, a po-litical appointee, must find a building and hire astaff large enough to justify his salary. To investi-gate and collect data on what is being done is atime- and tax-consuming job.

Turning the conservation problems over to anagency with police power does not mean solution,however. It only means that the director has beengiven the authority to find a solution and to forceit on those individuals who are in the market fornatural resources. This does not assure the publicthat the director has any special grant of wisdomconcerning the problems involved, or that he willeven know what they are. This appointment wouldlead him to assume that individual enterpriserswere not doing their jobs well. He would un-doubtedly define his task as one of finding whatindividual enterprisers are doing wrong and stop-ping it. Such interference could only prevent pri-vate individuals from utilizing their creativity andenergy in seeking a solution to both immediate andlong-run conservation problems. Having stoppedthis flow of creative endeavor, he would need tofind a "positive" solution—such as stockpiling by

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12. WHO CONSERVES OUR RESOURCES? 27

force certain quantities of those materials deemedmost scarce.

Difficult Decisions

But for whom would the director be stockpil-ing? Would he sacrifice the present generation tofuture ones? And, if so, which ones? The next gen-eration, the one after that, those living a hundredyears from now, or whom? And how could he pos-sibly know what those generations would want orneed? Moreover, he would have the problem ofwhat quantities to stockpile and what grades (bestor worst) to save. Would some items have alterna-tive uses? Would he plan for possible added or newuses in the future? These questions never seem tobe asked by the authors of books and articles onconservation, whose specialty is to condemn pri-vate enterprise.

Stockpiling only aggravates the very scarcitygiven as the reason for stockpiling. The morescarce a stockpiled item, the higher the price, andthe more complaints to be heard from the users.Whereupon, the director probably would seekpower to fix prices lower than market levels. This,of course, could only lead to increased demandand pressure on prices, leading to black marketsor government rationing, or both. Allocation by ra-tioning would present the problem of whom to fa-vor and whom to slight. His authority to discrim-inate would subject the director to strong politi-cal pressures. If not by political favoritism, thedirector could select by personal preference, orfirst come, first favored. Any system is discrimina-tory. The system of government planning impliesarbitrary discrimination by one man with policepower who decides who shall get what. Withoutpersonal favoritism, the free market "discrimi-nates" against those who would waste scarcematerials—it lets their businesses fail—and "dis-criminates" for those who would most efficientlyuse the resource to serve consumers—their profitdepends on their capacity to conserve the scarceresource.

The government system is based on arbitrary de-cisions of man over man, with strong probabilityof political influence; the free market system isinfluenced by nonpolitical and nonpersonal forces.There is no other alternative. The first system leadsto static conditions which cannot meet the chang-ing needs and desires of consumers, the "people"most involved and presumably those whom aconservation agency ought to protect. The business

way encourages search for substitutes when pricerises indicate growing scarcity. This not only aidsconservation but also affords the consuming publicmore reasonably priced alternatives in times ofscarcity. When prices are fixed below market levelsby the government director, this discourages con-servation and gives a false signal as to the degreeof scarcity all the way from the natural resourcelevel to the final consumer.

Private Enterprisers ConserveWhat Is Worth Saving

Until someone discovers that a resource has aspecific use, it has no value for which it should beconserved. Alexander the Great had no use for thereservoir of oil beneath his domain. The underde-veloped countries do not lack resources. But theyhave not yet found the key (personal saving andcompetitive private enterprise) by which to utilizethe resources to meet the people's needs. Privateenterprisers are constantly trying to find new ma-terials and new uses for known resources, alwayslooking ahead to see which ones will be availableand how efficiently they can be utilized. Pick upany trade journal and note the articles on how tocut costs, utilize waste materials, be more efficient.Because the government told them to? No. Thehope of profits acts as a powerful compulsion tobe efficient, to improve, to conserve. The follow-ing examples show how private enterprisers elim-inate waste and utilize natural resources to meetthe needs of the consuming public.

Until natural gas was known to be useful as afuel, petroleum producers burned it to get rid of it.Until ways were found of storing and transportinggas with safety, it had only local use. Competitionforced the search for further uses and wider mark-ets, and profits rewarded those who best servedconsumers. As ways were found to handle gasbeyond local markets, consumers elsewhere gaineda wider choice of fuel, and other fuels were there-by conserved.

Reliance on Hindsight

Accusations of waste in private industry are al-ways based on hindsight. Any statistics of inade-quate use of natural resources are history. When anew method or new use is discovered, it is easy topoint out past waste and misuse. The assumptionis that industrialists are wasteful if they haven'tseen in advance all possible uses for all materials.

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28 PRIVATE PROPERTY AND EXCHANGE

The meat-packing industry over the last centuryhas used all but the squeal of the pig. But this didnot come all at once. Nor did or could it havecome from government decrees. It came slowlythrough individual efforts to cut costs and increaseprofits in competition with others.

In the lumber and pulp-paper industries, useshave been found for virtually all of a tree, includ-ing the bark, branches, and sawdust which wereformerly "wasted." The "waste" lignin, after re-moval of the carbohydrates, has been the concernof many a pulp company as well as scientists atThe Institute of Paper Chemistry, who have yet tofind a use that will meet adequately the compe-titive market test of consumer choice.

With the increasing scarcity of pure water, thepulp and paper industry has used less and lessof it per ton of product. When wood became scarcein Wisconsin, the "Trees-for-Tomorrow" programwas instigated, encouraging farmers to grow treesas an added cash crop. As salt cake from Saskatche-wan grew scarce, the Southern kraft-pulp millslearned how to reclaim it and cut the amountneeded per ton of pulp by two-thirds or more.Could such a conservation measure have beenforced by government decree? It is most doubtful.

In the agricultural field are many illustrations ofcontinuous improvement: of tools (the history ofthe plow alone would make an impressive volume);of methods of utilizing land, fertilizers, insecti-cides, and seeds; of knowledge of genetics, hydro-ponics, and radioactive materials. All of these haveplayed a vital part in getting better farm productsto the people with fewer man-hours and at lesscost. These all conserve time.

Time also is a resource. Conserving time cansave lives from starvation, give relief from back-breaking jobs, enable individuals to furtherachieve their respective purposes. Improved toolshave won time for more leisure, for increasing rec-reational, cultural, educational, and religious activ-ities.

Individual Improvement

Improvement of the well-being of individuals,rather than conservation, is the chief goal in theutilization of resources. Absolute conservationcould lead to the absurdity of not utilizing our re-sources at all, and thus conserving to no purpose—no freedom and no improvement of our lives. J. S.Mill has expressed it thus: "The only unfailing andpermanent source of improvement is liberty, since

by it there are as many possible independent cen-ters of improvement as there are individuals." Theenergy of the police force of a government agencymust by its very nature be negative. Enterprisersare positive, constantly trying to solve specificproblems. It is impossible to force the release of thecreative energy of millions of individuals who, iffree, are each highly motivated to release it in try-ing to improve their status. Thus, force only inhib-its the real sources of improvement.

Because individuals have been free to find thebest use of land resources, the American farmertoday feeds himself and at least 25 others. In ourearly history food production was the principaloccupation, and in some countries today as high as90 per cent of the population still spends longhours of backbreaking work farming for a baresubsistence.

Who Is Responsible for Waste?

The real waste in resources comes from govern-ment policies. It is seen especially in wartime, butmore and more in peacetime programs. The gov-ernment farm program has encouraged waste ofland, seeds, fertilizers, labor, and capital by subsi-dizing the production of surpluses to be stored inbins that dot the countryside. The foreign aid pro-gram has wasted various resources, sending themto countries where little if any use has been or couldbe made of them. Waste occurs in such projects asthe TVA that floods permanently many fertileacres which formerly provided millions of dollarsworth of food products and which the Army En-gineers have estimated would not be flooded by thenatural forces of the Tennessee River in 500 years.

Rising taxes also promote waste. The corporateincome tax of 52 per cent of earnings, for example,encourages industrialists to engage in questionableand wasteful projects which appear justified onlywhen purchased with a 48-cent dollar. This is notin the interests of conservation.

However, the errors individuals make and theirwaste of resources are small and inconsequentialcompared with those made by government agentsin controlling a major supply of a scarce resource.Those in civil service positions are rarely dismissedor otherwise held accountable for their errors. Aprivate individual stands to lose personally if hewastes resources in his field of economic activity,and has a built-in motivation for attempting to cor-rect his mistakes as soon as they are reflected inrising costs or decreasing demand. A government

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13. THE WAR ON PROPERTY 29

agent, however, risks no personal loss when hemisuses resources, he cannot recognize mistakesby rising costs when prices are fixed arbitrarily,nor is he motivated to correct his mistakes evenwhen recognized.

Natural resources are best utilized and con-served where they meet specific economic require-ments in the most efficient way as determined bycompetition in the free market. Government con-trol of natural resources reduces the freedom ofchoice of producers in using these materials andthis affects adversely the freedom of choice of con-sumers who buy the final products made fromthem. There is no effective method of determiningthe economic requirements of the people when the

free market is not allowed to reflect them, nor canforce solve the problem of conservation. It is a falsepanacea that is centuries old, advocated by thosewho desire power over others whom they neithertrust nor respect. Conservation will take place inthe best sense where individuals are allowed toseek solutions to their own personal problems asthey arise. Necessity is the mother not only of in-vention but of conservation as well.

Notes1¥. A. Hayek, "The Use of Knowledge in Society," The Amer-

ican Economic Review, Vol. XXXV, No. 4, September 1945; re-printed in The Freeman, May 1961.

2 Hans Sennholz, "The Phantom Called Monopoly" (ReadingNo. 53).

13. THE WAR ON PROPERTY*

Paul L. Poirot

The results, after more than 30 years of Federal"war on poverty" in America, suggest that thecampaign has failed. "Instead of temporary aid,relief has become a permanent way of life for mil-lions. Second and third generations of familiesnow live on relief."1 Nor is it that the millions inthis new class of poverty-stricken are simply desti-tute of the material manifestations of private prop-erty. Far worse; many have lost their self-respectand the respect of their fellow men; they have losttheir human dignity. What can these persons claimas their own?

Respect for the dignity of an individual pre-sumes him to be responsible for the developmentand use of his faculties, his qualities, his prop-erties. The personal freedom of choice that is lib-erty depends upon self-control and possession orownership in the form of private property. Andconsistent with this concept of human dignity andprivate property is the right of the individual tomake his own mistakes, if he so chooses, and toabide by the consequences—to know the penaltiesof improper choice and action as well as the fruitsof success.

•From The Freeman, October 1967

"Property is desirable, is a positive good in theworld," said Abraham Lincoln. "That some shouldbe rich shows that others may become rich andhence is just encouragement to industry and enter-prise. Let not him who is houseless pull down thehouse of another, but let him work diligently tobuild one for himself, thus by example assuringthat his own shall be safe from violence."

Lincoln understood that poverty is not to beovercome by warlike or compulsory measures, butby peaceful example. Not by pulling down thehouse of another, not by destroying another's lifeor character or estate, but by each man workingdiligently to build one for himself.

A property owner, of course, might be able tolive upon his own resources. But few of us now-adays would be content with such a subsistencelevel of living. We have grown accustomed to theadvantages of specialized production and peacefulexchange of goods and services. Such voluntary ex-change also depends on private property. Everytrader is a property owner and his own man. Some-thing to offer is his ticket of admission to the mar-ket—his purchasing power.

This requirement for trade gives rise to a com-mon complaint about the so-called tyranny of the

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30 PRIVATE PROPERTY AND EXCHANGE

market economy: that it tends to be exclusive—forproperty owners only. The fact that a buyer's pur-chasing power depends upon what he has to offeris said to be undemocratic and unfair; it doesn'tafford everyone everything he wants. Some evenargue that "property is theft," in the belief that anyaccumulations of private property must have im-poverished other people.

Such beliefs might have been justified under var-ious conditions of the past—might be justified insome parts of the world today. A slave owner, forexample, acquires and holds his slaves by force,and thus impoverishes them. Tribal wars for terri-tory or other property leave the losers poorer tothe extent of the victors' spoils. But in a trading so-ciety as we know it, property required for produc-tion and marketing can only be accumulated andretained by an owner insofar as he uses it as con-sumers want him to. Otherwise, he's out of busi-ness.

The complaint that not everyone can have every-thing he wants should be leveled, not against themarket and the private ownership of property, butagainst the nature of things. The real world is char-acterized by unlimited human wants and limitedmeans, not the other way round. Any realistic so-cial system must consider not only the boundlessappetites of consumers but also the conservationand efficient use of scarce resources.

Ours is not a world that affords abundance forconsumption without productive effort or otherthought for the source of supply. This is why it isimportant to understand the basic principles andpractices of private ownership and control ofscarce resources. These are essential features ofany peaceful society.

Regulated by Competition

To say that a prosperous market economy de-pends upon respect for private property is the truthbut not the whole truth. Private ownership andcontrol, of itself, does not assure the most efficientuse of scarce resources in service to others. Thatassurance comes as a result of competition. Thisis not to say that competitors are solely interestedin pleasing customers. But catering to the wishesof customers is the surest and easiest way to haveand to hold valuable, scarce items. The fact thattwo or more businessmen bid for possession anduse of the same resource is the consumer's guaran-tee that it will be used efficiently to serve him.Consumers pay handsomely for efficient service

and thus determine who, among various competi-tors, is to own and control the means of production.

Competition for property is the great moderatoror regulator of temptations to abuse the privilegesof private ownership. Competition, of course, can-not force anyone to buy or sell at a price unaccept-able to him. But competitors can make trading dif-ficult for those who expect something for nothing.Competition is truly the life of trade—a powerful,peaceful influence for honest and efficient serviceby those who hope to own and control the use ofproperty.

Nor is the moderating force of competition con-fined to the supplier side of the exchange process.Consumers also compete against one another foravailable supplies. The resultant level of marketprices tempers appetites, rations scarce items, re-quires responsible performance by those who areto receive goods and services in exchange for theirown. The market will no more serve consumerswho demand something for nothing than it will tol-erate the false advertising of fraudulent suppliers.So, competition is a form of peaceful "policing" ofthe market. It tends to keep buyers and sellers hon-est in their trading and efficient in their use ofever-scarce resources.

Voluntary or Compulsory

Let it be clear that our discussion thus far per-tains to the so-called "private sector" of the econ-omy—the production, the saving and investment,the trading of goods and services, and the personalconsumption practices that result from voluntarychoices of buyers and sellers in open competition.And it bears repeating that the "private sector"market is a voluntary association of property own-ers for the purpose of trading to their mutual ad-vantage. Admittance to the market is gained byhaving something to offer. True, such offeringsconstitute the means for the satisfaction of thewants of consumers. But the expressed wants ofconsumers do not necessarily constitute a marketsituation. A combination of consumers to satisfytheir wants could very well be a den of thieves.

When the power of government is invoked toplunder property, in the name of war on poverty,any receiver of such loot must recognize that hepossesses it at his own risk. The "human right" toplunder is a denial of the right to own and controlproperty. It simply proclaims that might makesright; and that's a rough game for the meek andweak. That is precisely how thieves operate: non-

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owners deciding how an owner may or may not usehis property.

The more we observe and become involved inthe government war on poverty, the clearer comesthe message: War against poverty is war againstproperty, and war against property is war againstthe poor.

Monetary Misunderstanding

Much of the confusion about all this may betraced to the love of money, under the illusion thatmoney as such is wealth. True, at a given moment,a quantity of money given to a poor person willenable him to buy goods and services otherwise be-yond his reach. But his level of living depends uponthe goods and services rather than the money. Andredistributing the money supply does nothing assuch to increase the total available supply of goodsand services. It simply transfers buying power fromone person to another. Such transfer, however, hasimportant consequences.

Who buys what affects price and consumptionand saving and production patterns throughout theeconomy. When money is taxed from one personand given to another, to equalize wealth, there isthe strong probability that goods and services willbe diverted from productive use to immediate con-sumption. Taxing the fruits of saving and produc-tive effort discourages thrift and work. Subsidizingidleness increases it. This is the reason why com-pulsory socialism has failed to relieve povertywhen and wherever it has been tried. It redistrib-utes the money supply, but with consequences thatwaste resources and lives and lead relentlessly to-ward famine.

The formula, "from each according to his abilityand to each according to his need," simply emptiesthe breadbasket faster than it can be filled. Withinour lifetimes we have seen this happening in Rus-sia, Red China, India, Cuba, and other nations will-ing to accept every gift the free world has offered—but not willing to practice freedom. And perhapsthe most dramatic of all examples was afforded bythe history of the Plymouth Colony in the NewWorld. The first years of communal effort, poolingthe harvest and sharing "according to need," weremarked by dissension, dearth, and death. Fortu-nately, the settlers then tried private ownership ofthe land and the fruits of each owner's labor; andhunger and famine have been unknown in the landsince that change.

The reason why socialism fails to relieve poverty

comes clearer if one looks behind the monetaryscreen. Then it may be seen that material wealthis comprised of hoes and rakes and wheelbarrows,among other things.

Taking from a worker half the tools he needs todo a decent job (or taking them from that work-er's employer) and dividing the proceeds amongthe poor in the form of consumer goods lowers theproduction potential of such a society. It's a grass-hopper's way of high living for the moment and nothought for the morrow. The industrial revolution,that makes for a high level of production and ahigh level of living for all industrious and thriftymembers of society, is contingent upon respect forprivate property in the hands of those who haveearned and saved it for a purpose. Owners of toolsare in a position to hire others to help them usethose tools for productive purposes. As previouslydiscussed, competition obliges the owners of re-sources to use them efficiently and in a responsiblemanner.

The public-sector war on property includes var-ious governmental programs of a socialistic naturesuch as outlined by Marx and Engels in The Com-munist Manifesto. And these may be studied atclose range without traveling to Russia or RedChina or Cuba. What country today lacks expe-rience with price supports and price ceilings, rentcontrols, minimum wage and maximum profitlaws, rate regulations and other controls over in-terest, electricity, gas, water, housing, garbage dis-posal, communications, travel, insurance, banking,and what not? Where in today's world is a personfree to assume his own risks against the vicissi-tudes of old age, illness, illiteracy, illegitimacy, in-digence, and unemployment instead of being taxedfor everybody else's benefit? What country is freeof such protectionist measures as tariffs, quotas,embargoes, and similar restraints of trade? Allthese are forms of plunder, war on property, classwarfare in the Marxian sense.

Helping the Aged

Most of us readily recognize plunder when ittakes the form of force applied to a person or tohis property by an authoritarian dictator or bysome unlicensed crook. But what do we make of aproposition like this from President Johnson's"Message on Older Americans" addressed to Con-gress last January?

"We should look upon the growing number of older cit-izens, not as a problem or a burden for our democracy,

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but as an opportunity to enrich their lives, and, throughthem, the lives of all of us."

The President was advocating further expansionof the social security program originally enacted in1935. After all these years, who could possiblyquestion so worthy a goal as helping ourselvesby helping the aged? Yet, compulsory social secur-ity is a plundering game, perhaps more harmful inthe long run simply because its ultimate impactwas so dimly foreseen in the beginning.

The social security tax bill has doubled on theaverage every six years since the first collections in1937. It amounted to $20 billion in 1966 andthreatens, under new proposals, to double again by1974. A younger worker, facing the prospect of anannual social security tax of $1,000 or more, surelymust suspect that this could become "a burden forour democracy." Every taxpayer knows that taxesare a burden.

But is the taxpayer the only victim of the socialsecurity plunder game? What of the harm done therecipients of such handouts? Are their lives trulyenriched by relieving them of the responsibilityand the opportunity to grow out of their own errorsand misfortunes? Can a life be enriched, except asit becomes more useful? Just how does a govern-ment promise of old age assistance help anyone tohelp himself?

We know the harmful consequences of paternal-ism beyond the call of duty within the family. Andwe also should understand the danger of paternal-istic practices on a societal scale. That danger liesin the moral and economic impoverishment of thevictims of such intervention.

Urban Renewal

Another campaign front in the general war onpoverty has been that of Federal urban renewal.Professor Martin Anderson has admirably docu-mented the failure of that program.2 More homeswere destroyed than have been built under the pro-gram; and those destroyed were predominantlylow-rent homes while those built were predom-inantly high-rent homes. Many of the small busi-ness firms displaced by urban renewal went outof business, while others relocated in higher-rentand higher-cost areas; very few have ever movedback into the urban renewal area. Most renewalprograms decrease the tax revenues flowing intothe cities' tax coffers, placing added tax burdens onpresumably unaffected properties. And all pro-grams involve the use of the power of eminent do-

main to take the property of some for redistribu-tion or use by others. So, urban renewal is a form ofthe war against property; and the major victimshave been the families of the very persons—thepoor—in whose interests the program supposedlywas initiated.

Not all of the various welfare programs of com-pulsory intervention and redistribution have beenas clearly cost-accounted and measured in their im-pact as the Federal urban renewal program hasbeen weighed by Professor Anderson. But there isno reason to expect any other result from any of theother seizures or controls of private property in-tended to overcome poverty. The noblest of inten-tions may go unrealized. But the unforeseen andinevitable consequences are quite real.

When government sets the price of bread belowthe market level, there are two victims: the pro-ducer of bread who is driven out of business, andthe consumer who is left waiting in line for thebread that was not produced. The victims of rentcontrol are as much the tenants who cannot findhousing space as the landlords who cannot supplyit at that fixed price. Minimum wage laws injurenot only the employers who cannot afford to hire atsuch wages but also the employees incapable ofearning them. The same tariff that bars a producerfrom the market also bars a consumer. Every con-sumer subsidy is a tax upon producers, a waragainst property that injures the poor.

The Key to Jobs

The private ownership of resources by personsmost capable of using them productively is the keyto job opportunities and more abundant living forthe poor. The "lower third" and the "upper third"and the "middle class" have a common interest inprotecting the private ownership of property. Thejobs and livelihoods and lives of all depend upon it.Any person who hopes to sell his services ought tosee that his prospects depend upon property own-ers. Their right to own and use property, coupledwith their ability to manage it well, create job op-portunities for others. If a person is not satisfiedto be an employee of a property owner, he mayturn to self-employment. In that case, he will needto save for tools—become a property owner himself—if he is to succeed.

So, in any case, whether a person be relativelywealthy or relatively poor, it is to his own best in-terest to respect and uphold the private ownershipof property. When a government seizes private

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13. THE WAR ON PROPERTY 33

property, or otherwise clouds an owner's title in thename of war on poverty, it is the poor of that soci-ety who can least afford the costs of such warfare.They will be the first to starve.

Riots in History

Whenever a government exploits taxpayers tothe point of serious inflation, which amounts to aheavy tax burden on the poor, riots and insurrec-tion are to be expected.

What is happening in the urban centers of theUnited States today has happened before, and instrikingly similar fashion, among over-governedand over-taxed people throughout history. Officialcourt historians always have ascribed the inevi-table rioting to such handy scapegoats as gougingmerchants, greedy landlords, brutal local police-men, slave-owning ancestors, and every otherreason except the real one: too much governmentintervention and too little personal freedom.

This is not to defend the earlier practice of slav-ery in America and elsewhere or the mistaken andharmful practices of shortsighted marketeers orshort-tempered lawmen. Human beings make mis-takes; and each such mistake has consequencesthat ripple through society, often for years. Buthuman progress is not a process of building mole-hill mistakes of the moment into permanent moun-tains of misery. Unless we can learn by our errorsto do otherwise, we are condemned to keep on re-peating them. And our most terrible mistake is tofall upon an earlier evil as the justification for anew one. The horrors of slavery can never beerased by a new reign of arson, looting, murder,and riotous brutality.

The French Revolution:from Inflation to Napoleon

A clearer view of current happenings in Newark,Detroit, and other trouble spots in the UnitedStates may be possible if we look back with thatscholarly historian, Andrew Dickson White, at thesequence of events during the French Revolutionwhen the United States was a mere babe in arms.3

Louis XVI had recklessly spent France to theverge of bankruptcy by 1789, and inflation was tobe the "short road to prosperity." Despite abun-dant warnings from those who recalled the historyand disaster of earlier inflationary practices, themembers of the French National Assembly votedever-larger and more frequent issues of irredeem-

able paper money. But the inflation, as always, ag-gravated the very evils it was proposed to cure.

What began as the confiscation of the propertyof the Church, the leading landlord of France atthat time, became the excuse for more and moreprinting of worthless "assignats." This growingflood of "purchasing power" caused the skyrocket-ing of prices, prompting businessmen to expandoperations but often in a wrong direction leadingtoward personal failure and bankruptcy and unem-ployed workers. And, as usual during inflation,wages failed to keep pace with rising costs of liv-ing. Workers' savings were exhausted, along withany reason that might have held for saving in thefirst place. Thus the relentless inflation took its tollfrom among the very poor it had promised so muchto help. Meanwhile, the recklessly-spending andmoney-printing government had shifted the blamefor rising prices onto merchants and landlords andother businessmen equally trapped by events;maximum price laws and other disrupting controlmeasures were enacted with death penalties forviolators. But the people rioted, regardless, and theguillotine eventually claimed the heads of thosewhose good intentions had brought on all the trou-ble.

And the only thing the people of France gainedfrom that particular version of the Great Societywas Napoleon!

The ways in which Louis XVI spent taxpayers'money in 1790 doubtless would seem foolish toheads of state in 1967. But there is no indicationthat Louis was giving the money to enemy nations,or waging war at the opposite side of the world onbehalf of one unfriendly nation against other un-friendly nations, or planning to colonize the moon.It is true that modern rulers have found interestingnew ways to bankrupt their country's treasury.And the resultant inflationary resort to the print-ing presses may be slightly more sophisticated to-day. But reckless spending of artificially createdpurchasing power still spells inflation, and today'sriots by the tax-burdened and dispossessed poor ofDetroit are very much the same as the riots ofParis in the 1790's.

Offering Explanations That Won't Stand Scrutiny

It is not that some of the looters are the greatgrandchildren of Negro slaves; doubtless amongmem also are to be found the great grandchildrenof slave owners and of ardent Abolitionists of acentury earlier.

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34 PRIVATE PROPERTY AND EXCHANGE

It is not that the rioters are poor; the poor of theworld have as good a record for peace and honestyand brotherly love and law-abiding citizenship ashave those on any other rung of the economic lad-der.

Nor is it that those who flout the laws of theland have been denied educational opportunity;many of their provocateurs and leaders in violenceare holders of college degrees with campus train-ing for insurrection.

Our riotous friends are the unhappy victims ofthe false promises and bulldozer practices of thewelfare state.

These are individuals who have been dispos-sessed, driven from the modest homes they couldafford in the name of slum clearance and urbanrenewal and public housing. They are urban dwell-ers obliged to pay in higher grocery bills for an an-nual $6 billion farm relief program. They are sub-ject to draft for "somebody else's" war that seemsfar more likely to threaten than to strengthenAmerican security. They are unemployed by rea-son of special privileges that have been extendedto the leadership of organized labor unions. Theyare asked to pay for the protection granted indus-try in the form of tariffs, quotas, embargoes, andother price-hiking barriers to world commerce.They have been guaranteed subsistence, but withshackles attached. A slave to handouts and subsi-dies, for which he himself must pay in the end, isnonetheless a slave. Stripped of his self-responsi-bility and his self-respect, he may not be expected

to understand or respect the lives or the propertiesof others who have earned their rights. The poor ofour nation have been promised the moon—and pre-sented the bill! And they riot against this evil theycannot understand.

Nor is it easy to understand. The aftermath of aWatts or a Newark or a Detroit riot must appearto the careful observer very much like the gapingwounds in "demonstration cities" when the Fed-eral bulldozer of urban renewal has taken its toll ofhomes and businesses and displaced persons. Itmay be said for the rioting, looting, and burningthat it is considerably faster and less costly thanthe legalized method of urban demolition. But thatdoes not excuse the violence or the destruction in-volved in either procedure.

And what it will cost to rebuild the wreckedhomes and businesses and lives all depends onwhether it is attempted by the compulsory meth-ods of government planning and taxation or by thevoluntary cooperation of self-responsible and self-respecting individuals in the open competition ofthe market. What we can be certain of is that onemethod is warlike and the other is peaceful. Andthat should be sufficient reason for anyone to casthis vote for freedom.Notes

1U. S. News 6- World Report, July 17, 1967, p. 44.2 Martin Anderson. The Federal Bulldozer: A Critical Anal-

ysis of Urban Renewal, 1949-1962 (Cambridge, Massachusetts:The M.I.T. Press, 1964). 272 pp.

3 Andrew Dickson White. Fiat Money Inflation in France (Irv-ington-on-Hudson, N. Y., Foundation for Economic Education,Inc.).

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Social Cooperation and the Market

14. FREE WILL AND THE MARKET PLACE*

Frank Chodorov

Free will is the starting point of all ethical think-ing and it plays an equally important part in thebusiness of making a living. If man were not en-dowed with this capacity for making choices, hecould not be held accountable for his behavior, anymore than could a fish or a fowl—an amoral being,a thing without a sense of morals. So, if man weredevoid of this capacity, his economics would beconfined to grubbing along on whatever he foundin nature. It is because man is capable of takingthought, of making evaluations and decisions in fa-vor of this or that course, that we have a disciplinecalled economics.

In making his ethical choices, man is guided bya code believed to have the sanction of God; andexperience has shown that the good life to whichhis instinct impels him can be achieved only if hemakes his decisions accordingly. The Ten Com-mandments have been called the Word of God;they can also be described as natural law, andnatural law has been described as nature's way ofapplying means to ends. Thus, we say that naturein her inscrutable ways had determined that watershall always run down hill, never up; that is anatural law, we say, because it is without excep-tion, inevitable, and self-enforcing. Therefore,when we decide to build ourselves a house, we setit at the bottom of the hill so as to avail ourselves ofa supply of water. If we put the house at the top ofthe hill, nature will not cooperate in our obstinacy

*From The Freeman, January 1959. Adapted from an addressbefore the American Farm Bureau's "Farm Family and Chris-tian Resources" Conference at Madison, Wisconsin, October30, 1958

and we shall not have any water in the house; un-less, of course, we discover and make use of someother natural law to overcome the force of gravity.

That is to say, nature is boss and we had betterheed her teaching when we make decisions or weshall not achieve the ends we desire. But, herteaching is not freely given; we must apply our-selves diligently to a study of her ways to find outwhat they are. The prerequisite for a successful in-vestigation is to admit that nature has the secretwe are trying to uncover; if we begin by saying thatin this or that field nature has no laws, that hu-mans make their own way without reference to na-ture, we shall end up knowing nothing.

If, for instance, we discard the Ten Command-ments, declaring them to be mere man-made con-ventions changeable at will, we end in chaos anddisorder—evidence that we are on the wrong track.Likewise, if we declare that God in his infinite wis-dom chose to disregard economics, that in order-ing the world he overlooked the ways and meansfor man's making a living, that in this particularfield man has to work out his own formulae, wewill end up with a poor living.

"Economics" without Principles

And that is exactly what has happened in thestudy of economics; many experts in this field areof the opinion that nature can tell us nothing aboutthe business of making a living; it's all a matter ofhuman manipulation. That is why economics is sooften a meaningless hodgepodge of expediencies,leading us to no understanding and no good end. Imight add that the incongruities of ethical life,

35

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36 SOCIAL COOPERATION AND THE MARKET

such as divorce, juvenile delinquency, interna-tional friction, and so on, are largely the result ofthe current conceit that there is no warrant for eth-ics in nature, no positive laws for moral behavior;but that is another subject.

I shall try to present some evidence that naturehas her own rules and regulations in the field ofeconomics, indicating that we had better applyourselves to learning about them if we would avoidthe obviously unsatisfactory results from relyingon man's ingenuity. Come with me into the labora-tory of experience, which is the source of much un-derstanding.

The First Pioneer

Let us cast our mind's eye back to the time whenthere was no Madison, Wisconsin, or any other citywest of the Alleghenies, when only the seed of alater social integration was planted here—when alone frontiersman decided to settle on this spot ofearth. The primary consideration which influencedhis decision was the possibility of making a livinghere. He selected what later became Madison be-cause the land was fertile, water was plentiful, theforests abounded with wood for his comfort, meatfor his sustenance, and hides for his raiment. Thiswas the workshop from which he could expectgood wages for his efforts. Without benefit of eco-nomic textbooks, he hit upon a couple of economiclaws: (1) that production, or wealth, consists ofuseful things resulting from the application of hu-man labor to natural resources; (2) that wagescome from production.

These laws, these precepts of nature, are still inforce and always will be despite the efforts of some"experts" to rescind them. Often the yearning formanna from heaven obscures the fact that only bythe application of labor to raw materials can eco-nomic goods appear, but the yearning is so strongthat men ask government to play God and repro-duce the miracle of the wilderness.

Government, of course, can produce nothing, letalone a miracle; and when it presumes to dropmanna on its chosen people, it simply takes whatsome produce and hands it over to others; its lar-gess is never a free gift. And as for wages, theystill come from production, even though there aresectarians who maintain that wages come from thesafety vaults of a soulless boss. The conse-quences of disregarding these two dictates of na-ture are too well known to call for discussion.

Returning to our first pioneer, his initial wagesare meager. That is because he is compelled by thecondition of his existence to be a jack-of-all-trades,proficient in none. He produces little and thereforehas little. But he is not satisfied with his lot for, un-like the beasts in the forest or the fish in the sea,man is not content merely to exist.

And here we hit upon a natural law which playsa prime role in man's economic life: He is the in-satiable animal, always dreaming of ways andmeans for improving his circ*mstances and widen-ing his horizon. The cabin built by the pioneer toprotect himself from the elements was castleenough in the beginning; but soon he begins tothink of a floor covering, of pictures on the wall, ofa lean-to, of a clavichord to brighten his eveningsat home and, at long last, of hot-and-cold runningwater to relieve him of the laborious pumping.Were it not for man's insatiability, there would beno such study as economics.

A Neighbor Arrives

But the things the pioneer dreams about are un-attainable as long as he is compelled to go it alone.Along comes a second pioneer, and his choice of aplace to work is based on the same considerationthat influenced his predecessor. What wages canhe get out of the land? However, as between thislocation and others of equal natural quality, thisone is more desirable because of the presence of aneighbor. This fact alone assures a greater income,because there are jobs that two men can performmore easily than can one man alone, and some jobsthat one man simply cannot do. Their wages aremutually improved by cooperation. Each has moresatisfactions.

Others come, and every accretion to the popula-tion raises the wage level of the community. In thebuilding of homes, in fighting fires and other haz-ards, in satisfying the need of entertainment or inthe search for spiritual solace, a dozen peopleworking together can accomplish more than twelvetimes what each one, working alone, can do. Still,the wage level of the community is rather low, forit is limited by the fact that all the workers are en-gaged in the primary business of existence on aself-sustaining, jack-of-all-trades basis.

At some point in the development of the com-munity it occurs to one of the pioneers that he hasan aptitude for blacksmithing; and if all the otherswould turn over to him their chores in this line, hecould become very proficient at it, far better than

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14. FREE WILL AND THE MARKET PLACE 37

any of his neighbors. In order for him to ply thistrade the others must agree to supply him with hisneeds. Since their skill at blacksmithing is de-ficient, and since the time and effort they put intoit is at the expense of something they can do bet-ter, an agreement is not hard to reach. Thus comesthe tailor, the carpenter, the teacher, and a num-ber of other specialists, each relieving the farmersof jobs that interfere with their farming. Special-ization increases the productivity of each; andwhere there was scarcity, there is now abundance.

Specialists with Capital

The first condition necessary for specialization ispopulation. The larger the population the greaterthe possibility of the specialization which makesfor a rising wage level in the community. There is,however, another important condition necessaryfor this division of labor, and that is the presenceof capital. The pioneers have in their barns andpantries more than they need for their immediatesustenance, and are quite willing to invest thissuperfluity in other satisfactions. Their savings en-able them to employ the services of specialists; andthe more they make use of these services the morethey can produce and save, thus to employ morespecialists.

This matter of savings, or capital, may be de-fined as that part of production not immediatelyconsumed, which is employed in aiding furtherproduction, so that more consumable goods maybecome available. In man's search for a moreabundant life he has learned that he can improvehis circ*mstances by producing more than he canpresently consume and putting this excess into theproduction of greater satisfactions.

Respect for Property

Man has always been a capitalist. In the begin-ning, he produced a wheel, something he could noteat or wear, but something that made his laborseasier and more fruitful. His judgment told himwhat to do, and of his own free will he chose todo it. That makes him a capitalist, a maker anduser of capital. The wheel, after many centuries,became a wagon, an automobile, a train, and anairplane—all aids in man's search for a better liv-ing. If man were not a capitalist, if he had chosennot to produce beyond requirements for immediateconsumption—well, there would never have beenwhat we call civilization.

However, a prerequisite for the appearance of

capital is the assurance that the producer can re-tain for himself all he produces in the way of sav-ings. If this excess of production over consumptionis regularly taken from him, by robbers or tax-collectors or the elements, the tendency is to pro-duce no more than can be consumed immediately.In that case, capital tends to disappear; and withthe disappearance of capital, production declines,and so does man's standard of living.

From this fact we can deduce another law ofnature: that security in the possession and enjoy-ment of the fruit of one's labor is a necessary condi-tion for capital accumulation. Putting it anotherway, where private property is abolished, capitaltends to disappear and production comes tumblingafter. This law explains why slaves are poor pro-ducers and why a society in which slavery is prac-ticed is a poor society. It also gives the lie to thepromise of socialism in all its forms; where privateproperty is denied, there you will find austerityrather than a functioning exchange economy.

The Trading Instinct

The possibility of specialization as population in-creases is enhanced by another peculiarly humancharacteristic—the trading instinct. A trade is thegiving up of something one has in order to acquiresomething one wants. The trader puts less worthon what he possesses than on what he desires. Thisis what we call evaluation.

It is not necessary here to go into the theory, ortheories, of value except to point out that evalua-tion is a psychological process. It springs from thehuman capacity to judge the intensity of variousdesires. The fisherman has more fish than he caresto eat but would like to add potatoes to his menu;he puts a lower value on fish than on potatoes. Thefarmer is in the opposite position, his barn beingfull of potatoes and his plate devoid of fish. If anexchange can be effected, both will profit, bothwill acquire an added satisfaction. In every t rade-provided neither force nor fraud is involved—sellerand buyer both profit.

Only man is a trader. No other creature is cap-able of estimating the intensity of its desires and ofgiving up what it has in order to get something itwants. Man alone has the gift of free will. To besure, he may go wrong in his estimates and maymake a trade that is to his disadvantage. In hismoral life, too, he may err. But, when he makesthe wrong moral choice, we hold that he shouldsuffer the consequences, and hope that he will

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38 SOCIAL COOPERATION AND THE MARKET

learn from the unpleasant experience.So it must be in his search for a more abundant

life. If in his search for a good life the human mustbe allowed to make use of his free will, why shouldhe not be accorded the same right in the search fora more abundant life? Many of the persons whowould abolish free choice in the market place log-ically conclude that man is not endowed with freewill, that free will is a fiction, that man is merely aproduct of his environment. This premise ineluct-ably leads them to the denial of the soul and, ofcourse, the denial of God.

Those who rail against the market place as if itwere a den of iniquity, or against its techniques asbeing founded in man's inhumanity, overlook thefunction of the market place in bringing peopleinto closer contact with one another. Remember,the market place makes specialization possible,but specialization makes men interdependent. Thefirst pioneer somehow or other made his entirecabin; but his son, having accustomed himself tohiring a professional carpenter, can hardly put up asingle shelf in a cabin. And today, if some catas-trophe should cut off Madison from the surround-ing farms, the citizens of the city would starve. Ifthe market place were abolished, people would stillpass the time of day or exchange recipes or bits ofnews; but they would no longer be dependent onone another, and their self-sufficiency would tendto break down their society. For that reason we cansay that society and the market place are twosides of the same coin. If God intended man to bea social animal, he intended him to have a marketplace.

Traders Serve One Another

But, let us return to our imaginary experiment.We found that as the pioneer colony grew in num-bers, a tendency toward specialization arose. Itwas found that by this division of labor more couldbe produced. But this profusion from specializationwould serve no purpose unless some way werefound to distribute it. The way is to trade. Theshoemaker, for instance, makes a lot of shoes ofvarious sizes, but he is not interested in shoes perse; after all, he can wear but one pair and of oneparticular size. He makes the other shoes becauseother people want them and will give him in ex-change the things he wants: bread, raiment,books, what not—the things in which his interestsnaturally lie. He makes shoes in order to serve him-self, but in order to serve himself he has to serve

others. He has to render a social service in order topursue his own search for a more abundant life.

In our lexicon we refer to a business undertakingby the government as a social service; but this is amisnomer, because we can never be certain thatthe service rendered by the government business isacceptable to society. Society is compelled to ac-cept these services, or to pay for them even if un-wanted. The element of force is never absent froma government-managed business. On the otherhand, the private entrepreneur cannot exist unlesssociety voluntarily accepts what he has to offer; hemust render a social service or go out of business.

Profits Come from Patrons

Let us suppose that this shoemaker is especiallyefficient, that many people in the community likehis service and therefore trade with him. He ac-quires what we call a profit. Has he done so at theexpense of his customers? Do they lose because hehas a profit? Or, do they not gain in proportion tothe profit he makes? They patronize him becausethe shoes he offers are better than they could makethemselves or could get elsewhere, and for thatreason they are quite willing to trade with him.They want what they get more than they wantwhat they give up and therefore profit even as heprofits.

If he goes wrong in his estimate of their require-ments, if he makes the wrong sizes, or styles thatare not wanted, or uses inferior materials, peoplewill not patronize him and he will suffer a loss. Hewill have no wage return for the labor he puts inand no return for the capital—the hides and ma-chinery—which he uses in making his unwantedproduct. The best he can do under the circum-stances, in order to recoup some of his investment,is to hold a bargain-basem*nt sale. That is the cor-relative of profits—losses.

No entrepreneur is wise enough to predeterminethe exact needs or desires of the community hehopes to serve and his errors of judgment alwayscome home to plague him. But, the point to keep inmind is that when an entrepreneur profits, he doesso because he has served his community well; andwhen he loses, the community does not gain. Abusiness that fails does not prosper society.

The Distributive Function

The market place not only facilitates the distri-bution of abundances—including the abundances

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14. FREE WILL AND THE MARKET PLACE 39

that nature has spread all over the globe, like thecoal of Pennsylvania for the citrus fruit of Florida,or the oil of Iran for the coffee of Brazil—but it alsodirects the energies of all the specialists who makeup society. This it does through the instrumentalityof its price-indicator. On this instrument are re-corded in unmistakable terms just what the variousmembers of society want, and how much they wantit. If the hand on this indicator goes up, if higherprices are bid for a certain commodity, the produc-ers are advised that there is a demand for this com-modity in excess of the supply, and they then knowhow best to invest their labors for their own profitand for the profit of society. A lower price, on theother hand, tells them that there is a superfluity ofa certain commodity, and they know that to makemore of it would entail a loss because society hasa sufficiency.

The price-indicator is an automatic device forrecording the freely expressed wishes of the com-munity members, the tally of their dollar ballotsfor this or that satisfaction, the spontaneous andnoncoercive regulator of productive effort. Onewho chooses to tamper with this delicate instru-ment does so at the risk of producing a scarcity ofthe things wanted or an overabundance of un-wanted things; for he disturbs the natural order.

Beneficiaries of Competition

One more social function of the market placeneeds mentioning. It is the determinant of produc-tive efficiency, provided, of course, it is permittedto operate according to the unimpeded motivepower of free will. In the primitive economy wehave been examining, one shoemaker can takecare of the shoe needs of the community. Underthose conditions, the efficiency of that server is de-termined by his skill, his industry, and his whim.He alone can fix the standard of the service he ren-ders his customers, or the prices he charges. As-suming that they can go nowhere else for shoes,their only recourse if they do not like his servicesor his prices is either to go without or to make theirown footwear.

As the community grows in size, another shoespecialist will show up to share the trade with thefirst one. With the appearance of a second shoe-maker the standard of efficiency is no longer de-termined by one producer. It is determined by therivalry between them for the trade of the commu-nity. One offers to fix shoes "while you wait," theother lowers his prices, and the first one comes

back with a larger assortment of sizes or styles.This is competition.

Now the beneficiaries of the improved servicesresulting from competition are the members of so-ciety. The more competition and the keener thecompetition, the greater the fund of satisfactions inthe market place. Oddly enough, the competitorsdo not suffer because the abundance resultingfrom their improved efficiency attracts more shoecustomers; "competition," the old adage holds, "isgood for business."

If, perchance, one of the competitors cannotkeep up with the improving standard of perfor-mance, he may find himself out of business; butthe increased productive activity resulting from thecompetition means that there are more productivejobs to be filled, and in all likelihood he can earnmore as a foreman for one of the competitors thanhe could as an entrepreneur. Even those physicallyunable to care for themselves and dependent onothers are benefited by competition; when there isan abundance in the market place, charity can bemore liberal.

Immutable Laws Prevail

I am not attempting here a complete course ineconomics. What I have tried to show is that ineconomics, as in other disciplines, there are inflex-ible principles, inevitable consequences, immu-table laws written into the nature of things. Exer-cising his free will, man can attempt to defy thelaw of gravitation by jumping off a high place; butthe law operates without regard for his conceit,and he ends up with a broken neck.

So, if the first pioneer had set up with force ofarms a claim to everything produced in the Mad-ison area, other pioneers would not have comenear, and the community known as Madison wouldnever have been born. Or, if he could have col-lected tribute, also by force of arms, from everyproducer in the area, he would have driven pros-pective specialists to places where private prop-erty was respected. If the first shoemaker had es-tablished himself, with the help of law, as amonopolist, barring competition, the shoes thatMadisonians wore would have been of poor qual-ity, scarce, and costly; the same result would havefollowed any legal scheme to subsidize his inef-ficiency at the expense of taxpayers. If earlyMadisonians had decreed to abolish the marketplace with its price-indicator, specialization andexchange would have been thwarted and the

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40 SOCIAL COOPERATION AND THE MARKET

economy of Madison would have been character-ized by scarcity.

The laws of economics, like other natural laws,are self-enforcing and carry built-in sanctions. Ifthese laws are either unknown or not heeded, the

inevitable eventual penalty will be an economy ofscarcity, a poor and uncoordinated society. Why?Because the laws of nature are expressions of thewill of God. You cannot monkey with them with-out suffering the consequences.

15. I, PENCIL*MY FAMILY TREE AS TOLD TO

Leonard E. Read

I am a lead pencil—the ordinary wooden pencil fa-miliar to all boys and girls and adults who can readand write.1

Writing is both my vocation and my avocation;that's all I do.

You may wonder why I should write a genealogy.Well, to begin with, my story is interesting. And,next, I am a mystery—more so than a tree or a sun-set or even a flash of lightning. But, sadly, I amtaken for granted by those who use me, as if I werea mere incident and without background. This su-percilious attitude relegates me to the level of thecommonplace. This is a species of the grievouserror in which mankind cannot too long persistwithout peril. For, as a wise man observed, "Weare perishing for want of wonder, not for want ofwonders."2

I, Pencil, simple though I appear to be, merityour wonder and awe, a claim I shall attempt toprove. In fact, if you can understand me—no, that'stoo much to ask of anyone—if you ,can becomeaware of the miraculousness which I symbolize,you can help save the freedom mankind is so un-happily losing. I have a profound lesson to teach.And I can teach this lesson better than can an auto-mobile or an airplane or a mechanical dishwasherbecause—well, because I am seemingly so simple.

Simple? Yet, not a single person on the face ofthis earth knows how to make me. This sounds fan-tastic, doesn't it? Especially when it is realized thatthere are about one and one-half billion of my kindproduced in the U.S.A. each year.

Pick me up and look me over. What do you see?Not much meets the eye—there's some wood, lac-•From The Freeman, December 1958

quer, the printed labeling, graphite lead, a bit ofmetal, and an eraser.

Just as you cannot trace your family tree backvery far, so is it impossible for me to name and ex-plain all my antecedents. But I would like to sug-gest enough of them to impress upon you the rich-ness and complexity of my background.

My family tree begins with what in fact is a tree,a cedar of straight grain that grows in NorthernCalifornia and Oregon. Now contemplate all thesaws and trucks and rope and the countless othergear used in harvesting and carting the cedar logsto the railroad siding. Think of all the persons andthe numberless skills that went into their fabrica-tion: the mining of ore, the making of steel and itsrefinement into saws, axes, motors; the growing ofhemp and bringing it through all the states toheavy and strong rope; the logging camps withtheir beds and mess halls, the cookery and the rais-ing of all the foods. Why, untold thousands ofpersons had a hand in every, cup of coffee the log-gers drink!

The logs are shipped to a mill in San Leandro,California. Can you imagine the individuals whomake flat cars and rails and railroad engines andwho construct and install the communication sys-tems incidental thereto? These legions are amongmy antecedents.

Consider the millwork in San Leandro. The cedarlogs are cut into small, pencil-length slats less thanone-fourth of an inch in thickness. These are kilndried and then tinted for the same reason womenput rouge on their faces. People prefer that I lookpretty, not a pallid white. The slats are waxed andkiln dried again. How many skills went into the

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15. I, PENCIL 41

making of the tint and the kilns, into supplying theheat, the light and power, the belts, motors, andall the other things a mill requires? Sweepers inthe mill among my ancestors? Yes, and includedare the men who poured the concrete for the damof a Pacific Gas & Electric Company hydroplantwhich supplies the mill's power!

Don't overlook the ancestors present and distantwho have a hand in transporting sixty carloads ofslats across the nation from California to Wilkes-Barre!

Complicated Machinery

Once in the pencil factory—$4,000,000 in ma-chinery and building, all capital accumulated bythrifty and saving parents of mine—each slat is giv-en eight grooves by a complex machine, afterwhich another machine lays leads in every otherslat, applies glue, and places another slat atop—alead sandwich, so to speak. Seven brothers and Iare mechanically carved from this "wood-clinched"sandwich.

My "lead" itself—it contains no lead at all—iscomplex. The graphite is mined in Ceylon. Con-sider these miners and those who make their manytools and the makers of the paper sacks in whichthe graphite is shipped and those who make thestring that ties the sacks and those who put themaboard ships and those who make the ships. Eventhe lighthouse keepers along the way assisted inmy birth—and the harbor pilots.

The graphite is mixed with clay from Mississippiin which ammonium hydroxide is used in the refin-ing process. Then wetting agents are added suchas sulfonated tallow—animal fats chemically re-acted with sulfuric acid. After passing through nu-merous machines, the mixture finally appears asendless extrusions—as from a sausage grinder—cutto size, dried, and baked for several hours at 1,850degrees Fahrenheit. To increase their strength andsmoothness the leads are then treated with a hotmixture which includes candelilla wax from Mex-ico, paraffin wax, and hydrogenated natural fats.

My cedar receives six coats of lacquer. Do youknow all of the ingredients of lacquer? Who wouldthink that the growers of castor beans and the re-finers of castor oil are a part of it? They are. Why,even the processes by which the lacquer is made abeautiful yellow involves the skills of more per-sons than one can enumerate!

Observe the labeling. That's a film formed by ap-plying heat to carbon black mixed with resins. How

do you make resins and what, pray, is carbonblack?

My bit of metal—the ferrule—is brass. Think of allthe persons who mine zinc and copper and thosewho have the skills to make shiny sheet brass fromthese products of nature. Those black rings on myferrule are black nickel. What is black nickel andhow is it applied? The complete story of why thecenter of my ferrule has no black nickel on it wouldtake pages to explain.

Then there's my crowning glory, inelegantly re-ferred to in the trade as "the plug," the part manuses to erase the errors he makes with me. An in-gredient called "factice" is what does the erasing.It is a rubber-like product made by reacting rapeseed oil from the Dutch East Indies with sulfurchloride. Rubber, contrary to the common notion,is only for binding purposes. Then, too, there arenumerous vulcanizing and accelerating agents.The pumice comes from Italy; and the pigmentwhich gives "the plug" its color is cadmium sul-fide.

No One Knows

Does anyone wish to challenge my earlier asser-tion that no single person on the face of this earthknows how to make me?

Actually, millions of human beings have had ahand in my creation, no one of whom even knowsmore than a very few of the others. Now, you maysay that I go too far in relating the picker of a cof-fee berry in far off Brazil and food growers else-where to my creation; that this is an extreme posi-tion. I shall stand by my claim. There isn't a singleperson in all these millions, including the presidentof the pencil company, who contributes more thana tiny, infinitesimal bit of know-how. From thestandpoint of know-how the only difference be-tween the miner of graphite in Ceylon and thelogger in Oregon is in the type of know-how.Neither the miner nor the logger can be dispensedwith, any more than can the chemist at the factoryor the worker in the oil field—paraffin being a by-product of petroleum.

Here is an astounding fact: Neither the workerin the oil field nor the chemist nor the digger ofgraphite or clay nor any who mans or makes theships or trains or trucks nor the one who runs themachine that does the knurling on my bit of metalnor the president of the company performs hissingular task because he wants me. Each onewants me less, perhaps, than does a child in the

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42 SOCIAL COOPERATION AND THE MARKET

first grade. Indeed, there are some among this vastmultitude who never saw a pencil nor would theyknow how to use one. Their motivation is otherthan me. Perhaps it is something like this: Each ofthese millions sees that he can thus exchange histiny know-how for the goods and services he needsor wants. I may or may not be among these items.

No Master Mind

There is a fact still more astounding: The ab-sence of a master mind, of anyone dictating or forc-ibly directing these countless actions which bringme into being. No trace of such a person can befound. Instead, we find the Invisible Hand at work.This is the mystery to which I earlier referred.

It has been said that "only God can make a tree."Why do we agree with this? Isn't it because werealize that we ourselves could not make one? In-deed, can we even describe a tree? We cannot,except in superficial terms. We can say, for in-stance, that a certain molecular configuration man-ifests itself as a tree. But what mind is there amongmen that could even record, let alone direct, theconstant changes in molecules that transpire in thelife span of a tree? Such a feat is utterly unthink-able!

I, Pencil, am a complex combination of miracles:a tree, zinc, copper, graphite, and so on. But tothese miracles which manifest themselves in Na-ture an even more extraordinary miracle has beenadded: the configuration of creative human ener-gies—millions of tiny know-hows configurating nat-urally and spontaneously in response to humannecessity and desire and in the absence of any hu-man master-minding! Since only God can make atree, I insist that only God could make me. Man canno more direct these millions of know-hows tobring me into being than he can put molecules to-gether to create a tree.

The above is what I meant when writing, "Ifyou can become aware of the miraculousnesswhich I symbolize, you can help save the freedommankind is so unhappily losing." For, if one isaware that these know-hows will naturally, yes,automatically, arrange themselves into creativeand productive patterns in response to human nec-essity and demand—that is, in the absence of gov-ernmental or any other coercive master-minding—then one will possess an absolutely essential in-gredient for freedom: a faith in free men. Freedomis impossible without this faith.

Once government has had a monopoly of a cre-ative activity such, for instance, as the delivery of

the mails, most individuals will believe that themails could not be efficiently delivered by menacting freely. And here is the reason: Each oneacknowledges that he himself doesn't know how todo all the things incident to mail delivery. He alsorecognizes that no other individual could do it.These assumptions are correct. No individual pos-sesses enough know-how to perform a nation'smail delivery any more than any individual pos-sesses enough know-how to make a pencil. Now, inthe absence of a faith in free men—in the unaware-ness that millions of tiny know-hows would nat-urally and miraculously form and cooperate to sat-isfy this necessity—the individual cannot help butreach the erroneous conclusion that mail can bedelivered only by governmental "master-minding."

If I, Pencil, were the only item that could offertestimony on what men can accomplish when freeto try, then those with little faith would have a faircase. However, there is testimony galore; it's allabout us and on every hand. Mail delivery is ex-ceedingly simple when compared, for instance, tothe making of an automobile or a calculating ma-chine or a grain combine or a milling machine orto tens of thousands of other things. Delivery?Why, in this area where men have been left free totry, they deliver the human voice around the worldin less than one second; they deliver an event vis-ually and in motion to any person's home when itis happening; they deliver 150 passengers fromSeattle to Baltimore in less than four hours; theydeliver gas from Texas to one's range or furnace inNew York at unbelievably low rates and withoutsubsidy; they deliver each four pounds of oil fromthe Persian Gulf to our Eastern Seaboard—halfwayaround the world—for less money than the govern-ment charges for delivering a one-ounce letteracross the street!

The lesson I have to teach is this: Leave all cre-ative energies uninhibited. Merely organize societyto act in harmony with this lesson. Let society'slegal apparatus remove all obstacles the best itcan. Permit these creative know-hows freely toflow. Have faith that free men will respond to theInvisible Hand. This faith will be confirmed. I,Pencil, seemingly simple though I am, offer themiracle of my creation as testimony that this is apractical faith, as practical as the sun, the rain, acedar tree, the good earth.Notes

xMy official name is "Mongol 482." My many ingredientsare assembled, fabricated, and finished by Eberhard Faber Pen-cil Company, Wilkes-Barre, Pennsylvania.

2G. K. Chesterton.

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Prices, Pricing

16. COST-PLUS PRICING*

Paul L. Poirot

Every seller of a commodity or service wants tocover his costs of production and receive some-thing over and above such costs if possible. Hespends long hours keeping records and, with rareexception, believes that he actually sets the priceof his goods and services by adding a margin abovehis expenditures.

The truth, however, is that all recorded costs ofan item are washed out and rendered irrelevantby the actual market price at which that item istraded—a price determined by the competitiveforces of supply and demand. That price becomesthe new "cost" of consideration to the next user,regardless of how much labor he or any prior own-er expended on that particular item. And if he sellsit in turn to another willing buyer, the latter's de-mand will have as much to do with determiningthe price as do the supplier's recorded expenses.Cost, of course, influences the supply side of themarket and thus the price; but costs incurred donot determine price.

To believe or to say that any item of commerceis but the sum of the costs incurred in producingit—a package of somebody's prior labor—is to intro-duce a confusing irrelevancy into the bargainingprocess that determines the price at which freetrade takes place. The only relevant factors in avoluntary trade are that each party to the trans-action, at the moment, values what he receivesmore than he values what he gives. Each thinksthat he gains from the trade, no matter what costswere incurred to produce what he gives or gets inexchange.

'From The Freeman, January 1971

That's all there is to the subjective theory of val-ue. It takes into account the demand as well asthe cost of production. And this determination ofprices in the open competitive market affords thecurrent running record of costs and returns that abusinessman needs in order to calculate profit orloss and judge whether or not to continue a par-ticular business activity.

His record of yesterday's costs and returns mayafford him some clues as to the efficiency of hisprocedures. But today's prices are the nearest in-dication available to him as to what tomorrow'scosts and returns may be. What are today's pricesfor the buildings and machinery in use as com-pared with other production facilities now on themarket or waiting to be invented? What are today'sprices for various raw materials as compared withavailable or potential substitutes? How do today'sprices for hired help compare with prices for labor-saving machinery? And how do today's prices forhis saleable commodity or service compare withprices for competing items?

The Labor Theory

Despite this marvelous facility of market pricingand economic calculation, a man as producer findsit almost impossible to view his product or serviceother than as the result of labor or work. If he'sworking for wages, he demands a wage rate highenough to keep pace with "the cost of living." Ifhe's selling wheat or corn or beans, he wants priceshigh enough to cover his costs of production. Ifhe's providing a postal service under an exclusivegovernment monopoly, he wants postage rates tocover costs.

43

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44 PRICES, PRICING

In other words, the seller's inclination is to try tohedge against the forces of supply and demand soas to assure a price that would include a "fair"markup over costs. What he seeks, in effect, is aguaranteed customer. And the postal service mo-nopoly is a good example of such a condition. If thecustomers do not cover the costs, other taxpayersare obliged to do so. Market prices, with competi-tive postal services, are forbidden. There is no wayof knowing what might be the demand for or thesupply of postal services if buyers and sellers wereobliged to look to the market to tell them howmuch of which scarce resources to devote to suchpurposes. Resources are simply used in the postalmonopoly, with no way to know whether the userepresents conservation or waste. The force ofgovernment sees to it that the full costs are coveredby taxpayers, regardless of the inefficiency andwaste.

Outside the Market

Government pricing and government contracts,including the payment of subsidies of any kind, al-ways are on a "cost-plus" basis because in thosecases the efficient market method of pricing hasbeen prohibited. Supply and demand are ruledout of the determination: the customer is led to be-

lieve the resources involved are not very scarce—relatively free; the supplier is guaranteed that tax-payers will cover his costs, whatever they may be.Such socialistic pricing affords no effective methodof economic calculation by which to measure suc-cess or failure, profit or loss, conservation orwaste. Thus, socialists are foredoomed to stum-bling in the dark with their outmoded labor theoryof value—the sum of costs.

As long as men continue to view goods and ser-vices as a package of labor or the sum of the costsof production, they will continue to turn to govern-ment for subsidies, handouts, privileges, guar-anteed incomes, protectionism, and the like. Themore this is done, the less chance there is to tradefor gain in the open market—the only system ofpricing that conserves rather than wastes scarceresources.1 Chief and foremost among those scarceresources is man, not for his capacity to consumeas the socialists imply, but for his productive powerto serve himself by serving others.

Note*It may be assumed that the most urgent purposes of con-

sumers will be served in one way or another and that it is bestto do it as efficiently as possible. A businessman's profit or lossis the measure of his efficiency—his capacity to minimize thecost of serving consumers. Profit denotes the conservation, andloss the waste, of scarce resources.

17. CHARGING "ALL THE TRAFFIC WILL BEAR!"*

Leonard E. Read

To be accused of charging "all the traffic will bear"for goods or services makes one a scalper, gouger,sharp practitioner or, at least, not graced with themilk of human kindness. Persons who think thatcharging all the traffic will bear is an antisocial

•Answer to Cliche of Socialism No. 45 (FEE, 1963)

practice will likely advocate such "corrective" so-cialistic steps as price or production or exchangecontrols.

Most of us shop around. We look for sellers whowill offer us the best product at the lowest price,and for buyers of our own goods or services towhom we can make the most advantageous sale;

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17. CHARGING "ALL THE TRAFFIC WILL BEAR!" 45

to say that you and I act on the opposite principlewould be arrant nonsense.

But let some good or service on which we havebecome dependent—a necessity, we call it—fall into"short supply," then let the fortunate few who pos-sess the good or service charge all the traffic willbear, and watch the epithets fly. "The Shylock!"And for acting precisely as most all of us act whenfree to choose.

We would be less apt to destroy the free market,willing exchange, private property way of life werewe to think less harshly of those who charge all thetraffic will bear. On the contrary, we shouldshower them with our kindest sentiments whenthis so-called "short-supply-high-demand" situa-tion most seriously threatens our economic wel-fare.1 Actually, such pricing in response to the sig-nals of a free and unfettered market can mostquickly and justly bring supply and demand towardequilibrium. Charging all the traffic will bear isidentical in principle to its economic opposite, thefire sale to dispose of burdensome stocks. Each isa rectifying, remedial action. To curse the formerwhich tends to irritate us is as senseless as to con-demn the latter which tends to please us. Each allo-cates available resources to the uses we prefer, asindicated by our buying or not buying.

The free market—freedom in exchange, withprices freely responsible to changing supply and de-mand—is, in fact, an enormous computer, far supe-rior to any electronic computer man has ever de-vised, or ever will. Data from all over the world, ofthe most varied and complex nature—only frag-ments of which any one man or set of men can evenbe aware of, let alone assemble and feed into i t -are automatically and quickly processed, answerscoming out as prices. These prices are, in effect,stop and go signals which clearly say to all would-be enterprisers: "Get into this activity at once, thesupply is comparatively short and the demand iscomparatively heavy" or "Get out of this activitynow, the supply is comparatively bountiful and thedemand is comparatively negligible."2

It makes no difference what good or service isused to illustrate how this marvelous, impersonalcomputer works. Mowing lawns or operating a ma-chine tool would do, as would a bag of wheat or asteel casting or a money loan or tomatoes.

Tomatoes, let us say, are suddenly in "short sup-ply." Millions of people relish this fruit and, thus,the demand continues high. The few growers for-tunate enough to have escaped the destructiveblight discover that they can sell their small supply

for two dollars per pound—and they do! Salad lov-ers who cannot afford to pay this "exorbitant"price are inclined to think unfavorably of thesegrowers: "Why, they're highway robbers." Yetthese fortunate few are only adhering closely to thecomputer's instructions; they are behaving precise-ly as you and I act when we accept an increase inour wages. This is splendid!

Assuming the market to be free, what wouldhappen in this situation? Several corrective forceswould automatically and immediately go to work.First, the high price, with promises of exceptionalprofit, would entice others to grow tomatoes; andeven more important, it would miraculously lead tothe development of blight-resistant strains. In theshortest possible time, there would be tomatoesgalore, perhaps at a dollar per bushel—within thereach of all.

For contrast, imagine the other extreme: A lawto keep the price at its old level. What would bethe probable results? At that price (where compe-tition had compressed profits to their lowest pos-sible level) there would be little incentive for newtomato growers to enter the field. And, thus, favor-itism instead of prices would necessarily determinethe allocation of the reduced supply of tomatoes.It is conceivable that the hard feelings generatedby such a system of allocation could even cause theremaining tomato growers to get into some lessemotional business; tomatoes could even becomeextinct!3

This fantastic computer—the free market and itspricing—presupposes freedom in exchange. When-ever price or wage or production controls are per-mitted, the data fed into the computer are made in-accurate; and when this happens, the signals itgives must to that extent be erroneous. This ex-plains why we have huge quantities of wheat, but-ter, cotton, and other produce wasting in tax-paidstorage—surpluses which frighten rather thanplease us.

The signals which emerge from the computerwill be useful relative to how accurately the datafed into it reflect the supply-demand situations ofall people on this earth. A socialistic sentiment,such as disapproval of those who charge all thetraffic will bear, tends to set in motion distortionsof the data. How? Economically unsound senti-ments feed the fires of government controls. In-stead of an automatic computer, the astoundingservices of which are "for free," we get a bureauc-racy attempting an impossible task of data collec-tion at a cost of many billions of dollars annually.

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46 PRICES, PRICING

And, eventually, we'll get no tomatoes!When all the ramifications are considered, the

seller who refuses to charge "all the traffic willbear" is rendering us a positive disservice. He isfailing to allocate scarce resources to the most de-sired uses, as you and I determine them by our buy-ing or abstention.

Notesll say "so-called" shortage because, of course, any wanted

product or service that commands any price at all is in short

supply; for unlike air, no one can have all he wants of it free.2 As an aside: While the free market derives its title from

freedom in exchange, there are two additional reasons why thetitle is justified—(1) its computing service is "for free," thereare no rentals or taxes for the service, this computer is as gratu-itous as the sun's energy and requires no more in the way of cor-porate structure or bureaucracy than does any other naturalphenomenon; and (2) buyers and sellers are freed from the ne-cessity of knowing all the trillions of whims, moods, needs,desires, dislikes, disasters, inventions, efficiencies, and what-ever (data) that go into the making of the few signals (prices)they need for decision-making.

3 Recall the rampant favoritism that went on during WorldWar II whenever OPA pricing went below what the supply-de-mand price would have been. Countless grudges remain to thisday!

18. HOW SHOULD PRICES BE DETERMINED?

Henry Hazlitt

"How should prices be determined?" To this ques-tion we could make a short and simple answer:Prices should be determined by the market.

The answer is correct enough, but some elab-oration is necessary to answer the practical prob-lem concerning the wisdom of government pricecontrol.

Let us begin on the elementary level and say thatprices are determined by the supply and demand.If the relative demand for a product increases,consumers will be willing to pay more for it. Theircompetitive bids will both oblige them individuallyto pay more for it and enable producers to get morefor it. This will raise the profit margins of the pro-ducers of that product. This, in turn, will tend toattract more firms into the manufacture of thatproduct, and induce existing firms to invest morecapital into making it. The increased productionwill tend to reduce the price of the product again,and to reduce the profit margin in making it. The

*From The Freeman, February 1967. Reproduced from a paperpresented before a special meeting of the Mont Pelerin Societyin Tokyo, September, 1966

increased investment in new manufacturing equip-ment may lower the cost of production. Or—partic-ularly if we are concerned with some extractive in-dustry such as petroleum, gold, silver, or copper—the increased demand and output may raise thecost of production. In any case, the price will havea definite effect on demand, output, and cost ofproduction just as these in turn will affect price.All four—demand, supply, cost, and price—are inter-related. A change in one will bring changes in theothers.

Just as the demand, supply, cost, and price ofany single commodity are all interrelated, so arethe prices of all commodities related to each other.These relationships are both direct and indirect.Copper mines may yield silver as a by-product.This is connexity of production. If the price of cop-per goes too high, consumers may substitute alu-minum for many uses. This is a connexity ofsubstitution. Dacron and cotton are both used indrip-dry shirts; this is a connexity of consumption.

In addition to these relatively direct connectionsamong prices, there is an inescapable interconnex-ity of all prices. One general factor of production,

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18. HOW SHOULD PRICES BE DETERMINED? 47

labor, can be diverted, in the short run or in thelong run, directly or indirectly, from one line intoany other line. If one commodity goes up in price,and consumers are unwilling or unable to substi-tute another, they will be forced to consume a littleless of something else. All products are in competi-tion for the consumer's dollar; and a change in anyone price will affect an indefinite number of otherprices.

No single price, therefore, can be considered anisolated object in itself. It is interrelated with allother prices. It is precisely through these inter-relationships that society is able to solve the im-mensely difficult and always changing problem ofhow to allocate production among thousands ofdifferent commodities and services so that eachmay be supplied as nearly as possible in relationto the comparative urgency of the need or desirefor it.

Because the desire and need for, and the supplyand cost of, every individual commodity or serviceare constantly changing, prices and price relation-ships are constantly changing. They are changingyearly, monthly, weekly, daily, hourly. People whothink that prices normally rest at some fixed point,or can be easily held to some "right" level, couldprofitably spend an hour watching the ticker tapeof the stock market, or reading the daily report inthe newspapers of what happened yesterday inthe foreign exchange market, and in the marketsfor coffee, cocoa, sugar, wheat, corn, rice, andeggs; cotton, hides, wool, and rubber; copper, sil-ver, lead, and zinc. They will find that none ofthese prices ever stands still. This is why the con-stant attempts of governments to lower, raise, orfreeze a particular price, or to freeze the interrela-tionship of wages and prices just where it was on agiven date ("holding the line") are bound to be dis-ruptive wherever they are not futile.

Price Supports for Export Items

Let us begin by considering governmental effortsto keep prices up, or to raise them. Governmentsmost frequently try to do this for commodities thatconstitute a principal item of export from theircountries. Thus Japan once did it for silk and theBritish Empire for natural rubber; Brazil has doneit and still periodically does it for coffee; and theUnited States has done it and still does it for cottonand wheat. The theory is that raising the price ofthese export commodities can only do good and noharm domestically because it will raise the in-

comes of domestic producers and do it almostwholly at the expense of the foreign consumers.

All of these schemes follow a typical course. It issoon discovered that the price of the commoditycannot be raised unless the supply is first reduced.This may lead in the beginning to the imposition ofacreage restrictions. But the higher price gives anincentive to producers to increase their averageyield per acre by planting the supported productonly on their most productive acres, and by moreintensive employment of fertilizers, irrigation, andlabor. When the government discovers that this ishappening, it turns to imposing absolute quantita-tive controls on each producer. This is usuallybased on each producer's previous production overa series of years. The result of this quota system isto keep out all new competition; to lock all exist-ing producers into their previous relative position,and therefore to keep production costs high by re-moving the chief mechanisms and incentives forreducing such costs. The necessary readjustmentsare therefore prevented from taking place.

Meanwhile, however, market forces are stillfunctioning in foreign countries. Foreigners objectto paying the higher price. They cut down theirpurchases of the valorized commodity from the val-orizing country, and search for other sources of sup-ply. The higher price gives an incentive to othercountries to start producing the valorized commod-ity. Thus, the British rubber scheme led Dutchproducers to increase rubber production in Dutchdependencies. This not only lowered rubber prices,but caused the British to lose permanently theirprevious monopolistic position. In addition, theBritish scheme aroused resentment in the UnitedStates, the chief consumer, and stimulated theeventually successful development of syntheticrubber. In the same way, without going into detail,Brazil's coffee schemes and America's cottonschemes gave both a political and a price incentiveto other countries to initiate or increase produc-tion of coffee and cotton, and both Brazil and theUnited States lost their previous monopolistic posi-tions.

Meanwhile, at home, all these schemes requirethe setting up of an elaborate system of controlsand an elaborate bureaucracy to formulate and en-force them. This has to be elaborate, because eachindividual producer must be controlled. An illus-tration of what happens may be found in theUnited States Department of Agriculture. In 1929,before most of the crop control schemes came intobeing, there were 24,000 persons employed in the

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48 PRICES, PRICING

Department of Agriculture. Today there are109,000. These enormous bureaucracies, of course,always have a vested interest in finding reasonswhy the controls they were hired to enforce shouldbe continued and expanded. And of course thesecontrols restrict the individual's liberty and setprecedents for still further restrictions.

None of these consequences seem to discouragegovernment efforts to boost prices of certain prod-ucts above what would otherwise be their competi-tive market levels. We still have international cof-fee agreements and international wheat agree-ments. A particular irony is that the United Stateswas among the sponsors in organizing the interna-tional coffee agreement, though its people are thechief consumers of coffee and therefore the mostimmediate victims of the agreement. Another ironyis that the United States imposes import quotas onsugar, which necessarily discriminate in favor ofsome sugar exporting nations and thereforeagainst others. These quotas force all Americanconsumers to pay higher prices for sugar in orderthat a tiny minority of American sugar cane pro-ducers can get higher prices.

I need not point out that these attempts to "sta-bilize" or raise prices of primary agricultural prod-ucts politicalize every price and production deci-sion and create friction among nations.

Holding Prices Down

Now let us turn to governmental efforts to lowerprices or at least to keep them from rising. Theseefforts occur repeatedly in most nations, not onlyin wartime, but in any time of inflation. The typicalprocess is something like this. The government,for whatever reason, follows policies that increasethe quantity of money and credit. This inevitablystarts pushing up prices. But this is not popularwith consumers. Therefore, the government prom-ises that it will "hold the line" against further priceincreases.

Let us say it begins with bread and milk andother necessities. The first thing that happens, as-suming that it can enforce its decrees, is that theprofit margin in producing necessities falls, or iseliminated, for marginal producers, while theprofit margin in producing luxuries is unchangedor goes higher. This reduces and discourages theproduction of the controlled necessities and rel-atively encourages the increased production ofluxuries. But this is exactly the opposite resultfrom what the price controllers had in mind. If the

government then tries to prevent this discourage-ment to the production of the controlled commodi-ties by keeping down the cost of the raw materials,labor and other factors of production that go intothem, it must start controlling prices and wages inever-widening circles until it is finally trying tocontrol the price of everything.

But if it tries to do this thoroughly and consis-tently, it will find itself trying to control literallymillions of prices and trillions of price cross-rela-tionships. It will be fixing rigid allocations andquotas for each producer and for each consumer.Of course these controls will have to extend in de-tail to both importers and exporters.

If a government continues to create more cur-rency on the one hand while rigidly holding downprices with the other, it will do immense harm. Andlet us note also that even if the government is notinflating the currency, but tries to hold either abso-lute or relative prices just where they were, or hasinstituted an "incomes policy" or "wage policy"drafted in accordance with some mechanical for-mula, it will do increasingly serious harm. For in afree market, even when the so-called price "level"is not changing, all prices are constantly changingin relation to each other. They are responding tochanges in costs of production, of supply, and ofdemand for each commodity or service.

And these price changes, both absolute and rel-ative, are in the overwhelming main both neces-sary and desirable. For they are drawing capital,labor, and other resources out of the production ofgoods and services that are less wanted and intothe production of goods and services that are morewanted. They are adjusting the balance of produc-tion to the unceasing changes in demand. They areproducing thousands of goods and services in therelative amounts in which they are socially wanted.These relative amounts are changing every day.Therefore the market adjustments and price andwage incentives that lead to these adjustmentsmust be changing every day.

Price Control Distorts Production

Price control always reduces, unbalances, dis-torts, and discoordinates production. Price controlbecomes progressively harmful with the passage oftime. Even a fixed price or price relationship thatmay be "right" or "reasonable" on the day it is setcan become increasingly unreasonable or unwork-able.

What governments never realize is that, so far

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18. HOW SHOULD PRICES BE DETERMINED? 49

as any individual commodity is concerned, the curefor high prices is high prices. High prices lead toeconomy in consumption and stimulate and in-crease production. Both of these results increasesupply and tend to bring prices down again.

Very well, someone may say; so governmentprice control in many cases is harmful. But so faryou have been talking as if the market were gov-erned by perfect competition. But what of monop-olistic markets? What of markets in which pricesare controlled or fixed by huge corporations? Mustnot the government intervene here, if only to en-force competition or to bring about the price thatreal competition would bring if it existed?

The fears of most economists concerning theevils of "monopoly" have been unwarranted andcertainly excessive. In the first place, it is very dif-ficult to frame a satisfactory definition of economicmonopoly. If there is only a single drug store, bar-ber shop, or grocery in a small isolated town (andthis is a typical situation), this store may be said tobe enjoying a monopoly in that town. Again, every-body may be said to enjoy a monopoly of his ownparticular qualities or talents. Yehudi Menuhin hasa monopoly of Menuhin's violin playing; Picasso ofproducing Picasso paintings; Elizabeth Taylor ofher particular beauty and sex appeal; and so forlesser qualities and talents in every line.

On the other hand, nearly all economic monop-olies are limited by the possibility of substitution.If copper piping is priced too high, consumers cansubstitute steel or plastic; if beef is too high, con-sumers can substitute lamb; if the original girl ofyour dreams rejects you, you can always marrysomebody else. Thus, nearly every person, produc-er, or seller may enjoy a quasi monopoly withincertain inner limits, but very few sellers are ableto exploit that monopoly beyond certain outerlimits. There has been a tremendous literaturewithin recent years deploring the absence of per-fect competition; there could have been equal em-phasis on the absence of perfect monopoly. In reallife competition is never perfect, but neither ismonopoly.

Unable to find many examples of perfect mo-nopoly, some economists have frightened them-selves in recent years by conjuring up the specterof "oligopoly," the competition of the few. But theyhave come to their alarming conclusions only byinserting in their own hypotheses all sorts of im-aginary secret agreements or tacit understandingsbetween large producing units, and deducing whatthe results could be.

Now the mere number of competitors in a partic-ular industry may have very little to do with theexistence of effective competition. If General Elec-tric and Westinghouse effectively compete, if Gen-eral Motors and Ford and Chrysler effectively com-pete, if the Chase Manhattan and the First Nation-al City Bank effectively compete, and so on (andno person who has had direct experience withthese great companies can doubt that they dom-inantly do), then the result for consumers, not onlyin price, but in quality of product or service, is notonly as good as that which would be brought aboutby atomistic competition but much better, becauseconsumers have the advantage of large-scale econ-omies, and of large-scale research and develop-ment that small companies could not afford.

A Strange Numbers Game

The oligopoly theorists have had a baneful influ-ence on the American antitrust division and oncourt decisions. The prosecutors and the courtshave recently been playing a strange numbersgame. In 1965, for example, a Federal districtcourt held that a merger that had taken place be-tween two New York City banks four years previ-ously had been illegal, and must now be dissolved.The combined bank was not the largest in the city,but only the third largest; the merger had in factenabled the bank to compete more effectively withits two larger competitors; its combined assetswere still only one-eighth of those represented byall the banks of the city; and the merger itself hadreduced the number of separate banks in New Yorkfrom 71 to 70. (I should add that in the four yearssince the merger the number of branch bank officesin New York City had increased from 645 to 698.)The court agreed with the bank's lawyers that "thegeneral public and small business have benefited"from bank mergers in the city. Nevertheless, thecourt continued, "practices harmless in them-selves, or even those conferring benefits upon thecommunity, cannot be tolerated when they tend tocreate a monopoly; those which restrict competi-tion are unlawful no matter how beneficent theymay be."

It is a strange thing, incidentally, that thoughpoliticians and the courts think it necessary to for-bid an existing merger in order to increase thenumber of banks in a city from 70 to 71, they haveno such insistence on big numbers in competitionwhen it comes to political parties. The dominantAmerican theory is that just two political parties

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50 PRICES, PRICING

are enough to give the American voter a realchoice; that when there are more than this it mere-ly causes confusion, and the people are not reallyserved. There is this much truth in this politicaltheory as applied in the economic realm. If they arereally competing, only two firms in an industry areenough to create effective competition.

Monopolistic Pricing

The real problem is not whether or not there is"monopoly" in a market, but whether there is mo-nopolistic pricing. A monopoly price can arisewhen the responsiveness of demand is such thatthe monopolist can obtain a higher net income byselling a smaller quantity of his product at a higherprice than by selling a larger quantity at a lowerprice. It is assumed that in this way the monop-olist can realize a higher price than would haveprevailed under "pure competition."

The theory that there can be such a thing as amonopoly price, higher than a competitive pricewould have been, is certainly valid. The real ques-tion is, how useful is this theory either to the sup-posed monopolist in deciding his price policies orto the legislator, prosecutor, or court in framingantimonopoly policies? The monopolist, to be ableto exploit his position, must know what the "de-mand curve" is for his product. He does not know;he can only guess; he must try to find out by trialand error. And it is not merely the unemotionalprice response of the consumers that the monop-olist must keep in mind; it is what the effect of hispricing policies will probably be in gaining thegoodwill or arousing the resentment of the con-sumer. More importantly, the monopolist mustconsider the effect of his pricing policies in eitherencouraging or discouraging the entrance of com-petitors into the field. He may actually decide thathis wisest policy in the long run would be to fix aprice no higher than he thinks pure competitionwould set, and perhaps even a little lower.

In any case, in the absence of competition, noone knows what the "competitive" price would beif it existed. Therefore, no one knows exactly howmuch higher an existing "monopoly" price is thana "competitive" price would be, and no one can besure whether it is higher at all!

Yet antitrust policy, in the United States, atleast, assumes that the courts can know how muchan alleged monopoly or "conspiracy" price isabove the competitive price that might-have-been.For when there is an alleged conspiracy to fix

prices, purchasers are encouraged to sue to recoverthree times the amount they were allegedly forcedto "overpay."

Our analysis leads us to the conclusion that gov-ernments should refrain, wherever possible, fromtrying to fix either maximum or minimum pricesfor anything. Where they have nationalized anyservice—the post office or the railroads, the tele-phone or electric power—they will of course have toestablish pricing policies. And where they havegranted monopolistic franchises—for subways, rail-roads, telephone or power companies—they will ofcourse have to consider what price restrictions theywill impose.

As to antimonopoly policy, whatever the presentcondition may be in other countries, I can testifythat in the United States this policy shows hardlya trace of consistency. It is uncertain, discrimina-tory, retroactive, capricious, and shot through withcontradictions. No company today, even a moder-ate sized company, can know when it will be heldto have violated the antitrust laws, or why. It alldepends on the economic bias of a particular courtor judge.

There is immense hypocrisy about the subject.Politicians make eloquent speeches against "mo-nopoly." Then they will impose tariffs and importquotas intended to protect monopoly and keep outcompetition; they will grant monopolistic fran-chises to bus companies or telephone companies;they will approve monopolistic patents and copy-rights; they will try to control agricultural produc-tion to permit monopolistic farm prices. Above all,they will not only permit but impose labor monop-olies on employers, and legally compel employersto "bargain" with these monopolies; and they willeven allow these monopolies to impose their condi-tions by physical intimidation and coercion.

I suspect that the intellectual situation and thepolitical climate in this respect is not much differ-ent in other countries. To work our way out of thisexisting legal chaos is, of course, a task for juristsas well as for economists. I have one modest sug-gestion: We can get a great deal of help from theold common law, which forbids fraud, misrepre-sentation, and all physical intimidation and coer-cion. "The end of the law," as John Locke re-minded us in the seventeenth century, "is not toabolish or restrain, but to preserve and enlargefreedom." And so we can say today that in the eco-nomic realm, the aim of the law should not be toconstrict, but to maximize price freedom and mar-ket freedom.

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Savings, Tools and Production

19. LETTER TO HIS GRANDSON*

Fred I. Kent

Mr. Kent's grandson, then a schoolboy was dis-turbed by the current fashion of disparaging theprofit system. He had asked his grandfather toexplain just how there can be a profit which isnot taken from the work of someone else.

April 1942My dear grandson:

I will answer your question as simply as I can.Profit is the result of enterprise which builds forothers as well as for the enterpriser. Let us consid-er the operation of this fact in a primitive commu-nity, say of one hundred persons who are non-intelligent beyond the point of obtaining the merenecessities of living by working hard all day long.

Our primitive community, dwelling at the footof a mountain, must have water. There is no waterexcept at a spring near the top of the mountain:therefore, every day all the hundred persons climbto the top of the mountain. It takes them one hourto go up and back. They do this day in and day out,until at last one of them notices that the waterfrom the spring runs down inside the mountain inthe same direction that he goes when he comesdown. He conceives the idea of digging a trough inthe mountainside all the way down to the placewhere he has his habitation. He goes to work tobuild a trough. The other ninety-nine people arenot even curious as to what he is doing.

•Reprinted from Economic Council Letter

Then one day this hundreth man turns a smallpart of the water from the spring into his troughand it runs down the mountain into a basin he hasfashioned at the bottom. Whereupon he says to theninety-nine others, who each spend an hour a dayfetching their water, that if they will each give himthe daily production of ten minutes of their time,he will give them water from his basin. He willthen receive nine hundred and ninety minutes ofthe time of the other men each day, which willmake it unnecessary for him to work sixteen hoursa day in order to provide for his necessities. He ismaking a tremendous profit—but his enterprise hasgiven each of the ninety-nine other people fiftyadditional minutes each day for himself.

The enterpriser, now having sixteen hours aday at his disposal and being naturally curious,spends part of his time watching the water rundown the mountain. He sees that it pushes alongstones and pieces of wood. So he develops a waterwheel; then he notices that it has power and, fi-nally, after many hours of contemplation and work,makes the water wheel run a mill to grind hiscorn.

This hundredth man then realizes that he has suf-ficient power to grind corn for the other ninety-nine. He says to them, "I will allow you to grindyour corn in my mill if you will give me one tenththe time you save." They agree, and so the enter-priser now makes an additional profit. He uses thetime paid him by the ninety-nine others to build a

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better house for himself, to increase his conve-niences of living through new benches, openings inhis house for light, and better protection from thecold. So it goes on, as this hundredth man con-stantly finds ways to save the ninety-nine the totalexpenditure of their time—one tenth of which heasks of them in payment for his enterprising.

This hundredth man's time finally becomes allhis own to use as he sees fit. He does not have towork unless he chooses to. His food and shelterand clothing are provided by others. His mind, how-ever, is ever working and the other ninety-nineare constantly having more time to themselves be-cause of his thinking and planning.

For instance, he notices that one of the ninety-nine makes better shoes than the the others. Hearranges for this man to spend all his time makingshoes, because he can feed him and clothe him andarrange for his shelter from profits. The otherninety-eight do not now have to make their ownshoes. They are charged one tenth the time theysave. The ninety-ninth man is also able to workshorter hours because some of the time that is paidby each of the ninety-eight is allowed to him bythe hundredth man.

As the days pass, another individual is seen bythe hundredth man to be making better clothesthan any of the others, and it is arranged that histime shall be given entirely to his specialty. And soon.

Due to the foresight of the hundredth man, adivision of labor is created that results in more andmore of those in the community doing the thingsfor which they are best fitted. Everyone has agreater amount of time at his disposal. Each be-comes interested, except the dullest, in whatothers are doing and wonders how he can betterhis own position. The final result is that each per-son begins to find his proper place in an intelligentcommunity.

But suppose that, when the hundredth man hadcompleted his trough down the mountain and saidto the other ninety-nine, "If you will give me whatit takes you ten minutes to produce, I will let youget water from my basin," they had turned on himand said, "We are ninety-nine and you are onlyone. We will take what water we want. You cannotprevent us and we will give you nothing." Whatwould have happened then? The incentive of themost curious mind to build upon his enterprisingthoughts would have been taken away. He would

have seen that he could gain nothing by solvingproblems if he still had to use every waking hour toprovide his living. There could have been no ad-vancement in the community. The same stupiditythat first existed would have remained. Life wouldhave continued to be a drudge to everyone, withopportunity to do no more than work all day longjust for a bare living.

But we will say the ninety-nine did not pre-vent the hundredth man from going on with histhinking, and the community prospered. And wewill suppose that there were soon one hundredfamilies. As the children grew up, it was realizedthat they should be taught the ways of life. Therewas now sufficient production so that it was pos-sible to take others away from the work of pro-viding for themselves, pay them, and set them toteaching the young.

Similarly, as intelligence grew the beautiesof nature became apparent. Men tried to fix scen-ery and animals in drawings—and art was born.From the sounds heard in nature's studio and inthe voices of the people, music was developed.And it became possible for those who were pro-ficient in drawing and music to spend all theirtime at their art, giving of their creations to othersin return for a portion of the community's produc-tion.

As these developments continued, each memberof the community, while giving something fromhis own accomplishments, became more and moredependent upon the efforts of others. And, unlessenvy and jealousy and unfair laws intervened torestrict honest enterprisers who benefited all,progress promised to be constant.

Need we say more to prove that there can beprofit from enterprise without taking anythingfrom others, that such enterprise adds to the easeof living for everyone?

These principles are as active in a great nationsuch as the United States as in our imaginarycommunity. Laws that kill incentive and cripplethe honest enterpriser hold back progress. Trueprofit is not something to be feared, because itworks to the benefit of all.

We must endeavor to build, instead of tearingdown what others have built. We must be fair toother men, or the world cannot be fair to us.

Sincerely,Grandfather

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20. TECHNOLOGICAL STATUS*

John W. Campbell

It has been said that "technology we can't under-stand appears to be magic." Actually, this appliesonly to technology more advanced than our own—for frequently we see some great technologicaldevice and, by familiarity, fail to recognize it forwhat it is.

Perhaps the Grade A No. 1 prime example is onewhich is now generally considered the perfect sym-bol of non-technology—the epitomization of thefailure to develop technology.

The peasant-farmer, plodding along behind hishorse-drawn plow as he sweats to till his fields,does seem, to us, about as untechnical as you canget. Yet in that pastoral scene is a technical break-through that properly ranks slightly behind har-nessing fire, and perhaps a bit ahead of the wheel.(After all, all the native American civilizations gotalong without the wheel!)

It might be described in modem terms as "asolid-state power-handling device for coupling aheavy duty power source to heavy tractive loads."Or, more simply, as the device that freed humanslaves from service as draft animals.

One of the reasons the Romans and Greeksneeded so many slaves was that there was noknown way of harnessing animals to heavy draftloads. Man, because of his bipedal posture and hishands, could have a harness slipped over his chestand shoulders, and by leaning into it, exert all hisstrength in pulling the load. It was literally truethat a man could exert more pull than a 1,500-pound horse.

A horse's sloping chest, and lack of shoulders orgrasping hands, made it impossible to tie him to aload except by putting a rope around his neck. Dothat, and as soon as he pulls, he's choked by therope at his throat; he can pull only lightly before

•From The Freeman, February 1969. Reprinted by permis-sion from Analog Science Fiction-Science Fact. Copyright 1968by the Cond^ Nast Publications, Inc.

his wind is cut off and he has to stop. True, somepowerful horses can exert enough pull to move arelatively light chariot at a good speed that way—but as a coupling device it's exceedingly inefficient.The horse couldn't pull a plow, or a heavy dray.

Oxen, equipped by nature with some well-an-chored homs, could do considerably better—but itwas extremely tiring on even an ox's heavy neckmuscles to hold his head down against the back-ward pull of the load.

Rapid, Heavy Transport

The horse collar, invented somewhere, some-time during the Middle Ages in Europe, was Man'sfirst really successful device for harnessing power-ful animal muscles to do the heavy hauling workthat was needed. It made possible heavy transport—even on the horrible mud ruts they called roads.It vastly increased die amount of agricultural landthat could be prepared and used during a singlegrowing season; there was far more food availablefor men and motive power. Where before, horsesand other animals had transported goods primarilyas pack animals, transportation was expanded,quite suddenly, as greatly as it was a few cen-turies later with the invention of the steampow-ered railroad.

Naturally, with the potential of heavy, relativelyrapid transportation available, the sedan chairwent out of use as the coach came in, and pack-trains were replaced by loaded wagons. Inevitablythe demand for more roads wide enough—andgood enough!—for horse-drawn vehicles came, andthe entire economy began speeding up.

The contact with the highly sophisticated andeducated society of Islam was undoubtedly a tre-mendous factor in the development of the renais-sance in the seacoast regions of the Mediterranean,where water transport made transportation rea-sonably effective. But it was the horse collar that

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brought an economic renaissance to most ofEurope.

It's not at all easy to recognize technologicalimportance—particularly when we're used to it.Certainly a horse collar seems a simple enoughidea. . . .

Most moderns haven't actually seen and handledone, or studied one closely. Take a good look atthe structure of a horse's chest and shoulders, andwithout studying a horse collar, try devising aform that will fit snugly onto those sloping curvesand planes, allow the horse free movement of neckand forelegs, avoid concentrating the load onprominent bony areas, and so distribute it that thehorse can exert his full strength without painfulchafing. Then make it stay in place without aid ofadhesive tapes, glue, or surgical implants!

The agricultural technicians of the Middle Ageswho developed that gadget were not fools, even ifthey hadn't ever had a course in mechanical en-gineering, or force-analysis. And they did achievesomething that the learned Greeks and the greatRoman engineers did not; they harnessed the mosteffective power source in the world at the time.

And be it noted that that animal power sourceis still used as the basis for measuring our mechan-ical tractive engines—as Watt originally defined itin his sales-promotion literature for his new steamengines.

However, two horses can do a lot more plowingthan a two-horsepower gasoline-engined tractorcan; the gas job can't slow down in a tough spot,dig in. its hooves, bellydown to the earth, andlunge with half a ton of hard-tensed muscle to dragthe plow through.

Of course, the tractor is also not capable of self-repair, automatic routine maintenance, living offthe fields it works, self-replication, or sense enoughnot to destroy itself by ramming itself over a cliff.In addition to operating on locally-available fuels,a horse is approximately twice as efficient as atractor in conversion of chemical to mechanicalenergy.

Current Applications

The moral of this little story is not to be appliedjust to humans visiting alien planets; it appliesvery cruelly to situations right here on our owncrazy, confused world. Backward nations—I will notbe euphemistic and call them "underdeveloped"because they've had the same thousands of yearsto develop that Europe and America had, and sim-

ply didn't do so—do not recognize the importanceof what could be called "the Horse Collar Revolu-tion."

Those economically depressed nations want,most ardently, to join "the modern world"—i.e., toachieve the industrially-developed status of thehigh-level technological nations.

Now there are two kinds of "status"; one is whatyour neighbors think you are, and the other is whatyou actually have and can do. The first type of sta-tus is, of course, far and away the most popular,and the most eagerly sought.

One type of individual, if he happens to inherita few thousand dollars, or hit it lucky in gambling,promptly puts it into fancy new clothes, a downpayment on a fancy new car, and a fancy new wom-an or two, and has himself a whee of a time beingadmired and respected because man, he's got allthe symbols of Status!

So in three months the fancy car is repossessed,the fancy woman moves off, and the fancy clothesprove to have poor durability.

Another approach is to spend the little inheri-tance on getting a small business started—maybea neighborhood grocery, or a newsstand. Doesn'tget you much Status, of course, and not muchspectacular fun . . . but put to work that way a fewthousand can support you for life.

It's just that it is not as much fun, and a fewthousand won't do it unless you get in and workjust as hard yourself, and that makes the wholeidea much less popular.

Status Symbols

The national equivalent now showing up amongthe backward nations is that foreign aid—winningthe numbers game, in the international lottery!—is spent on fancy Status projects. Hydroelectricplants are Status Symbols, man! That means you'vegot it!

Even if you don't have many electric lights orpower machines in grass huts and fields plowedby men and women pulling wooden stick plowsthrough the earth.

Steel mills are great international Status Sym-bols, too. Of course, what would really make oneof those nations have Status with all its neighborswould be to have something really technical andultra-fancy, like a few nuclear bombs.

Trouble is, nobody, except a few experts, in afew major Western nations, have the wisdom to seethat the horse collar is one of the greatest technical

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developments of human history.The basic plot in Christopher Anvil's "Royal

Road" stemmed from an actual disaster of WW II;it didn't have the comfortable ending Anvil's storydid. The lesson, bitterly learned then, is being re-learned most reluctantly by the backward coun-tries today.

The Allies had a tremendous military need forroads and barracks and airfields in an area wherethere simply were none. It was a remote area;shipping simply wasn't to be had for sending inearth-moving machinery, bulldozers, powershovels, and so on. So local natives were hired, athigh pay, to do the work.

The men who set up that operation didn't knowwhat a subsistence-level economy was; they foundout that fall and winter. The men they'd hired towork at such fine wages were, of course, the na-tive farmers—who therefore didn't farm that year.

In Anvil's story, the thing was planned, and theaftermath was part of the plan; in the real event itwasn't planned that way—it just happened. Therewas no shipping to bring in food that winter, justas there had been no shipping to bring in earth-moving machinery. It was a horribly grim demon-stration of the oft-repeated remark of philosophersthat "you can't eat gold." There was a lot of moneyaround—but no crops.

Repeating the Error

What's happening again and again in backwardcountries today is of the same order. The magnif-icent new dams and hydroelectric plants employthousands of workers at good wages—and hirethem away from food-production in a near-subsis-tence economy. The result is inadequate food pro-duction, incipient famine, and a desperate plea forhelp to feed the starving millions. But they surehave a great Status dam!

Oh, they get irrigation water, too—only some-times the results haven't been any better thoughtout than the economic disaster of famine was.Many areas of the world have fairly fertile landlying on top of extremely saline under-soil—prac-tically salt beds. When rain falls, the fresh waterseeps downward, and keeps washing the salt backdown to the under-soil where it is harmless. Butrun in irrigation water—the salt from below dis-solves, and evaporation from the surface soil pullsthe now-saline water up, where it in turn evap-orates, and thus rapidly builds up a salt crust onthe surface.

It takes several years of non-irrigation, and nocrops, for natural rainfall to wash the salt backdown so the land can be used again.

But don't you forget—that big irrigation dam andproject is an international Status Symbol of highvalue!

If a nation has a primitive- subsistence-leveleconomy, this simply means that its food-and-goods production has economic value just barelysufficient to keep the population from starvation.And that in crop-failure years, there will be famine,and people will die of starvation.

In many, many such subsistence-level areas, ifsuch famines occurred, there was literally nothingwhatever anyone could do to help them. The thinghappened repeatedly in India and in China; India,under the British, had railways and His Majesty'sgovernment did everything humanly possible torelieve the starvation. But the food needed to feed300,000,000 starving people can't be gatheredfrom the surrounding areas; they're subsistence-level economies, too. And the railroads weren'tvast, heavy-traffic networks such as Europe andAmerica had developed; they didn't have enoughcars or engines. And shipping from half around theworld took so long that even if the transport andgrain were freely donated, it wouldn't get therein time to be very helpful.

In China, because of bad roads and no railroadsat the time, there were huge areas where the onlypossible transport was by porters. (Mules can'tclimb ladders, and some of the routes required lad-ders to get up mountain "passes.") Since portershad to start in carrying their own food for theround trip, it was fairly easy to figure what dis-tance of penetration was possible before the porterhad consumed his total load in his own round-tripsupply. No food whatever could be shipped intoany more distant point. People in those innerareas simply starved to death because help wasphysically impossible.

Breaking the Habit

In subsistence-level economy areas today, whatsort of help can the industrial nations give?

Well, first is the fact that Step no. 1 is to breakdown the cultural pattern of the people that holdsthem at the subsistence level. And at this step, nat-urally, the people will do all they can to destroy thevile invaders who are seeking to destroy their Wayof Life, which is the Good, the True, and the Beau-tiful and Holy Way.

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You can't do it by telling them that they shouldstop growing those inefficient crops, those cropsthat produce protein malnutrition, and learn howto raise these new and far more efficient nutritivecrops.

There are problems involved that aren't econo-mic or technical. The Israeli, for instance, haveworked out techniques for growing watermelons,wheat, various fruits, and grains on sandy gravelirrigated with salt water. They can make the barrenNegev Desert produce fine crops of excellent food—techniques that can be applied anywhere thereare sand dunes, gravel, and sea water, or salt-water springs. It would work fine in huge areas ofthe Sahara. No vast irrigation dams needed forthis project!

Unfortunately, the Arabs don't seem enthusiasticabout accepting and applying this Jewish tech-nique.

Even if it were an Arab development, the peo-ples of the area are tradition-oriented; it wouldtake at least a generation to put over the idea ofdoing precisely those things which they know arewrong. For every farmer knows that salt water killsplants, and you can't grow plants in sand andstony gravel.

The odd thing is that the salt-water irrigation cannot be used in "good soil"; it works only in theworst kind of gravel-sand soil.

Resistance to Change

The proper development of the backward areasrequires recognition that the people dont want tochange. They want their results to change—theywant to have the fine things other nations have,but not to build them.

To pull up from a subsistence-level economy,the first step is building better roads, and a moreefficient agriculture. Not irrigation projects, nottractor manufacturing plants and hydroelectricprojects and establishing an internationallyknown air line, complete with twenty or so Boeing707 jets. Man, those are real Status Symbols!

What's needed is the Horse Collar Revolutionand its results. Draft animals can live off the localfields; they don't require exchanging scarce goodsfor foreign fuel supplies and replacement parts.

The road network has to be built up slowly; toomany farmers diverted to vast construction proj-ects and you have famine.

You need schools—schools that teach agricultureand medicine and veterinary medicine and sim-

ple local-irrigation techniques and public hygieneand basic nutrition. Not electronics, industrialchemistry, and jet-engine maintenance—not for ageneration will that be valid. The few natives whoare really cut out for that sort of work can betaught in other nations, where schools of that orderare needed, and already exist. But don't expectthem to come home—there will be nothing for themto come home to for a generation.

But no High Status schools?Sorry—getting out of a subsistence system can't

be achieved on Status—it has to be achieved byStatus, the hard-work-and-practical-learning kindof real accomplishment.

The ancient truth prevails: God helps those whohelp themselves. Because even God can't helpsomeone who won't help himself—that's what theancient concept of Free Will implies!

The more developed nations can help effectivelyonly where the national leaders have the wisdomto work for real accomplishment, not for high Sta-tus projects.

And be it noted—that "more developed nations"does not mean the U.S., the U.S.S.R., and otherWestern nations alone, by any means. One exam-ple has been cited; Israel has a technique thatcould immensely aid many backward nations rightnow.

The Philippines have developed a spectacularlyproductive new breed of rice by careful botanicalresearch; they've done a bang-up job of it, andhave a strain that yields three to four times asmuch food from a given area. It's a breed thatcould release two out of three rice-farmers in a sub-sistence-level nation to work on those neededroads and dams and other projects, without bring-ing starvation to the country.

The water buffalo is an extremely economicanimal; it's one beastie that the Western worldneeds to accept and use as a domestic animal—and is needed far more widely in the world. Thewater buffalo yields high-quality milk, high-qual-ity meat, and is an enormously powerful draftanimal capable of working under muddy condi-tions which ruin the feet of most creatures. More-over, the critter can yield meat, milk, and powerwhen fed on an incredible diet consisting solely ofrice stubble! The Thais have carried on a carefulprogram of breeding for some decades, and nowhave breeds of water buffalo that run over a ton inweight.

Rather surprisingly, about the only area outsideof the Southeast Asia region where water buffaloes

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20. TECHNOLOGICAL STATUS 57

are used in any numbers is in Italy, where some40,000 of them are kept. The familiar MozzarellaItalian cheese—in its original, genuine form—ismade from water-buffalo milk.

Only when many thousands, or millions, of agri-cultural workers can leave the farms for work with-out producing the inevitable famine—only when theagricultural economy gets above the subsistencelevel—can any nation become "advanced." Argen-tina isn't an industrial power—but has a highlydeveloped agricultural economy. All of the highlyindustrialized nations first became highly success-ful agricultural nations.

Yet we—and unfortunately the backward nations!—see the horsedrawn plow and the farmer as sym-bols of low-status, nonindustrial economies.

The great trouble is that people don't want tochange. It's not just the peoples in backwardcountries; the great economic advantages of thewater buffalo have been around for centuries, yetonly Italy among all the Western nations has ac-cepted them. Why aren't they being raised in south-ern Louisiana, for instance, where there's plentyof land and climate of the type they particularlylove?

In Africa, millions of children die of protein mal-nutrition because the natives raise traditionalcrops that do not provide the essential aminoacids—and can't be induced to change their cus-toms.

Indians in Central America suffered the sametype of protein malnutrition; their one and onlystaple was corn—maize. And corn, like most grains,is deficient in lysine to an extent human beingscan't live on it.

Anthropologists and nutritionists could get no-where changing their dietary habits; finally, bot-anists succeeded in breeding a strain of corn thatdid contain adequate lysine, so the natives could goon doing as they'd always done—eating corn—andstill get the food they needed to live.

That is not a solution to the problem.Sure, it keeps the children alive—but it does not

achieve the crucially important necessity. Thosepeople will remain forever backward people unlessthey change.

A change in government does no good, for agovernment cannot remain in power if the people

actively hate it. And so long as people insist onnot changing their Good, Beautiful, Familiar, andHoly Traditional Way of Life—even if it's killingthem!—the social system will not change. Andthey'll kill anyone, any government, that seeks tochange them, if they possibly can. Only a power-fully entrenched and ruthlessly determined dic-tatorship can impose on them the basic changesthey, the people, must make.

If, that is, you insist the change must be madein this generation.

Otherwise, you'll have to have patience, andwait while slow, steady, continuing pressuresalter the Established Way of Things decade bydecade.

Agriculture First

And the greatest, fastest progress will be madein the backward nations which gain least Tech-nological Industrial Status Projects—and developtheir agriculture most.

In a rice-eating nation, if one third of the rice-growers, raising high-production strains, usingnew and more efficient techniques, can sell twiceas much rice for only seventy-five per cent of thecost—the rice farmer who would not change his tra-ditional ways will be forced out of agriculture. Hispoor harvest won't be wanted. He'll lose his land,his home, all the things he has lived by and with.

Here, the ruthless dictator who forces him tochange his way of life is not human—it's economic.It's even more ruthless and relentless. But it, too,has the same compelling message: "You mustlearn a new way of life—or die!"

At the same time, of course, the fine surplus ofcheap rice means that industrial workers, road anddam builders, all sorts of people in all sorts ofnewly developing occupations, are living muchbetter. The old near-starvation level of rice is gone—there's plenty to eat, at last.

Look, friends—industry didn't produce a highstandard of living. A high standard of agricultureforced people to learn a new high standard ofliving and industry.

And that's the only way it will be—unless a com-pletely ruthless, dedicated tyrant oppresses hishelpless people into learning the new way of lifefast.

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2 1 . WHERE KARL MARX WENT WRONG

Samuel B. Pettengill

Now that the whole nation is talking about the com-munist threat to the country—at home and abroad—it seems a good time to ask what is really wrongwith Marxism.

In 1848, Karl Marx and Friedrich Engels wroteThe Communist Manifesto, which begins withthese words: "A specter is haunting Europe—thespecter of Communism." This reads like today'snewspaper. Yet the words were written one yearbefore gold was discovered in California, beforethe covered wagons began to roll across the plains.Please keep this date in mind. It is significant towhat I shall say.

In London a few years later, Marx wrote DasKapital—the "bible" of the Communists and So-cialists. As a reporter, Marx was accurate. The con-ditions of the workers in England a century ago,as he pointed out, were very grim. Women withropes over their shoulders pulled canal boats alongthe towpaths. Women were harnessed like beastsof burden to cars pulling coal out of British mines.Children went to work in the textile mills whenthey were nine or ten years old, and they worked12 to 15 hours a day. It was said that the bedsin which they slept never got cold as one shifttook the place of the other. It was said that theywere "machines by day and beasts by night."Tuberculosis and other diseases killed them off likeflies.

Yes, conditions were terrible. Not only Marx, butother warm-hearted men—Charles Dickens, JohnRuskin, Thomas Carlyle—poured out a literature ofprotest, which was read around the world.

On his facts, Marx can scarcely be challenged.But his diagnosis was wrong; and, therefore, theremedy he prescribed was wrong also.

Marx said that these terrible conditions were dueto greed, exploitation, and the theft by the owners

•Based on a radio address (ABC Network, April 6, 1947). Re-vised 1953 for publication by FEE

of the mines and mills of the "surplus value" pro-duced by the workers. That was his diagnosis. Andto some extent, it was partly correct. Man's inhu-manity to man has always been a factor in humanaffairs. Greed can never be defended—whether inbusiness or in government. Sympathy for the un-derdog will always have its work to do—always,certainly, in the communist nations with theirforced labor camps and human slavery.

The remedy advanced by Marx was to preachthe gospel of hate, of the class struggle, of the re-distribution of wealth, of the confiscation of prop-erty and its ownership and management by thestate—which always means the politicians. Butgreed and exploitation are not cured by socialism.Stalin and Molotov live like oriental potentates,giving state dinners that would make Nero andCaligula green with envy—all this in the name ofthe down-trodden proletariat!

Greed, however, was not the main reason forthe conditions which Marx described. If all thewealth of the owners of the mines and mills hadbeen redistributed to the workers, it would haverelieved their condition but slightly, and for but ashort time.

So, the class struggle, as the remedy for theseconditions, was wrong. What then was the realtrouble, and what is the true remedy?

Low Productivity at Fault

The real trouble was the low productivity of theworkers. And, as workers can be paid only out ofproduction—whether in England a century ago or inRussia today—wages must be low and hours ofwork long when production is low.

Production was low because tools and equipmentwere poor; because human backs had to do whatslaves of iron and steel do today here in America;because capital had not been accumulated to buybetter tools; because freedom had so recently

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21. WHERE KARL MARX WENT WRONG 5 9

emerged from centuries of feudalism that the in-ventors and scientists and businessmen had nothad a chance to dream and to plan. They have hadthat chance today here in America.

Listen. In 1940, before war increased our pro-duction, it was estimated that electric power alonein this country was performing work equal to thelabor of 500,000,000 men, each working eighthours a day. This is equal to nearly ten times thetotal human labor force employed in America and50 times the number employed in manufacturing—and that leaves out steam power and gasolinepower and windmill power, with their tremendouscontributions for increasing the productivity ofworkers and thereby lifting burdens from humanbacks.

No wonder America outproduced the world inthis last war! No wonder wages are higher herethan anywhere in the world! While Marx preachedthe gospel of hate and the class struggle, Americagave the green light to the Edisons, the Whitneys,the Burbanks, and the Fords.

James Watt, the inventor of the steam enginewhich revolutionized the modern world, and thosewho followed him in the competitive struggle tomake a better engine and sell it for less, did moreto take women out of the coal mines and off thetowpaths of the canal boats, more to take childrenout of the factories, than did all the Socialists andCommunists and politicians of the world combined.

Yet Watt's name would be unknown today if oneof these despised capitalists, a man named Mat-thew Boulton, had not risked $150,000 on Watt'sinvention. Would he, by the way, dare take thatrisk under today's taxation?

A Measure of Progress

One measure of the progress of civilization is theextent to which mechanical horsepower and toolssupplement human labor. The steam engine didmore to outlaw slavery, both in England andAmerica, than did all the political humanitariansput together.

The laboratories do far more for mankind thando the legislatures. If modern Americans were togo back to the same tools and horsepower thatwere available when Benjamin Franklin was tryingto capture lightning from the sky, our productionof wealth would at once go down 90 per cent;wages would go down in proportion; hours of laborwould increase to the limit of human endurance;the population would necessarily decrease drastic-

ally; and nothing that governments or humanitar-ians or labor unions or Communists could do wouldprevent it.

I mentioned the discovery of gold in California inconnection with The Communist Manifesto of1848. With pick and shovel and a pan in which towash gravel from gold, didn't men work long hoursfor a meager return, or for none? Didn't they sleepin filthy cabins and live on jerked meat, andweren't they often covered with lice?

If you saw that great motion picture, The Cov-ered Wagon, you will recall the scenes of terribletoil—of men and women and children pulling thewagons across rivers and the trackless desert andover the Continental Divide; of families, on foot,pushing handcarts from the Mississippi to SaltLake.

Yet, were those conditions due to greed and ex-ploitation? No, the people were working for them-selves. What was wrong? The answer is poor tools.The plow of the pioneer was a wooden plow, con-stantly breaking, constantly needing repairs.

Poor Transportation

In Vermont where I was raised, a man back inmy great-grandfather's time dug some iron ore outof a hill. He put 100 pounds in a bag on his backand walked 80 miles through the wilderness to sellit to an iron foundry in Troy, New York; and thenhe walked home—an infinite expenditure of humanenergy for an insignificant return.

What was wrong? Greed? Exploitation? Theclass struggle? No—he was working for himself.There was no relationship of employer and em-ployee; no one was stealing the "surplus product"of his labor. He kept all of it—and it was little in-deed.

What was wrong? Why did he have to work sohard for so little? The answer is poor tools. Todaythe steam engine, in the form of the modern loco-motive, could move his 100 pounds of iron ore 80miles for four cents—or a ton, one mile for onecent! Railroads, paved highways, motor trucks,and automobiles have solved his problem and willdo it even better in the days to come, if we stayAmerican.

Let us say that James Watt and the man whofinanced his project were not humanitarians. Letus say that they put their brains and money to-gether in a common enterprise for the profit mo-tive. What of it? Was the result good or bad? Didthey take the women out of the coal mines or did

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60 SAVINGS, TOOLS AND PRODUCTION

Karl Marx, with his gospel of hate and the classstruggle?

What did the profit motive do? It made Watt andhis partner, and all who followed them, work tomake better engines and to offer them at a lowerprice to get the market from their competitors.

Was the result good or bad? The profit motiveis just as honorable and useful to mankind as is thewage motive. Both do infinite good.

The wage motive prompts men to become skilledand efficient so they can produce more and earnhigher wages; and because they do, all mankindbenefits.

The profit motive prompts men to make bettertools and to cut costs in order to sell cheaper; andagain, all mankind benefits.

The radio which only 25 years ago sold for $300now sells for $30 or less, and it is a better radio.

Has the result of the competitive struggle in thefield of radio been good or bad? The result hasbeen good—humanitarian, if you please. It bringsthe news of the world, good music, and discussionsof public affairs to the remotest farmhouses and topeople on their sickbeds.

Not many centuries ago, starvation was a com-mon occurrence—even in England, where 90 percent of the people lived on the land. Was the con-quest of starvation a humanitarian thing? Whatconquered it? Who conquered it? Karl Marx? No!

In America, the time in the field required to raisean acre of wheat has gone down from 60 hours ofhuman labor in 1830 to two hours or less in 1930.

What caused this decrease? The steel plow, thetractor, the harvester, better seed, the conquest ofinsects and plant diseases, and cheap transporta-tion were responsible. Today, American wheatfeeds millions in a Europe that is adopting thephilosophy of Karl Marx!

Aluminum was so expensive in 1870 that Na-poleon III of France had an aluminum table set—more valuable than gold—for state dinners. Today,aluminum is commonplace in the Americankitchen.

The Answer

No, my friends, Karl Marx did not have the an-swer—he lifted no burdens from human backs. Theanswer is not in the class struggle. The answer is incompetitive free enterprise. The answer is in thecooperation of inventor and investor; in the co-operation of the manager and the worker with hisknow-how. The answer is to substitute slaves ofiron and steel for the strength of human backs. Theanswer is constitutional liberty, which sets menfree and says that what any man honestly makesis his "to have and to hold."

Wages can be paid only out of the product; andthe larger the production, the higher the wage. Themore money that is invested in horsepower andequipment—the more capital that is put to work—the less will children and women and men have towork at killing toil. The true remedy for our trou-bles is more capitalism, not less.

22. THE GREAT MISTAKE OF KARL MARX*

Benjamin F. Fairless

Karl Marx completely rejected the only economicsystem on earth under which it is possible for theworkers themselves to own, to control, and to man-age directly the facilities of production. And shock-ing as the news may be to the disciples of Marx,that system is capitalism!

•Address at 35th Annual Meeting of the Pennsylvania StateChamber of Commerce, October 22, 1952

Here in America, ownership of our biggest andmost important industries is sold daily, in littlepieces, on the stock market. It is constantly chang-ing hands; and if the workers of this country trulywish to own the tools of production, they can do sovery simply.

They do not have to seize the government byforce of arms. They do not even have to win an

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22. THE GREAT MISTAKE OF KARL MARX 61

election. All in the world they have to do is to buy,in the open market, the capital stock of the corpo-ration they want to own—just as millions of otherAmericans have been doing for many decades.

Now I imagine that some persons may say: "Oh,that's all very good in theory; but, of course, itisn't possible in practice. No group of workerscould ever purchase the great multibillion dollarcorporations that we have today."

Well, the other day I did a little simple arith-metic. The results may be as amazing to you asthey were to me. At today's market prices, the em-ployees of U. S. Steel could buy every share of theoutstanding common stock of the Corporation justas easily and just as cheaply as they can purchaseone of the higher-priced automobiles.

We have approximately 300,000 employees.That is not just steelworkers, of course. It is all ourworkers—including me. And together, they couldbuy all the common stock of the Corporation bypurchasing just 87 shares apiece. At today's prices,the total cost of 87 shares is less than $3,500. Andat today's wages, the average steelworker earnsthat much in approximately ten months.

Ten Dollars

By investing $10 a week apiece—which is aboutwhat our steelworkers gained in the recent wageincrease—the employees of U. S. Steel could buy allof the outstanding common stock in less than sevenyears; and—except for the relatively small fixedsum that is paid in dividends on the preferred stock—our employees would then be entitled to receiveall of those so-called "bloated profits" they haveheard so much about. But here, I'm afraid theywould be in for a disappointing surprise. At currentrates, the total dividend on 87 shares is only $261a year.

But in order to control U. S. Steel, the employeeswould not even have to purchase 87 shares apiece;they would need only to purchase enough of thestock to give them a voting majority. Then theycould elect their own Board of Directors, fire thepresent management, put their own president inmy job, and run the business to suit themselves.

Before they become too overjoyed at this pros-pect, however, they should be warned that theystill would not be their own bosses; for the truebosses of every American business are its cus-tomers. And unless those customers are satisfied asto the quality and price of the product, there willbe no business and there will be no jobs. But as

long as the new owners of the company could keepthe customers happy, they could run the show ex-actly as they pleased.

If the workers of America ever did own the toolsof production, all of us would quickly learn a fewfundamental and simple economic truths that havesomehow escaped a great many of our people. Wewould learn that this endless conflict betweenowner and worker over the division of income isthe sheerest, unadulterated folly.

Of the total sum which the employees and theowners of U. S. Steel divided between them lastyear, more than 92 per cent went to the employees,while less than 8 per cent went to the owners. Yetthat small share which went to the owners was thetotal "rent" we paid them for all of the billionsof dollars worth of plants and furnaces and facil-ities we used in making steel. And without thesefacilities, of course, our men could not have madeany steel at all.

A Startling Fact

Suppose the workers take everything the ownersreceive for the use of these tools—suppose theywipe out all of the dividends completely and for-ever—what would each get? Less than a dollar aday! And meanwhile this process would destroythe company, destroy our jobs, work infinite harmupon a vast segment of our national economy, andwipe out the savings which more than 275,000 ofour fellow Americans have invested in our busi-ness. And for what? For the price of about threecartons of cigarettes a week, apiece!

American workers will never improve their stan-dard of living by grabbing the meager share whichthe owners get. They will improve their positiononly by producing more; for if we produce moregoods, we shall have more goods to divide amongourselves. If we produce fewer goods, we shallhave less to divide and less to live on.

And there we have the simple, economic truthof the matter. To live better, we must producemore; but production is the result of teamwork,not of conflict. We cannot produce by fighting eachother and hating each other; for by doing that, wedestroy ourselves. And we shall only achieve ourfullest measure of production when we begin to un-derstand that the interests of worker and owner arenot antagonistic, but identical—that under ourAmerican system of enterprise, it is impossibleover a period of time for one to prosper while theother suffers.

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23. THE ROLE OF SAVINGS

Brian Summers

One of the least appreciated aspects of the privateenterprise system is the role of savings in increas-ing the wealth of all the people. That the savingsof some can increase the wealth of all may seem,at first glance, paradoxical, so let us consider fora moment just what happens when an individual—call him Joe—forgoes a little spending to put asum in the bank.

Some people say: "The money that Joe hassaved is money that won't be spent. The decreasein Joe's consumption can only mean a commen-surate decrease in production and a resulting risein unemployment. Saving should really be discour-aged."

Saving is a form of spending! Joe's moneydoesn't just sit in the bank; the bank must lend it tosomeone in order to earn money to pay Joe inter-est. This lending is not only a form of spending, itis, in fact, the only kind of spending that actuallyincreases wealth: investment.

What happens when money is invested? Say acorporation goes to Joe's bank and borrows moneyto build a factory. The corporation then spendsJoe's money on building materials, machines,tools, and labor. The money that Joe has savedwinds up being spent just the same as if he hadspent it himself. There is no decrease in productionand no rise in unemployment. In fact, as we shallsee, there is an increase in production and a de-cline in unemployment!

Soon the factory is complete. The corporationthen proceeds to hire workers. Joe's savings haveincreased employment!

How does the corporation hire workers? Byoffering better conditions of employment thantheir competitors. Perhaps the most important con-

The Freeman, May 1974

dition—as far as workers are concerned—is thelevel of wages. In all probability, the workers in thenew factory have been lured by higher salaries.Joe's savings, whether he realizes it or not, haveincreased the wealth of workers in a factory heprobably has never seen.

"You said that savings increase the wealth of allthe people. What about the 210 million Americanswho don't work in Joe's factory?"

Competitive Bidding

Consider first the workers in competing fac-tories. If these factories don't want to lose theirworkers to new factories, they had better raisetheir wages. Joe's savings have increased salariesthroughout an entire industry!

As for workers in other fields, we should remem-ber that most of them are potential factory work-ers. If you want to keep your best farm hand fromgoing off to work in Joe's industry or taking a jobthat has been vacated by someone else who wentoff to work in Joe's industry, you had better givehim a raise. Competition among employers meansthat Joe's savings, and the savings of millions ofother Americans, raise the wages of all workers.

"That is still not everybody! How about peoplewho don't work?"

Every man, woman, and child—worker and non-worker—is a consumer. The end of economic activ-ity—saving, factory building, working, and all therest—is consumption. We should always keep thisend in mind. The higher wages we have talkedabout would prove meaningless if they didn't re-sult in increased consumption.

Joe's savings benefit everyone because the fac-tory, machines, and tools they helped build are de-signed to produce goods that consumers will preferto those already being offered on the market. The

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corporation that borrowed money from Joe's banktook a financial risk because they think that theycan satisfy consumers better than their compet-itors. In other words, they hope to give the con-sumer more for his money. If they fail, then the lossis theirs. If they succeed, then consumers consumemore of what they want and thus enjoy a higherstandard of living. The consumer—each and everyone of us—is the final judge and ultimate winner.

"Savings seem to be pretty good after all. Whatshould be done to encourage more saving?"

Instead of doing things to encourage saving, weshould undo things that discourage it. In particular,the law itself is probably the greatest hindrancepotential savers face. Let us make a brief survey ofsome of the ways in which the law discourages sav-ing.

To begin with, people can't save money they nolonger have. Every dollar that goes in taxes is a dol-lar that won't be saved. Add up all the taxes thatJoe pays, and he may find himself withdrawingfrom, rather than adding to, his bank account.

Tax Disincentives

In addition to the general level of taxation, sev-eral specific taxes are especially discouraging tosavers. Corporate profits taxes, capital gainstaxes, and taxes on dividends and bank account in-terest hit the saver particularly hard and must betaken into account by every potential saver.

High as taxes are, government spending is evenhigher. The difference, of course, is "made up" byrunning fiat money off the government printingpresses—inflation. And inflation, combined withother ramifications of over-extended government,is enough to give even the most devoted savercause to re-think his frugal habits.

The saver sees inflation galloping along fasterthan legal limits on interest rates. Even though heactually has lost money, in terms of purchasingpower, he finds himself forced to pay taxes on his"earnings."

The saver sees inflation increasing the paper val-ue of his capital holdings. When he sells his hold-ings he must pay capital gains taxes—even though

his "capital gains," in terms of real wealth, actuallymay have been capital losses.

The saver sees inflation increasing the replace-ment costs of capital equipment—machines, spareparts, tools—while depreciation allowances are de-termined by original costs. He finds that deprecia-tion allowances have become inadequate to pay fornew equipment to replace the old.

The saver sees inflation increasing the paperprofits of his corporation. In particular, inventory"profits"—the difference between the cost of pro-ducing an item and the cost of later replacing it ininventory after it has been sold—are a direct resultof inflation. Were all these inventory "profits"available for investment in new inventory, the cor-poration could at least hold its own. However, al-most half these "profits," on the average, wind upas corporate profits taxes. Thus, the saver may findhis corporation losing money and paying profitstaxes at the same time.

Inflation itself, even without being combinedwith various governmental controls and taxes, isdiscouraging to potential savers. With prices ris-ing, people are encouraged to make purchases be-fore prices go any higher, rather than to save forfuture purchases.

This brief survey of ways in which the law dis-courages saving is, of course, by no means com-plete. However, I would like to conclude with onefactor that can never be measured, but which isnonetheless very real. This is the factor of uncer-tainty. In recent years, the United States govern-ment has grown so interventionistic that every fewmonths the president is announcing "strong new"economic measures. Who knows what is next?Already we hear congressmen calling for a virtualnationalization of oil companies. Who is going toinvest under such circ*mstances? To complete thedestruction of the American economy, the govern-ment does not have to expropriate the means ofproduction. It merely has to make conditions soonerous and so frightful that no one will dare in-vest in private enterprise.

A free market, and the belief that the market willcontinue to be free, is all the encouragement saversneed.

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24. TOOLS*

Jasper E. Crane

A prominent American industrialist made a tripthrough the Orient recently, and in every countryhe visited from Russia to Hong Kong and Japanhe met and talked with the ruler of that country.In every one of these conversations he would askwhat he called the "$64 question"—"You haveheard of the high standard of living in the UnitedStates. What do you believe to be the cause ofAmerica's prosperity?" Most of those interviewedreplied that it was our abundant natural resourceswith plentiful raw materials. The industrialistwould then state that this was quite untrue, thatsome of these countries had more natural resourcesper capita than we did in America. The ruler of thecountry would then flounder about, but not onegave a reasonable reply. For instance, Nehru of In-dia, a great man with complete authority over morethan four hundred million people, thoughtfullyconsidered the question and finally came out withthe reply, "You're lucky."

Yet, the true answer to the $64 question issimple—the provision of tools in a free country.

That answer is clearly manifested in our owncountry's history as well as in other past and con-temporary events. At the end of the eighteenthcentury, immediately after Independence, Amer-icans turned to making things which the British,with their policy of mercantilism, had not per-mitted the colonials to do. There developed a greatcenter of industry on the little Brandywine River,with 120 mills on the last twenty miles of thatstream. Elsewhere, the growth of manufacturingindustry throughout the country was prodigious.The tremendous release of energy among free menwas the potent factor in manufacturing enterprisesthroughout the new nation. "Yankee ingenuity"was often spoken of, but the outburst of energyand the reasons for it have seldom been explained.It proceeded at an accelerating pace.

•From The Freeman, March 1968

Throughout human history there have been oc-casional occurrences of increased freedom in var-ious places, always accompanied by increased pro-duction and a better standard of living. The correctanswer to the $64 question explains why this isalways so.

We have recently witnessed the phenomenalprogress of Western Germany. Prostrated by mili-tary defeat and in dire trouble in 1948, its situationseemed hopeless. Vice Chancellor Erhard con-sulted W. Ropke, the great economist at Geneva,and he advised, "Try freedom." Thereupon, despitethe remonstrance of American officials in Ger-many, controls were taken off of wages and prices.In this climate of freer enterprise, the rebound ofthe German economy was theatrical. West Ger-many soon became the most prosperous country inEurope, with a much higher standard of living forthemselves and for over six million refugees fromcommunist countries. Moreover, they brought intotheir country great numbers of workers, particular-ly from Greece and Italy.

All goods and services are produced by changingthe form, condition, and place of raw materialswith the aid of human energy and tools. These arethe three factors of production—human energy,raw materials, tools.

About 78 per cent of all private goods and ser-vices produced in the United States in 1965 camefrom firms using the corporate form of organiza-tion. The remaining 22 per cent of production cov-ered the output of nonincorporated agriculture,shopkeepers, professions, personal and businessservice industries, and other unincorporated enter-prises.

The relative importance of the three basic fac-tors of production in noncorporate enterprises isdifficult to judge, for lack of statistics, but somefigures are available for corporate industry.

Tools are instruments of production (in additionto natural resources and human energy, mental

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and physical)—cultivated land, mechanical power,buildings, machinery, equipment, and apparatus ofall sorts.

The use of tools by all animals other than manis practically nil. They use unchanged the raw ma-terials presented by nature. Charles Kettering toldthe story of travelers in Africa who would sitaround a bonfire to counteract the chill of the eve-ning. When they retired to their tents, monkeyswould come down from the trees to warm them-selves by the fire. And, he added, no monkey wasever known to put a piece of wood on the fire!

One of Aesop's fables tells of the quarrel be-tween the organs of digestion, each claiming that itdid the major part of digestion and was not prop-erly rewarded for its work. Their proper propor-tions of the digestive process can hardly be deter-mined. However, the factors or elements of produc-tion of goods and services can be approximatedby considering that a worker in the highly indus-trialized United States produces at least twentytimes as much as a coolie laborer with only a toolsuch as a basket or other simple instrument. Thetoolless coolie is paid a few cents a day; the aver-age American factory worker received $20.88 foran eight-hour day in 1965.

A prominent clergyman visiting Egypt found hissense of justice and decency offended by the factthat the "fellah" was paid only twelve cents a day.Yet, examination of the total income of Egyptshowed that if it were divided equally to all thepeople, the daily wage would be thirteen cents aday. It wasn't a question of distribution of incometo be corrected by a sense of charity; for that wasall the "fellah" could earn in the Egyptian econo-my. What they needed was more tools.

In America, the corporate investment in toolsaveraged over $12,000 per worker last year, and insome industries, such as petroleum, it ran as highas $97,000 per worker.

Analysis of the facts of private production in theUnited States indicates that raw materials—thevalue of ore, oil, and minerals in the ground; un-cultivated land; standing timber in the forests;naturally occurring raw foodstuffs; and the like—account for about 2 per cent of the final price paidfor goods and services in a free market. In someproducts, such as textiles, raw materials may con-stitute as much as 6 per cent of this final value; butthe average for all goods and services seems to beapproximately 2 per cent. About 4 per cent of endvalues may be ascribed to unassisted human en-ergy, physical and mental. About 94 per cent of the

value of private goods and services produced in theUnited States, therefore, may be attributed to theuse of tools. This high figure attributable to toolsmay surprise those who have not studied this mat-ter; but it will be realized that production in othertimes and, sadly, even today in some places, de-pends on slave labor and crude tools.

Today in the United States, every worker hassixty "slaves" working for him in the form ofmechanical power. Several times more power is re-leased by the automobile than by all other mechan-ical energy and only a small portion of this motorcar energy is used for production purposes. So wemodify the statement above, the correct figure be-ing close to twenty mechanical slaves for eachworker, and that worker is paid seven to ten timesas much as is paid out in dividends.

The truth of this is evident when we considerhow much useful work a man can do on a farm orgarden with only his bare hands as tools, and howdependent we are upon even the simple farm toolsfor winning livelihood from the land. It is clearlyrevealed when one sees in backward lands farmersplowing with a wooden plow or sharpened stick.One must realize that the amount of a farmer'sproduction has been multiplied many times by thecomplicated and efficient farm machinery avail-able today in the United States.

The proof of these assertions is clearly shownby the fact that when the white man came to Amer-ica the estimated Indian population was two hun-dred thousand—all the country could support intheir practically toolless economy. Today, there aretwo hundred million inhabitants (including almostfour hundred thousand Indians) with a per capitaincome twenty-five times that of the Indian beforethe white man came.

The production of automobiles is truly marvel-ous. The assembly line was one of man's greatestinventions. A leading automobile manufacturersome years ago experimentally constructed an or-dinary car by bringing simple tools to the pointof manufacture, similar to the way in which ahouse is built. The result was a cost of $10,000 forthat car, whereas his company was selling themodel at the time for less than $2,000.

Another instance of the value of the best toolswas given to me while visiting one of the largestmotor car manufacturers in a foreign country afew years ago. The manager of the plant, and agreat admirer of American methods, said that itcost them eighteen cents a pound to produce a carof the Chevrolet type; whereas, in Michigan the

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cost was ten cents a pound for the same type. Yet,the American worker received three times the dailywage of the worker in the plant abroad. They stillhad a long way to go in reducing manual opera-tions and using better tools.

How Are Tools Supplied?

In a free country, investors in companies supplytools for use by the worker who has not sufficientcapital to buy them himself. Such companies arein competition with other corporations in the sameline of business. The payment investors receive forthe use of tools they supply for manufacturing pur-poses averaged about 4.8 per cent of the marketprice of the goods produced over the past decade.

In a socialist country, government supplies thetools, but at a high cost. For instance, according tofigures for Russia released some twenty years ago,the government in effect owned all tools and sup-plied them to the worker at markups averagingover 15 per cent of sales. Thus, the Russian workerat that time, although he did not realize it, was pay-ing three times as much for his tools as did theAmerican.

So-called "surplus income," both private andcorporate, is not only a mighty force in helping tofinance charitable, community, educational, andreligious organizations, but is the principal sourceof the funds for providing tools.

Socialists claim that they will finance their ser-vices by appropriating "surplus income," by whichthey mean corporation profits and private incomebeyond the necessities of life. Every such efforthas failed. Bismarck, taking over the Sozialpolitikfrom the socialists, thought to finance it by seizingthe railroads and employing their income for thegovernment's social services. Soon, railroad in-come turned into deficits. Heavier taxation fol-lowed and, finally, war and disaster.

Britain employed the Marxian formula of heavyand steeply graduated income taxes. This de-stroyed private fortunes. Clement Atlee boastedthat while there once had been several thousandpersonal incomes of $16,000 or more per year aftertaxes, now there were only sixteen such fortunesleft in the country. The deficits of British socialismhave outrun the loans and gifts from America. Nowthe "luxuries" of the people—"beer, baccy, andbedding"—are taxed to fuel the socialist state. Theresulting poverty, particularly in formerly thriftyScotland, is appalling. But it is the consequence ofgovernment ownership and control of industry.

And in Britain, as in other welfare states, what can-not be taxed directly is confiscated through infla-tion.

So-called "surplus income" is important in aneconomy, for out of corporate profits and the sav-ings of the people comes the money needed to buythe tools. In fact, successful corporations and othercooperative enterprises retain much of their in-come for the renewal, improvement, and expan-sion of tools. This vital point is often ignored,people imagining that once an industry is fully op-erating, it needs no further supply of tools. Thesuccess of any industry depends on keeping itstools up-to-date by repairs, replacement, and im-provement. This vital supply of equipment comesfrom adequate charges for depreciation and obso-lescence, from income retained and invested inbusiness, and from additional capital supplied byinvestors. Corporation dividends, along with per-sonal savings such as are invested in savings banksand life insurance, are important phases in theprocess of providing tools.

The most valuable public-service income in anycountry is the part of savings used for buying tools.Capital formation in plant and properties is the lifeblood of a successful corporation, enabling it tocontinue and increase its services to customers. Ifearnings and savings are insufficient to meet theneeds and growth of the business, the corporationgoes downhill or succumbs. And a nation that thuscuts off the source of tools is destined to lose posi-tion in the world and dwell in poverty.

Those of socialistic philosophy object that theuse of tools is at the expense of employment, thatit throws people out of work. Historically, in Eng-land, the early use of labor-saving machinerywas violently fought and the new equipment oftendestroyed on the ground that men were losingtheir jobs. The record shows, however, that labor-saving machinery not only lifted drudgery frommen's backs but also greatly increased the produc-tion of goods and services, creating new jobs andgreater income for all.

That the process of industrialization, the savingand investing in tools, is further advanced in theUnited States than elsewhere explains our highand rising wage rates and level of living. And oftotal corporate income in the country, 85 per centgoes to employees—the users of tools—and 15 percent to the suppliers.

So, let us beware of foolish talk about the evilsof this tool-using age! Let us not kill the goose thatlays the golden eggs!

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25. THE LIBERATION OF WOMEN*

Bettina Bien Greaves

"Vive la difference," say the French in refer-ring to the difference between the sexes due tophysical and physiological causes. This differencecan be a source of delight to those free to enjoy it,but can generate ill-feeling and friction betweenthe sexes if they are compelled by law to ignoreit.1 Our physical and physiological characteristicsare bound to have economic consequences, whichwill persist so long as human life continues as weknow it.

Legal and political rights, without distinction asto sex, have been recognized gradually by the gov-ernments of most civilized nations of the world. Bylegislation and common law decisions, womenhave acquired freedom on a par with men to act,own property, and make contracts in their own be-half. (This freedom is being eroded by the presenttrend toward socialism—to the disadvantage ofboth men and women. Special government priv-ileges and subsidies, progressive taxation, legisla-tion limiting the right of contract, hours of work,and so on, have already seriously interfered withthe rights of property owners and the freedom ofcontract. But this is another story.) For all practicalpurposes, laws now deal with men and womenpretty much the same.

Economic Opportunities

In recent decades, economic and professionalopportunities have been opened to women. Step-by-step, insofar as social customs have permitted,and within the limitations imposed by the "differ-ence" between the sexes which at least the Frenchappreciate, women in this country are relativelyfree. They may now compete with men, each to theextent of her abilities, in seeking their chosen goals—economically and professionally.

The tremendous advances, which have made it

•From The Freeman, February 1971

possible for women to achieve recognition as per-sons—legally, politically, economically, and pro-fessionally—are undoubtedly due in large part tocapitalistic contributions. Savers, inventors, andproducers, operating in a relatively free marketeconomy risking their own private property in thehope of profit, supplied the goods and serviceswhich have freed women from the daily drudgeryand heavy manual labor expected of them for cen-turies simply to fulfill their roles as sexual com-panions, mothers to their children, and home-makers for their families. The improved productionand preparation of food, more efficient transport,better retail outlets, and inventions of modernhousehold appliances have given women moretime to pursue interests outside the home.

In this day of push button kitchens, automatictimers, electric refrigeration, home freezers,mechanical beaters and choppers, prepared foodsand instant mixes, a housewife cannot begin toconceive of the many strenuous chores her grand-mothers and great-grandmothers coped with daily.Imagine a home without heat or electricity. Imag-ine a kitchen without a stove, refrigerator, or run-ning water. Suppose there were no corner stores orsupermarkets with milk, butter, bread, meat,vegetables, or soap. Think of a life when each fam-ily had to grow its own food, gather the fuel tocook it, tote all water, produce the textiles, andsew, patch, and mend the family clothing.

Early Household Hints

Early cookbooks offer helpful hints to save thehousewife's time and energy, hints which no mod-ern bride need consider. For instance, keep kettlesof water, both hot and cold, handy always in thekitchen. Pine wood is an economical fuel for heat-ing ovens but hard wood makes much hotter coals.Lamps will have a less disagreeable smell if youdip your wick-yarn in strong hot vinegar, and dry

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it. Teach children to prepare and braid straw fortheir own bonnets, and their brothers' hats. Freshmeat brought into the house should be carefullycovered from the flies, put in the coldest place inthe cellar, and then cooked promptly—especially insummer. Save all the nice pieces of fat to makelard, and put those that are not so nice into thesoap grease.

The earliest cookbooks and housekeeping man-uals appeared only about 200 years ago. Fewwomen could read before then; and how-to-do-itinformation, so much of which was needed to runa household smoothly, was passed along by ex-ample and by word-of-mouth.

One early cookbook published in this countrywas The American Frugal Housewife by Mrs. LydiaMaria Childs (12th ed., 1832). The housewife ofthat day cooked over an open fire, roasted meaton a spit, or baked in a reflecting oven before thefire or in a brick oven built in the chimney. To fireup the oven was such a chore that one or two daysa week were set aside just for baking. With goodplanning, five successive bakings could be done inthe oven with one heating: "The bread first—thenthe puddings—afterward pastry—then cake and gin-gerbread—and lastly, custards." This last sug-gestion comes from Mrs. M. H. Cornelius, whosebook, The Young Housekeepers Friend, appearedin 1859. At the time she wrote, brick ovens weregoing out, cooking stoves and ranges coming in.Yet, boiled dinners, stews, soups, and steamedcakes and puddings prepared on top of the stovewere still more popular with the cooks than cakeswhich called for firing up the oven.

In 1832, Mrs. Childs wrote for the rural house-wife who had her own vegetable garden, a fewfruit trees, and chickens. The whole family sharedin the household chores, of course, and most house-wives had extra help from a hired girl or a femalerelative living with the family. Yet, the responsi-bility for the work was the housewife's. She grewthe herbs for flavoring, gathered the eggs, and oft-times milked the cow. She baked with yeast of herown making, or used eggs or baking soda andcream of tartar for leavening—baking powder wasnot for sale until about 1850. She did the family'scooking, and did it all with crude utensils. Shebeat eggs with a fork or a wire whisk, and elbowgrease—the rotary egg beater did not come intogeneral use until the second half of the nineteenthcentury.

Housewives had to bake the family's bread reg-ularly. This meant mixing the dough, usually in the

evening, setting it to rise overnight, and kneadingit "very thoroughly." Mrs. Cornelius wrote, "A halfan hour is the least time to be given to kneading abaking of bread, unless you prefer, after havingdone this till it ceases to stick to your hands, tochop it with a chopping-knife four or five hundredstrokes. An hour's kneading is not too much."Bread was the staff of life and good bread was asource of pride to the housewife.

Lack of refrigeration was a continual challenge.The housewife took care to use things before theyspoiled or to find satisfactory ways to preservethem. Before the canning industry developed in thelate 1800's, she had to preserve fruits and vegeta-bles in season to be assured of provisions yearround. In 1859, Mrs. Cornelius advised puttingpreserves in wide-necked bottles, pasting paperover the tops, and then brushing egg white overthe paper with a feather to seal the bottles and dis-courage mold.

First, Get a Cow

The nineteenth century housewife had to be aJill of all trades. The industrial revolution with itsincreased specialization and division of labor bare-ly ruffled the surface of traditional housekeepingpractices. The 1859 housewife purchased a fewmore household items than her grandmother couldhave in 1832. But she still had to kill her own fowl,cut up the family's meat, salt it, smoke it, or other-wise cure it and keep it safe from bugs and ani-mals. To be sure of good dairy products, she wastold: "The first requisite is to have a good cow."Keeping a cow added to the household chores.Someone had to feed the cow and milk her, day inand day out, set the milk for the cream to rise, andchurn butter at least twice a week. Without refrig-eration, keeping milk, cream, butter, and dairyutensils sweet was a continual worry. Now thatdairy products are sold in stores, packaged andready to use, men do most of this heavy manuallabor on a mass production basis, using methodsdeveloped and equipment produced with the aid ofincreased savings and investments.

Doing the family wash was another backbreak-ing chore in the nineteenth century. First the soaphad to be prepared from lye made out of woodashes, and fat and grease saved from cooking. Thewater had to be toted and heated, heavy wash tubsfilled, with countless trips back and forth to thestove. After the clothes were sorted, the finest andless soiled things were washed first, the coarser

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25. THE LIBERATION OF WOMEN 69

and dirtier items later in the same water. Mostpieces were scrubbed by hand on a washboard. Thewhite things were boiled. After washing, rinsing,boiling, wringing, bluing, and starching as neces-sary, the clothes were wrung and hung outdoorson a line. Doing the family wash took another fullday of the housewife's time.

Ironing consumed most of a third day each week.The flat irons and special "polishing irons" forfinal touchups had to be heated on the stove andreheated again and again as they cooled.

Then Came Automation

The kitchen stove or range using wood or coalgradually came into use in the mid-nineteenth cen-tury. These had advantages over the open fireplaceand the brick oven. With the use of gas and theconstruction of gas lines in the late 1800's, newcooking jets became available—gas ovens cameconsiderably later—making meal preparations alittle easier. The development of electricity, refrig-eration, large scale specialized farming, improvedtransportation, professional bakeries, and the ex-pansion of retail outlets have further liberatedwomen from the grueling household labor whichhad been their lot in life. Automatic washing ma-chines and dryers have taken the drudgery out ofdoing the family wash. Moth-proofed woolens andnew miracle fibers have simplified the care of thefamily's clothing. Vacuum cleaners, floor polishers,and local dry cleaning establishments help to keephomes and their furnishings clean the year round,doing away with the need to scour the house andeverything in it from top to bottom spring and fall.Refrigeration and other effective ways of preserv-ing foods have freed the family menu from de-pendence on the season. When compared with hernineteenth century counterpart, the modern house-wife is truly liberated from grinding householddrudgery and endless kitchen chores.

When a housewife presses a button or turns aswitch on a modern household appliance, she hasat her command the labor of countless specialists—savers, investors, inventors, producers, andmerchants—each of whom then helps with her daily

chores. In effect, they help tote the wood when sheturns up the thermostat. A twist of the faucetdraws the water. Turning a dial will fire the oven.A push-button machine will wash, rinse, and wringthe weekly wash. With a trip to a grocery store, thehousewife can in effect grow the family's food,milk the cow, churn the butter, make the cheese,gather the eggs, knead and bake the bread, grindthe spices, kill the poultry, cure the meat, preservefruits and vegetables, and make the soap.

Capital, the Key

Each person in the world differs from every otherperson. Thanks to these differences, everyone bene-fits if each of us is free to concentrate in the field ofhis (or her) greatest aptitude and interest. There issome specialization and division of labor even insmall groups and primitive communities. But un-der capitalism, with private property and the free-dom to move, invest, and exchange goods and ser-vices throughout large areas and among increas-ingly large populations, it has been possible to de-velop and exploit our differences more fully thanever before, to everyone's advantage. It was thiscomplex economic system, developed on the basisof highly specialized division of labor, which lib-erated women from their traditional householdchores.

Women are different from men—and always willbe. The woman of the 1970's has gained recogni-tion as an individual under law. She may own prop-erty, make contracts and, thanks to the develop-ment of capitalism, now has time to pursue herspecial aptitudes and interests outside the homeand thus compete with men economically and pro-fessionally. Rather than trying to compel denialby law of the physical and physiological differ-ences between the sexes, let's acknowledge andaccept them philosophically as the French do:"Vive la difference."

Note*For a discussion of some effects of prohibiting discrimina-

tion on the basis of sex in economic dealings, see Gary North's"The Feminine Mistake: The Economics of Women's Libera-tion," The Freeman, January, 1971.

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26. INDUSTRIALISM: FRIEND OR FOE?*

V. Orval Watts

Capitalistic industry' today stands before JudgePublic Opinion charged with various high crimesand misdemeanors.

Among the charges are (1) that it makes thosewho take part in it materialistic in tastes, interests,and ways of living; (2) that it standardizes people—turns them into robots, kills individualism; (3) thatit concentrates "power" in the hands of a few whouse this power with little regard for the welfare ofothers.

Those making the charges demand increasinggovernment action to punish and prevent these al-leged offenses against the common weal. Unfor-tunately, all too many Americans are ready to casttheir ballots for the prosecution when they enterthe polling booths on election days.

Yet, nearly all Americans show by their dailyconduct that they really like what modern industry—big and little—does; and the vast majority of man-kind look to the most industrialized, free-enterprisenation—the United States—as a Mecca which theywould like most of all to visit and if possible maketheir permanent home.

Most people, worldwide, for example, like whatmodern industry produces. From chewing gum tocameras, from aspirin to automobiles, they buymachine-made goods. Moreover, they buy, oftenand abundantly, the products of the free-enterpriseelite, that is, the products of the industrial giants;and they generally buy with confidence that theywill get a fair deal. Similarly, where they can, mil-lions of housewives go to the super-markets, chainstores, and big department stores for the necessar-ies of life, as well as for thousands of comforts,gadgets, and sundries from toothpaste to tissues,from soap to stockings, and from vitamins to vac-uum cleaners. And when shoppers go to smallstores, or dealers, they usually buy goods that big

•From The Freeman, April 1973

companies, in some way or other, have helped tomake.

Millions of these customers also earn their wagesand salaries in the employ of the biggest manufac-turing, commercial, and financial firms where free-enterprise industrialism is supposedly doing mostto turn them into dehumanized robots. Fully one-fourth of the working force of the United Statesprefer the wages, working conditions, and "fringebenefits" of the big employers; and I never metany of these who seemed ashamed of his employer.On the contrary, they generally appear proud to beassociated with one of these outstanding enter-prises.

More millions of Americans, including millionsof employees and customers, also invest their sav-ings in the stocks and bonds of these big compa-nies. Or they put their money in banks, insurancecompanies, and other agencies which buy the se-curities of big companies in the belief that theseare likely to be especially safe and profitable waysto invest the funds entrusted to them.

Big Businesses Foster Small Businesses

Millions of small businesses buy, sell, and ser-vice the products of the biggest industrial compa-nies; and hundreds of thousands of small producersact as suppliers for the "big boys." For example,the United States Steel Co. buys from 50,000 smalland medium-size concerns and sells to 100,000more.

Thus, small and medium-size establishmentsdo most of the business in the United States, theworld's most industrialized country. A firm withless than 500 employees is a small or medium-sizebusiness by U.S. standards. Such firms, togetherwith farmers and the self-employed, account fortwo-thirds or more of the total work force outsideof government service.

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The fact is that big business gives rise to smallerbusinesses. So the "Big Four" in the automobileindustry create opportunities for many thousandsof dealers in cars and accessories, car "laundries,"and garages, and the big oil producers and refin-eries create opportunities for more thousands ofservice stations. Furthermore, the growth of bigbusiness provides the jobs, income, and materialsnecessary for new enterprises to develop and mar-ket new products. Some of these may rise from abasem*nt or garage to skyscraper status; but theyall start small, and most of them remain small.

Without large-scale industrialism and big busi-ness, in fact, America would be still in the horse-and-buggy age, and so too would be the rest of theworld. The industrial giants—railroad companies,producers of steel, aluminum and copper, automanufacturers, producers of farm machinery andchemicals—these built the foundations of our mod-ern economy, and they are still maintaining ourunprecedented affluence.

We should remember, too, that mass merchan-dising is essential for large-scale industry. Thegreat selling organizations—mail-order houses, de-partment stores, chain stores, and supermarkets—have brought down the costs of trade as the greatindustrial organizations have reduced costs of ex-traction, transportation, and processing. These"distributors" are as truly productive and as neces-sary for economic progress as the mines and fac-tories. The same may be said for finance. Withoutlarge-scale banking, investment, insurance, andbrokerage there would be neither large-scale mer-chandising nor large-scale output of goods to mar-ket.

But is this affluence provided by modern indus-try too costly in terms of the human spirit and in-dividual dignity? Does mass production turn hu-man beings into materialistic, standardized ro-bots?

Mass Production Means Mass Prosperity

True, "mass production" means standardizationof products and methods, and this mass productionimplies a mass market. It is production for "themasses." At first thought—without looking at thefacts—this seems to mean standardization of people—turning them into faceless non-persons. Yet, thismass production by way of standardization is pre-cisely what the communist rulers of Russia andChina want for their subjects because it meansmass prosperity.

What big concerns arise in freedom to serveonly a wealthy few? In freedom, big business mustproduce mainly for factory workers, farmers, ste-nographers, school teachers, bookkeepers, salesclerks, mechanics, waiters, government employ-ees, carpenters, and plumbers, along with othermodestly paid producers and their dependents.These buy most of the products of industry be-cause they get most of the total income of this na-tion.

And let us not forget that the pensioners and"reliefers" also have radios, TV sets, and drip-dryshirts, along with the necessaries of life. If anyAmerican goes barefoot, it is from choice, not ne-cessity, for our mass production has made shoes soabundant that Americans commonly give away orthrow into the trash cans better shoes than theshoddy new footwear the victims of Communist"planning" can buy in their dingy shops.

But besides an abundance of the necessaries andcomforts of life, and besides the great variety ofrecreations and entertainments, free-enterprise in-dustry and business provide the high purchasingpower and leisure necessary for cultivation of thearts and literature, for schooling and research, forbo,oks and free lectures on every conceivable sub-ject. They provide these on a scale never knownbefore the advent of modern industrialism, andhave made them available even to the poorest ofour population.

The victims of communist rule covet these fruitsof free-enterprise capitalism; and their rulers tryhard to establish the same great industries andmarketing organizations that we have in theUnited States. And they do get a certain bignessand large-scale industry. But their industries, bigand little, lack efficiency; and lacking efficiency,they progress only at a painfully slow rate—and I domean painfully. Consequently, communist coun-tries lag behind the U.S., economically, as far asthey did 30 or 40 years ago.

But we come back to the question: does massproduction and mass prosperity produce a mech-anized, standardized, collectivized, materialisticpeople?

Industry Fosters Personality

In the answer to this question we find a strangeparadox. In freedom, mass production actually per-sonalizes—individualizes—both consumer goodsand the uses we make of them. It continually cre-ates a greater variety of occupations and greater

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opportunity for individuals to choose the kind ofwork and working conditions which best fit theirparticular interests and abilities. It provides in-creasing opportunities for intellectual and artisticpursuits, for extending each person's circle offriends, for increasing awareness and sensitivity,that is, for the development of personality. Inshort, modern free-enterprise industrialism re-duces the amount of drudgery, the long hours ofmonotonous, mind-dulling toil, and the subsistencelevels of poverty which held the vast majority ofmankind at a near-animal level of mind and spiritfor untold aeons of the past. It enables humansto become persons.

Furthermore, it is the opportunity for individualsto satisfy a vast variety of tastes and pursue count-less individual interests— intellectual, artistic, liter-ary and social, as well as recreational—that pro-vides the drive and enterprise which in freedomgives rise to rapid economic progress, with its massproduction and giant business organizations.

Look in on any typical American assemblage—aroomful of students, a concert audience, a crowdof diners—what do you see? Outside the ranks ofthe few militant revolutionaries, it is hard to findtwo persons dressed in any way alike. Similarly, ifyou ask Americans about their life experiences andexpectations, their work and their leisure pursuits,you will find individual variations too numerous tolist.

Where else but in highly industrialized America,the land where most of the giant businesses aroseand flourish, will you find the variety of con-sumers' goods offered for sale, the variety of jobs,the variety of leisure pursuits, the proportion ofthe population in colleges and universities, theamount and variety of scientific research, the widecircles of friends possessed by everyone who wantsthem, the amount of travel, and the widespreadawareness of human problems and opportunities?And, insofar as other nations permit freedom forprivate enterprise, they correspondingly provideopportunity for development of more humane andindividualized personalities.

Communism Standardizes and Dehumanizes

This points to a seldom-noted paradox: Whenthey gain power, as in Soviet Russia and RedChina, socialist authorities impose on their people,by force, the very same mass production methodswhich they say make robots of workers in capital-istic countries. In fact, they often carry the stan-

dardization much further than in capitalistic coun-tries and in more burdensome fashion, as, for ex-ample, in use of the manual labor of women streetsweepers and construction workers. But despitethefts, loans and subsidies from capitalistic coun-tries, and despite ruthless coercion to get labor andcapital from their subjects, they fail to achieve theprosperity necessary for individualized living—ex-cept for a small minority of privileged bureaucratsand their favorites of the moment (ballet dancers,mistresses, champion athletes or chess players,and a few scientists).

The reason for the continued deprivations andstandardized ways of living for the masses in com-munist countries should be obvious. Centralizedplanning, imposed by legal force, suppresses indi-vidual experimentation, reduces individual incen-tive, and denies individual responsibility. Indeed,suppressing individual freedom to experiment isprecisely what socialists mean by "planned pro-duction."

Communists regard people as no more than com-plex machines to be manipulated by physicalmeans as are inanimate tools. Or they look on theproletarian masses as rather dull-witted creaturesto be fed, stalled and herded about as domesticatedanimals. Therefore, although communist govern-ments impose on their subjects much standardiza-tion and some mechanization, they so dehumanizetheir people that they lose the individual enterprisenecessary for mass prosperity and general eco-nomic progress. They have achieved a measure oftechnical ("material") progress; but they provideless opportunity for developing individual talent,personality, character, and intellect than prevailedthree generations ago under czarist rule.

Despite the standardization of machines, ma-terials, and gadgets, free-enterprise industrialismprovides increasing opportunities for "the masses"to develop, individually, the highest human qual-ities. This freedom for individuation in theseUnited States is precisely why we have so muchbig industry, big business, mass production, massprosperity, and mass opportunity. It releases hu-man energies and imagination which are the driv-ing and directing factors in progress.

Why Communist Economies Are Backward

Under socialism and communism, on the otherhand, the "planners" dictatoriaUy restrict indi-viduation of products and personal pursuits. As aresult, they fail to develop the mass production and

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26. INDUSTRIALISM: FRIEND OR FOE? 73

universal affluence which they so much covet andtry to produce without regard for human life andhuman dignity. It is under socialism, or commu-nism, therefore, that we find the actual concen-tration of power and rampant abuses of power.Only under socialism or communism can the fewforce the rise of great industries to serve theirwhims about what standardized goods their sub-jects should have, including the weapons for im-perialism, war, and their own enslavement.

For these reasons, the victims of this concen-trated power remain poor—drably dressed, badlyhoused, misinformed, restricted, standardized,materialistic and collectivized. As a consequence,their masters must maintain mine fields, greatwalls, and millions of armed guards to keep theirpeople at home.

If we can understand these facts and the reasonsfor them, perhaps we can enlarge the freedom forenterprise which this and other "capitalistic" na-tions have so well demonstrated is necessary forall truly human ("humane") progress.

Freedom Depends on Understanding

I say we can "enlarge freedom" advisedly; and Imean that we can enlarge it everywhere that hu-mans congregate.

Complete freedom is as unattainable as com-plete understanding. In fact, we gain in freedom—freedom from trespass, freedom from infringementof individual rights—only as we progress in under-standing of human nature, human conduct, indi-vidual rights and responsibilities.

How many Americans, for example, understand

that minimum-wage laws restrict the freedom ofour young people and the less skilled adults? Andhow much thought do we give to the demoralizingeffects of this tragic denial of opportunity to bearand discharge self-responsibility?

We know that "unemployment"—useless or de-structive dissipation of human energies—demoral-izes its victims. But how often do we hear or readof anyone relating the sudden rise in teen-age un-employment, especially among black teenagers, tothe hikes in minimum-wage rates in the past 20years in this country?

Yet, that relation is clear and obvious; and timeand time again, research has verified it as well asany cause-and-effect relationship can be demon-strated in human affairs.

We hear and read that "welfare" is demoralizingmillions of our fellow citizens. But how often do westop to think that the confiscation of some two-thirds or more of business profits by taxes is re-stricting the freedom of every competent employerto offer jobs to unemployed job-seekers?

I repeat: in freedom, industrialism provides in-creasing opportunity for humans to develop mor-ally, intellectually, physically, and esthetically; andthis freedom is far from complete in these UnitedStates or anywhere else on earth.

But although it is an unattainable ideal, it is im-perative that man pursue it. For that pursuit re-quires of us the pursuit of understanding that is thevery wellspring of all human progress.

Wisdom is the principal thing; therefore get wis-dom; and with all thy getting get understanding.And ye shall know the truth, and the truth shallmake you free.

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27. THE ECONOMIC ROLE OF SAVING AND CAPITAL GOODS

Ludwig von Mises

As the popular philosophy of the common mansees it, human wealth and welfare are the productsof the cooperation of two primordial factors: na-ture and human labor. All the things that enableman to live and to enjoy life are supplied either bynature or by work or by a combination of nature-given opportunities with human labor. As naturedispenses its gifts gratuitously, it follows that allthe final fruits of production, the consumers'goods, ought to be allotted exclusively to the work-ers whose toil has created them. But unfortunatelyin this sinful world conditions are different. Therethe "predatory" classes of the "exploiters" want toreap although they have not sown. The landowners,the capitalists, and the entrepreneurs appropriateto themselves what by rights belongs to the work-ers who have produced it. All the evils of the worldare the necessary effect of this originary wrong.

Such are the ideas that dominate the thinking ofmost of our contemporaries. The socialists and thesyndicalists conclude that in order to render hu-man affairs more satisfactory it is necessary toeliminate those whom their jargon calls the "rob-ber barons," i.e., the entrepreneurs, the capitalists,and the landowners, entirely; the conduct of allproduction affairs ought to be entrusted either tothe social apparatus of compulsion and coercion,the state (in the Marxian terminology called Soci-ety), or to the men employed in the individualplants or branches of production.

Other people are more considerate in their re-formist zeal. They do not intend to expropriatethose whom they call the "leisure class" entirely.They want only to take away from them as muchas is needed to bring about "more equality" in the"distribution" of wealth and income.

But both groups, the party of the thoroughgoingsocialists and that of the more cautious reformers,

*From The Freeman, August 1963

agree in the basic doctrine according to whichprofit and interest are "unearned" income, aretherefore morally objectionable, are the cause ofthe misery of the great majority of all honest work-ingmen and their families, and ought to be sharplycurbed, if not entirely abolished, in a decent andsatisfactory organization of society.

Yet this whole interpretation of human condi-tions is fallacious. The policies engendered by itare pernicious from whatever point of view we mayjudge them. Western civilization is doomed if wedo not succeed very soon in substituting reason-able methods of dealing with economic problemsfor the present disastrous methods.

Three Factors of Production

Mere work—that is, effort not guided by a ra-tional plan and not aided by the employment oftools and intermediary products—brings about verylittle for the improvement of the worker's condi-tion. Such work is not a specifically human device.It is what man has in common with all other ani-mals. It is bestirring oneself instinctively and usingone's bare hands to gather whatever is eatable anddrinkable that can be found and appropriated.

Physical exertion turns into a factor of humanproduction when it is directed by reason toward adefinite end and employs tools and previously pro-duced intermediary products. Mind—reason—isthe most important equipment of man. In the hu-man sphere, labor counts only as one item in acombination of natural resources, capital goods,and labor; all these three factors are employed,according to a definite plan devised by reason, forthe attainment of an end chosen. Labor, in thesense in which this term is used in dealing withhuman affairs, is only one of several factors ofproduction.

The establishment of this fact demolishes entire-74

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27. THE ECONOMIC ROLE OF SAVING AND CAPITAL GOODS 75

ly all the theses and claims of the popular doctrineof exploitation. Those saving and thereby accumu-lating capital goods, and those abstaining from theconsumption of previously accumulated capitalgoods, contribute their share to the outcome of theprocesses of production. Equally indispensable inthe conduct of affairs is the role played by the hu-man mind. Entrepreneurial judgment directs thetoil of the workers and the employment of the cap-ital goods toward the ultimate end of production,the best possible removal of what causes people tofeel discontented and unhappy.

What distinguishes contemporary life in thecountries of Western civilization from conditionsas they prevailed in earlier ages—and still existfor the greater number of those living today—isnot the changes in the supply of labor and the skillof the workers and not the familiarity with the ex-ploits of pure science and their utilization by theapplied sciences, by technology. It is the amount ofcapital accumulated. The issue has been intention-ally obscured by the verbiage employed by the in-ternational and national government agenciesdealing with what is called foreign aid for the un-derdeveloped countries. What these poor countriesneed in order to adopt the Western methods ofmass production for the satisfaction of the wants ofthe masses is not information about a "know how."There is no secrecy about technological methods.They are taught at the technological schools andthey are accurately described in textbooks, man-uals, and periodical magazines. There are manyexperienced specialists available for the executionof every project that one may find practicable forthese backward countries. What prevents a countrylike India from adopting the American methods ofindustry is the paucity of its supply of capitalgoods. As the Indian government's confiscatorypolicies are deterring foreign capitalists from in-vesting in India and as its prosocialist bigotry sab-otages domestic accumulation of capital, theircountry depends on the alms that Western nationsare giving to it.

Consumers Direct the Use of Capital

Capital goods come into existence by saving. Apart of the goods produced is withheld from im-mediate consumption and employed for processesthe fruits of which will only mature at a later date.All material civilization is based upon this "cap-italistic" approach to the problems of production.

"Roundabout methods of production," as

Boehm-Bawerk called them, are chosen becausethey generate a higher output per unit of input.Early man lived from hand to mouth. Civilized manproduces tools and intermediary products in thepursuit of long-range designs that finally bring forthresults which direct, less time-consuming methodscould never have attained or only with an incom-parably higher expenditure of labor and materialfactors.

Those saving—that is consuming less than theirshare of the goods produced—inaugurate progresstoward general prosperity. For the seed they havesown enriches not only themselves but also allother strata of society.

It benefits the consumers. The capital goods arefor the owner a dead fund, a liability rather thanan asset, if not used in production for the bestpossible and cheapest provision of the people withthe goods and services they are asking for mosturgently. In the market economy the owners ofcapital goods are forced to employ their propertyas if it were entrusted to them by the consumersunder the stipulation to invest it in those lines inwhich it best serves those consumers. Virtually,the capitalists are mandataries of the consumers,bound to comply with their wishes.

In order to attend to the orders received from theconsumers, their real bosses, the capitalists musteither themselves proceed to investment and theconduct of business or, if they are not prepared forsuch entrepreneurial activity or distrust their ownabilities, hand over their funds to men whom theyconsider as better fitted for such a function.Whatever alternative they may choose, the su-premacy of the consumers remains intact. No mat-ter what the financial structure of the firm or com-pany may be, the entrepreneur who operates withother peoples' money depends no less on the mar-ket, that is, the consumers, than the entrepreneurwho fully owns his outfit.

There is no other method to make wage ratesrise than by investing more capital per worker.More investment of capital means: to give to thelaborer more efficient tools. With the aid of bettertools and machines, the quantity of the productsincreases and their quality improves. As the em-ployer consequently will be in a position to obtainfrom the consumers more for what the employeehas produced in one hour of work, he is able—and,by the competition of other employers, forced—topay a higher price for the man's work.

As the labor union doctrine sees it, the wage in-creases that they are obtaining by what is euphe-

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76 SAVINGS, TOOLS AND PRODUCTION

mistically called "collective bargaining" are not toburden the buyers of the products but should beabsorbed by the employers. The latter should cutdown what in the eyes of the communists is called"unearned income," that is, interest on the capitalinvested and the profits derived from success infilling wants of the consumers that until then hadremained unsatisfied. Thus the unions hope totransfer step by step all this allegedly unearnedincome from the pockets of the capitalists and en-trepreneurs into those of the employees.

What really happens on the market is, however,very different. At the market price m of the prod-uct p, all those who were prepared to spend mfor a unit of p could buy as much as they wanted.The total quantity of p produced and offered forsale was s. It was not larger than s because withsuch a larger quantity the price, in order to clearthe market, would have to drop below m to m-.But at this price of m- the producers with the high-est costs would suffer losses and would therebybe forced to stop producing p. These marginal pro-ducers likewise incur losses and are forced to dis-continue producing p if the wage increase enforcedby the union (or by a governmental minimum wagedecree) causes an increase of production costs notcompensated by a rise in the price of m to m+. Theresulting restriction of production necessitates areduction of the labor force. The outcome of theunion's "victory" is the unemployment of a num-ber of workers.

The result is the same if the employers are in aposition to shift the increase in production costsfully to the consumers, without a drop in the quan-tity of p produced and sold. If the consumers arespending more for the purchase of p, they must cutdown their buying of some other commodity q.Then the demand for q drops and brings about un-employment of a part of the men who were pre-viously engaged in turning out q.

The union doctrine qualifies interest received bythe owners of the capital invested in the enter-prise as "unearned" and concludes that it could

be abolished entirely or considerably shortenedwithout any harm to the employees and the con-sumers. The rise in production costs caused bywage increases could therefore be borne by shorten-ing the company's net earnings and a correspond-ing reduction of the dividends paid to the share-holders. The same idea is at the bottom of theunions' claim that every increase in what they callproductivity of labor (that is, in the sum of theprices received for the total output divided by thenumber of man hours spent in its production)should be added to the wage bill. Both methodsmean confiscating for the benefit of the employeesthe whole or at least a considerable part of the re-turns on the capital provided by the saving of thecapitalists. But what induces the capitalists toabstain from consuming their capital and to in-crease it by new saving is the fact that theirforbearance is counterbalanced by the proceedsof their investments. If one deprives them of theseproceeds, the only use they can make of the capitalthey own is to consume it and thus to inaugurategeneral progressive impoverishment.

The Only Sound Policy

What elevates the wage rates paid to the Amer-ican workers above the rates paid in foreign coun-tries is the fact that the investment of capital perworker is in this country higher than abroad. Sav-ing, the accumulation of capital, has created andpreserved up to now the high standard of livingof the average American employee.

All the methods by which the federal govern-ment and the governments of the states, the po-litical parties, and the unions are trying to improvethe conditions of people anxious to earn wages andsalaries are not only vain but directly pernicious.There is only one kind of policy that can effec-tively benefit the employees, namely, a policy thatrefrains from putting any obstacles in the way offurther saving and accumulation of capital.

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The Entrepreneur and theProfit and Loss System

28. IF MEN WERE FREE TO TRY<

John C. Sparks

Private ownership, private initiative, the hope ofreward, and the expectation of achievement havealways been primarily responsible for the advance-ment of mankind. Continued progress—be it spir-itual, mental, or material—rests squarely upon a bet-ter understanding of the idea of individual freedomof choice and action, with personal responsibilityfor one's own decisions.

For the purpose of illustrating this idea, let ussuppose you had lived in 1900 and somehow wereconfronted with the problem of seeking a solutionwithin 54 years to any one of the following prob-lems:

1. To build and maintain roads adequate foruse of conveyances, their operators, and pas-sengers.

2. To increase the average span of life by 30years.

3. To convey instantly the sound of a voicespeaking at one place to any other point or anynumber of points around the world.

4. To convey instantly the visual replica of anaction, such as a presidential inauguration, to menand women in their living rooms all over America.

5. To develop a medical preventive againstdeath from pneumonia.

6. To transport physically a person from LosAngeles to New York in less than four hours.

7. To build a horseless carriage of the qualitiesand capabilities described in the 1954 advertisingfolder of any automobile manufacturer.

Without much doubt you would have selected

•Clipping of Note No. 63 (FEE, 1954)

the first problem as the one easiest of solution. Infact, the other problems would have seemed fan-tastic and quite likely would have been rejected asthe figments of someone's wild imagination.

Now, 54 years later, let us see which of theseproblems has been solved. Has the easiest problembeen solved? No. Have the seemingly fantasticproblems been solved? Yes, and we hardly givethem a second thought.

It is not accidental that solutions have beenfound wherever the atmosphere of freedom and pri-vate ownership has prevailed wherein men couldtry out their ideas and succeed or fail on their ownworthiness. Nor is it accidental that the coerciveforce of government—when hooked up to a creativefield such as transportation—has been slow, plod-ding, and unimaginative in maintaining and re-placing its facilities.

Does it not seem odd that a privately-ownedautomobile company found it expedient to sponsora national contest with tremendous prizes and toconduct its own search in order to correct thefaults of the publicly-owned and inadequate high-way system? The highway dilemma has becomemore and more acute until someone other than thepublic owner seeks an answer. If the points ofownership had been reversed in 1900—that is,motorcar development in the hands of the gov-ernment, and highways left to private individuals—we would today likely be participating in a con-test sponsored by the privately-owned highwaycompanies to suggest how to improve the govern-ment's horseless carriage so that it would keeppace with the fine and more-than-adequate high-ways.

How could roads be built and operated privately?77

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78 THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM

I do not know. This is a subject to which none ofus directs his creative attention. We never dothink creatively on any activity pre-empted by gov-ernment. It is not until an activity has been freedfrom monopoly that creative thought comes intoplay.

But go back to 1900. Could any of us then havetold how to solve the six problems to which solu-tions have been found? Suppose, for instance, thatsomeone could at that time have described thelooks and performance of a 1954 automobile.Could any of us have told him how to make it? No,no more than we can describe how privately to

build and operate highways today.What accounts, then, for the 1954 automobile

and other "fantastic" accomplishments? Govern-ment did not pre-empt these activities! Instead,these have been left to the area of free, unin-hibited, creative thinking. Millions of man-hours oftechnically skilled, inventive thought have been atwork. And the end is not yet. Nor will there be anend if the inhibitory influence of government isconfined to its proper functions of protecting equal-ly the life, liberty, and property of all citizens;if men are free to try their ideas in a competitiveand voluntary market.

29. "FOR THE GOOD OF OTHERS"*

Leonard E. Read

A professor writes, "It seems to me that it isquite an unworthy goal for businessmen to go towork for the sake of bringing profit to the stock-holders."

The head of a large corporation bemoans the badimage of business and contends that the first con-sideration of American business is, when rightlyoriented, the well-being of employees and cus-tomers.

These positions typify a growing, collectivisticsentiment among corporate managers and aca-demicians. Their view, in essence, is that oneshould go into business for the good of others;profit for the owners is an unworthy objective. Aleading American socialist built his Utopia arounda similar notion: "Production for use and not forprofit."

I suspect that there are no card-carrying altru-ists in this world, though there are those whothink of themselves as such. "So many people whothink they have a tender heart have only a softmind."1 Anyway, this is to say that there are noselfless persons; there are only those who get self-satisfaction out of the mistaken idea that they areselfless. Self-satisfaction motivates one as muchas another. Some aim for this state of bliss by pil-

•From The Freeman, July 1963

ing up money, others by minding your and mybusiness, and still others by working "for the goodof employees and customers." The individual whogives his worldly goods to others gets as muchthrill from his action as did Midas in his pennypinching.

We differ from one another, of course, in how in-telligently we interpret our self-interest. A ThomasJefferson, for instance, is intelligent enough to seethat his self-interest is best served when he at-tempts to perfect the society in which it is his lot tolive. A pickpocket, on the other hand, thinks hisself-interest is best served when he takes greatrisks for the sake of small gains. The differencebetween the two cannot be identified as selfless-ness and selfishness; it is simply a matter of intel-ligence.

Persons who get more thrills by "doing good" toothers than by improving their own status—intel-lectual or spiritual or material—are drawn towardsocialism which, theoretically, is consistent withand appealing to their manner of thinking.

Adam Smith, nearly two centuries ago (in TheWealth of Nations), stated what experience seemsto confirm:

I have never known much good done by those whoaffected to trade for the public good. . . .

It is only for the sake of profit that any man em-

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30. FOOD FROM THOUGHT 79

ploys a capital in the support of industry; and he willalways, therefore, endeavor to employ it in the sup-port of that industry of which the produce is likely tobe of the greatest value. . . .

He generally, indeed, neither intends to promote thepublic interest, nor knows how much he is promotingit. . . . By directing that industry in such a manner as itsproduce may be of the greatest value, he intends onlyhis own gain, and he is in this, as in many other cases,led by an invisible hand to promote an end which wasno part of his intention. Nor is it always the worsefor the society that it was no part of it.

By pursuing his own interest he frequently pro-motes that of the society more effectually than whenhe really intends to promote it. (Italics supplied)

Let us reduce this debate to manageable propor-tions and reflect on what, for example, motivatesa person to put his savings into a hamburger stand.The answer comes clear: to make as good a livingas possible. We know from daily observations thatit is the hope of profit, not humanitarian concernabout the meatless diet of the population, which isresponsible for the venture. Observe, however, thata large profit—the enterpriser's aim—signifies cus-tomer approval. By keeping his eye on his own gain,he assures that others are well served. Their re-peated purchases, leading to the enterpriser'sprofit, prove this. Imagine how different this situa-tion would be were the hamburger man to concen-trate not on his own gain but only on the good ofothers!

Of course, to achieve a profit it is necessary thatemployees be given a wage and working conditionsfor which they will freely exchange their labor andthat people be offered goods or services for whichthey will willingly exchange their dollars. This isthe free market way!

Humanitarian? Yes, indeed: Assume that a sur-geon has discovered how to do a brain surgery, thathe can do only one a month that 1,000 persons ayear need such an operation if they are to survive.How is the surgeon's scarce resource to be allo-cated? Charge whatever price is necessary to ad-just supply to demand, say $50,000! "For shame,"some will cry. "Your market system will save onlywealthy people." For the moment, yes. But soonthere will be hundreds of surgeons who will acquirethe same skill; and, as in the case of the oncescarce and expensive "miracle drugs," the pricethen will be within the reach of all.

Look to the improvement of your own position ifyou would be most considerate of others! And thisis sound advice whether one's business consists ofearning profit or doing basic research or prac-ticing medicine or saving souls or whatever. Thebest charity is to set an example by which othersmay learn to help themselves.

Note'Jacques Maritain: Lettre a Jean Cocteau.

30. FOOD FROM THOUGHT

Charles W. Williams

Important events in the exciting history of foodhave interesting, divergent, and often accidentalbeginnings.

In 1856 a boy in Pittsburgh grew some extrahorseradish in his mother's garden. He borrowed awheelbarrow, which he filled with bottles ofground horseradish and sold to local grocers. The

*From The Freeman, November 1968

boy was Henry Heinz; and from this first bottleof horseradish sauce grew the intricate world-widebusiness of the H. J. Heinz Company. Before 1900that one variety had grown to 57, which todaynumbers close to 570 in this far-flung food empire.

In 1904 Thomas Sullivan, a tea merchant, sentsamples of his various blends of tea to a few of hiscustomers packed in little, hand-sewn silk bags. Tohis amazement, orders began pouring in by thehundreds for his tea put up in bags. His customers

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80 THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM

had discovered that tea could be made quickly with-out muss or fuss by pouring boiling water over teabags in cups. Thus, quite by accident, was the startof a million-dollar innovation in the sale of tea.

In 1890 a salesman living in Johnstown, New York,while watching the time it took his wife to makesome calfs-foot jelly, decided that powderinggelatin would save a lot of time in the kitchen.Charles B. Knox put his idea into operation, hiredsalesmen to go into peoples' homes to show howeasily his gelatin could be dissolved in water andused. His wife worked out recipes for aspics anddesserts to be given away with each package. Thiswas the beginning of Knox Gelatine known todayby every American housewife.

Peter Cooper, the inventor of the "Tom Thumb"locomotives, also invented a process for mixingpowdered gelatin, sugar, and fruit flavors. Thiswas fifty years before it began to appear ongrocers' shelves as Jell-O. He was too early; mer-chandising methods had not been developed to con-vince housewives of the need for ready preparedfoods. Just before the beginning of this centuryspectacular advertising for its day pointed outhow many desserts could be prepared from thisinexpensive, neat, clean package of Jell-O. Recipebooklets were distributed by the millions, as manyas 15 million in one year, unheard of in that day.Another billion-dollar food business was launched.

Count Rumford, born in Massachusetts, who latermigrated to England, was a leading physicist of thenineteenth century. He built the first kitchen rangedesigned for use in a prison in Munich. This provedso efficient and workable that many wealthy peo-ple commissioned Count Rumford to replace theiropen hearth type of cooking apparatus with thesenew contraptions in their manor kitchens. By 1850many American manufacturers had adapted Rum-ford's invention and were producing cast ironranges in many sizes and shapes, lavishly dec-orated. From an experimental prison range, themodern stove industry was born.

In 1914 a young scientist from Brooklyn, NewYork, named Clarence Birdseye joined a scientificexpedition to Labrador. He was also an avid sports-man, so he lost no time. He cut a hole in the thickarctic ice to try his hand at fishing. The fish froze assoon as they were exposed to the subfreezing air,often before he had them off the hook. To his sur-

prise, the fish could be kept frozen for weeks andthen defrosted and cooked like a fresh fish with-out any loss of texture or flavor. After returning tothe United States, Birdseye made the same dis-covery while hunting caribou. The steaks from thequick-frozen caribou could later be broiled to ajuicy, flavorsome rareness. Because of World WarI, he had to drop many additional experiments inquick-freezing all kinds of food. After the war hewent into the fishery business in Gloucester, Mas-sachusetts, and experimented with fast freezing onthe side. With a tremendous amount of good sales-manship, he raised money for the first quick-frozenfood company. The first Birdseye package wenton sale to the public in 1930. It would have beendifficult to believe, at that time, that within a rela-tively few years almost every segment of our giantAmerican food industry would be in quick freezing.

In Boston in 1894 a boardinghouse keeper wascriticized by a sailor in her rooming house becauseher puddings were lumpy. Insulted at first, she be-came interested when he explained that the SouthSea island natives pounded tapioca to a smoothconsistency and suggested that she experiment byrunning some through her coffee grinder. Sureenough from there on her puddings were as smoothas silk. Soon she was putting up her finely groundtapioca in bags and selling them to her neighbors.She chose a very magic name—"Minute Tapioca"—and soon found a big business on her hands.Many quickly prepared foods have since copiedthe word "minute," but today a minute does notseem fast enough and has been replaced by "in-stant."

Many people believe Aunt Jemima to be a fictionalname representing an old-fashioned Negro mam-my. On the contrary, the name of this ever-popu-lar pancake mix was inspired by a real, live person.A widow who lost all her money and could nolonger pay wages to the faithful old family cookworked out a formula with her real-life AuntJemima and managed to borrow enough money sothey could jointly put their product on the market.The mix brought fame and fortune to the real AuntJemima and her former penniless mistress.

Chiffon cake was billed in huge cake mix ads inthe 1940's as the "first really new cake in a hun-dred years." Harry Baker was a professional bakerand owned a pastry shop in Hollywood, California.For years celebrities had flocked to his store and

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30. FOOD FROM THOUGHT 81

raved about his cakes. Many cooks feel that theirpersonal recipes should be very valuable to somebig food manufacturer but are shocked to find thatvariations of nearly every recipe have already beentried in the research kitchens. Harry Baker was oneof the lucky ones; he sold his recipes for many thou-sands of dollars to General Mills. The valuablesecret of his chiffon cake was that instead of short-ening he used salad oil.

Going back many years to 1520, Cortez, the Span-ish conqueror of Mexico, observed native MayanIndians treating tough meat with the juice of thepapaya, a common fruit in most tropical lands. Henoted this in his writings about his conquest.Strangely enough, this find lay dormant untilrecent years, when the tenderizing element inpapayas was turned into a powder, put up in jarsready to sprinkle on the surface of meat to makechuck and round steaks as tender as sirloin andporterhouse. From this long-forgotten idea cameAdolph's Meat Tenderizer, a necessity in manyhomes.

In 1824 a German doctor living in Venezuela hada Spanish wife who had been sickly for years. De-termined to cure her, he worked for over a year ona formula of herbs and spices until he invented atonic that he claimed brought her back to health.Sailors stopping at the little port of Angosturafound that this blend of herbs, spices, and theblossoms of the blue Gentian plant would cureseasickness. They spread the fame of Angosturabitters around the world, the process being speededwhen they learned to add it to their ration of rum.When it became an essential part of a Manhattanco*cktail, its place in our lives was further assured.Later, it was found to be an excellent addition inmany food recipes, and today Angostura Bitters isfound on almost everyone's food shelf.

Early traveling merchants from the city of Ham-burg, Germany, learned from the Tartars in theBaltic Sea area how to scrape raw meat, season itwith salt, pepper, and onion juice to make what isstill called tartar steak. The people of Hamburgsoon adopted the tartar steak. After many yearssome unknown Hamburg cook made patties out ofthe raw meat and broiled them brown on the out-side and still pretty raw on the inside—a true ham-burger. Today in the butcher shops of America,ground hamburger meat accounts for 30 per centof all the beef sold to consumers.

The Toll House was a country inn in Massachusettsnoted for good food. In the early 1940's RuthWakefield, who was then mistress of the inn,started serving a crisp little cookie studded withbits of chocolate. Miss Wakefield readily gave hercustomers the recipe, and all of a sudden, bars ofsemi-sweet chocolate began vanishing from theshelves of the stores in the area. It didn't take longfor the Nestle Company, and later Hershey, tosmoke out the fact that everyone was making thecookie recipe from the Toll House; and soon theywere selling millions of packages of chocolate bitsspecifically so people could make these wonderfulcookies. Today it is America's most popular cookie,available frozen, in read-to-use cookie mixes, andalready made in packages.

The early Chinese found that seaweed dried andground into a powder and added like salt to foodhad a magical effect on meats and vegetables—alltheir natural flavor was enhanced. That's why Chi-nese food became so popular all over the world.Eventually our chemists discovered the flavor-en-hancing element and called it glutamate. Todaythis product, monosodium glutamate, made frombeet sugar waste, soy beans, or wheat, is a stapleitem in every market. It is known to Americanshoppers as Ac'cent.

Gail Borden, the son of a frontiersman, went toLondon in 1852 to sell a dehydrated meat biscuitat the International Exposition being held in Eng-land. He used all his money trying to put over hisidea and had to travel steerage to get home. Hewas appalled at the crowded, miserable condi-tions imposed on the immigrant families coming toAmerica. During the trip several infants died intheir mothers' arms from milk from infected cows,which were carried on board most passenger ves-sels to furnish milk, cream, and butter for thepassengers. Borden was sure there was a way topreserve milk for long voyages; but many beforehim had tried and failed, including Pasteur. Afterfour years of intensive research, Borden perfecteda process of condensing milk. In 1856 his patentwas approved in Washington. After much workselling the idea to skeptics, the first canned milkwas introduced to the American market andformed the cornerstone of the vast and diversi-fied Borden Company.

In Battle Creek, Michigan, Ellen Gould White hada dream one night in which she was told by the

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Lord that man should eat no meat, use no tobacco,tea, coffee, or alcoholic beverages. As a SeventhDay Adventist she established the "Health ReformInstitute," a sort of sanitarium, where her guestsate nuts disguised as meat and drank a cerealbeverage. This beverage was the creation of one ofher guests named Charles William Post, who wassuffering from ulcers. He named his beveragePostum. Post also invented the first dry breakfastcereal, which he called "Elijah's Manna." He de-cided to go into business producing his inventions;but the name Elijah's Manna ran into consumerresistance, so he changed it to "Grape Nuts."

In this same sanitarium was a surgeon named Dr.Harvey Kellogg, whose name along with Post'swas destined to be on millions of cereal packagesevery year. One of Dr. Kellogg's patients hadbroken her false teeth on a piece of zwiebach, sohe invented a paper-thin flake cereal from corn.Breakfast cereals immediately became a rage, andat one time there were as many as forty differentcompanies in Battle Creek competing for this newhealth food business. So began the vast cerealbusiness of today.

Margaret Rudkin was the wife of a stock brokerand her son suffered from allergies. She made anold-fashioned loaf of bread from stone-milledwhole wheat flour, hoping to build up her son'shealth. The bread helped her son; so her doctorpersuaded her to bake the bread for some of his pa-tients, and soon she was in business. When thisbread was introduced in the thirties, it competed at25$ against the spongy white variety selling at 10<P.Within 10 years, Maggie Rudkin's PepperidgeFarm Bread was in demand all over the East Coastand other bakers were making similar loaves—another small beginning for a nationally-knowncompany, Pepperidge Farms.

One night Teddy Roosevelt, who had been visitingthe home of President Andrew Jackson, stoppedfor dinner at the Maxwell House, a famous eatingplace nearby. Roosevelt, a great extrovert, was sodelighted with the coffee that when he finished hereplaced the cup in the saucer with a formal ges-ture and cried out heartily, "that was good to thelast drop," a phrase destined to make quite famousthe coffee named after the Maxwell House.

St. Louis, Missouri, was the site of two importantdevelopments in the realm of food. In 1904 anEnglishman was tending a booth at the St. LouisInternational Exposition demonstrating the vir-tues of a hot cup of tea. This was an insurmount-able task during the hot July days in the Mid-West.Our Englishman, Richard Blechynden, disparaging-ly wiped the perspiration from his face as hewatched the crowds pass him by. Finally, in des-peration, he threw some ice into the hot tea urnand the crowds began to swarm around his booth.The drink was a sensation, and iced tea quickly be-came one of America's most popular thirst quench-ers.

Still in St. Louis, but back in 1890, a physicianground and pounded peanuts to provide an easily-digested form of protein for his patients. The re-sult was peanut butter, which was quickly andrightly adopted by food faddists all over the coun-try. Today it is a staple found in almost everyAmerican kitchen. It's a rare mother who isn'tthankful for healthful peanut butter when nothingelse seems to tempt her children's appetites.

So, with these ancedotes, one can see that al-most every great food company or food idea had asmall but fascinating beginning. Some came quiteby accident, others from diligent perseverance,reflecting the drive and ingenuity of the humanrace—free enterprise among free men.

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3 1 . WINDFALL PROFITS*

Robert G. Anderson

Of all aspects of the free market economic system,the role of profit-making by individuals is the onemost subject to controversy. An air of apologyseems to permeate any discussion of profit-making,even among those who generally commend themarket society.

Companies seem duty-bound to defend theirlatest financial reports. Any increase in profits iscontrasted with earlier periods of losses or "inade-quate" profits. The relative smallness of profits isdemonstrated in terms of capital invested, annualsales, or total wages. Public relations departmentstremble over reported company success and gearthemselves for the inevitable onslaught such fa-vorable reports will bring.

Among the charges most feared is the accusationthat the firm has reaped windfall profits. While"normal" profits might be tolerated, anythingabove so-called normalcy is invariably subject topublic charges of exploitation. The implicationsubtly drawn is that windfall profits accrue as a re-sult of someone else's losses. While the publicmight overlook small injustices, large profits aresimply intolerable.

This massive assault on profit-making reflects abelief that profits are something extra, the elimi-nation of which would result in a general improve-ment in human welfare, that profits are gained atthe expense of others—"unearned" and "unjust."

This anti-profit mentality stems from a failure tounderstand the true nature and source of profits,the integral relationship existing between profitsand losses, and their basic importance to the func-tioning of the market system. It is a failure to un-derstand that an attack upon profits, even excessor windfall profits, is an attack upon the marketsystem itself.

Within the framework of a free market price sys-tem, profits show which producers have best satis-

•From The Freeman, May 1974

fied the wants of consumers. Profits appear as theresult of actions taken earlier by those producersmost successful in anticipating and serving thedemands of the consumer. Profits demonstratehow well a producer has employed scarce re-sources in the past toward the satisfaction of con-sumer wants. Profits are a record of experience, areward for satisfactory service rendered.

The process of profit-making, however, is not thesame thing as the amount of profits recorded.Profits earned in the past serve as no specific guidefor future productive activity, though the fact thatthey were earned may offer hope of future profits.Past profitable activity in a given form of produc-tion assures nothing about the future. Attempts toimitate activities that have been profitable haveresulted in many business failures.

The opportunity for profit-making stems fromthe changing values of consumers over time, andthe reflection of these changing values on prices.The individual who foresees correctly these de-veloping changes in market prices, and acts uponhis foresight, will be the profit-maker.

Adjusting to Change

If man were omniscient, or if his values were toremain static, the concept of profit and loss wouldnot exist. But fallibility and change are part of thehuman condition and necessarily affect man'seconomic behavior.

Today's market prices are reflections of valuespreviously held by consumers and of the produc-tion those values generated. The prices so estab-lished will be either too high or too low with respectto the market conditions of tomorrow, conditionswhich could only be known by knowing the future,which is impossible.

The profit-maker, however, must attempt theimpossible. The uncertainty of the future overridesall human action. The fact that future prices are

83

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84 THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM

uncertain does not dissuade the potential profit-maker from acting.

It is this potential of profit-making that providesthe entrepreneur's motivation and incentive forproduction. The entrepreneur identifies resourcesin today's market that he believes will possess ahigher market value tomorrow. If his foresightabout the future values of the consumers is cor-rect, a profit can be realized. The magnitude of theprofit will depend upon the degree of change infuture market prices and the entrepreneurial de-cision to act on his foresight.

When the rise in prices is large, the entrepreneurholding the resources so affected will experiencelarge profits. The identification of this develop-ment as excess or windfall profits has been grosslymisleading. The fact that he did not anticipate theprecise degree of change in prices is no basis fordenying the owner of the resources his right to thegain.

The concept of windfall profit merely observesthat large gains can be realized from drastic chan-ges in consumer evaluations and their resultant im-pact on market prices. The owner of the affectedresources experiences a dramatic and sudden in-crease in the value of his property. But, if consum-er evaluations change in the other direction,market prices can just as suddenly and dramatical-ly fall, causing windfall losses to the owners ofresources so affected.

Windfall profits or losses simply emphasize therisk of productive activity resulting from the chang-ing values of consumers. While the entrepreneurattempts to calculate future market conditions,he is not omniscient. An underestimate of futureprices may yield him a higher profit than he hadanticipated when he took productive action, butthat same higher profit becomes the magnet for aninflux of new competitive activity.

A Reliable Guide

With the profit and loss system as their guide,competing entrepreneurs decide how resourcesshall be directed for future consumption. Antici-pated profitability attracts the productive capitalof the entrepreneurs, but the ultimate profit is de-termined by the actions of the consumers. The en-trepreneur's astuteness in judging the consumer'sdemands will decide whether profits or losses areto be realized by him in the future.

A significant contributor to a smoothly func-tioning market is the much maligned speculator.

As an entrepreneur, the speculator acts in antici-pation of the changing values of consumers. Hisbuying and selling of resources creates a more or-derly market, reducing erratic fluctuations inprices, and thus holds down the magnitude and se-verity of gains and losses. Accurate foresight bythe speculator mitigates the errors of resource pric-ing and the consequent large profits or lossesbrought on by changing consumer tastes.

Once profits are understood to evolve from theactions of the consumers, it becomes pointless tospeak of profits as being "fair," "normal," "ex-cess," or whatever.

The decision on how to allocate existing re-sources into future use is made by entrepreneurson the basis of their interpretation of the consum-er's actions in the market place of the future.Through a subsequent return of profits and lossesto the entrepreneur, the consumer is constantlysignaling entrepreneurs, as to how to direct scarceresources toward best satisfying consumer wants.

This relationship between the entrepreneur andthe consumer is much like that of a revocable trust.The trustee-entrepreneur allocates resources forthe benefit of the trustor-consumer, a relationshipperpetuated by profits and revoked by losses.Through the signal of these profits and losses theconsumer steers the producer.

The allure of profit-making is the catalyst forproductive activity. Sparked by an entrepreneur-ial decision on the future state of the market, re-sources are continually being directed into hope-fully productive use. The soundness of the originaldecision is reflected by profits or losses generatedby the venture. Without some prospect that profitswill substantiate the original decision, no produc-tive activity would be undertaken. The problemof determining how resources should be allocatedcould not be resolved. There would be no responseto the will of the consumer in the market. Themarket would be in a state of chaos.

The Fundamental IssueConcerns Property Rights

The real controversy over the concept of excessor windfall profits evolves over who should be thebeneficiary of these subsequent unanticipatedchanges in market prices. The fundamental issue inthis controversy is one of property rights. In a freemarket system the entrepreneur subjects his prop-erty to risk in a productive activity in the hope ofgenerating a profit. If his judgment of the future

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demand of the consumers proves correct, his prop-erty increases in value, and he profits. The extentof his gain is thus determined by the consumer.In a market system of private ownership the gainswould therefore accrue to the owner of the prop-erty.

Similarly, the burden of windfall losses is borneby the entrepreneur. If he directs his property intoproductive activities later rejected by the consum-er's changing values, he is responsible for his er-roneous decision. The sudden abstention from buy-ing on the part of the consumers causes a fall inthe value of his property and a loss to the entre-preneur. Within such a market system, the entre-preneur subjects his property to risk—to the gain orloss that accrues from the changing tastes of theconsumer.

The notion that windfall profits accrue at an-other's expense or loss is patently false. They resultfrom the same forces that bring windfall losses:changes in the values of consumers. Such windfallsresult from future uncertainty, and should accrueto the owners who expose their property to therisks of production.

Profits or Losses Stem fromChanging Values of Consumers

Once it is understood that profits and lossesevolve from the changing values of consumers, itbecomes obvious that abolishing windfall profitsor windfall losses is impossible. Fallibility andchange are a part of our nature, and both largeerrors and great changes are inevitable. To deny to

the entrepreneur the gains or losses resulting fromsuch error or change does not eliminate gains orlosses; it eliminates entrepreneurs, disrupts themarket, and ultimately leaves everyone under thedead hand of government control.

As long as consumers continue to express theirchanging values in the market place, profits, antic-ipated or not, will continue to materialize. Theonly question is whether the gain in the value ofthe entrepreneur's property should accrue to theowner or to someone else.

When the government attempts to make itselfthe beneficiary of windfall profits, it can only dis-rupt the productive processes of the market. Thenatural adjustments in supply and demand that oc-cur in the free market are hampered, and furtherdisequilibrium develops. The consumer's urgentsignal for increased production, which is the es-sence of windfall profits, cannot be heard or actedupon by producers to whom the market is closed.The ultimate consequence must inevitably be evenhigher prices for the resources involved. Thus, theexpropriation of windfall profits is not only coun-terproductive, but also denies the sovereignty ofthe consumer in the structuring of society.

If the individual as consumer is to retain hispersonal liberty, if he is to remain the sovereignforce in the structuring of society, he must be freeto reflect fully his changing values in the marketplace. This requires that the profit and loss signalmust remain unhampered. For that is the only sig-nal to which entrepreneurs can reasonably re-spond.

32. THE ELITE UNDER CAPITALISM*

Ludwig von Mises

A long line of eminent authors, beginning withAdam Ferguson, tried to grasp the characteristicfeature that distinguishes the modern capitalisticsociety, the market economy, from the older sys-tems of the arrangement of social cooperation.They distinguished between warlike nations and

•From The Freeman, January 1962

commercial nations, between societies of a militantstructure and those of individual freedom, betweenthe society based on status and that based on con-tract. The appreciation of each of the two "idealtypes" was, of course, different with the variousauthors. But they all agreed in establishing thecontrast between the two types of social coopera-tion as well as in the cognition that no third prin-

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8 6 THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM

ciple of the arrangement of social affairs is think-able and feasible.1 One may disagree with some ofthe characteristics that they ascribed to each of thetwo types, but one must admit that the classifica-tion as such makes us comprehend essential factsof history as well as of contemporary social con-flicts.

There are several reasons that prevent a full un-derstanding of the significance of the distinctionbetween these two types of society. There is in thefirst place the popular repugnance to assign to theinborn inequality of various individuals its due im-portance. There is furthermore the failure to real-ize the fundamental difference that exists betweenthe meaning and the effects of private ownershipof the means of production in the precapitalisticand in the capitalistic society. Finally, there is ser-ious confusion brought about by the ambiguousemployment of the term "economic power."

Inborn Inequality

The doctrine that ascribed all differences be-tween individuals to postnatal influences is unten-able. The fact that human beings are born unequalin regard to physical and mental capacities is notdenied by any reasonable man, certainly also notby pediatrists. Some individuals surpass their fel-low men in health and vigor, in brain power andaptitude for various performances, in energy andresolution. Some people are better fit for the pur-suit of earthly affairs, some less. From this pointof view we may—without indulging in any judg-ment of value—distinguish between superior andinferior men. Karl Marx referred to "the inequalityof individual endowment and therefore productivecapacity (Leistungsfahigkeit) as natural privileges"and was fully aware of the fact that men "wouldnot be different individuals if they were not un-equal."2

In the precapitalistic ages the better endowed,the "superior" people, took advantage of their su-periority by seizing power and enthralling themasses of weaker, i.e., "inferior" men. Victoriouswarriors appropriated to themselves all the landavailable for hunting and fishing, cattle raising andtilling. Nothing was left to the rest of the peoplethan to serve the princes and their retinue. Theywere serfs and slaves, landless and penniless un-derlings.

Such was by and large the state of affairs in mostparts of the world in the ages in which the "he-roes"3 were supreme and "commercialism" was

absent. But then, in a process that, although againand again frustrated by a renascence of the spiritof violence, went on for centuries and is still goingon, the spirit of business, i.e., of peaceful cooper-ation under the principle of the division of labor,undermined the mentality of the "good old days."Capitalism—the market economy—radically trans-formed the economic and political organization ofmankind.

In the precapitalistic society the superior menknew no other method of utilizing their own super-iority than to subdue the masses of inferior people.But under capitalism the more able and moregifted men can profit from their superiority onlyby serving to the best of their abilities the wishesand wants of the majority of less gifted men. In themarket economy the consumers are supreme. Theydetermine, by their buying or abstention from buy-ing, what should be produced, by whom and how,of what quality and in what quantity. The entre-preneurs, capitalists, and landowners who fail tosatisfy in the best possible and cheapest way themost urgent of the not yet satisfied wishes of theconsumers are forced to go out of business andforfeit their preferred position. In business officesand in laboratories the keenest minds are busyfructifying the most complex achievements of sci-entific research for the production of ever betterimplements and gadgets for people who have noinkling of the scientific theories that make the fab-rication of such things possible. The bigger an en-terprise is, the more it is forced to adjust its produc-tion activities to the changing whims and fanciesof the masses, its masters. The fundamental prin-ciple of capitalism is mass production to supply themasses. It is the patronage of the masses thatmakes enterprises grow into bigness. The com-mon man is supreme in the market economy. He isthe customer "who is always right."

In the political sphere representative govern-ment is the corollary of the supremacy of the con-sumers in the market. The officeholders depend onthe voters in a way similar to that in which the en-trepreneurs and investors depend on the consum-ers. The same historical process that substitutedthe capitalistic mode of production for precapital-istic methods substituted popular government—democracy—for royal absolutism and other forms ofgovernment by the few. And wherever the marketeconomy is superseded by socialism, autocracymakes a comeback. It does not matter whether thesocialist or communist despotism is camouflagedby the use of aliases such as "dictatorship of the

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proletariat" or "people's democracy" or "Fiihrerprinciple." It always amounts to a subjection of themany to the few.

It is hardly possible to misconstrue more improp-erly the state of affairs prevailing in the capitalisticsociety than by dubbing the capitalists and entre-preneurs a "ruling" class intent upon "exploiting"the masses of decent men. We do not have to raisethe question how the men who under capitalismare businessmen would have tried to take advan-tage of their superior talents in any other thinkableorganization of production activities. Under cap-italism they are vying with one another in servingthe masses of less gifted men. All their thoughtsaim at perfecting the methods of supplying theconsumers. Every year, every month, every weeksomething unheard of before appears on the mar-ket and is very soon made accessible to the many.Precisely because they are producing for profit, thebusinessmen are producing for the use of the con-sumers.

Confusion Concerning Property

The second deficiency of the customary treat-ment of the problems of society's economic organ-ization is the confusion produced by the indis-criminate employment of juridical concepts, first ofall the concept of private property.

In the precapitalist^ ages there prevailed by andlarge economic self-sufficiency, first of everyhousehold, later—with the gradual progress towardcommercialism—of small regional units. The muchgreater part of all products did not reach the mar-ket. They were consumed without having beensold and bought. Under such conditions there wasno essential difference between private ownershipof producers' goods and that of consumers' goods.In each case property served the owner exclusively.To own something, whether a producers' good or aconsumers' good, meant to have it for oneself aloneand to deal with it for one's own satisfaction.

But it is different in the frame of a market econ-omy. The owner of producer's goods, the capital-ist, can derive advantage from his ownership onlyby employing them for the best possible satisfac-tion of the wants of the consumers. In the marketeconomy property in the means of production is ac-quired and preserved by serving the public and islost if the public becomes dissatisfied with the wayin which it is served. Private property of the mate-rial factors of production is a public mandate, as itwere, which is withdrawn as soon as the consum-

ers think that other people would employ the cap-ital goods more efficiently for their, viz.,^the con-sumers', benefit. By the instrumentality of theprofit and loss system the capitalists are forced todeal with "their" property as if it were other peo-ples' property entrusted to them under the obliga-tion "to utilize it for the, best possible provision ofthe virtual beneficiaries, the consumers. This realmeaning of private ownership of the material fac-tors of production under capitalism could be ig-nored and misinterpreted because all people-economists, lawyers, and laymen—had been ledastray by the fact that the legal concept of prop-erty as developed by the juridical practices anddoctrines of precapitalistic ages has been retainedunchanged or only slightly altered while its effec-tive meaning has been radically transformed.4

In the feudal society the economic situation ofevery individual was determined by the share al-lotted to him by the powers that be. The poor manwas poor because little land or no land at all hadbeen given to him. He could with good reason think—to say it openly would have been too dangerous—:I am poor because other people have more than afair share. But in the frame of a capitalistic societythe accumulation of additional capital by thosewho succeeded in utilizing their funds for the bestpossible provision of the consumers enriches notonly the owners but all of the people, on the onehand by raising the marginal productivity of laborand thereby wages, and on the other hand by in-creasing the quantity of goods produced andbrought to the market. The peoples of the econom-ically backward countries are poorer than theAmericans because their countries lack a sufficientnumber of successful capitalists and entrepre-neurs.

A tendency toward an improvement of the stan-dard of living of the masses can prevail only whenand where the accumulation of new capital outrunsthe increase in population figures.

The formation of capital is a process performedwith the cooperation of the consumers: only thoseentrepreneurs can earn surpluses whose activitiessatisfy best the public. And the utilization of theonce accumulated capital is directed by the antic-ipation of the most urgent of the not yet fully satis-fied wishes of the consumers. Thus capital comesinto existence and is employed according to thewishes of the consumers.

When in dealing with market phenomena weapply the term "power," we must be fully aware ofthe fact that we are employing it with a connota-

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tion that is entirely different from the traditionalconnotation attached to it in dealing with issues ofgovernment and affairs of state.

Governmental power is the faculty to beat intosubmission all those who would dare to disobeythe orders issued by the authorities. Nobodywould call government an entity that lacks thisfaculty. Every governmental action is backed byconstables, prison guards, and executioners. How-ever beneficial a governmental action may appear,it is ultimately made possible only by the govern-ment's power to compel its subjects to do whatmany of them would not do if they were not threat-ened by the police and the penal courts. A govern-ment supported hospital serves charitable pur-poses. But the taxes collected that enable the au-thorities to spend money for the upkeep of the hos-pital are not paid voluntarily. The citizens paytaxes because not to pay them would bring theminto prison and physical resistance to the revenueagents to the gallows.

It is true that the majority of the people willy-nilly acquiesce in this state of affairs and, as DavidHume put it, "resign their own sentiments and pas-sions to those of their rulers." They proceed in thisway because they think that in the long run theyserve better their own interests by being loyal totheir government than by overturning it. But thisdoes not alter the fact that governmental powermeans the exclusive faculty to frustrate any dis-obedience by the recourse to violence. As humannature is, the institution of government is an in-dispensable means to make civilized life possible.The alternative is anarchy and the law of thestronger. But the fact remains that government isthe power to imprison and to kill.

The concept of economic power as applied by thesocialist authors means something entirely differ-ent. The fact to which it refers is the capacity toinfluence other peoples' behavior by offering themsomething the acquisition of which they consideras more desirable than the avoidance of the sacri-fice they have to make for it. In plain words: itmeans the invitation to enter into a bargain, an actof exchange. I will give you a if you give me b.There is no question of any compulsion nor of anythreats. The buyer does not "rule" the seller andthe seller does not "rule" the buyer.

Of course, in the market economy everybody'sstyle of life is adjusted to the division of labor,and a return to self-sufficiency is out of the ques-tion. Everybody's bare survival would be jeopard-ized if suddenly he would be forced to experience

the autarky of ages gone by. But in the regularcourse of market transactions there is no danger ofsuch a relapse into the conditions of the primevalhousehold economy. A faint image of the effects ofany disturbance in the usual course of market ex-changes is provided when labor union violence,benevolently tolerated or even openly encouragedand aided by the government, stops the activitiesof vital branches of business.

In the market economy every specialist—andthere are no other people than specialists—dependson all other specialists. This mutuality is the char-acteristic feature of interpersonal relations undercapitalism. The socialists ignore the fact of mutual-ity and speak of economic power. For example, asthey see it, "the capacity to determine product" isone of the powers of the entrepreneur.5 One canhardly misconstrue more radically the essentialfeatures of the market economy. It is not business,but the consumers who ultimately determine whatshould be produced. It is a silly fable that nationsgo to war because there is a munitions industryand that people are getting drunk because the dis-tillers have "economic power." If one calls eco-nomic power the capacity to choose—or, as the so-cialists prefer to say, to "determine"—the product,one must establish the fact that this power is fullyvested in the buyers and consumers.

"Modern civilization, nearly all civilization,"said the great British economist, Edwin Cannan,"is based on the principle of making things pleas-ant for those who please the market and unpleas-ant for those who fail to do so."6 The market, thatmeans the buyers; the consumers, that means all ofthe people. To the contrary, under planning or so-cialism the goals of production are determined bythe supreme planning authority; the individualgets what the authority thinks he ought to get. Allthis empty talk about the economic power of busi-ness aims at obliterating this fundamental distinc-tion between freedom and bondage.

The "Power" of the Employer

People refer to economic power also in describ-ing the internal conditions prevailing within thevarious enterprises. The owner of a private firm orthe president of a corporation, it is said, enjoyswithin his outfit absolute power. He is free to in-dulge in his whims and fancies. All employees de-pend on his arbitrariness. They must stoop andobey or else face dismissal and starvation.

Such observations, too, ascribe to the employerpowers that are vested in the consumers. The re-

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quirement to outstrip its competitors by serving thepublic in the cheapest and best possible way en-joins upon every enterprise the necessity to em-ploy the personnel best fitted for the performanceof the various functions entrusted to them. The in-dividual enterprise must try to outdo its compet-itors not only by the employment of the most suit-able methods of production and the purchase of thebest fitted materials, but also by hiring the righttype of workers. It is true that the head of anenterprise has the faculty to give vent to his sym-pathies or antipathies. He is free to prefer an in-ferior man to a better man; he may fire a valuableassistant and in his place employ an incompetentand inefficient substitute. But all the faults he com-mits in this regard affect the profitability of hisenterprise. He has to pay for them in full. It isthe very supremacy of the market that penalizessuch capricious behavior. The market forces theentrepreneurs to deal with every employee exclu-sively from the point of view of the services herenders to the satisfaction of the consumers.

What curbs in all market transactions the temp-tation of indulging in malice and venom is pre-cisely the costs involved in such behavior. Theconsumer is free to boycott for some reasons, popu-larly called noneconomic or irrational, the purvey-or who would in the best and cheapest way satisfyhis wants. But then he has to bear the conse-quences; he will either be less perfectly served orhe will have to pay a higher price. Civil govern-ment enforces its commandments by recourse toviolence or the threat of violence. The market doesnot need any recourse to violence because neglectof its rationality penalizes itself.

The critics of capitalism fully acknowledge thisfact in pointing out that for private enterprise noth-ing counts but the striving after profit. Profit canbe made only by satisfying the consumers betteror cheaper or better and cheaper than others do.The consumer has in his capacity as customer theright to be full of whim and fancies. The business-man qua producer has only one aim: to provide forthe consumer. If one deplores the businessman'sunfeeling preoccupation with profit-seeking, onehas to realize two things. First, that this attitudeis prescribed to the entrepreneur by the consumerswho are not prepared to accept any excuse for poorservice. Secondly, that it is precisely this neglectof "the human angle" that prevents arbitrarinessand partiality from affecting the employer-employ-ee nexus.

To establish these facts does not amount either

to a commendation or to a condemnation of themarket economy or its political corollary, govern-ment by the people (representative government,democracy). Science is neutral with regard to anyjudgments of value. It neither approves nor con-demns; it just describes and analyzes what is.

Stressing the fact that under unhampered cap-italism the consumers are supreme in determiningthe goals of production does not imply any opinionabout the moral and intellectual capacities of theseindividuals. The individuals qua consumers as wellas qua voters are mortal men liable to error andmay very often choose what in the long run willharm them. Philosophers may be right in severelycriticizing the conduct of their fellow citizens. Butthere is, in a free society, no other means to avoidthe evils resulting from one's fellows' bad judg-ment than to induce them to alter their ways of lifevoluntarily. Where there is freedom, this is the taskincumbent upon the elite.

Men are unequal and the inherent inferiority ofthe many manifests itself also in the manner inwhich they enjoy the affluence capitalism bestowsupon them. It would be a boon for mankind, saymany authors, if the common man would spendless time and money for the satisfaction of vulgarappetites and more for higher and nobler gratifica-tions. But should not the distinguished criticsrather blame themselves than the masses? Whydid they, whom fate and nature have blessed withmoral and intellectual eminence, not better succeedin persuading the masses of inferior people to droptheir vulgar tastes and habits? If something iswrong with the behavior of the many, the faultrests no more with the inferiority of the massesthan with the inability or unwillingness of the eliteto induce all other people to accept their own high-er standards of value. The serious crisis of our civil-ization is caused not only by the shortcomings ofthe masses. It is no less the effect of a failure of theelite.

Notes^ee Ludwig von Mises, Human Action (New Haven, Conn.:

Yale University Press, 1949), pp. 196-199.2 Critique of the Social-Democratic Program of Gotha (Letter

to Bracke, May 5, 1875).3 Werner Sombart, Handler und Helden (Heroes and Huck-

sters) (Munich, 1915).4 It was the great Roman poet, Quintus Horatius Flaccus, who

first alluded to this characteristic feature of property of produc-ers' goods in a market economy. See Mises, Socialism, new edi-tion, p. 42 n.

5Cf. for instance, A. A. Berle, Jr., Power without Property(New York: Harcourt, Brace, Inc.), 1959, p. 82.

6Edwin Cannan, An Economist's Protest (London: P. S. King& Son, Ltd., 1928), pp. Vlf.

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33. PROFITS

Hans F. Sennholz

Although every businessman aims to earn a "prof-it," he usually knows very little about the economicnature of his objective. He may even succeed inearning a profit, and yet be unable to explain thisexcess of proceeds that accrues to him after all ex-penses are paid.

The same can be said about tax collectors whosearch for "profits" and aim to seize parts thereoffor the state. And the accountants who reveal the"profits" by comparing the business revenue withthe expenses. They all look at the totality of netincome without any distinction of its various com-ponent parts.

The economist who analyzes the economic na-ture of "profits" actually perceives three entirelydifferent sources of income.

Most proprietors and partners of small busi-nesses who think they are reaping "profits" actual-ly earn what economists call managerial remuner-ation. They are earning an income through theirown managerial labor, supervising their employees,serving customers, working with salesmen, ac-countants, and auditors. Obviously, their servicesare very valuable in the labor market. They wouldearn a good salary if they were to work for theA & P or a 5 & IOC store. Therefore, that part of abusinessman's income that is earned through hisown labor exertion is a kind of wage or salary, andas such, totally unrelated to economic profits.

Most small businessmen with incomes up to$20,000 and $25,000 fall in this category. In themanagerial labor market they would earn this in-come for services rendered to customers, for buy-ing and selling, supervision of personnel, book-keeping and accounting, and many other businessactivities.

But the majority of American enterprises earn anincome in excess of managerial remuneration. The

*From a speech to business executives, Dallas, Texas, April 23,1965

economist who dissects this residium finds yet twoother heterogeneous parts. By far the largest part,which is earned by the majority of American enter-prises, is interest on the owners or stockholdersinvested capital. It accrues to the owner on accountof the time-consuming nature of the productionprocess.

Interest

Whoever refrains from spending his income andwealth and, instead, invests them in time-consum-ing production can expect a return. For without itno one would relinquish his savings to provide cap-ital for production. Interest ultimately flows fromhuman nature. Men of all ages and races valuetheir present cash more highly than a claim pay-able in the future. Therefore, in order to induce aninvestor to relinquish his cash for production,which will yield its fruits in the future, a premium,called originary interest, must be paid. In otherwords, the businessman who invests in his ownenterprise should hope to earn on his investmentthe same kind of income as the lender who extendsa loan to a borrower.

This basic interest return of some 4 per centmust accrue to business lest it withdraw its capitalfrom production. As labor will leave an industrythat pays low wages, so will capital shun an indus-try that does not yield a market return. If the gov-ernment should tax it away or if labor unionsshould succeed in wresting this interest incomefrom businessmen, production will necessarily con-tract and ultimately fall into deep depression. Noadditional capital will be placed at the disposal ofan industry whose interest accrual is distributedto workers instead of owners. In fact, the liquidcapital of that industry will even be withdrawn andturned to other employment where interest canstill accrue. Capital consumption may even destroy

90

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33. PROFITS 91

what many generations before have built andaccumulated.

It is difficult to ascertain the precise rate of orig-inary interest which businessmen earn on accountof the time-consuming nature of production. Forreasons of comparison we cannot even use themarket rate of interest applicable to loan funds be-cause the market rate itself is a gross rate consist-ing of originary interest, an entrepreneurial profitcomponent that flows from the risks of the individ-ual loan, and finally, a risk premium that flowsfrom the dangers of monetary depreciation wher-ever inflation is practiced. But for reasons of simpleillustration of the originary interest rate, we mayuse the rate the U.S. government must pay for theuse of funds. If we assume that the lender of fundsto the U.S. government bears no debtor's risk andthat inflation does not affect the loan value, we ar-rive at an interest rate that may constitute the orig-inary rate, which is the rate businessmen shouldhope to earn as a basic interest return on theirinvested capital.

Suppose your net worth of business, stated inpresent value, amounts to $100,000. Originary in-terest on that amount would come to $4,000 a year,which you would earn even in such riskless invest-ments as U. S. Treasury bonds or savings banksdeposits. As a basis for mis interest calculation youwould take the estimated present market value ofyour net worth, for only the present value of yourassets, and not the arbitrary book value reflectingpast valuations or tax considerations, is meaning-ful for individual motivation and action.

A merchant with a business net worth of $100,-000, spending long days in his shop serving cus-tomers, supervising his help, and otherwise man-aging the business may thus earn $4,000 interestand $20,000 managerial remuneration without ac-tually reaping any profits.

Pure Profits—Temporary Responseto Changing Market Conditions

Finally, there are enterprises that do earn pureprofits. Through correct anticipation of future eco-nomic conditions, businessmen may earn whateconomists call entrepreneurial profits. For in-stance, through buying at a time when prices arelow and selling when prices are higher, they mayearn inventory profits. After interest allowance ismade for the time of investment, stock marketprofits are pure profits. Of course, such profits areconnected with risk on account of the uncertainty

of the future. Instead of reaping profits, manybusinessmen suffer losses.

Contrary to popular belief, pure profits are onlyshort-lived. Whenever a change in demand, supply,fashion, or technology opens up an opportunity forpure profits, the early producer reaps high returns.But immediately he will be imitated by competi-tors and newcomers. They will produce the samegood, render identical services, apply similarmethods of production, and thus depress pricesuntil the pure profit disappears. The first hoola-hoop manufacturer undoubtedly reaped pure prof-its. But as soon as dozens of competitors had re-tooled their factories the market was flooded withhoola-hoops. Prices dropped rapidly until the pureprofits had vanished. When the American peoplesuddenly discovered their need for compact cars,American Motors, who was the early manufac-turer, temporarily earned pure profits. After Gen-eral Motors, Chrysler, and Ford invaded the field,American Motors profits returned to the marketrate of interest or even changed to losses.

Pure profits are very elusive. But opportunitiesfor profits will emerge as long as there are changesin demand, supply, fashion, population, technol-ogy, or even the weather. As all life is change, andeconomic adjustments need to be made contin-uously, opportunities for profits will arise againand again.

And yet, in spite of the competitive forces thatwork incessantly in a free economy to wipe outpure profits, we may observe numerous enterprisesthat succeed in earning them over lengthy periodsof time. The reason must be sought not only in thesuperior management of some enterprises in whichgifted entrepreneurs direct the speculative aspectsof business, but also in the different degrees of riskconnected with the various industries.

Industries that work with a minimum of risk instable markets and with stagnant technology mustexpect to earn the lowest profits. When completelyadjusted to consumer demand and without any an-ticipation of risk, pure profits would indeed becompletely eliminated and only the originary in-terest return would remain. But as even a com-pletely adjusted industry may face future risks,economic or political, and as the risk factor cannotbe eliminated entirely from any productive invest-ment, some remnant of pure profit is usuallyearned by the successful enterprises. This is thereason why even apparently riskless industriescontinue to earn a little more than the 4 per centoriginary interest. The successful public utility,

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92 THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM

for instance, which may bear little investment risk,may earn 6 or 7 per cent, which consists of 4 percent interest and 2 to 3 per cent pure profit. But thepresence of risk also explains why some enter-prises in the same industry only earn the interestreturn or even suffer loss.

On the other hand, the successful enterprisesthat continuously face high degrees of risk tend toearn higher profits. For several years during thecold-war rearmament, the manufacture of aircraftand parts was exceptionally profitable. Accordingto some statistics, a few aircraft manufacturersearned more than 20 per cent of net worth. Even ifwe bear in mind that corporate net worth is usuallyunderstated when compared with present values,and earnings ratios therefore are considerablyoverstated, we must admit that exceptionally highprofits were earned by the most successful enter-prises. In short, economic activity that involves agreat deal of risk must yield exceptionally highprofits to the successful enterprise in order to at-tract the necessary capital. It is obvious that theaircraft industry that continuously faces a greatmany imponderables, and often has suffered heavylosses, could not attract the needed capital if nomore could be expected than a one per cent profitabove the originary interest. Or, oil explorationand drilling which entail great financial riskswould not be carried on without high rewards forsuccess.

Interference with Profits

Taxation of these high rewards, or their arbitrarydistribution to workers, would eliminate the incen-tive for risk-taking. Why should a man risk his cap-ital in production if he can only suffer losses? Inthat case he would shun every productive invest-ment, and search for riskless employment of hisfunds. The economy thus becomes rigid and inflex-ible, and unable to adjust to changes in demand,supply, and technology. Expansion and moderniza-tion are severely hampered. A confiscatory tax-ation of pure profits, maliciously called "excessprofits," destroys the vitality and dynamism of themarket economy. (For an excellent discussion ofprofit and loss see Ludwig von Mises, Planning forFreedom, Libertarian Press, South Holland, 111.)

And what are the effects of taxes levied on the4 per cent basic interest return? As describedabove, interest is the payment for the use of capitalover time. Without it capital cannot be investedand production must come to a standstill. When

the government levies its confiscatory taxes on thisbasic income component, the market must fall intosevere depression. In fact, the "multiplier" econo-mists who usually apply their calculations to gov-ernment spending would do much better calculat-ing the depressive effects of this taxation. Let usassume, for instance, that the government imposesa tax of $1 billion on the interest return of busi-ness. At 4 per cent this interest constitutes theyield of $25 billion capital invested. And withoutthis yield these $25 billion of business capital willbe withdrawn from production, at least as far as itis liquid and can be withdrawn without heavylosses. For why should the owner keep his capitalinvested without a return?

The Great Depression gave dramatic proof of thedepressive effects of confiscatory corporate tax-ation. And today, we can observe similar stagnat-ing effects whenever the Federal or state govern-ments raise their basic levies on business, such asthe social security taxes and unemployment taxeswhich fall on every business regardless of its profit-ability.

And, finally, what are the economic effects oftaxes that fall on the first-mentioned component,the managerial remuneration? Why should a mer-chant spend twelve to sixteen hours daily in hisstore if he cannot earn an income that is compar-able with the salaries earned by other managers?If profit taxes encroach upon this income the inde-pendent businessman will be tempted to sell out tohis big competitor and rather earn a salary as abranch manager than to face confiscatory profittaxes.

In economic life it is rather difficult to ascertainthe impact of profit taxation. The same tax in somecases may fall on pure profits, in others on basicinterest, and yet others on managerial remunera-tion. The effects, therefore, do vary. In some casesthe tax merely prevents risky undertakings, inothers it causes depressive restrictions of produc-tion, and in yet others it may cause the liquidationof small and medium-sized enterprises.

Addendum on Profit-Sharing

For many people, profit-sharing is thought toprovide the solution to our labor problems. It issaid to hold the key to industrial peace and repre-sent the ideal of industrial democracy. Accordingto a Senate Committee Report, profit-sharing is"essential to the ultimate maintenance of the cap-italistic system." Even some businessmen praise

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33. PROFITS 93

it for giving employees a sense of partnership inthe enterprise, raising worker morale, avoidingstrikes, reducing turnover, increasing efficiency,and so on. In fact, profit-sharing is said to affordworkers a stake in our capitalistic system.

These people do not seem to realize that themarket economy is a sharing system. Althoughhampered and mutilated, American business con-tinues to deliver ever more and better goods.Wages continue to rise on account of improvedtechnology and increased capital investments, notbecause we work ever harder and longer hours.Competition forces investors and businessmento share the fruits of their investments with theircustomers through lower prices and with theirworkers through higher wages.

But in popular terminology "profit-sharing" pro-poses to give the workers more than higher wagesthrough competition in the labor market. It meansan additional distribution of a businessman's earn-ings to his employees. Some proposals depend ongovernment or union coercion, others aim at vol-untary sharing. Most sharing firms are rather smallin size and employment.

The economist who analyzes this supplementarysharing must ask a pointed question. Which partof the business surplus commonly called "profit" isto be divided between businessmen and workers?Is it the "managerial remuneration" which busi-nessmen earn through their own managerial ser-vices? Why should independent businessmen yieldtheir labor income while managers and supervis-ors in the service of large corporations continue toearn a market wage?

Is it the "pure profit" which businessmen areurged to share? Only a small percentage of Amer-ican enterprises actually earn pure profits. Now,are the fortunate workers who found employmentin profitable enterprises to earn more than theirfellow workers in average firms? Should an ac-countant who serves a brilliant stockbroker earn$100,000 per year while his equally competentfellow accountants labor at $5,000 or $6,000?What is to determine his remuneration? But, what-ever the sharing plan should provide, it introducesa dubious wage principle: a man's labor income isdetermined by the ability of his employer. I doubtthat this is the matrix for human cooperation, thekey to industrial peace. On the contrary, it wouldcreate new sources of conflict. Most workers whor*ceive wages only would probably demand "equalpay" from their profitless employers, which wouldaggravate rather than alleviate the labor situation.

Many people fail to realize that industry doesn'thave much profit to share. According to ClaudeRobinson's excellent analysis, 45 per cent of allcompanies, on the average, are reporting no prof-its. The average annual earnings for all manufac-turing companies amount to eight and six-tenthcents per dollar of investment. "If we allow fivecents as a form of interest," Robinson concludes,"the remaining three and six-tenths cents is left forentrepreneurial risk-taking. Should the three andsix-tenths cents entrepreneurial fee be shared, itcould at best mean an insignificant wage increase,and would surely decrease the willingness of own-ers to take the investment risks involved in pro-viding better tools for workers. Sharing the entre-preneurial fee, therefore, would likely do the wage-earner more harm than good." (Claude Robinson,Understanding Profits. Princeton, N. J.: D. VanNostrand, 1961, p. 315.)

Interest on Investment

And finally, there is the "interest" which capi-talists usually earn on their invested funds. But, aforced reduction of this basic yield not only pre-vents capital formation but also causes its with-drawal and consumption. Such profit-sharing on alarge scale causes stagnation and depression asthe economic history of the past thirty-five yearshas repeatedly demonstrated.

Improvements in labor productivity and stan-dards of living largely depend on the increaseduse of capital. Saving is a fundamental prereq-uisite of economic progress. It is hard to under-stand how anyone who has human betterment atheart can urge us to reduce the award of savingby sharing it with those who did not earn it butpropose to consume it.

The friends of profit-sharing sometimes arguethat if all companies would share their profits,labor productivity would rise greatly and everyonewould benefit. But in this case, competition wouldagain reduce prices and profits until there wouldbe no excess profits to share. The benefits of risingproductivity would thus accrue to consumersthrough lower prices and to workers through risingwages. Competition would not tolerate the exist-ence of permanent profits to share. Therefore,profit-sharing can remain only a limited industrialpractice.

In many cases even this limited sharing is sail-ing under false colors. Where labor actually be-comes more productive through greater effort and

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94 THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM

application, its market value rises accordingly.Competition among businessmen will cause wagesto rise. A businessman who then proposes to sharehis profits with his workers may merely be usingthis means to pay higher market wages. But in-stead of making payments every Friday, he mayhold off paying for six months or a year, and callthis profit-sharing. It is my opinion that most of theseemingly successful profit-sharing plans merely

constitute plans for delayed payment of that partof wages that is earned through special effort andapplication.

In all such cases the workers would be well ad-vised to insist on payment of higher wages ratherthan expose their earnings to the risks of business.Workers may even lose their delayed wages in casethe business should lose money through poor man-agement decisions.

34. WHY SPECULATORS?*

Percy L. Greaves, Jr.

Back in February, 1871, a group of free enterpris-ers found a way to help cotton growers adjust theirproduction to market demand. They organized theNew Orleans Cotton Exchange. There, for 93years, cotton growers, wholesalers, manufacturers,and profit-seeking speculators could buy and sellcotton at free market prices for present and futuredelivery.

The prices paid and offered were published inthe press. No cotton grower or user was long indoubt about the state of the cotton market, presentor future. For there is no better indicator of thestate of a commodity market than the prices atwhich that commodity is bought and sold for var-ious dates of delivery.

The prices of the New Orleans Cotton Exchangewere long a valuable guide for farmers and manu-facturers alike. For farmers, they indicated howmuch land should be planted in cotton and howmuch in other crops. Through the growing season,future prices indicated how much time, care, andexpense should be spent in tending crops. Whenfuture prices were high, no expense was spared tobring every possible ounce to market. When futureprices were low, farmers were warned not to wastetoo much time and expense cultivating and pickingthat last possible ounce.

For manufacturers and other cotton buyers, theCotton Exchange quotations provided a base forestimating or determining their future raw mate-

•From The Freeman, November 1964

rial costs. This in turn helped them calculate theprices on which they bid for future business. Onorders accepted for delivery over long periods oftime, they could always make sure of their rawmaterial costs by immediately buying contracts fordelivery of cotton on the dates they would need it.

Cotton Prices Controlled

On July 9, 1964, the New Orleans Cotton Ex-change closed its doors to trading in "cotton fu-tures," as contracts for future delivery are known.For years such sales have been fading away. Withcotton prices more and more controlled by thegovernment, neither farmers nor manufacturersneed the information or insurance of a futuresmarket.

When demand for cotton drops off, the govern-ment advances the subsidized price to farmers andstores all unsold cotton. When demand for cottonrises, cotton pours out of government subsidizedwarehouses and sells at the government set price.Either way, the taxpayers lose. Until present lawschange or break down, cotton prices will be set bythe government, cotton acreage will be guided bybureaucrats, and valuable men, materials, and taxmoney will continue to be wasted in nonproductiveenterprise.

This situation reflects a complete lack of under-standing of the rules of human behavior and therole of speculators in a free market society. It sub-stitutes the wisdom of a few striving to stay in

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34. WHY SPECULATORS? 95

political power for the wisdom of those who spendtheir lives studying every facet of supply anddemand before pledging their names and fortunesin support of their considered judgment.

It is human nature for men to try to improve theirfuture conditions. That is the aim of every con-scious human action. Men make mistakes, but theyalways aim at success in providing a better futurefor themselves or their loved ones. Free markettransactions are merely the attempts of men toimprove their own situations by social actionswhich also improve the situation of others. Barringforce, fraud, or human error, all voluntary markettransactions must improve the situations of all par-ticipants.

How Men Act

Actually, there are only three basic principles ofhuman action. Men can act as gamblers, scientists,or speculators. Few acts fall entirely within anyone classification. For every human action is con-fronted by elements of future uncertainty, such asthose that exist in life itself.

Men act as gamblers when they know nothing inadvance about the results except that some willwin and others lose. There is nothing a man canknow, study, learn, or experience that will help himto become a winner. When men gamble, the de-sired results depend upon pure chance. No skillwhatsoever is involved.

Men act as scientists when they know in advancethe results their actions will produce. Scientistsdeal only with solvable problems where conditionscan be controlled and where identical actions inidentical situations will always produce identicalresults. Automation is a modern example of sci-entifically directed action. In all scientific action,the repetition of prescribed procedure will alwaysproduce the same results. So, the more that scien-tists know about the laws of nature, the more theycan undertake with prior certainty as to the actualresults.

Men act as speculators when they have onlypartial knowledge and understanding of the resultstheir actions are likely to produce. The more spec-ulators know and understand, the better they canpredict the future results of their actions. But theynever can be certain of the actual results.

Most speculations involve people and how theywill react to given situations. Since we can neverknow with certainty the future reactions of others,every action which involves others is a speculative

action. Thus, all voluntary actions, including mar-ket actions, are speculative.

Why Men Specialize

The best way to increase the probability thatspeculative actions will produce the desired re-sults is to increase our knowledge and understand-ing of all pertinent data, including the thoughtsand ideas that motivate the actions and reactionsof others. This takes time, study, experience, andeconomic analysis.

Men have found that the best way to gain moreof the needed knowledge, experience, and under-standing is for each one to select some limited areaof human activity and then specialize in it. Out ofthis division-of-labor principle the whole marketsystem has developed. In a market society, every-one specializes and then trades the products of hisspecialty for the products of other specialists, hispartners in total social production.

This system permits scientists to specialize inthe automatic mass production of inanimate ob-jects of wealth with certainty as to the physicalresults. However, men cannot plan or plot the mar-ket value of their products with scientific certainty.All such values are relative and speculative. Theydepend on the ever-changing ideas of buying menas to which of the many things offered for sale willgive them the most satisfaction for the sums theyhave to spend.

Specialization can and does help men engagedin marketing and other speculative social actions.It permits them to learn more about what they selland also more about the needs and wants of thoseto whom they seek to sell. Thus they become wiserand more efficient speculators, wasting less timetrying to sell the wrong things to the wrong people.

Perfect results depend on the perfect predictionof future conditions. Because of human fallibility,this is rarely possible. However, better predictionsand thus better results are often achievable. Great-er specialization tends to reduce errors and helpmen achieve better results.

Many men prefer the relative security of a rea-sonably assured steady income to the insecurity ofa wholly speculative income—an income that mayturn out to be very high, very low, or even a netloss. Such security-seeking people tend to becomeemployees.

Others prefer the lure and excitement of spec-ulation. Such people are the investors, employers,business promoters, and professional speculators.

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96 THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM

They assume responsibility for the uncertainty of abusiness venture's future success or failure. Theirlikelihood of success depends largely on their abil-ity to predict the future wants of buyers.

Better Foresight Pays

In a mass production market economy, the func-tion of prediction and speculation falls primarilyon investors, business promoters, and specialistsrather than on consumers. When producers seek toact as scientists only, creating wealth by relyingon the known laws of the physical sciences, theymust find others to undertake the predictions andspeculations as to the future conditions of themarket.

Such specialists must estimate, at the time pro-duction starts, what consumer demand, competi-tive supplies, and other market conditions are like-ly to be at the time of sale. Such speculators thenassume the responsibility that the planned produc-tion will meet the whims and wishes of consumers.Their income will depend on how correct theirearly predictions of future conditions prove to be.

As the division of labor has progressed, men andfirms have tried to reduce their predictive andspeculative functions to limited areas in which theybecome specialists with a better understandingthan most other men. They concentrate on makingor marketing certain goods and, in doing so, paylittle attention to the market conditions of othergoods, including their raw materials which maycome from far-away sources with which they areunfamiliar.

Of course, the future prices they can get fortheir finished goods are in part dependent uponthe ever-changing prices of the raw materialswith which they are made. So, to protect them-selves against future price fluctuations in theirraw materials, businessmen sometimes engage in"hedging." By "hedging," they transfer the haz-ards resulting from the uncertainty of future pricesto professional speculators in those products.

How Hedging Works

A good example of "hedging" is the case of thecotton shirt manufacturer. He is a specialist inmaking and selling shirts. He knows that the sell-ing price of cotton shirts is largely dependent uponthe price of raw cotton. He has little time to studythe cotton-growing conditions around the world orthe other prospective demands on the raw cotton

supply. He is fully occupied with his own prob-lems in the shirt business. However, he would liketo avoid the consequences of unforeseen changesin the prices of raw cotton.

Under free market conditions, he can hedge bycontracting to sell at current prices raw cottonwhich he need not buy or deliver until the date heexpects to sell the shirts he is making. Then, if theprice for shirts has fallen, due to a drop in rawcotton prices, he would buy raw cotton at the lowerprice to meet his hedging contract. The profit onhis raw cotton transaction would offset his loss onthe shirts.

On the other hand, if the prices of both raw cot-ton and cotton shirts have risen, the extra profitsfrom his shirt sales will be offset by his losses onthe hedging transaction in raw cotton. By hedginghe can protect himself against all possible fluctu-ations in raw cotton prices which might affect theprices of the shirts he sells. He rids his mind of thisworry so that he can concentrate on the details ofthe shirt business at which he is a specialist.

The man who takes his hedge is usually a profes-sional cotton speculator. He is a specialist whostudies and interprets all the available data andconditions that are likely to affect future raw cot-ton prices. He trades in cotton a thousand timesfor every once or twice by the average cottonmanufacturer. He knows how much has beenplanted in the many cotton-growing countries. Hestudies the rainfall and other weather conditionswhich may affect the size of the various crops. Hekeeps up-to-date on laws and proposed laws thatmay affect raw cotton prices. He follows the upsand downs in foreign exchange and transportationcosts.

He also keeps an eye open for changes in de-mand for each type of cotton. He has informedideas about increased demands arising from newuses for cotton, as well as any decreases due to thesubstitution of synthetics. He watches develop-ments in mass purchasing power, production, andconsumption in faraway lands like India. In short,he learns all he can about anything that might af-fect the supply of, or demand for, cotton and thusbring about a change in future raw cotton prices.

As a well-informed specialist, the speculator ismuch better able to predict future cotton pricesthan is the man who specializes in growing cottonor manufacturing cotton shirts. Competitionamong speculators trading on a commodity ex-change forces them to share the benefits of theirknowledge with their customers.

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Businessmen can protect themselves from somespeculative losses by taking out insurance. How-ever, customary insurance can only be bought forrisks which are largely known or predictable.Losses from fire, death, theft, or transportation ac-cidents are thus distributed over all those insured,instead of falling entirely on the ones who suffer aspecific disaster. Future price changes do not fall inthis category. They are the same for everyone.Only the well-informed specialist is equipped tospeculate successfully and "insure" others againstlosses from price changes.

In popular thinking, the speculator is a bold, badman who makes money at the expense of others.Many people believe he gains his livelihood byluck, gambling, or inside manipulation. There are,of course, a few dishonest speculators who lie andcheat, as do some in all occupations, but the honestspeculator is a serious specialist who serves man-kind. He constantly strives to obtain a better un-derstanding of future market conditions. He thenplaces this better understanding at the service ofall interested parties. Whenever his predictions arewrong, it is he who loses. When he is right, he andeveryone who trades with him benefit. For if theydid not expect to benefit, they would not trade withhim.

The service of a speculator is to smooth out someof the gaps between supply and demand and someof the extreme ups and downs in prices. He tries tobuy when and where a commodity is plentiful andthe price is low and to sell when and where thecommodity is in short supply and the price is high.When he does this wisely and successfully, hetends to raise extremely low prices and reduce ex-tremely high prices.

Frequently, the speculator is the first to foresee afuture scarcity. When he does, he buys while pricesare still low. His buying bids up prices, and con-sumption is thus more quickly adjusted to futureconditions than if no one had foreseen the ap-proaching scarcity. A larger quantity is then storedfor future use and serves to reduce the hardshipswhen the shortage becomes evident to all.

Since a price rise tends to encourage increasedproduction, the sooner prices rise, the sooner newand additional production will be started and be-come available. So a successful speculator reducesboth the time and the intensity of shortages as wellas the hardships which always accompany short-ages.

Likewise, speculators are often the first to fore-see an increase in future supplies. When they do,

they hasten to sell contracts for future delivery.This in turn drives down future prices earlier thanwould otherwise be the case. This tends to dis-courage new production that could only be sold ata loss. It also gives manufacturers a better idea ofwhat future prices will actually be. So, here againthe speculator tends to smooth out production andconsumption to the benefit of all concerned.

A good example of how speculators serve societywas provided in the coffee market a few years ago.A small newspaper item reported a sudden un-expected frost blight in Brazil. Speculators imme-diately realized that such a frost must have killedlarge numbers of coffee bushes. This meant muchsmaller future supplies for the United States. Sothe speculators promptly bought all the coffee theycould below the price they thought would prevailwhen consumers became fully aware of the ap-proaching shortage. This tended to raise coffeeprices immediately.

The effect of this was to reduce consumption andstretch some of the existing supply into the short-age period. It likewise alerted coffee growers inother areas to be more careful in their picking andhandling of coffee so that there was less waste.Higher prices encouraged them to get to marketevery last bean, which at lower prices would nothave been worth the trouble. Higher prices alsospeeded up the planting of new bushes. Since ittakes five years for a new coffee bush to bearberries, the sooner new planting was undertakenthe shorter the period of shortage.

The speculators who first acted on this develop-ment served every coffee consumer. If these spec-ulators had not driven up prices immediately, con-sumers would have continued drinking coffee atcheap prices for a time. Then, suddenly, theywould have faced a still greater shortage and stillhigher prices than those that actually prevailed.

By buying when coffee supplies were still rel-atively plentiful and selling later when the short-age was known to all, speculators helped to levelout the available supply and reduce the extremeheight to which prices would otherwise have risen.Speculators make money only when they serve so-ciety by better distributing a limited supply over aperiod of time in such a manner that it gives great-er satisfaction to consumers. They thus permitother businessmen and consumers to proceed withgreater safety and less speculation in their own ac-tions.

If a speculator buys a product thinking its pricewill rise and it later falls, he loses money for the

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98 THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM

simple reason that he has acted against the generalwelfare. He has sent out false indicators to produc-ers and consumers alike. That happened just re-cently in the case of a large sugar importer. Thefirm bought large quantities of sugar when it wasselling at 11$ a pound. Its purchases were nothedged. In six months or so the price of sugar fellbelow 5<P a pound and the importer was forced tofile a petition under the National Bankruptcy Act.

Hedging with a professional speculator wouldhave prevented that loss. Of course, if the specu-lator had made no better estimate about futuresugar prices than the importer did, it might havebeen the speculator who filed under the bank-ruptcy law. But as a rule, speculators are the spe-cialists who are best informed on what futureprices are likely to be.

Fruits of Intervention

When governments set prices, quotas, acreagelimits, or other hampering restrictions on the hon-orable activities of men, they countermand thechecks and balances that the free market places onsupply and demand. The result is always surplusesand shortages: the former, where producers' re-wards are set too high; the latter, where they areset too low. Where there are surpluses of somethings, there will always be shortages of others.For the men and materials subsidized to produce

surpluses have been lured from producing thosethings which free market conditions would indicatethat consumers prefer.

Political interference with free market processescan only burden the taxpayer and weaken the hu-man impulses of free men which tend to bringdemand and supply into balance at the point whichprovides the greatest consumer satisfaction. Withthe passage of time, each such intervention canonly make matters worse. Then, if people still be-lieve the remedy for every economic ill is more in-tervention, political interventions will increase fur-ther until the police state is reached.

In any such trend toward a police state, the spec-ulators are among the first to be eliminated. Theyare the specialists who study world-wide marketsin order to reduce the uncertainties that face allfarmers and businessmen. Without the services ofspeculators, bottlenecks of production—a symptomof socialism—soon develop.

Men and materials are then wasted in the pro-duction of surpluses. As a result there are ever-increasing shortages in the things people wantmost but can't have because the means to producethem have been misdirected by government de-cree. The recent end to trading in cotton futures onthe New Orleans Cotton Exchange is an omen thatshould make thoughtful men reflect on the road weare now traveling.

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Labor, Wages and Employment

35. BARGAINING*

Paul L. Poirot

Bargaining means trying to negotiate a contract orto arrange a trade on terms satisfactory to both thebuyer and the seller. That's why it takes two tomake a bargain, and only two—a buyer and a seller,higgling over terms. If it's true bargaining, there isno interference by anyone else and no threat orsuggestion of coercion or violence in any form.

Anyone who has been caught in a Christmasshopping rush or who has witnessed the operationsin a public market on a busy day may question theidea that only two persons can take part in the bar-gaining procedure. At the time, it always seems asthough several persons are involved. But this ismerely an example of competition at work. Thecompeting sellers offer their different lots of goodsand services and the competing buyers bid forownership of these various things. The presence ofmore than one potential buyer or seller widens therange for bargaining. But the actual bargaining iscarried on between one buyer and one seller at atime, each of whom is free to accept or to reject theother fellow's best offer. The whole concept of bar-gaining presumes that there will be alternativesfrom which to choose—alternatives offered by com-petition as well as the alternative of rejecting alloffers.

The satisfaction from bargaining, whether itleads to a trade or not, lies in the feeling of eachparty that he has obtained the best deal possiblewithout resort to force or fraud. Competition helpseach person decide what is best. Since competitionand bargaining are so closely related, the two ideasmay well be merged within the term "competitive

•FEE, September 1953

bargaining"—competition between persons whor*cognize the rights of individuals to use what theyhave as a means of bargaining for what they want.Mankind has never discovered a basis for humanrelationships, other than competitive bargaining,which so encourages a person's own self-interestto operate to the benefit of others.

When a person voluntarily offers his goods orservices for exchange, and when another personvoluntarily agrees to the terms of the offer, ex-change will take place. Both parties find satisfac-tion. It's not a question of one's gaining at theother's expense. The exchange works to their mu-tual benefit. Both gain. How much will each gain?Leave that to the judgment of those who practicecompetitive bargaining and who are directly in-volved in any specific transaction.

Trade occurs when both parties agree as to theprice—when both see an advantage in trading. Theterms of such trade are not anyone else's business—at least, not within the framework of truly compet-itive bargaining. There is no third party; even thegovernment is supposed to keep its hands off ex-cept where someone tries to substitute violence forfree choice in the market. Any other test of fairnessfor prices or wages is an abandonment of the pri-vate enterprise system.

The Right of Refusal

One of the important features of truly compet-itive bargaining is that a person has the right of re-fusal. He doesn't have to trade at another person'sprice. A man may keep what he has if he isn't satis-fied with the other fellow's best offer. Such a re-

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100 LABOR, WAGES AND EMPLOYMENT

fusal to trade is quite a common thing in any mar-ket place. It is typical of the competitive system. Itis a vital part of the bargaining procedure. It isas fair and just as the day is long. But a refusal tobuy or to accept the terms offered certainly is noexcuse for violent retaliation against the rightfulowner or against any other person who might bewilling to accept the owner's terms of trade.

A person may choose to quit a job if the wage orother conditions of employment are not satisfac-tory, just as a shopper returns a can of peaches tothe shelf if the price is too high for her. Yet thehousewife, by that act, does not pretend to haveacquired a claim of ownership to the peaches. Thenext shopper who wants them may claim them atthe price agreeable to the seller. An unhamperedmarket will function in exactly that same fashionwith respect to opportunities for employment.

Competitive bargaining has brought many bene-fits to the creative and highly productive men andwomen of America, just as all men and women cangain if they are willing to assume the responsibil-ity of being free. But freedom to bargain is beingforfeited by Americans who do not perceive thatsuch freedom is based upon respect for the rightsof others. The advantages of bargaining and tradeare not to be found in the kind of collective actionwhich calls for the suppression of individual free-dom of choice. The only alternative to bargainingis compulsion. To exercise compulsion is to govern.In the final analysis, the alternative to competitivebargaining is government control—the governmentin command of all property and all lives—individ-uality surrendered to the state—compulsory col-lectivism.

Bargaining Representatives

Any employer or any employee who feels that heis personally unqualified to gauge the conditions ofthe market owes it to himself to seek the servicesof a qualified bargaining representative. And aqualified bargaining representative will be onewho understands that his job is to find the rightwages—those which just clear the market withoutbringing compulsion against a single person.

Bargaining has indeed helped to provide manyof the material blessings available to Americanconsumers today. And some of this bargaining hasbeen of a "collective" nature in the sense that oneparty to the bargain has spoken in behalf of a num-ber of cooperative individuals whose common andunanimous interest is in a specific action not de-

signed to hurt someone else. However, much ofwhat has passed for bargaining in America has notbeen bargaining at all, but a kind of compulsorycollectivism which prefers coercion to voluntaryagreement.

Bargaining is not facilitated by a powerful mem-bership organization of competitors, whether theybe competing for wages or for profits or for any-thing else which is scarce enough to have marketvalue. It is a highly risky thing to delegate one'sown right to bargain to any representative whopretends that such organizational control of com-petition is either necessary or desirable. A bargain-er is one who cooperates with those who are will-ing; for that purpose, he needs no power of com-pulsion. He doesn't need coercive control of com-petitors. Such controls are the tools of persons whowill use force if bargaining doesn't go to suit them.Those who are still free to bargain, and who likeit that way, will think carefully before placing inthe hands of others those personal rights and re-sponsibilities which might be perverted intoweapons of coercion.

The Value of a Service

Much of the dissension about wages arises froma failure to distinguish between the worth of anindividual as such, and the value, for purposes ofexchange, of the services offered by the individual.Among free men, the worth of an individual is nota matter to be determined in an economic sense.Certainly that problem is beyond the scope of thisstudy, for we are not discussing the buying or sell-ing of human beings. The purpose of bargaining,in this respect, is to arrive at the market value orexchange price of specific services voluntarily of-fered by individuals. A man offers to sell eighthours of his day in order that he may better utilizethe balance of his day according to his own choice.

According to the expressions of preference in afree market, a higher exchange price may be of-fered for the services of one person than for an-other's services. There is great variation in the pro-ductive capacity of different individuals. This is astrue among so-called hourly workers as it is amongmanagerial workers. The efficiency of the capital-istic system stems from its tendency to concentratethe management of productive operations underthe direction of the most capable managers. So ithappens that a good manager may serve to coor-dinate the productive services of a large number ofemployees.

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35. BARGAINING 101

The control of capital also tends to be concen-trated in the hands of the best managers. The own-ers of property—and to a large extent, they aresimply those workers who have spent less thanthey earned—sometimes find it desirable to pooltheir property so as to attract the managerial ser-vices of an expert. Stockholders thus hire corpora-tion management—agree to pay a manager for hisservices to them.

In order to best serve the interests of stockhold-ers, the manager must be capable of coordinatingthe services of many individual employees in a waythat is sufficiently satisfactory to each employee toattract that employee from alternative opportuni-ties for the use of his services. So it is that a goodmanager serves a group of property owners aswell as a group of employees, all in the interest ofbetter service to customers. He serves to the extentthat he is able to improve the productivity of all theproperty and all the labor which has voluntarilysought his management.

The Worker's Reserve

It is frequently argued that an employee is at abargaining disadvantage when he seeks a favor-able employment contract because he has less of areserve to draw upon than does an employer. It issaid that the employee needs bread for his family'ssupper, whereas the employer needs nothing moreurgent than a new yacht. The effect of such dram-atization is to draw attention from the subject ofthe employer-employee relationship. The employ-ee wants die use of tools and managerial services,and the employer wants the workman's services sothat together they may create something useful inexchange for bread, yachts, or whatever else eitherof them may choose to buy with his part of theproduct.

It is true that some employees have little ex-cept their weekly wages as a buffer against billcollectors. And if the loss of a week's wages is thatserious to a man, it may be a sign that he isn't agood enough manager or, for some other reason,prefers not to try to make a living by working at abusiness of his own. Thus, he is in this sense de-pendent upon job opportunities created by others.But in a competitive society, a person is not boundto continue working for others, nor is he bound todepend upon any one employer for an opportunityto work. Some employees, of course, prefer not tochange jobs; free men have that choice. Unlesscompetition has been strangled by coercive inter-

vention, employers will be competing against oneanother for the productive services of employees.This competition between employers for an em-ployee's productive capacity is the thing that con-stitutes the employee's reserve, just as the reservevalue of capital depends upon the competition forthe use of that capital.

In this connection, it may be interesting to spec-ulate for a moment as to just how an employee's re-serve compares in dollar value with a reserve fundof capital. For instance, let us assume that a youngemployee might reasonably expect to find regularemployment for a period of forty years at an aver-age weekly wage of $100. For a nonworking per-son to draw a comparable income from a trust fund—assuming that it earns interest at the rate of threeper cent and that the principal also is to be usedup over the period of forty years—an original cap-ital investment of $120,000 would be required. Aperson's capacity for productive work is truly a val-uable reserve, equal in worth to the inheritance,from quite a "rich uncle." A young man has quitea stake in maintaining the kind of a competitivesociety in which such reserves are recognized asbeing private property.

The fact is that a man who is willing and able towork does have a kind of reserve—in a sense, a bet-ter reserve than is available to the man who hasnothing except money or capital. Robinson Crusoecould have salvaged the ship's silver, but as a non-working capitalist, he would have starved. Accord-ing to the story, he saved his life by digging into hisreserve capacity to work.

Employer and Employee

This same principle applies in our own kind of acomplex society where each of us depends more orless upon exchange for his livelihood. If a manowns a million dollars, yet refuses to offer it intrade, he may go hungry, just as an employee maybe faced with hunger if he refuses to turn his ser-vices to productive use. The market does not auto-matically guarantee subsistence to those who stopproducing and trading while waiting for a betteropportunity to present itself. An employee whochooses not to work may properly complain that hehas no other means of support, but he ought to con-fine his complaint to the person who is solely re-sponsible for his sad plight—himself. No one elsehas any right to make him work, nor any moral ob-ligation to support him in his voluntary idleness.

The employee who wants to sit until an employ-

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102 LABOR, WAGES AND EMPLOYMENT

er comes forth with a more attractive job offer maysay that he doesn't have the reserve to enforce hisdemand, but what he means is that he doesn't havecontrol over other employees who are willing to ac-cept the jobs which are offered. To describe suchcirc*mstances as a lack of reserve is just anotherway of saying that competition exists.

Labor Government

. . . The compulsory industry-wide union canpretty well guarantee a manager that no compet-itor will be able to achieve superior labor efficiency.It is possible to believe that in some instances com-pany management works closely with labor unionmanagement to tighten the grip of their joint in-dustry-wide monopoly. The consequence is thatwhole industries—all competing employers and allcompeting employees—can be called out on strikeby one man who has a closed-shop grip on all man-power authorized for employment in "his" industry.Consumers can thus be squeezed between the al-ternatives of paying more or of doing without theproducts of an entire industry. Competition givesway to compulsion. No employer is allowed tocontinue productive operations; the union won't lethim hire employees. Nor can any employee stay onhis job at the old wage, or bargain individually fora wage that might satisfy him; he, too, is compelledto strike until the demands of a single union officialare met. That a union official may sometimes im-pose his will upon the consuming public withoutactually calling a strike does not modify the basicfact that such imposition constitutes monopolypower.

In one other manner, also, the power of the gov-

ernment has been granted to the officialdom of or-ganized labor. Taxpayers are obliged to provideunemployment benefits for those who have beenforced into idleness by the tactics of exclusionwhich labor unions practice. This is monopolypower in its most terrible form.

Perhaps the truth is that governmental planningand compulsion, as a substitute for the market, isin itself the evil which wrecks lives and makes forbad relationships within a society. If so, then it iswrong to give any person, or group, or so-calledclass, the right to plan and govern the social rela-tionships of individuals.

To blame union organizers for usurping powerand for exercising the authority which has beengranted to them by law, is to miss the importantpoint. The fact is that the power of compulsioncannot be thus exercised until it has first been del-egated by our individual selves to the agency ofgovernment.

The self-interest of those who work and of thosewho have saved and accumulated capital is notdetrimental to peaceful progress within society;rather, the thing to be feared and guarded againstis the reckless abandonment of self-interest to asupposed class interest with the power to govern.And, if such power has developed and is beingused to oppress other persons and groups within asociety, the solution would seem to involve the dis-placement of such coercive power, not with a new"class" of governors, but with a new reliance uponfreedom. The lifting of restraints and restrictionsupon personal choice—the freeing of the market sothat each may bargain with what is properly hisown—is the only assurance of justice to every in-dividual.

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36. COLLECTIVE BARGAINING WRONG IN PRINCIPLE*

John W. Scoville

Although written before the passage of the LaborManagement Relations Act of 1947 (Taft-Hartley)and of the Landrum-Griffin Act of 1959, the au-thors criticism of compulsory collective bargainingstill applies. On another occasion, he contrastedvoluntary and coercive collective bargaining asfollows:

If collective bargaining means that the workers in aplant form an organization and elect a spokesman(not necessarily an employee) to discuss wage rates,hours, working conditions, etc. with management,and if the employer agrees to the procedure, I can seeno objection to such conduct. But this is not whatlabor men mean by collective bargaining. They con-sider that if the employer does not accept the de-mands of the union, the employees will go on strikeand, by picket lines and violence, prevent otherworkers from taking their jobs. The strike will inflictsuch losses on the employer that he will capitulateand accept the terms of the union. I do not agree thatstrikes, picket lines, and violence against workersseeking the jobs of the strikers are "a necessarymechanism in modern, industrial society."

A great many people feel that collective bargain-ing is all right in principle and that what is neededis better men as labor leaders and union officials.Many industrialists will say, "Of course we believein collective bargaining" or "We recognize thatcollective bargaining is here to stay" or "The em-ployers in the past were not fair to labor," etc.These views are incorrect. Collective bargaining,like all other monopolistic practices, is wrong inprinciple.

About 1800, the English law condemned com-binations, both of employers and employees. Thesecombinations were rightly called conspiracies. Butabout 1824, the English law against the combina-tion of laborers was repealed. I believe the Eng-lish lived under the shadow of the French Revolu-

°From an address to the Detroit (Michigan) Kiwanis Club, Au-gust 8, 1944

tion and were afraid of revolution breaking out inEngland. You will hear people say that the Wag-ner Act gave certain rights to labor. This is incor-rect. I will read a letter I sent to The Wall StreetJournal on this subject:

An agency for promoting private enterprise pub-lished a letter recently from which I quote:

The National Labor Relations Act must be so re-written that the rights and duties of employer andwage-earner in relation to each other and to thepublic are clearly defined. Individuals and minoritiesamong wage-earners, whether union or non-union,must be protected against majorities. The right ofcollective bargaining must at all times be maintained.But every worker must have the right, free from co-ercion from any source, to join or refrain from join-ing a union.

Let us analyze this alleged right of collective bar-gaining.

Confining our discussion to civil rights, all rightsare creations of the law.

All human acts fall in two categories:1. Acts of which the law takes no notice;2. Acts commanded or forbidden by law.In the first category we are free to act; we have

the right to act as we will. In the second categorywe have no right to disobey the command and noright to do what is forbidden.

A man has the right to marry. This right is in thefirst category, the law neither forbids nor com-mands. A young man asks ten maidens to marryhim—and each maiden says no. So he goes to thelegislature and says that women are denying himthe right to marry. So the legislature passes a lawwhich prohibits any woman from interfering withthe right of a man to marry.

Armed with this law, the man goes to his favor-ite woman and demands that she marry him. If sherefuses, the man goes to a National Marriage Re-lations Board which decides that the woman isengaged in an unfair marriage practice and that

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she cannot interfere with the man's right to marry.The Board draws up a marriage agreement or con-tract and compels the woman to sign it.

In this hypothetical case, we may observe:1. The law took from the woman the right to de-

cide whom she would marry or whether she shouldmarry at all.

2. Before the law was passed, the right to marrymeant that the man had a right to marry if he couldfind a woman to marry him.

3. After the law was passed, the right to marrymeant something else—namely, the right to compela woman to marry him.

4. The marriage contract signed by the womanwas signed under duress, and was therefore not acontract at all, but a legal mandate.

The analogy between this case and the WagnerAct is clear. Employees always had the right toengage in collective bargaining, if they could finda willing employer; that is, the law did not inter-fere. The Wagner Act conferred no rights on em-ployees. But it took away from the employer theright not to deal with a particular labor union orwith any union. Under the Wagner Act, most laboragreements or contracts are signed by employerswho are under duress—and hence are not reallycontracts.

The discussions between the employer and thelabor union should not be called bargaining, for itis of the essence of bargaining that both partiesare acting voluntarily. Would discussions betweena highwayman and his victim be described as bar-gaining? In genuine bargaining each party makesoffers. But labor unions, like bank robbers, makedemands. Those who make demands have thepower and the will to use force. The labor unionthreatens to strike if its demands are not met, thusinflicting a loss on the employer. The labor unionsexpect the higher wages in the future will exceedthe present losses due to the strike. But the em-ployer is faced with two losses—the loss due to thestrike, or the loss which will come from meetingthe demands.

The Wagner Act gives employees the power to in-flict certain and indeterminate losses on employ-ers, with the consent and assistance of the federalgovernment. It substitutes force for competitionas the mechanism for distributing the social prod-uct.

We should never refer to the Wagner Act as alaw which confers upon workers the right of col-lective bargaining—but as a law which denies toemployers the right to enter into voluntary agree-ments with their employees.

37. HOW WAGES ARE DETERMINED*

Percy L. Greaves, Jr.

Most people today seem to think that producersand sellers set prices. Likewise, they seem to thinkthat employers set wage rates. They think business-men get rich by setting low wages for their em-ployees and high prices for their products.

This leads many to think that employers can becompelled by law or union pressure to raise work-ers' wages at the expense of the owners of a busi-ness. This has been done in an increasing number

•Adapted from a June 13, 1969, lecture at Buenos Aires, Ar-gentina, the full version of which forms a chapter of Mr.Greaves' Understanding the Dollar Crisis (Western Islands,1973). From The Freeman, July 1970

of cases for a short period of time, but such wageincreases cannot be maintained in the long run.Actually, it is impossible to raise every worker'swages by law or union pressure. Every law or non-market pressure that raises wages for some, low-ers them for others.

In analyzing every economic proposal, it is nec-essary to examine all of its effects, not only theshort-run effects, but also the long-run effects, andnot only the effects on those whom the advocatesseek to benefit but also the effects on those whohave to pay the costs. All of these inevitable ef-fects should be weighed before passing judgmenton any attempt to interfere with free market pro-cesses.

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37. HOW WAGES ARE DETERMINED 105

In a free market you are free to take any of manyjobs open to you. Each man takes that one which,from his point of view, he considers best. Wheneveryone is free to do this and no one is permittedto trample on the equal freedom of others to doso, when no one or no group can prevent othersfrom taking jobs for which they and the potentialemployers reach mutually satisfactory agreements,then the Golden Rule will prevail. More workerswill be producing more goods for others and every-one will have more for himself. The result willbe ever-increasing production and human satisfac-tion. Of course, in a free market society, men willstill make mistakes. But free market practices tendto reduce such mistakes by penalizing most thosewho make them.

We may also have a few unfortunate people whoneed assistance from their fellow men. For suchfew cases, the free market not only encourages re-ligious and other private charities but it also pro-vides the means with which these charitable organ-izations can take care of the unfortunate. So theseunfortunate few do not have to become a burdenon the government. We are free to act voluntarilyas good Christians and take care of our neigh-bors who are in trouble.

In any society, in any group of men, there willalso be some who will try to help themselves at theexpense of others. There will be some who wish tosteal, or misrepresent, or resort to force. To protectpeaceful productive citizens against those who re-sort to such antisocial actions, governments arenecessary, and very necessary.

Consumers Determine Wage Rates

There is today a popular idea that employersexploit the workers. This fallacy has been growingever more popular since the days of Karl Marx. Itwas Marx's idea that employers overworked em-ployees, paying them much less than the moneyvalues of what they produced, while keeping thedifference for themselves. According to this theory,rich employers get richer and richer while thepoor workers get poorer and poorer. The timewould come, Marx held, when the workers wouldbreak the chains which bound them to their em-ployers and set up a socialist Utopia. According tothis idea, the poor worker is helpless in a marketsociety. He has no choice. He must take the wagethat is offered to him. There is no other employerwho might bid for his services.

Actually, of course, that is not so. In the absence

of any social interference, workers tend to get thefull value that consumers will pay for their contri-bution. It is the interferences by governments andthe interferences by labor unions supported by pub-lic opinion, even without the strength of laws, thatprevent all potential workers from getting thosemarket values they could contribute to society.

If the idea that unions help all workers is popu-lar, then we are powerless to stop them from ham-pering the market competition. However, in an un-hampered free market economy, competition tendsto allocate to every factor of production, includingworkers, all that each contributes. It is the valuesthat the ultimate consumers place on each particu-lar contribution to total production that determinewhat businessmen can pay for that particularcontribution.

The same principles apply to the wages paid forlabor that apply to the sums paid for raw materialsor any other factor of production.

In a free market, each employer seeks to hireas many workers as he profitably can. He hires em-ployees up to the point at which it is no longerprofitable for him to hire an additional workerbecause he cannot sell the product of that addition-al worker for the wage he must pay him. As hehires more workers, the wage rate tends to rise andas more units are produced, the market price hecan get per unit tends to fall. This is the inevitabletendency of a free and unhampered market.

The more workers you hire, the higher wage rateyou will have to pay. And you must pay the higherwage to all who do similar work. As you produceand offer more goods on the market, you can onlysell them at lower prices. Eventually you reachthe marginal point, where you make no profit onthe last man you hire. Wage rates are ultimatelyset by the marginal productivity of labor, that isthe market value added to the product producedby the marginal employee, the last man hired. Thisis the way the free market would work, if therewere no interferences. Unfortunately, the freemarket is something that we have never had com-pletely at any time and may never have. However,the nearer we get to it, the better off we shall allbe.

Given the conditions which the employer faces,he must pay workers pretty much the values thatconsumers place on their contributions. If the em-ployer pays a higher wage, he suffers a loss. If hedoes not then reduce his wage rate, his number ofemployees, and his production to what he can sellat a price that covers his costs, he will eventually

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be forced out of business. No businessman canlong pay costs which he cannot get back from con-sumers.

In the long run it is the consumers who pay thewages. The businessman is merely a middleman.He tries to make a profit as a middleman, buyingraw materials, hiring workers, and selling the prod-ucts to consumers. He makes his profit, if any, byholding what he pays for the factors of productionbelow what consumers will pay for the final prod-uct. However, once a profit appears, competitorscontinually bid up what must be paid for each fac-tor of production, including labor. There is alwaysa tendency in a free market for profits to besqueezed and disappear. This includes any profitsobtained by paying workers wages lower than themarket value of their contributions.

Free Competition Protects Workers

It cannot be denied that employers would alwayslike to pay lower than the market wages. In TheWealth of Nations, published in 1776, AdamSmith mentioned that whenever businessmen gettogether they try to set wages and hold them down.However, in the free market, they are unable to doso. It is just not possible for all employers to gettogether and agree to hold wage rates down forany length of time. Once one employer finds he canprofit by breaking such an agreement he will prob-ably do so. If none breaks the agreement and if youhave a free market society wherein anybody can be-come an employer, new employers will soon ap-pear, to take advantage of the situation by offeringworkers more.

If the employer pays a wage lower than the mar-ket wage, that is less than the product of the work-er can bring in the market, his profits will be suchthat he can expand his production and his numberof employees. If he fails to do so and fails to raisehis wage rates in doing so, he will invite new com-petition. In either case, market competition willraise the wage rates to the value produced by themarginal employee. And there is always a mar-ginal employee.

In most industries there are also marginal com-panies. These are the companies that are justbreaking even. If their costs go up a little bit, theywill suffer a loss. Then they will soon be out ofbusiness because money losers cannot stay in busi-ness indefinitely.

No businessman in a free market society canlong pay a worker a dollar an hour and sell his

product for five dollars an hour. Why not? Becauseyou and I and thousands of others like us wouldbe very happy to go into that business, pay thosem*n two dollars and sell their product for five dol-lars if we could. Others would soon offer to paythem three dollars, four dollars, or even four-fifty.In fact, large corporations would be very happy tomake profits of just two cents an hour for everyworker they employ. They are just not able to paythem much less than the market value of theirproduct. The last one employed would not yieldthem any profit, particularly in a free societywhere anyone who thinks he sees a chance to makea profit can come in and bid away any employeewho is paid- less than the market value of his con-tribution.

The frequent refutation is, "Yes, but most peo-ple do not have the capital to start a business."Let's remember there are many savers eager to in-vest their money where they can earn more. If theycan be shown a situation where they ean earn more,they will be happy to make the needed capitalavailable. All you need to do is to show themwhere a profit higher than current interest ratescan be made.

Whenever there is a profit in a free market soci-ety, it attracts competition, and competition al-ways reduces prices. This is how the market con-stantly allocates consumers a share of every in-crease or improvement in production.

Savings Raise Wages

The real secret of higher wages is increased sav-ings per capita. Increased savings are a result ofproducing more than is consumed. If more goodsand services are produced than consumed, thenthese unconsumed goods and services are avail-able for making tools, factories and other thingsneeded to help increase production. American livingstandards have gone up over the years because gen-eration after generation our parents have pro-vided their children with a better start in life thantheir parents had. The history of our country haslargely been that the first generation of immigrantsprovided their children with an elementary schooleducation, the next generation saved enough toprovide their children with a high school educa-tion, and the third generation sent their childrenthrough college. Now, many are going on to grad-uate work. In this way, each generation providedthe next generation with a higher standard of liv-ing. In each case, this higher education was the

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37. HOW WAGES ARE DETERMINED 107

result of increased savings. The earlier generationsjust could not afford to provide their children withwhat most American children now have.

When there are savings in a capitalistic system,people do not put them under a mattress. They donot dig a hole and hide them as people do in Indiaor China where savers are afraid that if they put upa factory, the property would be seized. No, in acapitalistic society people invest their savingswhere they hope they will earn a return. In a cap-italistic society, savings are not accumulated by therich only. One of the great advantages of a cap-italistic society is that low-income people can alsoinvest their savings and earn a return on them.They can buy savings bonds. They can put theirmoney in the savings banks. They can buy life in-surance. Then, the banks and the life insurancecompanies make their savings available to busi-nessmen and large corporations.

As a matter of fact, it is the low-income peoplewho are the great creditors of our day. They are theones who are hurt the most by low interest rates.It is largely the higher-income people who are debt-ors and who benefit from low interest rates. Theyare stockholders and their corporations borrow themoney saved by low-income people. One of thegreat advantages of the free market system is thatit provides a way for low-income people to partici-pate in the earnings that savings provide.

Effect of New Savings

Savings are, of course, the only real source of oldage security and higher living standards. Whennew savings are invested, the very first thing theydo, whether they are invested in a new company orin an expansion of an old company, is to bid upwages and the prices of raw materials. They bidup everything that is needed to expand production,including labor, and you cannot make anythingwithout labor.

Labor is one of the scarcest things in this world.There are many mines that are not mined becausethe available supplies of labor are worth more inother occupations. The same is true of farm lands.The same is true of every occupation. Every eco-nomic endeavor is limited by the high costs of la-bor. Labor is always scarce. The market allocatesthe scarce supplies of labor to the production ofthose goods and services for which consumersare expected to pay the highest prices. Other goodsand services are not available because of thisvery shortage of labor.

With new savings, there are employers or "en-trepreneurs" who are constantly trying to employmore workers. They have to bid up wage rates forthe limited quantities of labor available in themarket place. The factor which helps labor most isthe increased savings which permit employers tobid them away from their previously lower-payingjobs. After these savings are turned into new orlarger factories, they must produce goods and ser-vices previously not available.

The managers of these new expansions mustdetermine what to produce. They try to find out whatis not available that is next in importance on thevalue scales of consumers. They then expand theproduction of those things not sufficiently avail-able that they think customers want most. Theybring more production to the market. Each work-er, working with more or better tools, producesmore. If there has been no increase in the moneysupply, as more goods reach the market, the re-sult must be lower prices. With lower prices forconsumers' goods, everyone can buy more withhis limited money supply. The only way that a so-ciety can raise the real wages of all its workersis to increase the amount of savings available perworker.

For example, American steel companies need aninvestment of some $20,000 per worker, for work-ers to get the high wages they are paid. In a mar-ket economy these high wages are shared by all.The barber, who has not changed his methods verymuch in the last century or two, competes in thelabor market with steel workers, each of whomuses about $20,000 of equipment. Wage rates ofall workers are thus set by the average savingsavailable to help workers increase their produc-tion. These higher wages and lower prices mustappear before the savers can get any of theirmoney back, much less any interest or profit ontheir speculative investment.

Profits may come, but they can only come laterif buyers, of their own free will, decide that thenew market offerings are better bargains than allother available goods and services. This is thesecret of progressively higher living standards ina free market society. The secret of higher wagesis more savings per available worker. A man witha modern expensive earth-moving machine canmove far more earth than the strongest man usinghis hands or even a shovel. As more and bettertools become available and as more goods are pro-duced, there will be a higher standard of living foreveryone who participates in the market economy.

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108 LABOR, WAGES AND EMPLOYMENT

Effect of Present Union Policies

Consider now the effect of present-day union pol-icies upon our economy. The essence of labor unionpolicies today is (1) to restrict production and (2)to prevent the unemployed, or those employed atlower wages, from improving their economicsituation by underbidding union-imposed wagerates. We cannot improve the general welfare byfollowing union policies that restrict production bymaking high wages higher for some workers, withthe result that low wages are kept low or non-existent for other workers.

Whenever union workers get a raise above freemarket wage rates, this increase raises produc-tion costs, and as a result prices must be raisedto consumers. With higher prices, fewer goods aresold. When fewer goods are sold, some of theworkers are laid off and the laid-off workers mustthen compete for the lower-paying jobs. Their com-petition in these next lower-paying jobs drivessome previously employed workers out of jobs.This forces their wage opportunities still lower.Such policies restrict production and keep menfrom working where they can produce the goodsmost wanted by society.

Much of this is, of course, due to the popularfallacy that only an equal exchange is a fair ex-change and that if one person, the employer, forexample, gains, he must have done so at the ex-pense of the worker. This is responsible for somuch of the antagonism against the capitalist,against the investor, against the saver—the beliefthat his gain is unearned and that the capitalist orsaver is getting something at the expense of theworker. This is Karl Marx's exploitation theory.It is the theory of class warfare as opposed to themarket theory of voluntary social cooperation.

Marx put great stress on this. He believed thatunder the natural law of wages, employers workedthe workers too long. Workers produced enough tosupport and reproduce themselves in, let us say,ten hours. Employers worked them eleven ortwelve hours. According to this idea, what workersproduced in the extra hour or two was taken andkept by the capitalists. So one of the chief policiesof labor unions has been to demand shorterhours for the same pay. If you shorten hours for thesame pay, you have less production. Less produc-tion does not provide a higher standard of living.If widely practiced, it must mean higher prices anda lower standard of living. Of course, when thishappens as a result of free market processes, it

means that market participants prefer to takesome of their potential increased production in theform of more leisure.

Another fallacy in this area is the argument thatmoney wages must be raised in order to provideworkers with the purchasing power to buy theirproduction. Actually, higher living standards re-quire more production, not more money. Workerscan only buy what is produced. If production isreduced because fewer workers are hired, increas-ing money wages does not provide any more goods.This is an old fallacy. There is no way to increasethe purchasing power of one worker by increasinghis wages without at the same time decreasing thepurchasing power of other workers.

The employer has no power to set wages. He can-not in the long run pay more than the consumerwill repay him. Nor can he long pay less than themarket value of labor's contribution. This Marxianidea simply does not stand up. Yet, today manypeople honestly and sincerely subscribe to this ideathat employers have too much power. Their failureto understand free market economics permits themto believe that in a modern industrial society em-ployers have great power while the poor workersare helpless. Actually, in a free market society itis ultimately the consumers who set prices and thusthe wages that employers can and must pay.

How Labor Unions Affect Wages

Questioning the virtues of organized labor todayis like questioning or attacking religion, monog-amy, motherhood, or the home. In public opin-ion, the test of whether one is for or against laboror the workers or the poor in general is your at-titude toward labor unions. One simply cannot ar-gue that certain union policies hurt labor and ex-pect to be taken seriously. The fact is, of course,that union policies have hurt workers in generaland particularly those at the lower end of the in-come scale.

The essence of present-day union wage policiesis to reduce production and to keep the unem-ployed from finding work and the low-paid fromcompeting for higher-paying jobs. Such policiesare not going to raise the nation's standard of liv-ing. We can never improve the general welfare bypolicies which reduce production. Unions makehigh wages higher for some, but they make costshigher for other people and thus reduce the goodsand services that consumers, including workers,can buy in the market place.

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37. HOW WAGES ARE DETERMINED 109

The unemployed, those at the bottom of theeconomic ladder, have no voice in union affairs orin setting wage rates. They are completely shutout. Union officers care very little about nonmem-bers or beginners trying to get started. There arecases in New York where a man cannot get into aunion unless his father was in it before him. Since,under the law, only union members can work incertain trades, this has hurt Negroes trying to entertrades white unions have monopolized. If one'sfather had to be in the union, how can a Negroever get into that union? This has applied to otherlow-income minorities in times past. The unionsdo not help the relatively poor. They help the aris-tocrats of labor at the expense of low-income work-ers. They get privileges for their members at the ex-pense of other workers or would-be workers andthey raise prices for all consumers.

Combinations of workers can only raise wagesif they can raise the value or the quantity of theproduct that they produce. Now, of course, if thequantity produced is smaller, other things remain-ing the same, the value per unit is greater. How-ever, the available quantity will satisfy fewer con-sumers and thus provide less human satisfaction.So, if the unions do not increase production, theonly way they can raise the relative value of a unitof labor is to reduce the units of labor employedand the quantity of goods produced in that indus-try. Without the power to keep out other workers,unions can do little to raise the market value ofwhat their members produce. This does not helpeither the workers excluded or consumers in gen-eral.

We live in an age of mass production for massconsumption. If we do not have mass production,we cannot have mass consumption. So by reducingthe amount of production, unions are not helpingworkers in general. By setting wages at higher thanfree market wage rates, unions reduce theamount that can be sold. They throw people out ofthe jobs where they could be most productive.What the unions gain for their own members re-sults in a loss to those who are excluded from co-operating in the task, and it results in a loss to allconsumers as they will have to pay higher pricesper unit for a smaller quantity of goods and ser-vices. Every consumer who does not share the un-ion's gains will have to go without something hecould have bought if the union gain had not raisedprices.

The control of wage rates is also the control ofentry into a trade or industry. Such control also

determines rates at which a company or industryexpands or contracts. In a free society, if the wagesin an industry were lower than those forced byunions, that industry would expand. When unionsraise the wages of an industry, that industry eitherhas to contract, or, if it stays the same size, it isprevented from expanding as it would if it couldpay free market wages.

Expanding means paying higher wages to attractthe more workers needed. It also means producingmore goods that consumers want most and low-ering prices so the same wages will buy more. Ofcourse, there is also a tendency toward the elim-ination of profits. Unions can protect their mem-bers from the competition of other workers mere-ly by raising union wage rates, because then theemployer cannot afford to employ any more. Thisis one of the inevitable results of the union senior-ity principle. Those with high seniority are notworried about those who lose jobs because of high-er union wages.

Effect of Union Policies on Savings

One of the most important factors in the laborsituation is the effect of union policies on employ-ers, savers, and investors. Many think that wagescan be raised at the expense of the employer orthe investing owners, and thus higher wages neednot hurt the consumer. They think you can justreduce profits a little bit more and that will takecare of the higher wage costs. As we have tried tomake clear, the way to raise the wages of workersis to increase the savings invested in tools thatworkers can use to increase their production.

The accompanying table may help to give us abetter understanding of some of the problemsfaced by workers and by those who try to makea living by employing people. Assume a steam-ship which cost $2 million to build and which isexpected to last 20 years. The yearly depreciationand interest charge would then be $150,000. Theowners assume an expected market revenue of$14,100 per week. It is expected to operate 50weeks of the year. The people who are investingthis $2 million considered it carefully in advance.If their forecast is correct, they expect their weeklycosts will be:

Depreciation and interest $3,000Labor wages 8,000Other operating costs 2,100

and they hope for profits of $1,000 over and abovethe interest which they could get by lending the

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110 LABOR, WAGES AND EMPLOYMENT

Steamship Costs $2 Million and Lasts 20 YearsYearly Depreciation and Interest Charge—$150,000

Market Revenue $14,100 per Week (50 weeks)

Weekly Cost

Labor WagesOther Operating CostsDepreciation and InterestProfit

Totals

°Amount available toward

Free MarketWage Rates

$ 8,0002,1003,0001,000

$14,100

$3,000 expense.

Union10$

$ 8,8002,1003,000

200

$14,100

Forces Wages252

$10,0002,1002,000°none

$14,100

Up50X

$12,0002,100none*none

$14,100

money out. The total of the items mentioned comesto $14,100.

Of course, if they foresee future developmentsincorrectly, they will suffer a loss. But if they haveforeseen future operations correctly, if they havecalculated their labor and other costs correctly, andif they have estimated correctly what the publicwill pay for the service, then and then only willthey earn the estimated profits. Then only will theyearn the estimated profit and be able to replace theship and continue to employ the workers after 20years.

In order to make this problem easy to under-stand, we shall assume that this ship is on a lakeand cannot be moved to be used any place else. Soonce this investment is made, those who haveturned their savings into a steamship cannot with-draw them. If a labor union has the power, eitherthrough public opinion or through the laws of theland, to raise wages above those prevailing in themarket at the time, the investors will then be at themercy of the unions.

Now, we shall assume in the second column offigures that the union is able to threaten a strikeor otherwise use its power to raise wages 10 percent. This increases the cost of labor to $8,800 andreduces the profit, beyond the charge for interest,to $200. Under such a situation, the owners willcontinue operating. They will still get a small profit,smaller than they had calculated, yet more thanthey would have gotten if they had lent theirmoney out at market rates of interest. They are still—you might say—ahead of the game.

The union members, having found it easy to usetheir power to get this 10 per cent increase, are stillnot satisfied. They try it again. Let us assume thatthis time they increase wages to 25 per cent abovefree market wages. You see the results in the nextcolumn—a situation in which the workers are thengetting a weekly total of $10,000 in wages. Thereare no longer any profits after interest. In fact, theemployers are not covering their depreciation andinterest. They are only getting two-thirds of thisexpense, or $2,000. Under such circ*mstances,they will still operate the steamship. If they stop-ped operating, they would get nothing for depre-ciation and interest. $2,000 is better than nothing.Everyone prefers a little something to nothing. Weeven prefer a small loss to a larger loss. At thisrate, when the ship is worn out, the owners will notbe able to replace it. They will not have depre-ciated enough. So, of course, when the ship is wornout, this business will be ended and the men willlose their jobs.

But assume the union workers do not see this.Suppose they go on and ask for a further increase.This time we assume they seek a total increase of50 per cent. Then you find the situation in the lastcolumn where you have arrived at the margin. Theowners receive nothing for their capital, no allow-ance at all for depreciation or interest on their cap-ital. The operating income would just cover thewages of the workers and other operating costs.Then, it no longer pays the investors to operatetheir steamship. They have reached the pointwhere they would be operating the ship for noth-

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37. HOW WAGES ARE DETERMINED 111

ing. This they do not care to do. So the operationcomes to an end and the men lose their jobs. Theyhave killed a good thing.

Savers Can Be Scared Away

All this is not very far from reality. For manyyears, from 1837 to 1947, we had in the UnitedStates the old Fall River Line. It was a steamshipline that provided overnight boat service betweenthe beautiful harbor of New York and Fall River,Massachusetts, a short train ride from Boston. Itwas a trip that many people enjoyed and a cheapway to ship freight. The unions kept raising thewages of their members until the steamship linewas forced out of business.

There are lessons to be learned from this illus-tration. Businessmen can get caught. Investors canget caught. Savers can get caught. Once they puttheir money into particular forms of capital theyare caught. When unions can raise wages to thepoint that business income covers only part of thedepreciation and interest expenses, the investorswill still operate their business, because any in-come is better than writing off the investment as acomplete loss. But what is the effect of this on po-tential investors? Would you, if you had any sav-ings and saw this happening, try to go into compe-tition or start a similar service elsewhere?

This is the problem that workers face. Yes,unions can temporarily raise some workers' in-comes. But they also reduce the competition forworkers and in the long run they reduce the num-ber of high-paying jobs available. In real life,tools, machines, and other capital goods wear outor become obsolete one by one. They do not all goto pieces at one time. A typewriter wears out and itis replaced. Some small machinery wears out fromtime to time, but whole factories seldom wear outall at once. Unions can push wages up so long asit still pays to replace the worn-out parts and con-tinue operations. This permits businesses alreadyestablished to stay in operation, but it greatly dis-courages the starting of new businesses.

These union policies thus tend to stifle the verything that encourages competition for workers andraises wages. If we are to have higher real wages,higher real income, that is, more goods and ser-vices, we must have more savings and more busi-nesses competing for the workers. This union pol-icy, of forcing wage rates above those that wouldprevail in a free competitive market, reduces thesavings and the number of employers who compete

for workers. Under such policies, people with sav-ings will tend to put them under the mattress orsend them out of the country.

There are many people in many parts of theworld who are sending their savings outside oftheir country, just because of such conditions. Theyno longer feel that it is safe to invest savings intheir own country. Other people stop saving. Whysave, if your savings are going to be confiscated?Why not spend, live high, and have a good timewhile you are here? Still others will put their sav-ings in government bonds in the belief that theywill be safer there than invested in private enter-prises. But the money will then be spent to buyvotes and the interest on the government's debtwill become an added burden on the taxpayers andon the workers too. So we see that if union wagesare forced up above free market wage rates, theyend by killing the goose that lays the golden eggsof higher wages for all, that is, the increased in-vested savings that provide higher and higher stan-dards of living for all.

Only Savings Can Reduce Economic Hardships

The reason why we have so much starvation inso many countries, in India for instance, is becauseprivate property is not protected. Investments arenot protected. After India became independent ofEngland, Nehru said that India needed and wantedforeign capital. It is true, he admitted, that Indiawas going to be socialist but he added, if you willput your capital in India, we will promise notto confiscate it "for at least ten years." How muchmoney would you or any sane person invest in In-dia under such conditions?

If workers want to raise their wages, they mustadopt policies which will encourage savings. Wehave had this problem in the Western world for agood many years now, for most of this century.However, as union wages have gone up in the moreproductive industries, which unions can most eas-ily organize, and in what we call bottleneck indus-tries, like transportation, the unions can shut downother industries. They raise the wages of some, butraising wages raises the prices, and with higherprices fewer articles are sold, which means fewermen are employed in the organized industries. Theworkers kept from jobs in these industries mustthen compete in some other lower-paying industry.This drives those wages down unless those workerstoo are organized into politically privileged unions.Then more workers are thrown into competition

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112 LABOR, WAGES AND EMPLOYMENT

with still lower-paid workers, until some of themare, by these very "pro labor" policies, forced towork for wages on which they cannot keep bodyand soul together. Then we feel sorry for them.

The popular remedy today for such very lowwages is a minimum wage law. The minimumwage law says that you cannot employ a man un-less you pay him a specified minimum wage. In theUnited States, this is now $1.60 an hour. We stilldo not have a dictatorship. Until we do, employerswill only employ people if they can hope to getthe $1.60 back from consumers. If the consumersays a man's contribution is only worth $1.50, theemployer is not going to pay him $1.60.

The employer is only an agent of the consumer.So the man becomes legally unemployable. It isnow illegal for anyone to hire him. He cannot legal-ly earn what he could in a free market, which is tosay, the highest amount any consumer will pay forhis contribution. So unemployment insurance wasinvented to take care of these people. When unem-ployment insurance payments expire, the popularremedy is relief or welfare payments, which be-come a burden on taxpayers who are, of course, inthe long run, the workers. The only possible out-come of such policies is higher prices, higher taxes,less production, and more poverty.

People with the best of intentions and the leasteconomic understanding constantly try to help thepeople on the bottom of the economic ladder bygovernmental intervention. We have had the Na-tional Recovery Act, which was supposed to helpboth business and labor by letting them organizewith government help to set high prices and highwages. We had the Agriculture Adjustment Act.We had the Securities and Exchange Act. We hadmany such acts with nice sounding names and pre-ambles expressing the best intentions.

The real question always is: Are such laws asound means for obtaining the desired or specifiedends?

The National Recovery Act did not produce na-tional recovery. The Agriculture Adjustment Actdid not adjust agriculture to consumers' wishes.We have had surplus after surplus. We have givenbillions of taxpayers' dollars to the farmers andafter thirty-five years still do. The so-called farmproblem is still with us. Only one such law haslived up to its name. The Unemployment InsuranceAct has guaranteed that we will have unemploy-ment.

These interventions did not increase production.In a free market society everybody can get a job at

the highest wage the consumers will pay for hiscontribution. He cannot long get any higher wage;and nothing that government can do will changethis situation or improve it. But many workers andvoters believe unions can raise the wages of allworkers.

Governments, of course, have to do what is pop-ular; they cannot do what is unpopular. Today it ispopular to think that no worker's wages shouldever be allowed to fluctuate downwards. Wagerates, it is thought, should only move upward. Soour laws and labor unions attempt to prevent anyreductions in money wages.

The market system permits consumers to changetheir wishes and wants. When these shift, employ-ers have to change the things they produce to satis-fy the customers. The way this happens in a freemarket is that the prices of things no longer want-ed in such large quantities go down, while theprices of things for which demand has increased goup. Businessmen switch from producing losinglines of goods to producing goods on which theyhope to make a profit. They stop producing goodsthat can only be sold at a loss. When the demandchanges, they make fewer candles, for instance,and switch to producing electric bulbs and lamps.And so it is that workers must switch to differentindustries.

Nowadays, we no longer permit any wages tofall. So if employers can no longer pay the union-demanded wages, they must cease operations alto-gether and fire everybody, including those whomight be satisfied with slightly lower wages untilthey can find better-paying jobs.

Employers and Employees Not Enemies

In real life, workers and investors in the samecompany are not competitors. Production and mar-keting are not class warfare. Savers, employers,and employees of the same company are teamworkers. A demand for a Ford automobile is a de-mand for a Ford factory and for Ford workers. Allthose needed to produce the factory and the autosare a team. Anything which helps an automobilecompany helps all those who are on the team,either as investors or workers. The ultimate de-mand of consumers is for a team combination andit is this free combination that is going to help allof us have more of the things we want most.

The demand for workers at higher wages shouldcome from those putting increased investments to

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37. HOW WAGES ARE DETERMINED 113

work. New investments always seek new workers.Then all other employers have to pay the newhigher wages, because no employer can keep work-ers if a competitor is offering higher wages. Pres-ent union policies cannot raise the wages of allworkers. They lead only to higher prices and lowerproduction.

If we are going to stop the ever upward wage-price spiral before there is a complete collapse inthe value of the monetary unit, we must create aclimate that will lead to the repeal of all lawswhich permit unions to exclude qualified workersfrom competing for jobs in union-organized indus-tries. We must stop subsidizing unemployment andpermit wages to be set by free market competitionin the service of consumers.

This is not the policy in most countries of theworld. Under present policies, workers are gettinghigher money wages which are lower real wagesbecause the value of the monetary unit is constant-ly being diluted. We are going into progressive in-flation. Savers are being liquidated. Their propertyis being confiscated. New savers are scared away.

Politicians are constantly afraid, and rightly so,of doing things which are unpopular. They endorsepopular spending measures, but they shun the re-sulting costs; and to stay popular they have resort-ed to inflation. This is the so-called Keynesian pol-icy. It is set forth in John Maynard Keynes' book,The General Theory of Employment, Interest andMoney. The key sentence is: "A movement by em-ployers to revise money wage bargains downwardswill be more strongly resisted than a gradual andautomatic lowering of real wages as a result of ris-ing prices."

This was the policy endorsed by Keynes. It is thepolicy of most governments in the Western worldtoday. Keynes knew, as every economist does, thatthe only way that you can employ more people isto lower the wage rate. But ever since World War Ithis had become politically difficult in Great Brit-ain. Powerful British labor unions, with the help ofthe Fabian Socialists, had built up public pressures

which opposed any lowering of any money wages.British politicians of all parties were afraid to resistthis popular union policy. So in 1931, when thenumber of unemployed became unbearable, thepoliticians in office preferred to lower wages bydevaluing the British pound. The workers kepttheir puffed-up pound wages but their poundsbought less.

In 1936, Keynes gave this political policy ac-ademic sanction in the book and sentence justquoted. Since then, most Western nations haveadopted this "Full Employment" policy. In essence,when unemployment is considered too high, wagesare lowered by lowering the value of the monetaryunit. This is done by increasing the quantity of themonetary units. We have gotten into a situation ofever-rising wages and prices with more and moreworkers paid less than they would earn in a freemarket.

Neither union leaders nor union workers arestupid people. Keynes and the British politicianswere able to fool the employees in England whenthey first tried this scheme in 1931. They changedall the index numbers, making it difficult to doc-ument the price rises reflecting the lower purchas-ing power of the pound. But now every union hasa statistician, who can see from the official cost ofliving indices that prices are going up. And whenthey go up, the unions demand still higher wages.This system of Keynes' has just about reached theend of the road. You can no longer fool the work-ers by lowering the value of the monetary unit.They are now wise to what is happening and theyare not going to take it much longer.

The only final answer to this problem is moreeconomic education showing that the only way tokeep raising wages permanently is to increase pro-duction and the way to do this is to encouragesavings. For it is only increased savings that canprovide workers with more and better educationand more and better tools with which they canproduce and buy more and better products thatthey want most.

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38. JOBS FOR ALL

Percy L. Greaves, Jr.

Life is an unfinished series of wanting things. Fromthe day we are born to the day we die, we wantthings we don't have. If we didn't, we wouldn't benormal human beings. We would have no reason toeat, work, or get married. All life is a struggle tosatisfy more of our wants.

As our society is organized, the normal way toget more of what we want is to take a job. Then wecan use the dollars we earn to buy more of thethings we want for ourselves and our loved ones.Without a job, or a business of our own, we wouldall have to grow our own food and make our ownclothes as well as anything else we wanted. Takinga job where we can use tools supplied by savers isthe easiest way for most of us to satisfy more ofour wants.

So most men want a job. To be without a job ismost depressing. Continued unemployment,through no fault of one's own, is probably the dark-est future any man can face. Such longtime massunemployment is one of the great curses of ourage.

The human misery, degradation, and moraltemptation are not all. Besides these setbacks tothe human spirit, there is the great unseen loss ofthe wealth the idle might have produced if theyhad been employed. This loss is shared by all. In amarket economy every dollar holder can buy ashare of the total wealth offered for sale. The great-er the wealth produced and offered for sale, themore anyone can buy with each of his dollars. Sowe all have a stake in reducing unemployment andencouraging the production of more of the thingsmen want most.

Yet millions of able and willing men have re-cently remained unemployed for months on end.What is the answer?

•From The Freeman, February 1959

Let's use our heads. When we want to sell some-thing, we sell it to the highest bidder. He buys itfor the lowest price he can. That is what happens atauctions every day. It happens at the corn andcotton markets as well as the stock exchanges.Even the grocer with perishable fruits and vege-tables reduces his prices until a highest bidderbuys them.

That way, the seller gets the highest anyone iswilling to pay, while the buyer pays the lowestprice any seller will freely accept. Both buyer andseller get the highest possible satisfaction fromevery transaction. That is the way of the free mar-ket.

There is no reason why these same free marketprinciples can't be applied to the services of work-ing men. It would be very simple, requiring onlytwo things. First, let every job seeker choose thatjob which offers him what he considers the bestreturns he can get for the services he has to sell.Second, let every prospective employer choosethose job seekers who offer what he considers thebest services he can get for the wages he can pay.Competition would soon see to it that no one waspaid too much or too little.

Of course, such a simple solution would put anend to all privileges for those now overpaid. Nounion would then be able to hold up employers andconsumers for more than they need pay in a freeand competitive market. By forcing some wagesabove free market rates, some unions now gethigher wages for their members than such workerswould receive in a free society. But these forcedhigher wages for some mean that others must ac-cept lower wages or unemployment (unless the gov-ernment resorts to inflation). These lower wagesand unemployment (as well as this pressure for in-flation) would disappear if every man, includingthe unemployed, were free to compete for every

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39. WAGES AND PRODUCTIVITY 115

job. As long as some of men's wants remain un-satisfied, there will be enough jobs to go around.

A free job market would provide "full employ-ment" and greater production of the things menwant most. Competition might drive down somedollar wage rates, but living standards would haveto be higher. With more goods and services com-peting for every dollar, prices would be lower andeveryone with a dollar would be entitled to a shareof the increased production. Those now overpaid

might temporarily suffer, but in the long run wewould all be able to satisfy more of our wants.

With a free market in jobs, every man would befree to take the best offer available. Every em-ployer would also be free to hire the applicantsthat pleased him most. No one would remain longunemployed. There would be jobs for all, morewealth produced, and a greater satisfaction ofeveryone's wants. What is more, the economic lossand dread of unemployment would evaporate.

39. WAGES AND PRODUCTIVITY*

W. M. Curtiss

In discussions of wage rates, whether for individ-uals, firms, or for the entire economy, we hear alot about the increasing productivity of the worker,and that wages must rise to reflect such increases.A large steel company recently has negotiated acontract with its workers which says, in effect, "Ifyour productivity increases, your wages will keeppace." Is this the way wages are or should be deter-mined in an open society? Just what are the impli-cations, if all wages were determined by thismethod?

How come that a boy today gets $3.00 or $4.00for mowing the same lawn you did as a lad for 25or 50 cents? Has the productivity of boys increasedthat much? True, a boy with a power mower cando the job faster; but when he's finished, the totalaccomplishment is no greater than when done ageneration ago. In fact, the job may have beendone better then, if you consider the trimmingwhich boys with power mowers tend to neglect.

Or, take a haircut—$2.00 now compared to thequarter you paid for your first one! Electric clip-pers, to be sure; but again, you are interested in thefinished job rather than the barber's speed.

So it goes, for one service after another—a clean-ing woman, window washing and hanging screens,car waxing, house painting—whatever the service,you find it costs a lot more to get the job done thanwhen you were a boy.

When you think about it, you realize that infla-

*From The Freeman, November 1963

tion is a factor—a dollar doesn't go as far as it oncedid. That might account for perhaps a doubling ofthe price, but what about the rest of the increase?

Supply and Demand

In a free market, wages are determined by com-petitive forces of supply and demand. A manufac-turer, after very careful planning, concludes thathe can make and sell so many of a particular itemat a given price. He must assemble his resources,including his plant, his equipment, his managerialtalent, and workers, and hope to recover the cost ofthese things from the price buyers will pay for thefinished product.

So, the manufacturer goes into the labor marketto hire men to work for him. If his offered wageisn't high enough to get the workers he needs, thenhe must either give up the project or figure howto recombine his resources in such a way that hecan pay higher wages and still come out ahead. Hemay do this by simplifying his manufacturing proc-esses, by introducing more or better machinery,or by innovations of some sort.

The worker, on the other hand, will look after hisinterest, too, and will consider moving to a newjob if it seems more attractive to him for reasonsof higher pay, better working conditions, shorterdays, more vacation, or whatever.

But, suppose some manufacturer comes alongwith an item he can make and sell very profitably.It may be because of patents he holds, or special

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116 LABOR, WAGES AND EMPLOYMENT

skills or processes that only he knows about. Hemay be able to afford to pay wages half again ashigh as the going wage in the area and still comeout ahead. Shouldn't he do this?

In a free market, he is at liberty to pay the higherwage if he wishes. But if he has had some experi-ence in manufacturing, he knows that competitionis behind every tree and someone will figure out away to put a competing product on the market thatwill undersell his, with his high labor costs, inwhich case he may find himself without his expect-ed buyers. So, he probably will decide he shouldpay the going wage for his workers, or just enoughmore to fill his needs, and use most of his techno-logical advantages to reduce prices to the buyerand build his market. If, in the early stages, he isable to gain a handsome profit for himself and hisstockholders, he will have a cushion with which tomeet the competition certain to come.

All this has nothing to do with a particular busi-nessman offering his workers production incen-tives. He may believe that his workers will producemore for him if he gives them every Wednesdayafternoon off, or he may give them a share in theprofits of the firm, or he may pay them on a piece-work basis. That must be each employer's decision;but most will offer a base wage rate not greatlydifferent from the going wage in the area.

Competition the Key

But, what has all this to do with the cost of get-ting my lawn mowed, or a haircut, or hiring awoman to clean my house? Why have wages in theservices increased over the years about as much asthose in highly automated industries? In one in-stance, efficiency of doing the job may not haveincreased at all, while in the other, it may have in-creased tenfold.

Competition is the answer. If you want a man tocut your hair, you must pay enough to keep himfrom going to work in a factory or at some otheroccupation. As a result, we have what may be re-ferred to as a wage level for the entire economy.This is a somewhat mythical figure, not too mean-ingful because of the variability of individual skills.For example, consumers will pay a great deal morefor the services of a skilled brain surgeon than forthe services of a messenger.

The calculation of a wage level for a country is atremendously complicated procedure and not toosatisfactory at best. Nevertheless, it is a useful ifnot precise tool in comparing the economy of one

country with another. We know, for example, thatthe general level of wages is much higher in theUnited States than in India, which leads to certainconclusions about how wages may be improved inany economy.

With a free market, in an advanced economy,most of the returns from production go to theworkers—roughly 85 to 90 per cent. Competitionforces this. If workers are supplied with good toolsand equipment, they are more productive and theirwage level is higher than it would be otherwise.This is a generalization regarding all workers. Thegeneral wage level is higher in a country wherethere is a relatively high investment in tools andequipment per worker. It is just that simple! In theUnited States, the investment per worker in toolsmay be $20,000, and it is not unheard of to find aparticular business with an investment of $100,000in tools and equipment per worker.

The road, then, to a higher wage level is throughsavings and investment in the tools of production.There is no other.

A high investment in tools and equipment bene-fits the barber, the cleaning woman, and all serviceemployees, even though the investment is not di-rectly for their work. Competition sees to this.

A Negative Bonus

However enlightened it may appear on the sur-face, the wages of an individual worker or for agroup of workers cannot be tied to the productiv-ity of their job or to the profitability of a particularfirm. If this were the case, a highly skilled workermight find himself working for a negative "bonus"in a firm which, for some reason, happens to beoperating at a loss.

The same may be said for tying wages to a cost-of-living index. A fair wage, both to the workerand the employer, can only be established bybargaining between the two interested parties—the worker taking what appears to him to be thebest he can get and the employer, all things con-sidered, getting the best deal for himself.

The lesson here is that while productivity ofworkers is highly important when considering ageneral wage level, productivity does not deter-mine what the wage rate ought to be for any givenfirm or industry within the economy. The effect ofgeneral productivity on wages is automatic in afree market with competition. And all workersstand to gain when tools and capital are madeavailable to some of them.

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40. COMPETITION, MONOPOLY ANDTHE ROLE OF GOVERNMENT*

Sylvester Petro

The great monopoly problem mankind has toface today is not an outgrowth of the operation ofthe market economy. It is a product of purposiveaction on the part of governments. It is not one ofthe evils inherent in capitalism as the demagoguestrumpet. It is, on the contrary, the fruit of policieshostile to capitalism and intent upon sabotagingand destroying its operation.

—LUDWIG VON MISES, Human Action

In the free society government keeps the peace,protects private property, and enforces contracts.Government must do these things effectively, andit must do nothing else; otherwise, the conditionsindispensable to personal freedom in society areabsent. Whether or not a free society is attainableno mortal man can know; the limits of our knowl-edge are too narrow. But one thing we do know:that until at least the advocates of the free societyare fully aware of the conditions necessary to itsexistence, it can never come about. For they mustever be on guard against new movements, ideas,and principles which would endanger its realiza-tion. And on the other hand, they must be sharplyaware of existing impediments so that they maydirect their energies intelligently to the removal ofthe causes of current imperfections.

I take up with considerable trepidation the taskof arguing that government should quit trying topromote competition by means of the antitrustlaws, especially since some proponents of the freesociety believe that vigorous enforcement of thoselaws is absolutely indispensable. Yet, antitrustlaws are inconsistent with the basic principles ofthe free society, private property, and freedom ofcontract; they deprive persons of private propertyin some cases and outlaw certain contracts which

•From The Freeman, February 1974

would otherwise be valid. Moreover, they expandthe role of government far beyond that envisagedby the theory of the free society and thus amountto an unconscious admission that the fundamentaltheory itself is incoherent; for antitrust policy im-plicitly accepts the Marxian premise that a laissezfaire economy will result in the decay of competi-tion and in the emergence of abusive monopoly.Finally, and this may be the most pressing reasonfor the present article, in their attempt to promotecompetition the antitrust laws may in fact be in-hibiting it.

Vague and Uncertain Laws

One of the basic evils in the antitrust laws is thevagueness and uncertainty of their application.They have produced mainly confusion. Seventysome years ago the antitrust laws prevented theGreat Northern Railway and the Northern Pacificfrom merging, although but a minor fragment oftheir respective lines overlapped in competition.But a few years later United States Steel was per-mitted to consolidate a vast preponderance of thesteel production of the country under one manage-ment. Since then we have been off on another anti-merger binge, and so Bethlehem and Youngstownhave been enjoined from doing on a smaller scalewhat U.S. Steel did on a grand scale. Socony andother integrated oil companies were told that theymight not buy up distress oil at prices set in com-petitive markets. But only a few years earlier theAppalachian Coals Association had been permittedto act as exclusive marketing agent for most of thecoal production of an entire region. Forty yearsafter its foresight, courage, and capital had beeninstrumental in developing the great GeneralMotors productive complex, the du Pont Companywas ordered to give up control of its G.M. stock be-

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118 LABOR, WAGES AND EMPLOYMENT

cause of a relatively picayune buyer-seller rela-tionship between them. Only space limitations pre-clude an almost endless listing of equally contra-dictory and inequitable results of the unpredictableeruptions from the antitrust volcano. At present,the allegedly competitive policies of the ShermanAct are mocked by those patently anticompetitivecomponents of the antitrust laws, the Robinson-Patman Act and the fair-trade laws.

Thus, to the careful and honest observer theantitrust laws appear to be a charter of confusion,rather than the "charter of economic liberty"which oratory calls them. They have been trans-mogrified by the political vagaries to which theirvagueness makes them susceptible into an insultto the idea that laws should apply equally to all.Some may regard these consequences as merelyunfortunate incidents of a generally praiseworthyprogram. Yet we need continually to remind our-selves that law is for the benefit of the citizenry,rather than for the sport of government and of thelegal profession. The main function of law is to pro-vide people with clear and sound rules of the game,so that they may pursue their affairs with a mini-mum of doubt and uncertainty.

While aggravating the existing uncertainties oflife, the antitrust laws can make no demonstrableclaim to improving competition, despite the con-tentions of enthusiastic trustbusters. I have heardit said that the result of breaking up large firms isto create competition among its fragments, andthus to contribute to social well-being. But a mo-ment's reflection will expose this as a bare and un-supportable assertion. Even though additionalfirms may be created by breaking up large busi-nesses, the result is not necessarily in the social in-terest, nor does it necessarily create or improvecompetition. The social interest and competitionare not automatically served by an increase in thenumber of firms. It is a commonplace that compe-tition may be more vigorous and the service to so-ciety greater when an industry has few firms thanwhen it has many. The question from the point ofview of society is not how many firms there are, buthow efficiently and progressively the firms—nomatter how few or how numerous—utilize scarce re-sources in the service of the public. Maybe produc-tion will improve after a single large producer issplit into fragments; but it is equally possible thatit will not. No one can tell in advance, and it is alsoimpossible to do so after the fact. The only thingthat can be said with certainty about the breakingup of businesses is that government's power has

been used to deny property rights rather than toprotect them. If we really believe that private prop-erty is the most valuable institution of the free so-ciety, and that in it lies the strength of the freesociety, then it is wrong to abrogate that institu-tion on the basis of pure guesswork.

Monopoly Unionism

The antitrust approach to improving compe-tition loses even more of its glamor when one un-derstands that the most abusive and socially dan-gerous monopoly which exists today in this countryis the direct product of special governmental privi-leges. Labor unions are today the most destructivemonopolies in our system, and they are also thegreatest beneficiaries of governmental specialprivileges.

First and foremost, there is the virtual privilegeof violence, which trade unions alone enjoy. Nei-ther individuals nor other organizations are soprivileged. Memory is strangely short as regardsunion violence, and yet every big union in Americahas used it habitually, in both organizing and "col-lective bargaining."

Of the men who resist union membership, manyare beaten and some are killed. They have muchmore to fear than do persons who reject the blan-dishments of sellers of other goods or services. Andthis is true despite the fact that the right not to joina union is as firmly entrenched in legal theory andthe theory of the free society as is the right to buyas one wishes or to refuse to buy when one sowishes.

In 1959, the United Mine Workers engaged inone of its periodic purges of the nonunion mineswhich spring up continually owing to the uneco-nomic wage forced upon the organized mines bythe UMW. An Associated Press dispatch, datedApril 10, 1959, reported that "one nonunion oper-ator has been killed, five union members chargedin the fatal shooting, and three ramps damaged bydynamite since the strike began March 9. It hasmade idle more than 7,000 men over the union'sdemands for a $34.25 a day wage, a $2.00 in-crease." The grimmest aspect of the dispatch lay inthe news that Governor A. B. Chandler of Ken-tucky was threatening—after a full month of terrorand pillage by the union—to order National Guards-men into the coal fields.

This is no isolated case. On the contrary, vio-lence and physical obstruction are standard fea-tures of most strikes, except where the struck em-

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40. COMPETITION, MONOPOLY AND THE ROLE OF GOVERNMENT 119

ployers "voluntarily" shut down their businesses,in accordance with the Reuther theory of enlight-ened management which I have described in Pow-er Unlimited: The Corruption of Union Leadership(Ronald Press, 1959). A special dispatch to TheNew York Times, dated August 5, 1959, reportedthat "a siege was lifted today for 267 supervisoryemployees at the United States Steel Company'sFairless Works here. . . . From now on the super-visory personnel will be allowed to enter and leavethe plant at will for maintenance." The dispatch issilent concerning the probable consequence of anyattempt by the steel companies to maintain pro-duction. But the fact that supervisors were be-sieged because of maintenance operations sug-gests that rank-and-file workers who attempted toengage in production would be mauled. It is notout of order to infer that the siege of the super-visors, otherwise a pretty silly act, was intended toget across that message.

The careful student of industrial warfare will dis-cern a pattern of violence which reveals an insti-tutionalized, professional touch. Mass picketing,goon squads (or "flying squadrons" as they areknown in the Auto Workers union), home demon-strations, paint bombs, and perhaps most egre-gious of all, the "passes" which striking unionsissue to management personnel for limited pur-poses—these are the carefully tooled components ofthe ultimate monopoly power of unions.

As a matter of fact, we have become so be-fuddled by, and so weary of, the terror, destruction,and waste of the unions' organizing wars that weview with relief and contentment one of the mostprodigious contracts in restraint of trade ever ex-ecuted—the celebrated "no-raiding pact" of theAFL-CIO. No division of markets by any industrialfirm has ever achieved such proportions. The "no-raiding pact" divides the whole organizable work-ing force in accordance with the ideas of the unionleaders who swing the most weight in the AFL-CIO. It determines which unions are "entitled" towhich employees. The theory of modern labor re-lations law is that employees have a right to unionsof their own choosing. Reversing that principle, the"no-raiding pact" asserts that the choice belongsto the union leadership. If any business group wereso openly to dictate the choices of consumers, itwould be prosecuted by sundry federal agenciesand hailed before one or another, or perhaps manyCongressional committees. It would not receivecongratulatory telegrams from the chief politiciansof the nation.

Government Intervention

The more one examines American labor law themore one becomes convinced of the validity ofProfessor Mises' theory that no abusive monopolyis possible in a market economy without the help ofgovernment in one form or .another. If employerswere permitted to band together peacefully in or-der to resist unionization, as unions are permittedto engage in coercive concerted activities in orderto compel unionization, it is probable that the pure-ly economic (nonviolent) pressures of unionswould not be as effective as they have been in in-creasing the size and power of the big unions. Butthe government has taken from employers allpower to resist unionization, by peaceful as well asby violent means. At the same time it has per-mitted unions to retain the most effective methodsof economic coercion. And so picketing, boycotts,and other more subtle modes of compulsory union-ism are in many instances as effective in com-pelling unwilling membership—in the absence ofcountervailing economic pressures from employ-ers—as sheer physical violence.

Monopoly unionism owes much, too, to directand positive help from government. Consider thevigorous prohibition of company-assisted inde-pendent unions which has prevailed for overtwenty years. Although such small unions might attimes best serve the interests of employees, theearly National Labor Relations Board practicallyoutlawed all independent unions, and more recentdecisions continue to favor the big affiliatedunions.

The Majority-Rule Principle

But perhaps the most significant contributionof government to monopoly unionism is the ma-jority-rule principle which makes any union se-lected by a majority of votes in an "appropriatebargaining unit" the exclusive representative of allemployees in that unit, including those who havenot voted at all, as well as those who have express-ly rejected the union as bargaining representative.Majority rule is a monopolistic principle; it is al-ways to be contrasted with individual freedom ofaction. But it is particularly prone to monopolisticabuse in labor relations. Determination of the "ap-propriate bargaining unit" is left to the virtuallyunreviewable discretion of the National Labor Re-lations Board. And that agency has in numerousinstances felt duty-bound to carve out the bargain-

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120 LABOR, WAGES AND EMPLOYMENT

ing unit most favorable to the election of unions.Indeed, politicians might learn something aboutgerrymandering from studying the unit determina-tions of the Labor Board.

Even if the gerrymandering could be eliminated,the majority-rule principle would remain a sourceof monopolistic abuse, based on monopoly powergranted and enforced by government. A unionmay be certified exclusive representative in a1,000-man bargaining unit on the basis of as few as301 affirmative votes, for an election will be con-sidered valid in such a unit when 600 employeesparticipate. If a bare majority then votes in favorof the union, the remaining 699 are saddled withthe union as their exclusive bargaining representa-tive, whether or not they want it.

Competitive Safeguards

Society has nothing to fear from unions whichwithout privileged compulsion negotiate labor con-tracts and perform other lawful and useful jobs forworkers who have voluntarily engaged their ser-vices. For they are then but another of the consen-sual service associations or agencies which a freesociety breeds so prolifically. Moreover, the freesociety has demonstrated that its fundamentalmechanism, free competition in open markets, istough and resilient enough to defend against ex-ploitation by any genuinely voluntary association.The critical problem arises when a man or an as-sociation destroys society's chief defense mech-anism by violent and coercive conduct, or whenthat mechanism is blacked out by special privilegefrom government. For then, without the checksand balances of free men vying against free men incivilized competition, society lies as prone to ex-ploitation by the unscrupulous as a rich storewould be without guards and burglar alarms.

When the sources and components of unionmonopoly are understood, it becomes clear that theantitrust laws cannot cure the problem. The fun-damental source is to be found in failures anderrors of government which the most elaboratelyconceived antitrust laws could not cure. The basicjob of government is to keep the peace. It has notkept the peace in labor relations. Local, state, andfederal governments have all failed to preventlabor goons and massed picket lines from interfer-ing with the freedom of action of nonunion em-ployees and of employers in bargaining disputes.(See my book, The Kingsport Strike, ArlingtonHouse, 1967.) A similar failure in organizing cam-

paigns has permitted unions which would be pyg-mies, if they represented only workers who wantedthem, to become giants. The antitrust laws wouldequally clearly do nothing to remedy the monop-olistic consequences of the positive aids granted bygovernment to the big unions, such as the majority-rule principle and the virtual outlawry of small in-dependent unions.

I am convinced that the socially dangerous as-pects of big unionism have been brought about bythe errors and failures of government which wehave been considering. Government has on the onehand been tolerating the violence and economiccoercion by means of which the big unions haveattained their present power, and it has, on theother hand, positively intervened in their support.Moreover for the last forty years or more, officersof the national administration have played a crit-ical role in the key industrial disputes which haveset the pattern of the so-called inflationary wage-cost push.

The latter is a much more important fact than itmay seem at first view. It suggests that the checksand balances of free enterprise are adequate toprotect the public even from the artificially con-structed compulsory labor monopolies which wenow know. Moreover, it is not unreasonable to in-fer that those checks will work even more effec-tively if politicians not only stay out of negotiationsbut also enforce the laws against compulsory or-ganization. These considerations suggest that thelogical first step for those concerned about unionpower is to insist that government remove the pres-ent special privileges which unions enjoy and thenwait patiently, to see if the program will work itselfout without further government intervention.

Government's Limited Role,As Outlined by Mark Twain

I believe that the same approach should be takenin respect to businesses suspected of monopolisticabuses. Rather than following the hit-or-miss polit-ical vagaries of the antitrust approach, it would bebetter to make sure that all special privileges, suchas tariffs, exclusive franchises, and other govern-mental devices for blocking access to markets arewithdrawn. Repeal of the tax laws which unfairlyprevent high earners from amassing the capitalnecessary to compete with existing firms wouldalso help much more than antitrust prosecutionsdo in promoting competition. In short, if govern-ment would confine itself to protecting property

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40. COMPETITION, MONOPOLY AND THE ROLE OF GOVERNMENT 121

and contract rights, and if it would desist from im-pairing those rights, it would be doing all that gov-ernment can do to promote competition. And weshould not need to be greatly concerned aboutmonopolies and contracts in restraint of trade. For,as Mark Twain's account of the career of the river-boat pilots' monopoly in the nineteenth centurydemonstrates, the free enterprise system is in itselffully capable of destroying all abusive restraintsupon competition which are not supported andprotected by government.

In the years before the Civil War, Twain writesin Life on the Mississippi, the river steamboat pi-lots formed an association which was to become, asTwain put it, "the tightest monopoly in the world."Having gone through many trials in building up itsmembership, a sudden increase in the demand forpilots gave the association its first break. It heldmembers to their oath against working with anynonmember, and soon nonmembers began havingdifficulty getting berths. This difficulty was in-creased by the association pilots' safety record,which grew out of an ingenious method evolved bythe association for current reports on the ever-changing Mississippi channel. Since the informa-tion in these reports was confined to members ofthe association, and since nonmembers had nocomparable navigation guide, the number of boatslost or damaged by the latter soon became obvi-ously disproportionate. "One black day," Twainwrites, "every captain was formally ordered (bythe underwriters) to immediately discharge hisoutsiders and take association pilots in their stead."

The association was then in the driver's seat. Itforbade all apprentices for five years and strictlycontrolled their number thereafter. It went intothe insurance business, insuring not only the livesof members but steamboat losses as well. ByUnited States law the signature of two licensedpilots was necessary before any new pilot could bemade. "Now there was nobody outside of the as-

sociation competent to sign," says Twain and"consequently the making of pilots was at an end."The association proceeded to force wages up tofive hundred dollars per month on the Mississippiand to seven hundred dollars on some of its tribu-taries. Captains' wages naturally had to climb to atleast the level of £he pilots', and soon the increasedcosts had to be reflected in increased rates. Thensociety's checks and balances went to work. Thisis Twain's summation:

"As I have remarked, the pilots' association wasnow the compactest monopoly in the world, per-haps, and seemed simply indestructible. And yetthe days of its glory were numbered. First, the newrailroad . . . began to divert the passenger travelfrom the steamers; next the war came and almostentirely annihilated the steamboating industry dur-ing several years . . . then the treasurer of the St.Louis association put his hand into the till andwalked off with every dollar of the ample fund; andfinally, the railroads intruding everywhere, therewas little for steamers to do but carry freights; sostraightway some genius from the Atlantic coastintroduced the plan of towing a dozen steamer car-goes down to New Orleans at the tail of a vulgarlittle tugboat; and behold, in the twinkling of aneye, as it were, the association and the noble sci-ence of piloting were things of the dead and pa-thetic past!"

The moral: government's job is done when itdefends the right of competitive businessmen orworkers to take over functions which are beingabused by monopolistic groups. The deeper moralis that monopolistic abuses rarely survive withouta basis in one form or another of special privilegegranted by government. The long steel, auto, andother big strikes we have suffered would not havelasted nearly so long if government had effectivelyprotected the right of the companies to keep theirplants operating and the right of employees to con-tinue working during the strike.

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41. THE ECONOMICS AND POLITICS OF MY JOB*

Ludwig von Mises

Our economic system—the market economy or cap-italism—is a system of consumers' supremacy. Thecustomer is sovereign; he is, says a popular slogan,"always right." Businessmen are under the neces-sity of turning out what the consumers ask for andthey must sell their wares at prices which the con-sumers can afford and are prepared to pay. A busi-ness operation is a manifest failure if the proceedsfrom the sales do not reimburse the businessmanfor all he has expended in producing the article.Thus the consumers in buying at a definite pricedetermine also the height of the wages that arepaid to all those engaged in the industries.

It follows that an employer cannot pay more toan employee than the equivalent of the value thelatter's work, according to the judgment of the buy-ing public, adds to the merchandise. (This is thereason why the movie star gets much more thanthe charwoman.) If he were to pay more, he wouldnot recover his outlays from the purchasers; hewould suffer losses and would finally go bankrupt.In paying wages, the employer acts as a mandatoryof the consumers, as it were. It is upon the con-sumers that the incidence of the wage paymentsfalls. As the immense majority of the goods pro-duced are bought and consumed by people who arethemselves receiving wages and salaries, it is ob-vious that in spending their earnings the wageearners and employees themselves are foremost indetermining the height of the compensation theywill get.

What Makes Wages Rise?

The buyers do not pay for the toil and troublethe worker took nor for the length of time he spentin working. They pay for the products. The betterthe tools are which the worker uses in his job, themore he can perform in an hour, the higher is, con-

'From The Freeman, May 1958

sequently, his remuneration. What makes wagesrise and renders the material conditions of thewage earners more satisfactory is improvement inthe technological equipment.

American wages are higher than wages in othercountries because the capital invested per head ofthe worker is greater and the plants are thereby inthe position to use the most efficient tools and ma-chines. What is called the American way of life isthe result of the fact that the United States hasput fewer obstacles in the way of saving and cap-ital accumulation than other nations.

The economic backwardness of such countries asIndia consists precisely in the fact that their pol-icies hinder both the accumulation of domesticcapital and the investment of foreign capital. Asthe capital required is lacking, the Indian enter-prises are prevented from employing sufficientquantities of modern equipment, are therefore pro-ducing much less per man-hour, and can onlyafford to pay wage rates which, compared withAmerican wage rates, appear as shockingly low.

There is only one way that leads to an improve-ment of the standard of living for the wage-earn-ing masses—the increase in the amount of capitalinvested. All other methods, however popular theymay be, are not only futile, but are actually detri-mental to the well-being of those they allegedlywant to benefit.

The fundamental question is: Is it possible toraise wage rates for all those eager to find jobsabove the height they would have attained on anunhampered labor market?

Public opinion believes that the improvement inthe conditions of the wage earners is an achieve-ment of the unions and of various legislative mea-sures. It gives to unionism and to legislation creditfor the rise in wage rates, the shortening of hoursof work, the disappearance of child labor, andmany other changes. The prevalence of this beliefmade unionism popular and is responsible for the

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41. THE ECONOMICS AND POLITICS OF MY JOB 123

trend in labor legislation of the last decades. Aspeople think that they owe to unionism their highstandard of living, they condone violence, coer-cion, and intimidation on the part of unionized la-bor and are indifferent to the curtailment of per-sonal freedom inherent in the union-shop andclosed-shop clauses. As long as these fallacies pre-vail upon the minds of the voters, it is vain to ex-pect a resolute departure from the policies mis-takenly called progressive.

What Causes Unemployment?

Yet this popular doctrine misconstrues every as-pect of economic reality. The height of wage ratesat which all those eager to get jobs can be em-ployed depends on the marginal productivity oflabor, or, in other words, on the worker's contribu-tion to the usefulness of the product.

The more capital—other things being equal—is in-vested, the higher wages climb on the free labormarket, i.e., on the labor market not manipulatedby the government and the unions. At these marketwage rates all those eager to employ workers canhire as many as they want. At these market wagerates all those who want to be employed can get ajob. There prevails on a free labor market a ten-dency toward full employment. In fact, the policyof letting the free market determine the height ofwage rates is the only reasonable and successfulfull-employment policy. If wage rates, either by un-ion pressure and compulsion or by governmentdecree, are raised above this height, lasting unem-ployment of a part of the potential labor forcedevelops.

These opinions are passionately rejected by theunion bosses and their followers among politiciansand the self-styled intellectuals. The panacea theyrecommend to fight unemployment is credit ex-pansion and inflation, euphemistically called "aneasy money policy."

As has been pointed out above, an addition tothe available stock of capital previously accu-mulated makes a further improvement of the indus-tries' technological equipment possible, thus raisesthe marginal productivity of labor and consequent-ly also wage rates. But credit expansion, whetherit is effected by issuing additional banknotes or bygranting additional credits on bank accounts sub-ject to check, does not add anything to the nation'swealth of capital goods. It merely creates the illu-sion of an increase in the amount of funds avail-able for an expansion of production. Because they

can obtain cheaper credit, people erroneously be-lieve that the country's wealth has thereby beenincreased and that therefore certain projects thatcould not be executed before are now feasible. Theinauguration of these projects enhances the de-mand for labor and for raw materials and makeswage rates and commodity prices rise. An artificialboom is kindled.

Inflation and Unemployment

Under the conditions of this boom, nominalwage rates which before the credit expansion weretoo high for the state of the market and thereforecreated unemployment of a part of the potentiallabor force are no longer too high and the unem-ployed can get jobs again. However, this happensonly because under the changed monetary andcredit conditions prices are rising or, what is thesame expressed in other words, the purchasingpower of the monetary unit drops. Then the sameamount of nominal wages—wage rates expressed interms of money—means less in real wages—in termsof commodities that can be bought by the mon-etary unit. Inflation can cure unemployment onlyby curtailing the wage earner's real wages. Butthen the unions ask for a new increase in wages inorder to keep pace with the rising cost of livingand we are back where we were before, in a situa-tion in which large scale unemployment can onlybe prevented by a further expansion of credit.

This is what happened in this country as well asin many other countries in the last years. The un-ions, supported by the government, forced the en-terprises to agree to wage rates that went beyondthe potential market rates, that is, the rates whichthe public was prepared to refund to the employersin purchasing their products. This would have in-evitably resulted in rising unemployment figures.But the government policies tried to prevent theemergence of serious unemployment by credit ex-pansion—inflation. The outcome was rising prices,renewed demands for higher wages and reiteratedcredit expansion; in short, protracted inflation.

Inflation Can't Co On Endlessly

But finally the authorities became frightened.They know that inflation cannot go on endlessly.If one does not stop in time the pernicious policyof increasing the quantity of money and fiduciarymedia, the nation's currency system collapses en-tirely. The monetary unit's purchasing power sinks

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124 LABOR, WAGES AND EMPLOYMENT

to a point which for all practical purposes is notbetter than zero. This happened again and again,in this country with the Continental Currency in1781, in France in 1796, in Germany in 1923. It isnever too early for a nation to realize that inflationcannot be considered as a way of life and that it isimperative to return to sound monetary policies.

What Causes the Slump?

It is not the task of this article to deal with allthe consequences which the termination of infla-tionary measures brings about. We have only toestablish the fact that the return to monetary stabil-ity does not generate a crisis. It only brings to lightthe malinvestments and other mistakes that weremade under the hallucination of the illusory pros-perity created by the easy money. People becomeaware of the faults committed and, no longerblinded by the phantom of cheap credit, begin toreadjust their activities to the real state of the sup-ply of material factors of production. It is this—cer-tainly painful, but unavoidable—readjustment thatconstitutes the depression.

One of the unpleasant features of this processof discarding chimeras and returning to a soberestimate of reality concerns the height of wagerates. Under the impact of the progressing infla-tionary policy the union bureaucracy acquired thehabit of asking at regular intervals for wage raises,and business, after some sham resistance, yielded.As a result these rates were at the moment too highfor the state of the market and would have broughtabout a conspicuous amount of unemployment.But the ceaselessly progressing inflation very sooncaught up with them. Then the unions asked againfor new raises and so on.

The Purchasing Power Argument

It does not matter what kind of justification theunions and their henchmen advance in favor oftheir claims. The unavoidable effects of forcingthe employers to remunerate work done at higherrates than those the consumers are willing to re-store to them in buying the products are alwaysthe same: rising unemployment figures.

At the present juncture the unions try to rakeup the old hundred-times-refuted purchasingpower fable. They declare that putting more moneyinto the hands of the wage earners—by raisingwage rates, increasing the benefits to the unem-ployed, and embariking upon new public works-

would enable the workers to spend more and there-by stimulate business and lead the economy out ofthe recession into prosperity. This is the spuriouspro-inflation argument to make all people happythrough printing paper bills.

Of course, if the quantity of the circulatingmedia is increased, those into whose pockets thenew fictitious wealth comes—whether they areworkers or farmers or any other kind of people—will increase their spending. But it is precisely thisincrease in spending that inevitably brings about ageneral tendency of all prices to rise. Thus the helpthat an inflationary action could give to the wageearners is only of a short duration. To perpetuate it,one would have to resort again and again to newinflationary measures. It is clear that this leads todisaster.

There is a lot of nonsense said about thesethings. Some people assert that wage raises are"inflationary." But they are not in themselves infla-tionary. Nothing is inflationary except inflation,i. e., an increase in the quantity of money in cir-culation and credit subject to check (checkbookmoney). And under present conditions nobody butthe government can bring an inflation into being.What the unions can generate by forcing the em-ployers to accept wage rates higher than the po-tential market rates is not inflation and not highercommodity prices, but unemployment of a part ofthe people anxious to get a job. Inflation is a policyto which the government resorts in order to pre-vent the large scale unemployment the unions'wage raising would otherwise bring about.

The Dilemma of Present-Day Policies

The dilemma which this country and manyothers have to face is very serious. The extremelypopular method of raising wage rates above theheight the unhampered labor market would haveestablished would produce catastrophic massunemployment if inflationary credit expansionwere not to rescue it. But inflation has not onlyvery pernicious social effects. It cannot go on end-lessly without resulting in the complete break-down of the whole monetary system.

Public opinion, entirely under the sway of thefallacious labor union doctrines, sympathizesmore or less with the union bosses' demand for aconsiderable rise in wage rates. As conditions aretoday, the unions have the power to make the em-ployers submit to their dictates. They can callstrikes and, without being restrained by the author-

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41. THE ECONOMICS AND POLITICS OF MY JOB 125

ities, resort with impunity to violence against thosewilling to work. They are aware of the fact that theenhancement of wage rates will increase the num-ber of jobless. The only remedy they suggest ismore ample funds for unemployment compensa-tion and a more ample supply of credit, i. e., in-flation. The government, meekly yielding to a mis-guided public opinion and worried about the out-come of the impending election campaign, has un-fortunately already begun to reverse its attempts toreturn to a sound monetary policy. Thus we areagain committed to the pernicious methods of med-dling with the supply of money. We are goingon with the inflation that with accelerated speedmakes the purchasing power of the dollar shrink.Where will it end? This is the question which Mr.Reuther and all the rest never ask.

The Wage Earner s Stake

Only stupendous ignorance can call the policiesadopted by the self-styled progressives "pro-labor"policies. The wage earner like every other citizen isfirmly interested in the preservation of the dollar'spurchasing power. If, thanks to his union, hisweekly earnings are raised above the market rate,he must very soon discover that the upward move-ment in prices not only deprives him of the ad-vantages he expected, but besides makes the val-ue of his savings, of his insurance policy, and of hispension rights dwindle. And, still worse, he maylose his job and will not find another.

All political parties and pressure groups protestthat they are opposed to inflation. But what theyreally mean is that they do not like the unavoid-able consequences of inflation, namely, the rise inliving costs. Actually they favor all policies thatnecessarily bring about an increase in the quantityof the circulating media. They ask not only for aneasy money policy to make the unions' endlesswage boosting possible but also for more govern-ment spending and—at the same time—for taxabatement through raising the exemptions.

Duped by the spurious Marxian concept of ir-reconcilable conflicts between the interests of thesocial classes, people assume that the interests ofthe propertied classes alone are opposed to theunions' demand for higher wage rates. In fact, thewage earners are no less interested than any othergroups or classes in a return to sound money. A

lot has been said in the last months about the harmfraudulent officers have inflicted upon the unionmembership. But the havoc done to the workers bythe union's excessive wage boosting is much moredetrimental.

It would be an exaggeration to contend that thetactics of the unions are the sole threat to mone-tary stability and to a reasonable economic policy.Organized wage earners are not the only pressuregroup whose claims menace today the stability ofour monetary system. But they are the mostpowerful and most influential of these groups andthe primary responsibility rests with them.

Capitalism and the Common Man

Capitalism has improved the standard of livingof the wage earners to an unprecedented extent.The average American family enjoys today amen-ities of which, only a hundred years ago, not eventhe richest nabobs dreamed. All this well-being isconditioned by the increase in savings and capitalaccumulated; without these funds that enable busi-ness to make practical use of scientific and tech-nological progress the American worker would notproduce more and better things per hour of workthan the Asiatic coolies, would not earn more, andwould, like them, wretchedly live on the verge ofstarvation. All measures which—like our incomeand corporation tax system—aim at preventing fur-ther capital accumulation or even at capital decu-mulation are therefore virtually antilabor and anti-social.

One further observation must still be madeabout this matter of saving and capital formation.The improvement of well-being brought about bycapitalism made it possible for the common man tosave and thus to become a capitalist himselfin a modest way. A considerable part of the capitalworking in American business is the counterpart ofthe savings of the masses. Millions of wage earnersown saving deposits, bonds, and insurance pol-icies. All these claims are payable in dollars andtheir worth depends on the soundness of the na-tion's money. To preserve the dollar's purchasingpower is also from this point of view of vitalinterest to the masses. In order to attain this end,it is not enough to print upon the banknotes thenoble maxim, In God we trust. One must adopt anappropriate policy.

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Money, Credit and Banking

42. MILLION DOLLAR DREAM

I dreamed I had a million dollars and need neverwork again.

I thought of all the things I could now do be-cause I had a million bucks. I would have thefanciest food money could buy. I would buy a finehouse. Only the sportiest and most expensive auto-mobile would suit me from now on. Clothing? Onlythe richest and finest would ever cover me again.Oh, I was in clover all right. My fondest wishes hadcome true.

In my dream I dressed and, being hungry, wentto breakfast. There wasn't any. My wife was intears. The food she had ordered the day beforehadn't been delivered. Not even a bottle of milkor the morning newspaper greeted me when Iopened the door. I tried to telephone the grocerybut the line was dead. I said, "Oh, well, I'll take awalk and bring back something for breakfast."

The street was deserted. Not a bus, street car, orcab was in sight. I walked on and on. Nothing insight. Thinking something had happened only tomy neighborhood. I went to another. Not even atrain was moving. Then people began to appear onthe street—first, only a few, then many, then hun-dreds. I joined them and began asking questions:"What has happened? Where can I buy food?"Then I got the jolt. Somebody said, "Don't youknow? Everybody has a million dollars and nobodyhas to work any more."

"From The Freeman, March 1957. Reproduced by permissionof The Employers' Association of Chicago

At first I was stunned. I thought that somehow amistake, a ghastly mistake had been made—butthere was no mistake. It was really true. Everybodyhad a million dollars and thought that work wasover for him.

Then it dawned on me as never before that all ofus are dependent upon all of the rest of us; that toa small extent at least my labor had a place, apart, in the total welfare of mankind. With anangry shout I tossed to the winds even the thoughtof a million dollars.

Then I woke up. My dream was over. The sunwas shining, the birds singing, my wife rattling thebreakfast things. I looked out the window and sawa world of people moving about their tasks, eachcontributing a little to my life and living, just as Icontribute to theirs. I called to my wife, "Hurryup with that breakfast, sweetheart, I want to get towork."

EDITOR'S NOTE: This fable, reproduced by per-mission of The Employers' Association of Chicago,illustrates that money is not wealth. Nor has itexchange value except as the owners and pro-ducers of goods and services find that it facilitatestheir trading with one another.

A society of nothing but consumers is indeeda dream that no amount of money can bring torealization. Anyone who attempts to issue moneywith no provision for its redemption in goods orservices is due the same rude awakening that is instore for every dreamer of something for nothing.

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43. NOT WORTH A CONTINENTAL*

Pelatiah Webster

EDITOR S NOTE:

"Not worth a continental" is a descriptive phraseborn of an early American experiment in deficitfinancing. If its lessons are ignored or forgotten,that experience will have been as worthless as theContinental currency itself.

Pelatiah Webster, "an able though not conspic-uous citizen" of Philadelphia (1726-1795), iscredited by James Madison and others as havingbeen the first advocate of a constitutional conven-tion. Though he was not a delegate, many pointsin the Constitution conform to an outline he hadproposed several years prior to the Convention.

The "fatal mistakes" of deficit financing, infla-tion, and price control were understood by menlike Webster. Lessons learned the hard way duringthe period of revolutionary America had a deter-mining influence on those who founded the repub-lic.

The Continental Congress authorized the print-ing of paper money but depended upon enablinglegislation by the respective states under the Ten-der Acts to give negotiability to the irredeemablepaper and to keep it in circulation on a par withthe "hard money" of those days. Webster consid-ered it his duty as a citizen to criticize monetaryenforcement legislation then being proposed bythe Assembly of Pennsylvania. The proposal wasoffered by the Assembly for public considerationon November 29, and was enacted into law, despiteWebster's protest, on December 19, 1780.

It is too soon to tell the full impact of Webster'sobservations, for they were written with the hope"that our fatal mistakes may be a caution and awarning to future financiers who may live and actin any country which may happen to be in circum-stances similar to ours at that time." Yet the cir-c*mstances in which we find ourselves today, the

•First published December 13, 1780 in Philadelphia under thetitle "Strictures On Tender Acts"

penalties of deficit financing and other unecono-mic practices are the same as they were in 1780.

The text has been stripped of some archaisms ofgrammar and expression, but Webster's ideas andlucid style are intact.

The fatal error—that the credit and currency of theContinental money could be kept up and supportedby acts of compulsion—entered so deep into theminds of Congress and of all departments of admin-istration through the states that no considerationsof justice, religion, or policy, or even experienceof its utter inefficacy, could eradicate it. It seemedto be a kind of obstinate delirium, totally deaf toevery argument drawn from justice and right, fromits natural tendency and mischief, from commonsense, and even common safety.

Congress began, as early as January 11, 1776,to hold up and recommend this maxim of maniasm,when Continental money was but five months old.Congress then resolved that "whoever should re-fuse to receive in payment Continental bills, etc.,should be deemed and treated as an enemy of hiscountry, and be precluded from all trade and inter-course with the inhabitants . . ."—that is, should beoutlawed, which is the severest penalty, except oflife and limb, known in our laws.

These Fatal Measures

This ruinous principle was continued in practicefor five successive years, and appeared in allshapes and forms—in tender acts, in limitations ofprices, in awful and threatening declarations, inpenal laws with dreadful and ruinous punish-ments, and in every other way that could be de-vised. And all were executed with a relentlessseverity by the highest authorities then in being,namely, by Congress, assemblies and conventionsof the states, by committees of inspection (whose

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1 2 8 MONEY, CREDIT AND BANKING

powers in those days were nearly sovereign) andeven by military force. Men of all descriptionsstood trembling before this monster of force with-out daring to lift a hand against it during all thisperiod. Its unrestrained energy ever proved inef-fectual to its purposes, but in every instance in-creased the evils it was designed to remedy, anddestroyed the benefits it was intended to promote.At best its utmost effect was like that of watersprinkled on a blacksmith's forge, which indeeddeadens the flame for a moment, but never fails toincrease the heat and force of the internal fire.Many thousand families of full and comfortable for-tune were ruined by these fatal measures, and liein ruins to this day, without the least benefit to thecountry or to the great and noble cause in which wewere then engaged.

I do not mention these things from any pleasureI have in opening the wounds of my country or ex-posing its errors, but with a hope that our fatal mis-takes may be a caution and warning to future fi-nanciers who may live and act in any countrywhich may happen to be in circ*mstances similarto ours at that time.

A Standard of Value

The nature of a Tender-Act is no more or lessthan establishing by law the standard value ofmoney, and has the same use with respect to thecurrency that the legal standard pound, bushel,yard, or gallon has to those goods, the quantities ofwhich are usually ascertained by those weights andmeasures. Therefore, to call anything a pound orshilling, which really is not so, and make it a legalstandard, is an error of the same nature as dimin-ishing the standard bushel, yard, or gallon, or mak-ing a law that a foot shall be the legal yard, anounce the legal pound, a peck the legal bushel, ora quart the legal gallon, and compelling everybodyto receive all goods due to them by such deficientmeasures.

Further, to make anything the legal standard,which is not of fixed but variable nature, is anerror of the same kind and mischief as the others—for example, to make a turnip the standard poundweight, which may dry up in the course of a year toa pith of not more than two or three ounces, or tomake a flannel string the standard yard, which willshrink in using to half its length. The absurdity ofthis is too glaring to need anything further said onit.

But to come to the matter now in question. The

first observation which occurs to me is that thebills, which are made a tender, contain a publicpromise of money to be paid in six years. On whichI beg leave to remark that the best and most in-dubitable security of money to be paid in six years,or any future time, is not so good or valuable asready cash.

Therefore, the law which obliges a man to acceptthese bills instead of ready cash obliges him to re-ceive a less valuable thing in full payment of amore valuable one, and injures him to the amountof the difference. This is a direct violation of thelaws of commutative justice—laws grounded in thenature of human rights, supported by the most nec-essary natural principles, and enjoined by the mostexpress authority of God Almighty. No legislatureon earth should have right to infringe or abrogatethis freedom of choice in the exchange of goods forgoods.

Again, the security arising from the public prom-ise is not generally deemed certain. The publicfaith has been so often violated, and the sufferingsof individuals thence arising have been so multi-plied and extensive, that the general confidence ofour people in that security is much lessened. Sincea chance or uncertainty can never be so valuableas a certainty, those bills must and will be con-sidered as less valuable than they would be if thesecurity on which they depended were free of alldoubt or uncertainty; and consequently, the dis-count of their value will always be estimated by,and of course be equal to, this difference. There-fore, the injustice of forcing them on the subject atfull value of present cash is greatly increased.

These positions and reasonings are grounded onsuch notoriety of fact that any explanation or proofis needless; and I hope an objection against a law,drawn from the most manifest and acknowledgedinjustice of its operation and effect, will not bedeemed trivial or be easily set aside or got over.

An Honest Man

Suppose a man of grave countenance and char-acter should, in distress, apply to his neighbor forthe loan of 1000 silver dollars, with solemn prom-ise on his honor and truth to repay them in a month,and in the meantime the Tender-Act under consid-eration should pass into a law, and the borrower,at the month's end, should tender 1000 of the newpaper dollars in payment.

I beg leave here to ask of every member of theAssembly who voted for that law, and every other

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43. NOT WORTH A CONTINENTAL 129

man who is a member of this state, what theirsentiments of that action would be, and in whatlight they would view the borrower who tenderedthe paper dollars—that is, two-fifths of the debt1—in payment of the silver ones he had received:Would they consider him as an upright, honestman, or a shameless rascal?

In whichever of the two characters they maychoose to consider such a man, it may be proper tonote that the act in question, if passed into a law,would protect him, and not only so, but would sub-ject the lender to the loss of the whole money if herefused to receive it. This is a somewhat delicatematter which it is painful to dwell long upon. I willtherefore close what I have to say on it with a fewvery serious remarks, the truth, justice, and propri-ety of which I humbly submit to the reader:

1. The worst kind of evil, and that which corruptsand endangers any community most, is that iniquitywhich is framed by a law; for this places the mis-chief in the very spot—on the very seat—to whichevery one ought to look and apply for a remedy.

2. It cannot be consistent with the honor, the pol-icy, the interest, or character of an Assembly ofPennsylvania to make a law which, by its naturaloperation, shall afford protection to manifest injus-tice, deliberate knavery, and known wrong.

3. No cause or end can be so good—so heavenly inits origin, so excellent in its nature, so perfect in itsprinciples, and so useful in its operation—as to re-quire or justify infernal means to promote it. By in-fernal means I mean such as are most opposed toHeaven and its laws, most repugnant to naturalprinciples of equity which are all derived fromHeaven, and most destructive of the rights of hu-man nature which are essential to the happiness ofsociety. Such laws are engraven by Heaven on theheart of every man. Some wicked men have for-merly said, "Let us do evil, that good may come,"whose damnation is just.

But perhaps this sort of argument may not haveall the effect I could wish on the mind of everyreader. I therefore proceed to another argument,which goes to the nature and principle of the act it-self: The credit or value of money cannot, in thevery nature of the thing, be supplied, preserved, orrestored by penal laws or any coercive methods.The subject is incompatible to force; it is out of itsreach, and never can be made susceptible of it orcontrollable by it.

The thing which makes money an object of de-sire—which gives it strength of motive on the hearts

of all men—is the general confidence, the opinionwhich it gains as a sovereign means of obtainingeverything needful. This confidence, this opinion,exists in the mind only, and is not compellable orassailable by force, but must be grounded on thatevidence and reason which the mind can see andbelieve. And it is no more subject to the action offorce than any other passion, sentiment, oraffection of the mind; any more than faith, love, oresteem.

It is not more absurd to attempt to impel faithinto the heart of an unbeliever by fire and fa*ggot,or to whip love into your mistress with a cowskin,then to force value or credit into your money bypenal laws.

Trial and Error

You may, indeed, by force compel a man to de-liver his goods for money which he does not es-teem, and the same force may compel him to de-liver his goods without any money at all. But thecredit or value of the money cannot be helped byall this, as appears by countless examples. Plainfacts are stubborn and undeniable proof of this.Indeed, this has been tried among ourselves insuch extent of places and variety of shapes—and inevery instance been found ineffectual—that I amamazed to see any attempt to revive it under anydevisable form whatsoever. Countless are the in-stances of flagrant oppression and wrong, and evenruin, which have been the sad effects of thesedreadful experiments, with infinite detriment tothe community in general, without effecting in anyone instance the ends intended. The facts on whichthis argument depends are fresh in everyone'smemory.

I could wish, for the honor of my country, todraw a veil over what is past, and that wisdommight be derived from past errors sufficient to in-duce everyone to avoid them in the future. In con-clusion, from the contemplation of the nature ofthe thing, and of the facts and experiments whichhave been made in every variety of mode and sup-ported by every degree of power and exertion, itappears as plain and undeniable as intuitive proofthat the credit or value of money is not in its na-ture controllable by force. Therefore, any attemptto reach it in that way must end in disappointment.The greater the efforts—and the higher the author-ity which may be exerted in that way—the greatermust be the chagrin, shame, and mortificationwhen the baseless fabric shall vanish into smoke.

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Natural Value

The only possible method then of giving value orcredit to money is to give it such qualities, andclothe it with such circ*mstances, as shall make ita sure means of procuring every needful thing; formoney that will not answer all things is defective,and has not in it the full nature and qualities ofmoney. In this way only it will grow fast enoughinto esteem, and become a sufficient object of de-sire, to answer every end and use of money. There-fore, when the question is proposed: "How shallwe give credit or value to our money?" theanswer, the only true answer, is: "Bring it into de-mand, make it necessary to everyone, make it ahigh means of happiness and a sure remedy ofmisery." To attempt this in any other way is to goagainst nature, and of course into difficulty, onlyto obtain shameful disappointment in the end.

There is nothing better than to take things intheir natural way. A great and difficult work maybe accomplished by easy diligence if a good meth-od and a wise choice of means are adopted; but asmall work may be made difficult, very soon, iftaken at the wrong end and pursued by unnaturalmeans. There is a right and a wrong method ofdoing everything. You may lead with a thread whatyou cannot drive with whips and scorpions. TheBritons have found this to their cost in the un-natural means they have pursued to preserve andrecover their dominions in America. I wish wemight be made wise by their errors. Happy is hewho is made cautious by observing the dangers ofothers.

I would be willing to learn wisdom from GreatBritain. It is right to be taught even by an enemy.Amidst all their madness, and in all their distressesfor money, they never once thought of makingtheir bank or exchequer bills a tender, or support-ing their currency by penal laws. But these con-siderations may have little effect on some mindswho are not very delicate in their choice of means,but seem resolved to carry their point, God willingor not.

I therefore hasten to another topic of argument.It appears to me the act is founded in mistaken andvery bad policy, and by its natural operation mustproduce many effects extremely prejudicial to ourgreat and most important interests.

It seems plain to me that the act has a fatal ten-dency to destroy the great motives of industry, andto dishearten and discourage men of every profes-sion and occupation from pursuing their business

on any large scale or to any great effect. There-fore, it will prevent the production of those sup-plies derived from husbandry and manufactures,which are essential to our safety, support, andcomfort. Few men will bestow their labor, atten-tion, and good money, with zeal, to procure goodsand commodities for sale, which they know theymust sell for money which they esteem bad, or atbest doubtful.

The extent and dreadful effects of this are un-avoidable and immense. If the industry of thefarmer and tradesman is discouraged, and theycease to strive for large crops and fabrics, theconsequence must be a universal diminution andscarcity of the produce of the country and of themost important articles of living, as well as com-merce. The general industry of the country is ofsuch vast importance—is an object of such magni-tude—that to check it is to bring on ruin, poverty,famine, and distress, with idleness, vice, corrup-tion of morals, and every species of evil. As moneyis the sinews of every business, the introducing of adoubtful medium—and forcing it into currency bypenal laws—must weaken and lessen every branchof business in proportion to the diminution of in-ducement found in the money.

The same thing will render the procurement ofsupplies for the army difficult, if not utterly im-practicable. Most men will hold back their goodsfrom the market rather than sell them for money ofa doubtful credit. There will be no possible way ofcollecting them but to send a superior force intothe country and there take them by violence fromthe owner, which will occasion such an expense aswill double the cost of the supplies by the timethey get to the army, and be subject to a thousandfrauds. This is the most obvious and natural oper-ation of the act if we consider its own nature only,and it is confirmed by such ample experience, re-cent in the memory of every man, that it can leaveno doubt but all this mischief must follow the actfrom its first operation.

Bad Money Corrupts Men

I apprehend the act will, by its natural operation,tend to corrupt the morality of the people, sap thesupport, if not the very foundation, of our indepen-dence, lessen the respect due to our legislature,and destroy that reverence for our laws which isabsolutely necessary to their proper operation andthe peace and protection of society. Many peoplewill be so terrified with the apprehension of see-

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43. NOT WORTH A CONTINENTAL 131

ing their real substance—the fruit of their labor andanxious attention—converted into a bundle of paperbills of uncertain value, that to avoid this evil theywill have strong inducements to rack their inven-tion for all devisable ways and methods of avoidingit. This will give rise to countless frauds, ambigu-ities, lies, quibbles, and shams. It will introduce thehabit and give a kind of facility to the practice ofsuch guile and feats of art as will endanger the up-rightness, plain honesty, and noble sincerity whichever mark the character of a happy and virtuouspeople.

Many, who wish well to our independence andhave many necessaries for our army which theywould wish to supply, yet will be held back fromoffering their goods because of the doubtful valueof the bills in which those supplies must be paidfor. Instances of this sort I conceive will be sonumerous as greatly to affect the supplies of ourarmy and, of course, the support of our indepen-dence. The injuries and sufferings of people whoare compelled to take said bills in satisfaction ofcontracts for real money will induce them in theirrage to use the legislature, who formed the act,with great liberty and, perhaps, gross disrespect.The habit of reproaching the legislature and elud-ing the injurious act will become general, and pavethe way to an habitual and universal abhorrence ofour legislature and contempt of our laws, with akind of facility and artful dexterity in eluding theforce of the whole code.

I freely submit it to my readers as to whetherthese consequences are at aD unnatural or ill-drawn, if the surmises are at all groundless, or thepainting a whit too strong. No art of government ismore necessary than that of keeping up the dignityand respectability of the legislatures and allcourts and officers of government, and excitingand preserving in the hearts of the people a liighreverence for the laws. And anything which endan-gers these great supports of the state ought to beavoided as a deadly evil.

Bad Money Destroys Foreign Respect

The act, I apprehend, will give a bad appearanceto our credit, honor, and respectability in the eyesof our neighbors on this continent, and the nationsof Europe, and other more distant parts of theworld. For when they learn that our own peoplemust be compelled by the loss of half their estatesand imprisonment of their persons to trust the pub-lic faith, they wfll at once conclude there must be

some great danger, some shocking mischief dor-mant there, which the people nearest to and bestacquainted with it abhor so much. And of course,as they are out of the reach of our confiscations andimprisonments, they will have little inducement totrust or esteem us.

Finally, the act will give great exultation and en-couragement to our enemies, and induce them toprolong the war, and thereby increase the horridpenalty of imprisonment which is to last during thewar. When they see that our money has become sodetestable that it requires such an act as this tocompel our own people to take it, they must at leastbe convinced that its nature is greatly corruptedand its efficacy and use nearly at an end. When wesee the passionate admirers of a great beautyforced by lashes and tortures into her embraces, weat once conclude that she has lost her charms andhas become dangerous and loathsome.

It cannot be fairly objected to these stricturesthat they suppose the bills funded by this act areof less value than hard money. The act itself im-plies this. The Assembly never thought of wastingtime in framing an act to compel people to takeEnglish guineas, Portuguese joes, and Spanishdollars under penalty of confiscation and imprison-ment.

I dare think that there is not a man to be found,either in the Assembly or out of it, that wouldesteem himself so rich and safe in the possessionof 1000 of these dollars as of 1000 Spanish ones.The most effectual way to impress a sense of thedeficiency of the act on the minds of all men, andeven discover the idea which the Assembly them-selves have of it, is to enforce it by penalties ofextreme severity. For if there were no deficiency inthe act it could not possibly require such penaltiesto give it all necessary effect, nor is it likely thatthe Assembly would add the sanction of horridpenalties to any of their acts unless they thoughtt^ere was need of them.

The enormity of the penalty deserves remark.The penalty for refusing a dollar of these bills isgreater than for stealing ten times the sum.

Destroys Contracts and Credit

Further, the act alters, and of course destroys,the nature and value of public and private con-tracts, and this strikes at the root of all public andprivate credit. Who can lend money with any secur-ity, and of course, who can borrow, let his necessityand distress be ever so great? Who can purchase

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1 3 2 MONEY, CREDIT AND BANKING

on credit or make any contract for future payment?Indeed, all confidence of our fellow-citizens in oneanother is hereby destroyed, as well as all faith ofindividuals in the public credit.

Upon the whole matter, the bills must rest on thecredit of their funds, their quantity, and other cir-c*mstances. If these are sufficient to give them acurrency at full value, they will pass readily enoughwithout the help of penal laws. If these are not suf-ficient, they must and will depreciate and therebydestroy the end of their own creation. This willproceed from such strong natural principles, suchphysical causes, as cannot, in the nature of thething, be checked or controlled by penal laws or

any other application of force.These strictures are humbly offered to public

consideration. The facts alleged are all open toview and well understood. If the remarks andreasonings are just, they will carry conviction; ifthey are not so, they are liable to anyone's correc-tion.

Note!On March 18, 1780, the Continental Congress officially had

recognized the debauchery of its currency, allowing it to ex-change for specie at the rate of 40:1. By the time this piece waswritten, the unofficial exchange rate had further widened to100:1. This probably explains Webster's illustration—"two-fifthsof the debt."

44. THE VALUE OF MONEYH

Hans F. Sennholz

Most economists are in agreement that the infla-tion in the United States during the past threeyears has been the worst since the early 1940's,taking account of both severity and duration. Butthey cannot agree on the nature of the inflationthat is engulfing the American economy. To some,inflation denotes a spectacular rise in consumerprices; to others, an excessive aggregate demand;and to at least one economist, it is the creation ofnew money by our monetary authorities.

This disagreement among economists is morethan an academic difference on the meaning of apopular term. It reflects professional confusion asto the cause of the inflation problem and the poli-cies that might help to correct it.

A review of some basic principles of economicsthat are applicable to money may shed light on theproblem.

Two basic questions need to be answered: (1)What are the factors that originally afforded valueto money, and (2) What are the factors that effectchanges in the "objective exchange value of mon-ey" or its purchasing power?

Money is a medium of exchange that facilitatestrade in goods and services. Wherever people pro-

•From The Freeman, November 1969

gressed beyond simple barter, they began to usetheir most marketable goods as media of exchange.In primitive societies they used cattle, or measuresof grain, salt, or fish. In early civilizations wherethe division of labor extended to larger areas, goldor silver emerged as the most marketable good andfinally as the only medium of exchange, calledmoney. It is obvious that the chieftains, kings, andheads of state did not invent the use of money. Butthey frequently usurped control over it wheneverthey suffered budget deficits and could gain rev-enue from currency debasem*nt.

When an economic good is sought and wanted,not only for its use in consumption or productionbut also for purposes of exchange, to be held inreserve for later exchanges, the demand for it obvi-ously increases. We may then speak of two partialdemands which combine to raise its value in ex-change—its purchasing power.

The Origin of Money Value

People seek money because it has purchasingpower; and part of this purchasing power is gen-erated by the people's demand for money. But isthis not reasoning in a vicious circle?

It is not! According to Ludwig von Mises' "re-

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44. THE VALUE OF MONEY 133

gression theory," we must be mindful of the timefactor. Our quest for cash holdings is conditionedby money purchasing power in the immediate past,which in turn was affected by earlier purchasingpower, and so on until we arrive at the very incep-tion of the monetary demand. At that particularmoment, the purchasing power of a certain quan-tity of gold or silver was determined by its non-monetary uses only.

This leads to the interesting conclusion that theuniversal use of paper monies today would be in-conceivable without their prior use as "substitutes"for real money, such as gold and silver, for whichthere was a nonmonetary demand. Only when mangrew accustomed to these substitutes, and govern-ments deprived him of his freedom to employgold and silver as media of exchange, did govern-ment tender paper emerge as the legal or "fiatmoney." It has value and purchasing power, al-though it lacks any nonmonetary demand, becausethe people now direct their monetary demand to-ward government tender paper. If for any reasonthis public demand should cease or be redirectedtoward real goods as media of exchange, the fiatmoney would lose its entire value. The ContinentalDollar and various foreign currencies over theyears illustrate the point.

On Demand and Supply

The purchasing power of money is determinedby the demand for and supply of money, like theprices of all other economic goods and services.The particular relation between this demand andsupply determines its particular purchasing power.So, let us first look at those factors that exert aninfluence on individual demand for money.

As money is a medium of exchange, our demandfor it may be influenced by considerations of factsand circ*mstances either on the goods side of theexchange or on the money side. Therefore, we mayspeak of goods-induced factors and money-inducedfactors.

A simple example may illustrate the former. Letus assume we live in a medieval town that is cut offfrom all fresh supplies by an enemy army. There isgreat want and starvation. Although the quantityof money did not change—no gold or silver has leftour beleaguered town—its purchasing power mustdecline. For everyone seeks to reduce his cashholdings in exchange for some scarce food in orderto assure survival.

The situation is similar in all cases where the

supply of available goods is decreased although thequantity of money in the people's cash holdings re-mains unchanged. In a war, when the channels ofsupply are cut off by the enemy or economic out-put is reduced for lack of labor power, the value ofmoney tends to decline and goods prices rise eventhough the quantity of money may remain un-changed. A bad harvest in an agricultural economymay visibly weaken the currency. Similarly, a gen-eral strike that paralyzes an economy and greatlyreduces the supply of goods and services raisesgoods prices and simultaneously lowers the pur-chasing power of money. In fact, every strike orsabotage of economic production tends to affectprices and money value even though this may notbe visible to many observers.

Some economists also cite the level of taxationas an important factor in the determination of theexchange value of money. According to ColinClark, whenever governments consume more than25 per cent of national product, the reduction inproductive capacity as a result of such an oppres-sive tax burden causes goods prices to rise and thepurchasing power of money to fall. According tothat view, with which one may disagree, high ratesof taxation are the main cause of "inflation." Atany rate, there can be no doubt that the Americandollar has suffered severely from the burdens ofFederal, state, and local government spending andtaxing that exceed 35 per cent of American na-tional product.

Yet, this purchasing power loss of the dollarwould have been greater by far if a remarkablerise in industrial productivity had not worked inthe opposite direction. In spite of the ever-growingburden of government and despite the phenomenalincrease in the supply of money (to be further dis-cussed below), both of which would reduce thevalue of the dollar, American commerce and indus-try managed to increase the supply of marketablegoods, thus bolstering the dollar's purchasing pow-er. Under most difficult circ*mstances, business-men managed to form more capital and improveproduction technology, and thus made availablemore and better economic goods which in turnhelped to stabilize the dollar. Without this remark-able achievement by American entrepreneurs andcapitalists, the U.S. dollar surely would have fol-lowed the way of many other national currenciesto radical depreciation and devaluation.

There also are a number of factors that affect thedemand for money on the money side of an ex-change. A growing population, for instance, with

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134 MONEY, CREDIT AND BANKING

millions of maturing individuals eager to estab-lish cash holdings, generates new demand, whichin turn tends to raise the purchasing power ofmoney and to reduce goods prices. On the otherhand, a declining population would generate theopposite effect.

Changes in the division of labor bring aboutchanges in the exchange value of money. Increasedspecialization and trade raises the demand and ex-change value of money. The nineteenth centuryfrontier farmer who tamed the West with plow andgun was largely self-sufficient. His demand formoney was small when compared with that of hisgreat grandson who raises only corn and buys allhis foodstuff in the supermarket. Under a modernand a highly advanced division of labor, one needsmoney for the satisfaction of all his wants throughexchange. It is obvious that such demand tends toraise the exchange value of money. On the otherhand, deterioration of this division of labor and re-turn to self-sufficient production, which we can ob-serve in many parts of Asia, Africa, and SouthAmerica, generates the opposite effect.

Development and improvement of a monetaryclearing system also exert an influence towardlower money value. Clearing means offsetting pay-ments by banks or brokers. It reduces the demandfor money, as only net balances are settled by cashpayments.

The American clearing system which graduallydeveloped over more than 130 years from local toregional and national clearing, slowly reduced theneed and demand for cash and thus its purchasingpower. Of course, this reduction of the dollar's ex-change value was negligible when compared withthat caused by other factors, especially the huge in-crease in money supply.

Business practices, too, may influence the de-mand for money and therefore its value. It is cus-tomary for business to settle its obligations on thefirst of the month. Tax payments are due on certaindates. The growing popularity of credit cards re-duces the need for money holdings throughoutthe month, but concentrates it at the beginning ofthe month when payments fall due. All such varia-tions in demand affect the objective exchangevalue of money.

The Desires of Individuals forLarger or Smaller Holdings

The most important determinant of purchasingpower of money under this heading of "money-

induced factors" is the very attitude of the peopletoward money and their possession of certain cashholdings. They may decide for one reason or an-other to increase or reduce their holdings. An in-crease of cash holdings by many individuals tendsto raise the exchange value of money, reduction ofcash holdings tends to lower it.

This is so well understood that even the mathe-matical economists emphasize the money "veloc-ity" in their equations and calculations of moneyvalue. Velocity of circulation is defined as theaverage number of times in a year which a dollarserves as income (the income velocity) or as an ex-penditure (the transaction's velocity). Of course,this economic use of a term borrowed from physicsignores acting man who increases or reduces hiscash holdings. Even when it is in transport, moneyis under the control of its owners who choose tospend it or hold it, make or delay payment, lendor borrow. The mathematical economist whoweighs and measures, and thereby ignores thechoices and preferences of acting individuals, istempted to control and manipulate this "velocity"in order to influence the value of money. He mayeven blame individuals (who refuse to act in ac-cordance with his model) for monetary depre-ciation or appreciation. And governments are onlytoo eager to echo this blame; while they are creat-ing ever new quantities of printing press money,they will restrain individuals in order to controlmoney velocity.

It is true, the propensity to increase or reducecash holdings by many people exerts an importantinfluence on the purchasing power of money. Butin order to radically change their holdings, individ-uals must have cogent reasons. They endeavor toraise their holdings whenever they foresee depres-sions ahead. And they usually lower their holdingswhenever they anticipate more inflation and de-clining money value. In short, they tend to reactrationally and naturally to certain trends and pol-icies. Government cannot change or prevent thisreaction; it can merely change its own policies thatbrought forth the reaction.

The Supply of Money

No determinant of demand, whether it affectsthe goods side of an exchange or the money side,is subject to such wide variations as is the supplyof money. During the age of the gold coin standardwhen gold coins were circulating freely, the supplyof money was narrowly circ*mscribed by the sup-

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44. THE VALUE OF MONEY 135

ply of gold. But today when governments havecomplete control over money and banking, whencentral banks can create or withdraw money atwill, the quantity of money changes significantlyfrom year to year, even from week to week. Thestudent of money and banking now must carefullywatch the official statistics of money supply inorder to understand current economic trends.

Of course, the ever-changing supply of moneymust not be viewed as a factor that evenly anduniformly changes the level of goods prices. Thetotal supply of money in a given economy does notconfront the total supply of goods. Changes inmoney supply always act through the cash hold-ings of individuals, who react to changes in theirpersonal incomes and to changing interest rates inthe loan market. It is through acting individualsthat supply changes exert their influences on var-ious goods prices.

In the United States, we have two monetary au-thorities that continually change the money sup-ply: the U.S. Treasury and the Federal ReserveSystem. As of February 28, 1969, the U.S. Trea-sury had issued some $6.7 billion of money, ofwhich $5.1 billion were fractional coins. The Fed-eral Reserve System had issued $46.3 billion innotes and, in addition, was holding some $22 bil-lion of bank reserves. Commercial banks wereholding approximately $150 billion in demand de-posits and some $201 billion in time deposits, allof which are payable on demand in "legal money,"which is Federal Reserve and Treasury money.

How Government Creates Money

The vast power of money creation held by theFederal Reserve System, which is our central bankand monetary arm of the U.S. Government, be-comes visible only when we compare today's sup-ply of money with that in the past. Let us, there-fore, look at the volume of Federal Reserve Bankcredit on various dates since 1929:

Date1929 June1939 Dec.1949 Dec.1959 Dec.1969 Aug. 20

Total in Billions$ 1.3

2.622.529.458.2

SOURCE: Federal Reserve Bulletins.

These figures clearly reveal the nature and ex-tent of the inflation that has engulfed us since theearly 1930's. The 1940's and again the 1960'sstand out as the periods of most rapid inflation andcredit expansion.

Why and how do our "monetary authorities"create such massive quantities of money that in-evitably lead to lower money value? During the1940's, the emergency argument was cited to jus-tify the printing of any quantity the governmentwanted for the war effort. During the 1960's, theFederal government through its Federal ReserveSystem was printing feverishly in order to achievefull employment and a more desirable rate of eco-nomic growth. Furthermore, the ever-growing pub-lic demand for economic redistribution inflictedbudgetary deficits, the financing of which was facil-itated by money creation.

How was it done? The Federal Reserve has atit* disposal three different instruments of controlwhich can be used singly or jointly to change themoney supply. It may conduct "open-market pur-chases," i.e., it buys U.S. Treasury obligations inthe capital market and pays for them with newly-created cash or credit. Nearly all the money issuedsince 1929 was created by this method. Or, theFederal Reserve may lower its discount rate, whichis the rate it charges commercial banks for accom-modation. If it lowers its rate below that of the mar-ket, demand will exceed supply, which the FederalReserve then stands ready to provide. Or finally,the Federal Reserve may reduce the reserve re-quirements of commercial banks. Such a reduc-tion will set Federal Reserve money free for loansor investments by commercial banks.

It does not matter how the new money supply iscreated. The essential fact is the creation by themonetary authorities. You and I cannot printmoney, for this would be counterfeiting and pun-ishable by law. But our monetary authorities arecreating new quantities every day of the week atthe* discretion of our government leaders. This factalone explains why ours is an age of inflation andmonetary destruction.

Variable Responses

The Quantity Theory, which offers one of theoldest explanations in economic literature, demon-strates the connection between variations in thevalue of money and the supply of money. Of course,it is erroneous to assume, as some earlier econo-mists have done, that changes in the value of mon-ey must be proportionate to changes in the quan-tity of money, so that doubling the money supplywould double goods prices and reduce by one-halfthe value of money.

As was pointed out above, changes in supply al-

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ways work through the cash holdings of the people.When the government resorts to a policy of infla-tion, some people may react by delaying theirpurchases of certain goods and services in the hopethat prices will soon decline again. In other words,they may increase their cash holdings and therebycounteract the price-raising effect of the govern-ment policy. From the inflators' point of view, thisreaction is ideal, for they may continue to inflatewhile these people through their reaction may pre-vent the worst effects of inflation. This is probablythe reason why the U.S. Government, through postoffice posters, billboards, and other propaganda,endeavors to persuade the American people to savemore money whenever the government itself re-sorts to inflation.

When more and more individuals begin to real-ize that the inflation is a willful policy and that itwill not end very soon, they may react by reducingtheir cash holdings. Why should they hold cashthat depreciates, and why should they not pur-chase more goods and services right now beforeprices rise again? This reaction intensifies theprice-raising effects of the inflation. While govern-ment inflates and people reduce their money de-mand, goods prices will rise rapidly and the pur-chasing power of money decline accordingly.

It may happen that the government may tem-porarily halt its inflation, and yet the people con-tinue to reduce their cash demand. The centralbank inflators may then point to the stability of the

money supply, and blame the people for "irra-tional" behavior and reaction. The governmentthus exculpates itself and condemns the spendinghabits of the people for the inflation. But in real-ity, the people merely react to past experiences andtherefore anticipate an early return of inflationarypolicies. The monetary development during mostof 1969 reflected this situation.

Finally, the people may totally and irrevocablydistrust the official fiat money. When in despera-tion they finally conclude that the inflation will notend before their money is essentially destroyed,they may rush to liquidate their remaining cashholdings. When any purchase of goods and servicesis more advantageous than holding rapidly depre-ciating cash, the value of money approaches zero.The money then ceases to be money, the solemedium of exchange.

When government takes control over money, itnot only takes possession of an important com-mand post over the economic lives of the peoplebut also acquires a lucrative source of revenue.Under the ever-growing pressures for governmentservices and functions, this source of revenue—which can be made to flow quietly without muchnotice by the public—constitutes a great temptationfor weak administrators who like to spend moneywithout raising it through unpopular taxation. Thesupply of money not only is the best indicator asto the value of money, but reflects the state of thenation and the thinking of the people.

45. THE GOLD PROBLEM

Ludwig von Mises

Why gold?Because, as conditions are today and for the time

that can be foreseen today, the gold standard alonemakes the determination of money's purchasingpower independent of the ambitions and machina-tions of dictators, political parties, and pressuregroups. The gold standard alone is what the nine-teenth century liberals, the champions of repre-

°From The Freeman, June 1965

sentative government, civil liberties, and pros-perity for all, called sound money.

The eminence and usefulness of the gold stan-dard consists in the fact that it makes the supplyof money depend on the profitability of mininggold, and thus checks large-scale inflationary ven-tures on the part of governments. The gold stan-dard did not fail. The governments sabotaged itand still go on sabotaging it. But no government ispowerful enough to destroy the gold standard as

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45. THE GOLD PROBLEM 137

long as the market economy is not entirely sup-pressed by the establishment of socialism in everypart of the world.

Governments believe that it is the gold stan-dard's fault alone that their inflationary schemesnot only fail to produce the expected benefits butunavoidably bring about conditions that also in theeyes of the rulers themselves and of all of the peo-ple are considered as much worse than the allegedor real evils they were designed to eliminate. Butfor the gold standard, they are told by hosts ofpseudo-economists, they could make everybodyperfectly prosperous.

Let us test the three doctrines advanced for thesupport of this fable of government omnipotence.

The Santa Claus Power of the State

The state is God, said Ferdinand Lassalle, thefounder of the German socialist movement. Assuch the state has the power to "create" unlimitedquantities of money and thus to make everybodyhappy. Irreverent people branded such a policy of"creating" money as inflation. The official termi-nology calls it nowadays "deficit spending."

But whatever the name used in dealing with thisphenomenon may be, its meaning is obvious. Thegovernment increases the quantity of money incirculation. Then a greater quantity of money"chases," as a rather silly but popular way of talk-ing about these problems says, a quantity of goodsand services that has not increased. The govern-ment's action did not add anything to the availableamount of useful things and services. It merelymakes the prices paid for them soar.

If the government wants to raise the income ofsome people—e.g., government employees—it has toconfiscate by taxation a part of some other peo-ple's incomes and to distribute the amount col-lected among its employees. Then the taxpayersare forced to restrict their spending, while the re-cipients of the higher salaries are increasing theirspending to the same amount. There does not re-sult a conspicuous change in the purchasing powerof the monetary unit.

But if the government provides the money itwants for the payment of higher salaries by print-ing it, the new money in the hands of the benefi-ciaries of the higher salaries constitutes on themarket an additional demand for the not increasedquantity of goods and services offered for sale. Theunavoidable result is a general tendency of pricesto rise.

Any attempts the governments and their propa-ganda offices make to conceal this concatenationof events are vain. Deficit spending means increas-ing the quantity of money in circulation. That theofficial terminology avoids calling it inflation, is ofno avail whatever.

The government and its chiefs do not have thepowers of the mythical Santa Claus. They cannotspend but by taking out of the pockets of some peo-ple.

The "Cheap Money" Fallacy

Interest is the difference in the valuation of pres-ent goods and future goods. It is the discount in thevaluation of future goods as against that of pres-ent goods. It cannot be "abolished" as long as peo-ple prefer an apple available today to an apple avail-able only in a year, in ten years, or in a hundredyears. The height of the originary rate of interest,which is the main component of the market rate ofinterest as determined on the loan market, reflectsthe difference in people's valuation of present andfuture satisfaction of needs. The disappearance ofinterest, that is an interest rate of zero, would meanthat people do not care a whit about satisfying anyof their present wants and are exclusively intentupon satisfying their future wants, their wants ofthe later years, decades, and centuries to come.People would only save and invest and never con-sume. On the other hand, if people were to stopmaking any provision for the future, be it even thefuture of the tomorrow, would not save at all andconsume all capital goods accumulated by previousgenerations, the rate of interest would rise beyondany limits.

It is thus obvious that the height of the marketrate of interest ultimately does not depend on thewhims, fancies, and the pecuniary interests of thepersonnel operating the government apparatus ofcoercion and compulsion, the much referred to"public sector" of the economy. But the govern-ment has the power to push the Federal ReserveSystem and the banks subject to it into a policy ofcheap money. Then the banks are expanding cred-it. Underbidding the rate of interest as establishedon the not-manipulated loan market, they offeradditional credit created out of nothing. Thus theyare intentionally falsifying the businessmen's esti-mation of market conditions. Although the supplyof capital goods (that can only be increased byadditional saving) remained unchanged, the illu-sion of a richer supply of capital is conjured up.

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Business is induced to embark upon projects whicha sober calculation, not misled by the cheap-moneyventures, would have disclosed as malinvestments.The additional quantities of credit inundating themarket make prices and wages soar. An artificialboom, a boom built entirely upon the illusions ofeasy money, develops. But such a boom cannotlast. Sooner or later it must become clear that,under the illusions created by the credit expansion,business has embarked upon projects for the ex-ecution of which it is not rich enough. When thismalinvestment becomes visible, the boom col-lapses. The depression that follows is the processof liquidating the errors committed in the ecstasiesof the artificial boom, is the return to calm reason-ing and a reasonable conduct of affairs within thelimits of the available supply of capital goods. It isa painful process, but it is a process of recovery.

Credit expansion is not a nostrum to make peo-ple happy. The boom it engenders must inevitablylead to a debacle.

If it were possible to substitute credit expansion(cheap money) for the accumulation of capitalgoods by saving, there would not be any povertyin the world. The economically backward nationswould not have to complain about the insufficiencyof their capital equipment. All they would have todo for the improvement of their conditions wouldbe to expand credit more and more. No "foreignaid" schemes would have emerged. In grantingforeign aid to the backward nations, the Americangovernment implicitly acknowledges that creditexpansion is no substitute for capital accumula-tion through saving.

The Failure of Minimum WageLegislation and of Labor Unionism

The height of wage rates is determined by theconsumers' appraisal of the value the worker'slabor adds to the value of the article available forsale. As the immense majority of the consumersare themselves earners of wages and salaries, thismeans that the determination of the compensationfor work and services rendered is made by thesame kind of people who are receiving these wagesand salaries. The fat earnings of the movie star andthe boxing champion are provided by the welders,street sweepers, and charwomen who attend theperformances and matches.

An entrepreneur who would try to pay a hiredman less than the amount this man's work adds tothe value of the product would be priced out of the

labor market by the competition of other entrepre-neurs eager to earn money. On the other hand, noentrepreneur can pay more to his helpers than theamount the consumers are prepared to refund tohim in buying the product. If he were to pay high-er wages, he would suffer losses and would beejected from the ranks of the businessmen.

Governments decreeing minimum wage lawsabove the level of the market wage rates restrictthe number of hands that can find jobs. They areproducing unemployment of a part of the laborforce. The same is true for what is euphemisticallycalled "collective bargaining." The only differencebetween the two methods concerns the apparatusenforcing the minimum wage. The government en-forces its orders in resorting to policemen andprison guards. The unions "picket." They and theirmembers and officials have acquired the powerand the right to commit wrongs to person andproperty, to deprive individuals of the means ofearning a livelihood, and to commit many otheracts which no one can do with impunity.1 Nobodyis today in a position to disobey an order issuedby a union. To the employers no other choice is leftthan either to surrender to the dictates of the un-ions or to go out of business.

But governments and unions are impotentagainst economic law. Violence can prevent theemployers from hiring help at potential marketrates, but it cannot force them to employ all thosewho are anxious to get jobs. The result of thegovernments' and the unions' meddling with theheight of wage rates cannot be anything else thanan incessant increase in the number of unemployed.

To prevent this outcome the government-manip-ulated banking systems of all Western nations areresorting to inflation. Increasing the quantity ofmoney in circulation and thereby lowering the pur-chasing power of the monetary unit, they are cut-ting down the oversized payrolls to a height conso-nant with the state of the market. This is todaycalled Keynesian full-employment policy. It is infact a method to perpetuate by continued inflationthe futile attempts of governments and labor un-ions to meddle with the conditions of the labormarket. As soon as the progress of inflation hasadjusted wage rates so far as to avoid a spreadof unemployment, government and unions resumewith renewed zeal their ventures to raise wagerates above the level at which every job-seeker canfind a job.

The experience of this age of the New Deal, theFair Deal, the New Frontier, and the Great Society

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46. HOW MUCH MONEY? 139

confirms the fundamental thesis of British nine-teenth-century liberalism: there is but one meansto improve the material conditions of all of thewage earners, viz., to increase the per-head quotaof capital invested. This result can only be broughtabout by additional saving and capital accumula-tion, never by government decrees, labor unionviolence and intimidation, and inflation. The foesof the gold standard are wrong also in this regard.

U. S. Cold Holdings Shrinking

In many parts of the earth an increasing numberof people realize that the U. S. and most of theother nations are firmly committed to a policy ofprogressing inflation. They have learned enoughfrom the experience of the last decades to concludethat on account of these inflationary policies theounce of gold will one day become more expensivein terms both of the currency of the U. S. and oftheir own country. They are alarmed and wouldlike to avoid being victimized by this outcome.

Americans are forbidden to own gold coins andgold ingots. Their attempts to protect their finan-

cial assets consist in the methods that the Germansin the most spectacular inflation that history knowscalled "Fkicht in die Sachwerte." They are invest-ing in common stock and real estate and prefer tohave debts payable in legal tender money to havingclaims payable in it.

Even in the countries in which people are free tobuy gold there are up to now no conspicuous pur-chases of gold on the part of financially potentindividuals and institutions. Up to the moment atwhich French agencies began to buy gold, the buy-ers of gold were mostly people with modest in-comes anxious to keep a few gold coins as a reservefor rainy days. It was the purchases on the part ofsuch people that via the London gold market re-duced the gold holdings of the United States.

There is only one method available to prevent afarther reduction of the American gold reserve:radical abandonment of deficit spending as well asof any kind of "easy money" policy.

Note1 Cf. Roscoe Pound, Legal Immunities of Labor Unions, Wash-

ington, D. C , 1957, p. 21.

46. HOW MUCH MONEY?

Percy L. Greaves, Jr.

Most people want more money. So do I. But Iwouldn't keep it long. I would soon spend it for thethings I need or want. So would most people. Inother words, for most of us, more money is merelya means for buying what we really want. Only mis-ers want more money for the sake of holding ontoit permanently.

However, if more money is to be given out, mostof us would like to get some of it. If we can't getany for ourselves, the next best thing, from ourviewpoint, would be for it to be given to those whomight buy our goods or services. For then it islikely their increased spending would make usricher.

•From The Freeman, May 1965

From such reasoning, many have come to be-lieve that spreading more money around is a goodthing—not only for their personal needs, but also forsolving most all of the nation's problems. For them,more money becomes the source of prosperity. Sothey approve all sorts of government programs forpumping more money into the economy.

If such programs are helpful, why not have moremoney for everyone? Why not have the govern-ment create and give everyone $100 or $200 or,better yet, $1,000? Why not have the governmentdo it every year or every month or, better yet,every week?

Of course, such a system would not work. Butwhy not? When we understand why not, we willknow why every attempt to create prosperity by

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140 MONEY, CREDIT AND BANKING

creating more money will not work. When we havelearned the answer, we shall have taken a long steptoward eliminating the greatest cause of both hu-man misery and the decay of great civilizations.

One way to find the answer is to analyze thelogic which seemingly supports the idea that moremoney in a nation's economy means more pros-perity for all. If we can spot an error in the chainof reasoning, we should be able to make it clearto others. Once such an error is generally recog-nized, the popularity of government money-cre-ation programs will soon disappear. Neither moralleaders nor voting majorities will long endorseideas they know to be false.

Perhaps the basic thought that supports an ever-increasing money supply is the popular idea thatmore business requires more money: if we producemore goods and services, customers must havemore money with which to buy the additionalgoods and services. From this, it is assumed thatthe need for prosperity and "economic growth"makes it the government's duty to pump out morepurchasing power to the politically worthy in theform of more money or subsidies paid for by thecreation of more money.

Support for such reasoning is found in an ideathat goes back at least to medieval days. In thethirteenth and fourteenth centuries some of theworld's best minds believed there was a "justprice" for everything. The "just price" was thenthought to be determined by a fixed cost of produc-tion. Actual prices might fluctuate slightly fromday to day or season to season, but they were al-ways expected to return to the basic "just price,"reflecting the supposedly never-changing numberof man-hours required for production.

From such thinking, it naturally follows that in-creased production can only be sold when consum-ers have more money. More goods might be need-ed for any of several reasons, let us say for an in-creased population. However, no matter how muchthey were needed, they would remain unsold andunused unless buyers were supplied additionalfunds with which to buy them at, or near, the "justprice."

What is the situation in real life? What do busi-nessmen do when they have more goods to sellthan customers will buy at their asking price?

They reduce prices. They advertise sales atmark-down prices. If that doesn't work, they re-duce their prices again and again until all their sur-plus goods are sold. Any economic good can al-ways be sold, if the price is right.

The way to move increased production into con-sumption is to adjust prices downward. Business-men, who have made mistakes in judging consum-er wants, will suffer losses. Those who providewhat consumers prefer will earn profits. Lowerprices will benefit all consumers and mean lowercosts for future business operations. Under such aflexible price system, there is no need for moremoney. Businessmen soon learn to convert avail-able supplies of labor and raw materials into thosegoods for which consumers will willingly pay thehighest prices.

What Are Prices?

Prices are quantities of money. They reflect acomplex of interrelated market conditions and in-dividual value judgments at any one time andplace. Each price reflects not only the availablesupply of that good in relation to the supply of allother available goods and services, but also the de-mand of individuals for that good in relation totheir demand for all other available goods andservices.

But even this is only one side of price-determin-ing factors. The money side must also be taken intoconsideration. Every price also reflects not only thesupply of money held by each market participant,but also—since very few people ever spend theirlast cent—how much money each participant de-cides to keep for his future needs and unknowncontingencies.

Prices thus depend on many things besides thecost of production. They depend primarily on therelative values that consumers place on the satis-factions they expect to get from owning the partic-ular mixture of goods and services that they select.However, prices also depend on the amount ofmoney available both to each individual and toall individuals. In a free market economy, unhamp-ered prices easily adjust to reflect consumer de-mand no matter what the total supply of moneyor who owns how much of it.

What is This Thing Called Money?

Money is a commodity that is used for facilitat-ing indirect exchange. Money first appeared whenindividuals recognized the advantages of the divi-sion of labor and saw that indirect exchange waseasier and more efficient than the clumsy, time-consuming direct exchange of barter.

In the earliest days of specialized production,

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46. HOW MUCH MONEY? 141

those who made shoes or caught fish soon foundthat if they wanted to buy a house, it was easier tobuy it with a quantity of a universally desired com-modity than with quantities of shoes or fresh fish.

So, they first exchanged their shoes or fish for aquantity of that commodity which they knew wasmost in demand. Such a commodity would keepand not spoil. It could be divided without loss.And most important, all people would value it nomatter what the size of their feet or their desirefor fish. The commodity which best meets thesequalifications soon becomes a community's medi-um of exchange, or money.

Many things have been used as money. In thiscountry we once used the wampum beads of Indi-ans and the shells found on our shores. As timepassed, reason and experience indicated that thecommodities best suited for use as money were theprecious metals, silver and gold. By the beginningof this century, the prime money of the world hadbecome gold. And so it is today. Gold is the com-modity most in demand in world markets.

Money is always that commodity which all sell-ers are most happy to accept for their goods or ser-vices, if the quantity or price offered is consideredsufficient. Money is thus the most marketable com-modity of a market society. It is also the most im-portant single commodity of a market society. Thisis so because it forms a part of every market trans-action and whatever affects its value affects everytransaction and every contemplated transaction.

Kinds of Goods

There are three types of economic goods:

1. Consumers' goods.2. Producers' goods.3. Money.

Consumers' goods are those goods which arevalued because they supply satisfaction to thosewho use or consume them. Producers' goods aregoods which are valued because they can be usedto make or produce consumers' goods. They in-clude raw materials, tools, machines, factories,railroads, and the like. Money is that good whichis valued because it can be used as a medium ofexchange. It is the only type of economic good thatis not consumed by its normal usage.

In the case of consumers' goods and producers'goods, every additional unit that is produced andoffered for sale increases the wealth not only of theowner but of everyone else. Every additional auto-

mobile that is produced not only makes the manu-facturer richer but it also makes every member ofthe market society richer.

How?The more useful things there are in this world,

the larger the numbers of human needs or wantsthat can be satisfied. The market system is a proc-ess for distributing a part of every increase in pro-duction to every participant in that market econo-my. When there is no increase in the money sup-ply, the more goods that are offered for sale, thelower prices will be—and, consequently, the moreeach person can buy with the limited amount ofmoney he has to spend. So every increase in pro-duction for a market economy normally meansmore for every member of that economy.

On the other hand, when any consumers' goodsor producers' goods are lost or destroyed, not onlythe owner but all members of the market commu-nity suffer losses. With fewer goods available in themarket place, and assuming no increase in themoney supply, prices must tend to rise. Every-body's limited supply of money will thus buy less.

Recently, a Montreal apartment house was de-stroyed by an explosion. The loss to the occupantsand the owners or insurance companies is obvious.The loss to all of us may be less obvious, but never-theless it is a fact.

The market society has lost forever the servicesand contributions of all those who were killed. Ithas also lost for a time the contributions of allthose whose injuries temporarily incapacitatedthem. There is also a loss for all of us in the factthat human services and producers' goods must beused to clear away the wreckage and rebuild whatwas destroyed. This diversion of labor and produc-ers' goods means the market will never be able tooffer the things that such labor and producers'goods could otherwise have been used to produce.With fewer things available in the market, priceswill tend to be higher. Such higher prices will forceeach one of us to get along with a little less thanwould have been the case if there had been no ex-plosion.

Thus, we are all sufferers from every catastro-phe. Be it an airplane crash, a tornado, or a fire insome distant community, we all lose a little bit.And all these little bits often add up to a significantsum.

This is particularly true of war losses. EveryAmerican killed in Vietnam hurts every one of usnot only in the heart but also in the pocketbook.Our government must supply some monetary com-

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142 MONEY, CREDIT AND BANKING

pensation to his family and an income, howeverlittle, to his dependents. In such cases, the loss maycontinue for years. The killed man's services arelost for his normal life span and his dependentsbecome a long-term burden on the nation's tax-payers and consumers. Such losses can never bemeasured or calculated, but they are real none-theless.

So, in a market society every increase in con-sumers' goods or producers' goods permits us tobuy more with whatever money we have, and everydecrease in consumers' goods or producers' goodsmeans ultimately higher prices and less for ourmoney. Increased supplies of such economic goodshelp both the producers and everyone else whoowns one or more units of money.

Limited Goods Available

With money, the situation is quite different. Anyincrease in the supply of money helps those whor*ceive some of the new supply, but it hurts allthose who do not. Those who receive some of thenew supply can rush out and buy a larger shareof the goods and services in the market place.Those who receive none of the new money supplywill then find less available for them to buy. Priceswill rise and they will get less for their money.

Pumping more money into a nation's economymerely helps some people at the expense of others.It must, by its very nature, send prices up higherthan they would have been, if the money supplyhad not been increased. Those with no part of thenew money supply must be satisfied with less. Itdoes not and cannot increase the quantity of goodsand services available.

There are some who claim that increasing themoney supply puts more men to work. This canonly be so when there is unemployment resultingfrom pushing wage rates above those of a freemarket by such political measures as minimumwage laws and legally sanctioned labor union pres-sures. Under such conditions, increasing themoney supply reduces the value of each monetaryunit and thus reduces the real value of all wages.By doing this, it brings the higher-than-free-marketwage rates nearer to what they would be in a freemarket. This in turn brings employment nearer towhat it would be in a free market, where there is ajob for all who want to work.1

Those who create and slip new supplies of mon-ey into the economy are silently transferringwealth which rightfully belongs to savers and pro-

ducers to those who, without contributing to so-ciety, are the first to spend the new money in themarket place. When this is done by private per-sons, they are called counterfeiters. Their attemptsto help themselves at the expense of others areeasily recognized. When caught, they are soonplaced where they can add no more to the moneysupply.

In recent generations our major problem has notbeen private counterfeiters. It has been govern-ments. Over the years, governments have foundways to increase the money supply that not morethan one or two persons in a million can detect.This is particularly true when production is increas-ing and when more and more of the monetary unitsare held off the market. Nonetheless, whetherprices go up or not, every time a government in-creases the money supply, it is taking wealth fromsome and giving it to others.

This semi-hidden increase in the money supplyoccurs in two ways:

One, by the creation and issuance of moneyagainst government securities. This is a favoriteway to finance government deficits. Governmentsecurities that private investors will not buy, be-cause they pay lower-than-free-market interestrates, are sold to commercial banks. The banks payfor such securities by merely adding the price ofthe securities to government bank accounts. Thegovernment can then draw checks to pay suppliers,employees, and subsidy recipients. (This process isencouraged and increased by technical actions anddirect purchases of the nation's central bank. In theUnited States, these powers reside in the FederalReserve Board, which has not been hesitant aboutusing them.)

The government thus receives purchasing powerwithout contributing anything to the goods andservices offered in the market place. It thus getssomething for nothing. As a result, there is lessavailable for those spending and investing dollarsthey have received for their contributions to so-ciety. The consequence of such government spend-ing is that prices are higher than they would other-wise have been.

Two, the other major semi-hidden means of in-creasing the money supply is for banks to lendmoney to private individuals or organizations bymerely creating or adding a credit to the borrowers'checking accounts. In such cases, they are notlending the savings of depositors. They are merelycreating dollars, in the form of bank accounts, bysimple bookkeeping entries. The borrowers are

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46. HOW MUCH MONEY? 143

thereby enabled to draw checks or ask for newlycreated money with which to buy a part of thegoods and services available in the market place.This means that those responsible for the produc-tion of these goods and services must be satisfiedwith less than the share they would have receivedif the money supply had not been so increased.

By such systems of money creation, our govern-ment and our government-controlled banking sys-tem have, from the end of 1945, increased the na-tion's money supply from $132.5 billion to an es-timated $289.9 billion by the end of 1964. This isan increase of $157.4 billion. During the same pe-riod, the gold stock, held as a reserve against thismoney and valued at $35 an ounce, fell from $20.1billion to $15.4 billion. The increase in the moneysupply for 1964 amounted to $21.0 billion.2

All these new dollars provided the first recipi-ents with wealth which, had there been no artifi-cial additions to the money supply, would havegone to those spenders and investors who receivedtheir dollars in return for contributions to society.Last year alone, political favorites were helped tothe tune of $21 billion, at the expense of all thenation's producers and savers of real wealth.

These money-increasing policies remain hiddenfrom most people, particularly when prices do notrise rapidly. It is now popular to say there is noinflation unless official price indexes rise appreci-ably. This popular corruption of the term inflation,originally defined as an increase in the moneysupply, makes it seem safe for the government toincrease the money supply so long as the govern-ment's own price indexes do not rise noticeably.So, if these price indexes can somehow be keptdown, the government can continue buying or allo-cating wealth which has been created by privateindividuals who must be satisfied with less thanthe free market value of their contributions.

Price Rise Kept Down

Since World War II, there have been two contin-uing situations which have helped to keep officialprice indexes from reflecting the full effect of thishuge increase in the money supply. The first suchsituation is that throughout this period Americanproduction of wealth has continued to increase.The second is that during these years foreignersand their banks and governments have taken andheld off the market increasing supplies of dollars.

If there had been no upward manipulation of themoney supply, the increased production of wealth

would have resulted in lower prices. This wouldhave provided more for everyone who earned orsaved a dollar. It would also have reduced costsand increased the amount of goods and servicesthat would have been sold at home and abroad.

As it was, with prices rising slowly over the1945-64 period, the Federal government and ourgovernment-controlled banking system have beenable to allocate the benefits of increased produc-tion, and a little bit more, to favored bank borrow-ers who pay lower than free market interest ratesand those who received Federal funds over andabove the sums collected in taxes or borrowed fromprivate individuals or corporations.

Untold billions of dollars have also gone into thehands or bank accounts of international organiza-tions, foreigners, their banks, and governments.Many of these dollar holders consider $35 to beworth more than an ounce of gold. Such dollarholders have felt they could always get the goldand, meanwhile, they can get interest by leavingtheir dollars on deposit with American banks. For-eign governments could even count such depositsas part of their reserves against their own curren-cies. For example, the more dollars held by theBank of France, the more it can expand the supplyof French francs. So the inflations of many Euro-pean governments are built on top of the great in-crease in their holdings of dollars.

Short term liabilities of American banks to for-eigners at the end of 1945 were only $6.9 billion.3

By the end of last year, they had risen to an esti-mated $28.8 billion, an increase of $20.9 billion.4

How many more dollars rest in foreign billfolds orunder foreign mattresses cannot even be guessed.Should such foreign dollar holders lose confidencein the ability of their central banks to get an ounceof gold for every $35 presented to our government,more and more of these dollars will return to ourshores where their presence will bid up Americanprices.

This whole process of increasing the money sup-ply by semi-hidden manipulations is not only high-ly questionable from the viewpoint of morality andeconomic incentives, but it also has a highly dis-organizing effect on the production pattern of oureconomy. Over the years, as these newly createddollars have found their way into the market, theyhave forced profit-seeking enterprises to allocate agrowing part of production to the spenders of thenewly created dollars, leaving less productionavailable for the spenders of dollars which repre-sent contributions to society. Once this artificial

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creation of dollars comes ,to an end, as it musteventually, those businesses whose sales have be-come dependent upon the spending of the newlycreated dollars will lose their customers.

This will call for a reorganization of the nation'sproduction facilities. Such reorganizations of busi-ness have become known as depressions. The de-pression can be short, with a minimum of humanmisery, if prices, wage rates, and interest rates areleft free to reflect a true picture of the ever-chang-ing demands of consumers and supplies of labor,raw materials, and savings. Private business willthen move promptly and efficiently to employwhat is available to produce the highest valuedmixture of goods and services. Any interferencewith the free market indicators will not only slowdown recovery but also misdirect some efforts andreduce the ability of business to satisfy as muchhuman need as a completely free economy would.

The day of reckoning can only be put off so long.Once the nation's workers and savers realize thatsuch semi-hidden increases in the money supplyare appropriating a part of their purchasing power,they may take their dollars out of governmentbonds, savings banks, life insurance policies, andthe like in order to buy goods or invest in real es-tate or common stocks, and even borrow at thebanks to do so. If this trend should develop, thegovernment would soon be forced to adopt soundfiscal and monetary' policies.

The same effect might be produced by a rush offoreign dollar holders to spend the dollars theynow consider as good as one thirty-fifth of anounce of gold. In any case, an ever-increasing sup-ply of dollars and ever-increasing prices will even-tually bring on a "runaway inflation," unless thegovernment stops its present practices before thesituation gets completely out of hand.

The important thing to remember is that in-creases in the nation's money supply can neverbenefit the nation's economy. Such increases in themoney supply do not and cannot increase the sup-ply of goods and services that a free economywould produce. Such inflations of the money sup-ply can only help some at the expense of others.Even such help for the politically favored is at bestonly temporary. As prices rise, it takes ever biggerdoses of new money to have the same effect, andthis in turn means still higher prices.

The fact is that no matter what the volume ofbusiness may be, any given supply of money is suf-ficient to perform all the services money can per-form for an economy. All that is needed for con-

tinued prosperity is for the government to let prices,wage rates, and interest rates fluctuate so that theyreveal rather than hide the true state of marketconditions.

Under the paper money standard, politicians areeasily tempted to keep voting for just a little morespending than last year, and just a little less taxingthan last year. The gap can be covered by a semi-hidden increase in the money supply—just a littlemore than last year. Then, too, the illusions ofprosperity are often helped along by an easy mon-ey policy—holding interest rates below those of afree market. This tends to increase the demand forloans above the amount of real savings availablefor lending. The banks then meet the demand formore credit by the bookkeeping device of increas-ing the bank accounts of borrowers.

Clever financial officials must then find ways toput off the day of reckoning. If gold continues toflow out, private travel, imports, and investmentscan be blamed and controls instituted. When thefirst controls do not succeed, more and more con-trols can be added.

When these fail, public attention can always bediverted by a war. War is now generally considereda sufficient excuse for more inflation and a com-pletely controlled economy of the type Hitler es-tablished in Germany.

No man or government should ever be trustedwith the legal power to increase a nations moneysupply at will.

The great advantage of the gold standard is thatgold cannot be created by printing presses or bybookkeeping entries. When a country is on the goldstandard, politicians who want to vote for spendingmeasures must also vote for increased taxes orsanction the issuance of government securities pay-ing free market interest rates that will attract thefunds of private savers and investors. Under a truegold standard, men remain free, the quantity ofmoney is determined by market forces, and boththe manipulated inflations and the resulting de-pressions are eliminated, along with all the povertyand human misery that they cause.

Notes'See "Jobs for All" by Percy L. Greaves, Jr., (Reading No.

38)2Figures from the Federal Reserve Bulletin, February 1965.

Figures for the money supply include those for currency outsideof banks, demand deposits, and time deposits of commercialbanks which in practice may be withdrawn on demand.

3 Federal Reserve Board "Supplement" to Banking andMonetary Statistics, Sec. 15. International Finance.

4 Federal Reserve Bulletin, February, 1965.

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47. BACK TO GOLD?*

Henry Hazlitt

In February of this year President de Gaulle ofFrance startled the financial world by calling for areturn to an international gold standard. Americanand British monetary managers replied that he wasasking for the restoration of a world lost forever.But some eminent economists strongly endorsedhis proposal. They argued that only a return to na-tional currencies directly convertible into goldcould bring an end to the chronic monetary infla-tion of the last twenty years in nearly everycountry in the world.

What is the gold standard? How did it comeabout? When and why was it abandoned? Andwhy is there now in many quarters a strong de-mand for its restoration?

We can best understand the answers to thesequestions by a glance into history. In primitive so-cieties exchange was conducted by barter. But aslabor and production became more divided andspecialized, a man found it hard to find someonewho happened to have just what he wanted andhappened to want just what he had. So peopletried to exchange their goods first for some articlethat nearly everybody wanted so that they couldexchange this article in turn for the exact thingsthey happened to want.

This common commodity became a medium ofexchange—money.

All sorts of things have been used in human his-tory as such a common medium of exchange-cattle, tobacco, precious stones, the precious met-als, particularly silver and gold. Finally gold be-came dominant, the "standard" money.

Gold had tremendous advantages. It could befashioned into beautiful ornaments and jewelry.Because it was both beautiful and scarce, goldcombined very high value with comparatively littleweight and bulk; it could therefore be easily heldand stored. Gold "kept" indefinitely; it did not

•From The Freeman, October 1965

spoil or rust; it was not only durable but practicallyindestructible. Gold could be hammered orstamped into almost any shape or precisely dividedinto any desired size or unit of weight. There werechemical and other tests that could establishwhether it was genuine. And as it could bestamped into coins of a precise weight, the valuesof all other goods could be exactly expressed inunits of gold. It therefore became not only the me-dium of exchange but the "standard of value."Records show that gold was being used as a form ofmoney as long ago as 3,000 B.C. Gold coins werestruck as early as 800 or 700 B.C.

One of gold's very advantages, however, alsopresented a problem. Its high value compared withits weight and bulk increased the risks of its beingstolen. In the sixteenth and even into the nine-teenth centuries (as one will find from the plays ofBen Jonson and Moliere and the novels of GeorgeEliot and Balzac) some people kept almost their en-tire fortunes in gold in their own houses. But mostpeople came more and more into the habit of leav-ing their gold for safekeeping in the vaults of gold-smiths. The goldsmiths gave them a receipt for it.

The Origin of Banks

Then came a development that probably no onehad originally foreseen. The people who had lefttheir gold in a goldsmith's vault found, when theywanted to make a purchase or pay a debt, that theydid not have to go to the vaults themselves for theirgold. They could simply issue an order to the gold-smith to pay over the gold to the person fromwhom they had purchased something. This secondman might find in turn that he did not want theactual gold; he was content to leave it for safekeep-ing at the goldsmith's, and in turn issue orders tothe goldsmith to pay specified amounts of gold tostill a third person. And so on.

This was the origin of banks, and of both bank145

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notes and checks. If the receipts were made out bythe goldsmith or banker himself, for round sumspayable to bearer, they were bank notes. If theywere orders to pay made out by the legal ownersof the gold themselves, for varying specifiedamounts to be paid to particular persons, they werechecks. In either case, though the ownership of thegold constantly changed and the bank notes cir-culated, the gold itself almost never left the vault!

When the goldsmiths and banks made the dis-covery that their customers rarely demanded theactual gold, they came to feel that it was safe toissue more notes promising to pay gold than theactual amount of gold they had on hand. Theycounted on the high unlikelihood that everybodywould demand his gold at once.

This practice seemed safe and even prudent foranother reason. An honest bank did not simply is-sue more notes, more IOU's, than the amount ofactual gold it had in its vaults. It would make loansto borrowers secured by salable assets of the bor-rowers. The bank notes issued in excess of the goldheld by the bank were also secured by these assets.An honest bank's assets therefore continued to re-main at least equal to its liabilities.

There was one catch. The bank's liabilities,which were in gold, were all payable on demand,without prior notice. But its assets, consistingmainly of its loans to customers, were most of thempayable only on some date in the future. The bankmight be "solvent" (in the sense that the value ofits assets equaled the value of its liabilities) but itwould be at least partly "illiquid." If all its depos-itors demanded their gold at once, it could not pos-sibly pay them all.

Yet such a situation might not develop in a life-time. So in nearly every country the banks went onexpanding their credit until the amount of bank-note and demand-deposit liabilities (that is, theamount of "money") was several times the amountof gold held in the banks' vaults.

The Fractional Reserve

In the United States today there are $11 of Fed-eral Reserve notes and demand-deposit liabilities—i.e., $11 of money—for every $1 of gold.

Up until 1929, this situation—a gold standardwith only a "fractional" gold reserve—was acceptedas sound by the great body of monetary econo-mists, and even as the best system attainable.There were two things about it, however, that werecommonly overlooked. First, if there was, say, four,

five, or ten times as much note and deposit "mon-ey" in circulation as the amount of gold againstwhich this money had been issued, it meant thatprices were far higher as a result of this more abun-dant money, perhaps four, five, or ten times high-er, then if there had been no more money than theamount of gold. And business was built upon, andhad become dependent upon, this amount of mon-ey and this level of wages and prices.

Now if, in this situation, some big bank or com-pany failed, or the prices of stocks tumbled, orsome other event precipitated a collapse of con-fidence, prices of commodities might begin to fall;more failures would be touched off; banks wouldrefuse to renew loans; they would start calling oldloans; goods would be dumped on the market. Asthe amount of loans was contracted, the amountof bank notes and deposits against them would alsoshrink. In short, the supply of money itself wouldbegin to fall. This would touch off a still further de-cline of prices and buying and a further decline ofconfidence.

That is the story of every major depression. It isthe story of the Great Depression from 1929 to1933.

From Boom to Slump

What happened in 1929 and after, some econo-mists argue, is that the gold standard "collapsed."They say we should never go back to it or dependupon it again. But other economists argue that itwas not the gold standard that "collapsed" but un-sound political and economic policies that de-stroyed it. Excessive expansion of credit, they say,is bound to lead in the end to a violent contractionof credit. A boom stimulated by easy credit andcheap money must be followed by a crisis and aslump.

In 1944, however, at a conference in BrettonWoods, New Hampshire, the official representa-tives of 44 nations decided—mainly under the in-fluence of John Maynard Keynes of Great Britainand Harry Dexter White of the United States—toset up a new international currency system in whichthe central banks of the leading countries wouldcooperate with each other and coordinate their cur-rency systems through an International MonetaryFund. They would all deposit "quotas" in the Fund,only one-quarter of which need be in gold, and therest in their own currencies. They would all be en-titled to draw on this Fund quickly for credits andother currencies.

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47. BACK TO GOLD? 147

The United States alone explicitly undertook tokeep its currency convertible at all times into gold.This privilege of- converting their dollars was notgiven to its own citizens, who were forbidden tohold gold (except in the form of jewelry or teethfillings); the privilege was given only to foreigncentral banks and official international institu-tions. Our government pledged itself to convertthese foreign holdings of dollars into-gold on de-mand at the fixed rate of $35 an ounce. Two-wayconvertibility at this rate meant that a dollar wasthe equivalent of one-thirty-fifth of an ounce ofgold.

The other currencies were not tied to gold in thisdirect way. They were simply tied to the dollar bythe commitment of the various countries not to lettheir currencies fluctuate (in terms of the dollar)by more than 1 per cent either way from theiradopted par values. The other countries could holdand count dollars as part of their reserves on thesame basis as if dollars were gold.

International Monetary Fund Promotes Inflation

The system has not worked well. There is no ev-idence that it has "shortened the duration and les-sened the degree of disequilibrium in the interna-tional balances of payments of members," whichwas one of its six principal declared purposes. Ithas not maintained a stable value and purchasingpower of the currencies of individual members.This vital need was not even a declared purpose.

In fact, under it inflation and depreciation of cur-rencies have been rampant. Of the 48 or so na-tional members of the Fund in 1949, practically allexcept the United States devalued their currencies(i.e., reduced their value) that year following de-valuation of the British pound from $4.03 to $2.80.Of the 102 present members of the Fund, the greatmajority have either formally devalued since theyjoined, or allowed their currencies to fall in valuesince then as compared with the dollar.

The dollar itself, since 1945, has lost 43 per centof its purchasing power. In the last ten years alonethe German mark has lost 19 per cent of its pur-chasing power, the British pound 26 per cent, theItalian lira 27 per cent, the French franc 36 percent, and leading South American currencies from92 to 95 per cent.

In addition, the two "key'* currencies, the cur-rencies that can be used as reserves by other coun-tries—the British pound sterling and the U.S. dollar—have been plagued by special problems. In the

last twelve months the pound has had to be repeat-edly rescued by huge loans, totaling more than $4billion, from the Fund and from a group of othercountries.

Balance of Payments

The United States has been harassed since theend of 1957 by a serious and apparently chronic"deficit in the balance of payments." This is thename given to the excess in the amount of dollarsgoing abroad (for foreign aid, for investments, fortourist expenditures, for imports, and for otherpayments) over the amount of dollars coming in (inpayment for our exports to foreign countries, etc.).This deficit in the balance of payments has beenrunning since the end of 1957 at a rate of morethan $3 billion a year. In the seven-year period tothe end of 1964, the total deficit in our balance ofpayments came to $24.6 billion.

This had led, among other things, to a fall inthe amount of gold holdings of the United Statesfrom $22.9 billion at the end of 1957 to $13.9 bil-lion now—a loss of $9 billion gold to foreign coun-tries.

Other changes have taken place. As a result ofthe chronic deficit in the balance of payments, for-eigners have short-term claims on the UnitedStates of $27.8 billion. And $19 billion of these areheld by foreign central banks and international or-ganizations that have a legal right to demand goldfor them. This is $5 billion more gold than wehold altogether. Even of the $13.9 billion gold thatwe do hold, the Treasury is still legally obliged tokeep some $8.8 billion against outstanding FederalReserve notes.

This is why officials and economists not only inthe United States but all over the Western worldare now discussing a world monetary reform. Mostof them are putting forward proposals to increase"reserves" and to increase "liquidity." They arguethat there isn't enough "liquidity"—that is, thatthere isn't enough money and credit, or soon won'tbe—to conduct the constantly growing volume ofworld trade. Most of them tell us that the goldstandard is outmoded. In any case, they say, thereisn't enough gold in the world to serve as the basisfor national currencies and international settle-ments.

But the advocates of a return to a full gold stan-dard, who though now in a minority include someof the world's most distinguished economists, arenot impressed by these arguments for still furthermonetary expansion. They say these are merely

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148 MONEY, CREDIT AND BANKING

arguments for still further inflation. And they con-tend that this further monetary expansion or infla-tion, apart from its positive dangers, would be afutile means even of achieving the ends that the ex-pansionists themselves have in mind.

Suppose, say the gold-standard advocates, wewere to double the amount of money now in theworld. We could not, in the long run, conduct anygreater volume of business and trade than wecould before. For the result of increasing theamount of money would be merely to increase cor-respondingly the wages and prices at which busi-ness and trade were conducted. In other words, theresult of doubling the supply of money, otherthings remaining unchanged, would be roughly tocut in half the purchasing power of the currencyunit. The process would be as ridiculous as it wouldbe futile. This is the sad lesson that inflating coun-tries soon or late learn to their sorrow.

The Great Merit of Cold

The detractors of gold complain that it is difficultand costly to increase the supply of the metal, andthat this depends upon the "accidents" of dis-covery of new mines or the invention of betterprocesses of extraction. But the advocates of a goldstandard argue that this is precisely gold's greatmerit. The supply of gold is governed by nature; itis not, like the supply of paper money, subjectmerely to the schemes of demagogues or thewhims of politicians. Nobody ever thinks he hasquite enough money. Once the idea is acceptedthat money is something whose supply is deter-mined simply by the printing press, it becomes im-possible for the politicians in power to resist theconstant demands for further inflation. Gold maynot be a theoretically perfect basis for money; butit has the merit of making the money supply, andtherefore the value of the monetary unit, indepen-dent of governmental manipulation and politicalpressure.

And this is a tremendous merit. When a countryis not on a gold standard, when its citizens are noteven permitted to own gold, when they are toldthat irredeemable paper money is just as good,when they are compelled to accept payment insuch paper of debts or pensions that are owed tothem, when what they have put aside, for retire-ment or old-age, in savings banks or insurancepolicies, consists of this irredeemable paper mon-ey, then they are left without protection as the is-sue of this paper money is increased and the pur-

chasing power of each unit falls; then they can becompletely impoverished by the political decisionsof the "monetary managers."

I have just said that the dollar itself, "the bestcurrency in the world," has lost 43 per cent of itspurchasing power of twenty years ago. This meansthat a man who retired with $10,000 of savings in1945 now finds that that capital will buy less thanthree-fifths as much as it did then.

But Americans, so far, have been the very luckyones. The situation is much worse in England, andstill worse in France. In some South Americancountries practically the whole value of people'ssavings—92 to 95 cents in every dollar—has beenwiped out in the last ten years.

Not a Managed Money

The tremendous merit of gold is, if we want toput it that way, a negative one: It is not a man-aged paper money that can ruin everyone who islegally forced to accept it or who puts his confi-dence in it. The technical criticisms of the goldstandard become utterly trivial when comparedwith this single merit. The experience of the lasttwenty years in practically every country provesthat the monetary managers are the pawns of thepoliticians, and cannot be trusted.

Many people, including economists who oughtto know better, talk as if the world had alreadyabandoned the gold standard. They are mistaken.The world's currencies are still tied to gold, thoughin a loose, indirect, and precarious way. Othercurrencies are tied to the American dollar, andconvertible into it, at definite "official" rates (un-fortunately subject to sudden change) through theInternational Monetary Fund. And the dollar isstill, though in an increasingly restricted way, con-vertible into gold at $35 an ounce.

Indeed, the American problem today, and theworld problem today, is precisely how to maintainthis limited convertibility of the dollar (and henceindirectly of other currencies) into a fixed quantityof gold. This is why the American loss of gold, andthe growing claims against our gold supply, are be-ing viewed with such concern.

The crucial question that the world has now toanswer is this: As the present system and presentpolicies are rapidly becoming untenable, shall theworld's currencies abandon all links to gold, andleave the supply of each nation's money to be de-termined by political management, or shall theworld's leading currencies return to a gold stan-

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48. ETERNAL LOVE 149

dard—that is, shall each leading currency be madeonce again fully convertible into gold on demandat a fixed rate?

Whatever may have been the shortcomings ofthe old gold standard, as it operated in the nine-teenth and the early twentieth century, it gave theworld, in fact, an international money. When allleading currencies were directly convertible into afixed amount of gold on demand, they were ofcourse at all times convertible into each other at

the equivalent fixed cross rates. Businessmen inevery country could have confidence in the cur-rencies of other countries. In final settlement, goldwas the one universally acceptable currencyeverywhere. It is still the one universally accept-able commodity to those who are still legally al-lowed to get it.

Instead of ignoring or deploring or combatingthis fact, the world's governments might startbuilding on it once more.

48. ETERNAL LOVE*

Lawrence Noonan

You are a member of the jury in this fictional courtcase

The courtroom was hushed as the judge enteredthe chamber. It was crowded and many peoplecould find standing room only. The trial, of course,had attracted nationwide interest and you could al-most reach out and feel the expectancy.

The defendant, Charles Akins, was a rathersmall and timid looking man. Perhaps the timiditywas a matter of fear—surely the somber courtroomand the overpowering majesty of the law wereenough to inspire fear in a defendant. Mr. Akinscertainly did not look like a criminal. As a matterof fact, he really looked quite respectable. But hedid look frightened. And yet, there was determina-tion there. And just a gleam of courage shiningthrough, too.

Perhaps we should tell you now that the yearwas 1984. Not that there was anything so specialabout '84. Children went to school, grew up, work-ed, got married, and reared their own children.People went to church, voted, talked politics, ar-gued, and endeavored to understand the subtle-ties of economics. But, all of it was just a littlebit different. Especially in the way that peoplelooked at things.

The Judge, the Honorable Warren Faber, having

•From The Freeman, May 1960

completed the preliminary ceremonies, was look-ing rather curiously, we thought, at the defendant.

"Mr. Akins," he said, "it is my understandingthat you have retained no counsel and that youwish to defend yourself. Considering the gravity ofthe charge against you, I feel that you might liketo reconsider."

"No, your honor," Akins replied, "I am going todefend myself."

"Mr. Akins, you are charged with a federal of-fense and are being tried in a federal court. You arecharged with usurping the function of the govern-ment, of undermining and attempting to replacethe monetary system of this country. With seriouscharges of this nature why will you not avail your-self of counsel?"

Mr. Akins seemed to be shivering slightly."Your honor, the facts have already been more

or less determined. This is a matter of right orwrong. There isn't any legal thing involved here.I'm not guilty of anything. I simply want to tellwhat happened. I want to tell my story. I don'tneed any lawyer to do that."

The Prosecuting Attorney, Arnold Spear, leapedto his feet.

"Your honor, I object. The defendant is attempt-ing to tell the court what is right and wrong. Fur-ther, I object to the statement that all of the factsare known."

"Objection overruled. This court will make itsfindings when the time comes. The defendant does

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150 MONEY, CREDIT AND BANKING

have the right to represent himself. Mr. Akins, youhave been sworn in. Now tell us what you considerto be your story."

"Well, this is the way it was. Back in 1957 mycompany, Trans-World Mining, became interestedin increasing the market for our principal product—platinum. We had expanded our mining con-siderably and we needed more in the way of sales.We believed that platinum could be used far moreextensively in jewelry and we bought a well-knownjewelry manufacturing firm. We experimentedwith combining platinum with another metal, andwe came up with something very beautiful andpractical."

Judge Faber interrupted. "Mr. Akins, let me in-terrupt a minute. Up to this point you have simplytold us that you were a mining company and hadturned to the manufacture of jewelry from plat-inum?"

"Yes sir, that is correct. We had considerablesuccess with the manufacture of jewelry, but as theyears went by we began to notice a very unusualthing."

The Judge leaned forward intently. There wasabsolute quiet in the courtroom.

"We had manufactured small disk-like piecesof jewelry with some fine detail work on each side.Each piece had a small hole near one edge and wehad intended them as pieces suitable for pen-dants. They sold for fifty, a hundred, and two hun-dred dollars apiece. Frankly, we had not expectedto sell too many of them. But as time passed, webegan to experience something unusual. As I said,in the beginning, we didn't know how much to ex-pect in the way of sales from a simple little piecelike this. But as the years went by, the sales on thisone small piece of adornment jewelry exceeded thesale of everything else the company was making!We couldn't understand it. These small pieces—originally priced at $50 to $200, and later at high-er figures as the dollar price of platinum rosealong with prices of everything else—were goinglike hot cakes. This went on and on. Finally, Ihad a market research outfit do a survey to findout why we were selling so many of these."

Charles Akins paused and licked his lips. Theaudience in the room was quiet but tense. Al-though they didn't have a doubt about the outcomeof the trial, it was fascinating to hear this storyfrom the man himself. After all, you didn't defythe government these days and get away with it!

Akins went on. "We discovered that people werebuying these as an investment. People had become

terribly afraid of the government's solvency. Thegovernment had issued barrels full of paper mon-ey. It wasn't even backed by gold any more. Youcouldn't even get gold."

Arnold Spear had jumped to his feet again. Therewas contempt in his eyes as he looked toward thedefendant.

"Your honor, the defendant is beating about thebush. These things about paper money and goldare ridiculous! He's completely dodging the mamissue—what was written on those coins?"

Little Mr. Akins was growing bolder."Your honor, it is my turn now to object. This

was not a coin. We did not make these as coins.We did put an inscription on this piece of jewelrywhich conveyed—in a foreign tongue—EternalLove. We had expected that this piece would beused for gift purposes. However, many people alsointerpreted this quotation to mean Eternal Value.Later on, this piece of jewelry began to be used bypeople in trade. They recognized and trusted thepurity of its alloy. It had real value to them not onlyas an ornament but also as a medium of ex-change. And as it came more and more into use intrade, this new use gave it still added value. Peo-ple began saving them, hoarding them. We in-creased our production many times. We almosteliminated the manufacture of all other platinumitems. The people wanted these. They were de-manding them."

Akins paused again. He seemed to be eitherwaiting to be challenged by the Prosecuting Attor-ney or for a request for clarification from theJudge. Nothing happened. Both the Judge andArnold Spear had become absorbed in the story.

Akins proceeded now with growing confidence.He was on familiar ground. Regardless of the out-come, he had only one course and he followed it.

"Naturally, we were in business to make a profit.However, we, too, had become very apprehensiveabout the monetary situation and the government'spolicy. We finally decided that in addition to sell-ing the platinum pieces, we would also make themthe basis of our accounting and billing system—ourprivate monetary unit. Thus, we began to use themas a medium of exchange. Of course, we were soonthreatened by the Treasury Department. But theycouldn't really do anything about it. Anyway, theydidn't try. But later the value of the paper money inthe country became almost worthless and theytried to blame Trans-World Mining for it. Therewas wild inflation. But the platinum pieces kepttheir value. People kept these whereas they would

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48. ETERNAL LOVE 151

have kept gold if they could have gotten it. Thegovernment's paper money became almost worth-less."

There was now both triumph and despair inAkins' voice.

"Well, it was almost incredible what had hap-pened. The chaos became almost indescribable.People became frantic to get more of these plat-inum pieces. Where the value of paper money wasgoing down and down, the value of the platinumpiece was going up. It became the only soundmeans of exchange in the country."

Sadly he continued. "People came to realize thatsound money was just as important as liberty it-

self. They found that there wasn't any honest free-dom without honest money."

Another pause. "But now the government needsa scapegoat and they've got me. They want to puttheir own blame on someone else."

We won't bore you with the cross examinationby Arnold Spear, the Prosecuting Attorney. He waseager for a conviction and the rhetoric thunderedin the court. He likened Akins to one guilty of trea-son, of plotting the downfall of his own country.Akins was morally a leach and legally far worse.The thunder rolled on and on.

We don't know yet what the verdict is. The juryis still out.

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Competition, "Big Business/' and Monopoly

49. THE COW IN THE APARTMENT*

Burton Rascoe

Haven't you at one time or another remarked, orheard, without protest, a friend remark: "Radioand TV would be all right if it weren't for the com-mercials," or "He used to be a pretty good writer,but he is turning out nothing but commercial stuffnowadays," or "Commerce and religion don't mixwell," or "It's the commercial angle that is tied inwith the project that I object to"?

If so, have you ever realized that every one ofthose expressions and others like them are nothingwhatever but displays and airings of baseless andrather vulgar snobbery?

We are all—every single one of us—engaged intrade. Trade is our way of helping ourselves andothers.

The man who deposits a bottle full of milk be-fore my apartment door every morning is in trade,even though he belongs to a driver's union; andhis being in trade is a way of helping me and oth-ers. Since I live in an apartment in the city, Ican't keep a cow handy, even if I knew how to milkher. Even if it were possible for me to keep a cowin the apartment, the cow would produce moremilk than I can use. I couldn't stop milking her; forif I did, she would go dry. I would have an un-productive cow on my hands in an apartment, andthe cost of feeding and cleaning up after her wouldbe great. If I tried to get back some of the cost byselling the surplus, I would have to go into bus-iness, buy bottles and sterilizing and pasteurizingchemicals and equipment, solicit customers, keepbooks, keep publicly displayed the O.P.A.1 milkprices, file and pay quarterly income taxes, get,

•From Ideas on Liberty, September 1955

display, and keep paid up on, the necessary li-censes, submit to regular federal, state, and mu-nicipal food and hygiene inspection, promptly re-port all symptoms of hoof-and-mouth disease, ticksor other cow afflictions, dun my delinquent cus-tomers, and Lord knows what all—and the surplusmilk from one cow would cost me X-dollars forevery 28<P bottle of milk I sold.

So my milkman, in trade, helps me in more waysthan he probably realizes; and he also helps somany other people. By helping the milk companyto keep together, he even helps me to enjoy certaindramas on my TV. From the aggregate of profitsin fractions of mills on the 28<P bottle of milk, thecompany seeks to increase the number of personsit helps in the same way it does me.

One of the ways the company can increase itsnumber of milk customers is by advertising; andone of these ways of advertising is by helping thetelevision companies to keep in business by buyingtime from the companies for the televising ofdramas for which writers, directors, producers,camera operators, electricians, costumers, make-up artists, script girls, announcers, and actors mustbe hired.

Every aspect of all this is commercial, from thecreative talent of the writer of the drama, whotrades the product of his brains for cash to the restof the studio, to the work of the scrub woman whocleans up the studio. But the only thing that is la-beled "commercial" is the selling-talk for the milkcompany, which appears at the beginning, in themiddle, and at the end of the TV drama, and whichconsumes not more than three minutes of the TVaudience's time.

152

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50. FREEDOM TO SHOP AROUND 153

Yet those three minutes are entirely devoted bythe company to the helping of others—commer-cial script-writers, actors, scenic artists, cam-eramen, electricians, and others—all of whom areprovided with a means of livelihood by the indis-pensable and economically justifiable "com-mercial" which makes it possible to see a good

drama, well acted, without cost in my living room.It is impossible honestly to make a great deal of

money without doing a great deal of good.Note

'The O.P.A. (established 1941) had its counterpart in thePrice Commission, set up under the President's Wage-PriceFreeze, August 15, 1971, and new control boards will undoubt-edly be created if new controls are enacted.

50. FREEDOM TO SHOP AROUND*

Hart Buck

Because we are human beings and not animals,we have at our command two principles whoserealization secures us an immensely better livingthan animals can ever get for themselves.

In the first place, two people can work to pro-duce more than twice as many valuable things asone can. In the second place, two people, simplyby exchanging things they have, can each end upwith more of the things they want.

Through these two principles, we can produceand enjoy immeasurably more as members of aneconomy than we could as so many Robinson Cru-soes or even Swiss Families Robinson. Through athird principle—freedom to shop—we can make themost of the economy we live in, and produce forour enjoyment more than ever.

This embraces not only the housewife's free-dom to shop for her detergent where she need payleast for it but also the producer's freedom toshop for his materials where he can get themcheapest; the investor's freedom to shop for thebiggest return for his money; the employer's free-dom to shop for the kind of help that will givehim the biggest production for what he pays;and the worker's freedom to shop for the job thatpays him best.

Competition is nothing but freedom looked atupside down. In a market where buyers are free toshop around, sellers must outdo each other to getand keep customers. Through competition there isproduced the maximum of goods and services that

•From an address delivered before the Queensway Lions Club(Toronto, Canada) February 10, 1954

the public wants most. Competition does not mean"dog eat dog." Instead, it is the necessary pref-ace to cooperation. Competition helps us to decidewith whom we can best cooperate in production.

The driving force behind the free market is theenterprise of the businessman. He is the man whosees a chance to turn unused resources to account,and produce something out of them which the pub-lic will want. He buys materials, secures tools,hires helpers, and sells his product in the hope ofrecovering all his costs; including the cost of hisown time and the cost of any tools that may behis. Perhaps he does not recover his costs, whichmeans that some better use could have been madeof all the resources involved, so that everybodyloses all round. Or else he may be lucky, and re-cover all his costs plus something extra. The extrais profit, and nothing else is.

On the free market, his costs will tend up, andhis prices will tend down, through the pres-sure of competition. They will so adjust themselvesin time that the businessman will earn no morethan he could get by renting his tools to some otherbusinessman and going to work for him. When thathappens, he has no profit any more. Profits arethe businessman's return for trying something newand desirable. When it is no longer new, profitsstop. Profits are temporary only, but the gain toconsumers, investors, and workers is permanent.

Most of us think of the businessman as distinctfrom the investor or the worker; we think of him in-stead as the operator of a going business. So typ-ically he is; nevertheless, every investor is a busi-nessman when he invests his money in hopes of a

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154 COMPETITION, "BIG BUSINESS/' AND MONOPOLY

bigger return some day than his investment bringshim now; and, most important, every worker takeson the character of a businessman when he fits him-self for one line of work rather than another, inhopes of turning his own capacities to the best ac-count possible in the end. You might say, therefore,that all of them are speculators, and so they are. En-terprise is speculation, and speculation is enter-prise. Both of them mean anticipating in advancewhat other people will want, and facing the pos-sibility that they won't want it. Under the free mar-ket everyone is free to anticipate and speculate.

As businessmen and speculators—even if we areinvestors or workers—we may feel handicapped,not by our own freedom to shop around, but byother people's; and so we may try to stop them, orto get the government to do it for us. We may suc-ceed; this involves controlling the supply of some

factor of production, and turning out at our ownprice a smaller product than the customers wouldtake if we didn't control the supply. But if we do,we may find that the pressure of competitionmakes us pay extra for the factors of productionwhose supply we don't control. As monopolists,therefore, we may find ourselves no better off thanif we had no monopoly. The public, on the otherhand, loses the goods that the monopoly keepsthem from getting.

Under the free market, therefore, some peoplemay get special benefits temporarily, but every-body benefits permanently. Under a market that isnot free, some people may get special benefitsfor a time, but everybody loses permanently. It isnever under the free market that some peoplebenefit at other people's expense. This results, in-stead, from interference with the free market.

51. SIX MISCONCEPTIONS ABOUT CONSUMER WELFARE

Joel Dean

The American consumer is, in the Great Society,the forgotten man. Antipoverty programs, theclosed shop, foreign aid, minimum wage hikesbenefit him little and are ultimately at his expense.

The consumer cannot count on the unselfishmunificence of the government to look after his in-terests. Instead, he had best place himself in thehands of the self-serving competitor. The forces ofcompetition alone can be counted on to compelsuppliers, in an enterprise system geared to self-interest, to achieve results which will advance thewelfare of the consumer.

The vigor of the competitive process is, there-fore, our main assurance of social benefit and con-sumer welfare. Protecting and strengthening thecompetitive process (which is quite different fromprotecting the individual competitor) is the whitehope of the consumer.

•From The Freeman, January 1966

The main peril to competition is not bigness, notconcentration, not conglomerates (variegatedproduct lines), not mergers, not even price con-spiracies. Instead, the main peril is prejudice: dis-trust of the competitive system in its modern guise.The roots of this prejudice are basic misunder-standings concerning the economics of consumerwelfare. Six economic fallacies are particularly im-portant:

1. That competition is declining and is now an un-trustworthy control device.

2. That competition becomes "cut-throat" unlesscurbed by government.

3. That profits are at the expense of the consum-er.

4. That advertising makes consumers captive andis economic waste.

5. That the best way to take care of the incompe-tent is to make competition soft.

6. That job security is best attained by slowingdown economic progress.

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51. SIX MISCONCEPTIONS ABOUT CONSUMER WELFARE 155

Let's look briefly at each of these misconcep-tions. Although unobtrusive and eminently re-spectable, these economic misunderstandings arepervasive and perilous. They are working to under-mine the protection that the consumer gets fromvigorous competition.

1. Competition Is Declining and Is Now anUntrustworthy Control Device

Looking back nostalgically at the Tom Sawyereconomy, we get a glowing glimpse of a structureof competition quite different from today's. We seesmall, independent, local business firms by thethousands: the local grist mill, lumber mill, brew-ery, and carriage shop. What we forget is that eachof these glorified competitors had a tight little loca-tional monopoly sheltered by miserable transporta-tion. What we often fail to see in our moderneconomy is the competition that counts. This com-petition is outside the purview of the conventionalantitrust case. It creeps in on little cat feet, unob-trusively at first. It is not quite respectable at thestart (for example, the discount houses and earlysupermarkets). It often works its beneficial mir-acles below the surface of consumer consciousnessthrough the vehicle of "value-analysis" by indus-trial purchasers (such as the revolution in welding,die casting, and oxygen furnaces). Its fiercest fight-ing front is often the research laboratory. This isthe competition that counts because it producesdecisive cost savings, usually as a result of revolu-tionary new technology or spectacular rearrange-ment of functions, or dramatic displacement bysubstitutes. Generally speaking, it is outside thepurview of the conventional antitrust case and thestereotyped concentration indices.

It is frequently an invader from outer space, thatis, from a different industry or a foreign nation.

This is the competition that keeps the Americaneconomy among the most competitive in the worldand that assures the American consumer a highand rising standard of living.

2. Competition Becomes "Cut-Throat"Unless Curbed by Government

One heritage of the great depression is a gen-eralized fear of excessive competition. This fearleads on to the belief that the government must re-strain these excesses by legislating minimum profitmargins, for example, state "fair trade" statutesand laws against "selling below cost." This mis-

conception has had an important role in shapingpublic policy, which is opposed to competition inseveral sectors of our economy, notably agricultureand transportation. Thus, despite formal profes-sions of faith, the evidence is that we really don'tbelieve in an enterprise economy—at least in thesesectors. The precedent and the preconception thatlie behind it are perilous for other sectors of oureconomy.

"Cut-throat" competition is a bogeyman whoseinfluence is powerful but unwarranted. It is un-warranted because the degenerative tendency is amyth, probably. Even if true, it's hard to see howcompetition can really be excessively vigorousfrom the viewpoint of the national interest. Themisconception arises partly from confusing injuryto an individual competitor with injury to thecompetitive process. Competition, if it is effective-ly to serve the consumer, must injure individualrivals and even annihilate some. And the notionthat this elimination of the unfit will inevitably re-duce surviving competitors to a sole monopolist isa theoretical extrapolation, unsupported by experi-ence and applicable in only a few industries wherescale economies are overwhelming relative to thesmall size of the market.

3. Profits Are at the Expense of the Consumer

It is almost standard operating practice for peo-ple who profess concern for consumer welfare toview corporate profits as being at the expense ofthe consumer and opposed to his welfare. Thisantiprofit bias infuses the viewpoints of many of-ficials in big government and particularly of thosein regulatory commissions.

We should all recognize that profits are usuallyan index of success in serving the public. In a com-petitive industry, most of the profits go to the moreefficient suppliers, not to the marginal supplierwhose costly output is nonetheless required to sat-isfy the full demand at the prevailing market price.The consumer gets a bargain in the few profit pen-nies per dollar he appears to pay. He pays less thanappears for two reasons. First, because losses thatare not formally book-kept are not offset againstreported corporate profits. Second, because equitycapital, which is costly, is treated in accounting asa free good. The consumer gets a bargain, not onlybecause corporate profits are partly illusory, butbecause the hope of profits and fear of losses (whatmakes the mare go) is the cheapest known form ofincentive and remuneration.

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4. Advertising Makes Consumers Captive andIs Economic Waste

Appalled by the huge sums spent on the adver-tising and annoyed by being a part of a captive au-dience, grieved by the gullibility of all consumersexcept themselves, and aroused by exposures ofthe hidden persuaders, many well-meaning re-formers believe that advertising disfranchises theconsumer and wastefully cancels claim againstoutrageous counterclaim.

Looking at the matter from the standpoint of thenational interest in consumer welfare, we shouldrecognize that advertising economizes leisure andis a cheap way for consumers to pre-shop. Themost that advertising can do is to get a personto try the product; and his own experience with it,plus reports from his acquaintances and the syn-thetic experience of consumer research services,develops immunizing skepticism.

We should also recognize that advertising opensmany more doors to new and beneficial competi-tion than it closes. The best weapon against thehidden persuader of one manufacturer's adver-tising is that of his competitor, particularly thecountervailing power of distributor brands whicherode the consumer franchise of a manufacturer'sbrand.

5. The Best Way to Take Care of the IncompetentIs To Make Competition Soft

Much anticompetitive legislation and adminis-trative and judicial case law is rooted in the thor-oughly American and highly laudable desire totake care of the incompetent. The question is notwhether society will look after the unfortunate. Inthis our society is doing a good job. The danger, in-

stead, is that we will take care of them in the wrongway, that is, in a way that will deter incentives forself-improvement and will block the automatic ad-justments of a competitive economy and preventit* serving consumers best. Charitable treatment ofthe less fortunate will be more efficient and lessdamaging to the growth and strength of our econo-my if it is entirely divorced from trying to protectthe individual competitor against the conse-quences of his own non-competitiveness.

6. Job Security Is Best Attained bySlowing Down Economic Progress

The quest for job security is universal. Each ofus is very much alive to any peril to our job. Mostof us would like to feel that a beneficent govern-ment will look after this vital matter and make surethat economic change will not imperil our job.

Unfortunately, the competitive process has fewchampions and no lobby. The job security of the in-dividual citizen can best be achieved, not by plac-ing roadblocks in the path of technological prog-ress, but instead by removing them. Society is bet-ter off to help the individual solve his problem ofadapting to economic progress by supplying infor-mation, incentives, and opportunities for re-educa-tion, rather than by trying to slow down economicprogress.

•Economic misunderstandings like these six are

causing a widespread, almost unconscious preju-dice against competition. There is disconcerting re-luctance to rely upon competition for the imperson-al force which compels individual competitors,each geared to self-interest and trying to increasehis own market power, to unconsciously serve so-ciety.

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52. IS ECONOMIC FREEDOM POSSIBLE?*

Benjamin A. Rogge

The real debate on domestic policy in the UnitedStates at mid-century concerns the proper role ofgovernment—and those who wish for less govern-ment in economic affairs are obviously losing. Thejudges, in this case the voters of the United States,have been giving verdict after verdict to those whoargue for more government intervention.

Those of us who are losing the debate oftenascribe our losses to the work of men in academiclife and elsewhere who are preaching socialismand trying to subvert the traditional American sys-tem of free enterprise. This easy and tempting ex-planation implies that our un-American opponentsshould be silent, and thus permit true Americanprinciples to prevail.

This explanation is both untrue and dangerous.It is dangerous because it could lead us to imposerestraints on freedom of speech and of press thatwould indeed be un-American. It is dangerous be-cause it leads us to relax our efforts to prepareand present our own case as powerfully and per-suasively as possible. It is untrue, because not onein five hundred of those who favor more govern-ment intervention is a committed socialist or evenbasically opposed to free private enterprise. On thecontrary, most of them are committed to the freemarket arrangement and believe that their pro-posals are designed to strengthen rather than toweaken it. Specifically, they argue that the marketarrangement can survive only if certain of itsweaknesses and failures are offset by appropriategovernment action.

For example, it is alleged that the free marketeconomy tends to be unstable, alternating betweenboom and bust, and that this instability will de-stroy the economy unless corrected by appropriategovernment action. Though this is a seriouscharge, I believe both the analysis and the call forgovernment action are mistaken.

•From The Freeman, April 1963

What I prefer to discuss here is an equally seri-ous charge made against the free market by itsfriends.

Their charge is that economic freedom, thoughdesirable, is not strictly possible—that in an un-hampered market the individual would not be trulyfree but would be imposed upon by monopolies ofvarious kinds and degrees. This charge appears inthe preamble to one piece of interventionist legis-lation after another. Thus, the worker is said toneed special protection because of the monopolypower of the employer. The farmer must be pro-tected against monopolies on both sides of his mar-ket. Certain kinds of business firms must be pro-tected against certain other kinds. Certain price de-cisions must be influenced by government be-cause of the monopoly power of the firms involved.And on and on it goes. Clearly, if private monop-oly is indeed this ubiquitous, a presumption is es-tablished in favor of a substantial role for govern-ment.

In my opinion, however, and this is to be the cen-tral thesis of my argument, the unhampered mar-ket tends to be a competitive market. In fact,strong action by government is all that can preventit* being a competitive market.

Phrased another way, my thesis is that positionsof monopoly power tend to be short-lived and rel-atively ineffective, except as they receive the pos-itive assistance and protection of government. Orphrased still another way, government in theUnited States has done far more to promote mo-nopoly than to promote and permit competition.

Good for Others, Not for Me!

In developing the argument, I admit that thereare certain very human attitudes which tend towork against competition. Although each of usmay approve of competition as a general principle,we are less than anxious to face competition in our

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158 COMPETITION, "BIG BUSINESS/' AND MONOPOLY

own personal activities. Competition is good inprinciple, we say, but not in our particular indus-try or occupation, or not when it comes from over-seas, or not when it comes from people improper-ly trained in this occupation.

A natural outcome of this attitude is the attemptto reduce competition by cooperative action amongwould-be competitors. This tendency was clearlyrecognized by Adam Smith, the father of free mar-ket economics. In The Wealth of Nations publishedin 1776, he wrote as follows: "People of the sametrade rarely meet together even for merrimentand diversion except that it end in some contriv-ance to raise prices."

A second reason for questioning the possibilityof a truly free economy is the influence of advanc-ing technology on the size of the firm. The contin-uing technological revolution has produced a sit-uation in one industry after another where, to beefficient, a firm must represent a large accumula-tion of capital, translated into buildings, machinery,and distribution organizations of great size andcomplexity. This growth in the size of the efficientfirm is another challenge to the maintenance ofthe competitive economy.

A third reason often advanced for skepticismabout competition is the difficulty of keeping one-self informed on the alternatives facing him in themultiple markets in which he operates, and theassociated difficulty of retaining the mobility toshift his course of action in response to changes inthose market alternatives.

A Temptation To Connive

The modern economic world is indeed a complexand confusing world, and these charges deserveserious attention. Let us take the charge that collu-sion rather than competition tends to be the dis-tinguishing characteristic of the unregulated mar-ket economy. It is true that men are always tempt-ed to practice collusion. However, it is equally truethat the same forces which lead to the formationof cartel agreements tend to destroy those agree-ments.

The principal force involved here is simply thedesire to make money. For example, suppose thata number of farmers agree to hold livestock off themarket in a local area. The effect of this, of course,is to cause livestock prices to rise in that area. Butwith each increase in price, the individual farmer isunder greater temptation to break the rules of thecartel and sell his hogs or beef cattle. At the same

time, each increase in price attracts more livestockto that local market from farms outside the agree-ment area. The members of the cartel must thenbattle both their own members and outsiders tomaintain the effectiveness of their operation.

In the same way, if a number of business firmsagree to divide the total market into exclusive terri-tories, the resulting price increase tempts eachfirm to try to increase its sales so as to increase itsprofits. However, each firm's own territory pro-vides only limited opportunities for increasedsales, and the temptation is enormous to expandsales by poaching on the neighboring, forbiddenmarkets.

Cartels in America

The history of cartels in America is a history ofbrief initial successes followed by increased cheat-ing on the agreement, then serious internal conflict,and eventual breakdown and dissolution of the car-tel. This was the history of cartels long before thegovernment made such agreements illegal per se,when the only restraining influence was the time-honored common law practice of court refusal toenforce cartel contracts. I could provide one casehistory after another to support my thesis. At thesame time, I know of no cartel agreement in thehistory of this country that has been both effectiveand long-lived except those that have had the ex-plicit support of government.

The farm program in this country in the last 35years has been nothing more nor less than a gov-ernment sponsored and operated cartel arrange-ment among otherwise competing producers. Thenonfarm citizens have had to pay both the higherfood and fiber prices and the cost of operating thecartel producing those higher prices.

In the same way, the trade union, a cartel ar-rangement among otherwise competing sellers ofthe services of labor, has been given the explicitsupport of government. In addition, trade unionshave been permitted methods of enforcing theircartel rules that have made a mockery of the legalprohibition against assault.

In the same way, certain business and profes-sional groups have been given legal protection intheir cartel arrangements through licensing andfranchise protection and through so-called fairtrade laws.

The seriousness of these actions by governmentlies not only in the economic consequences butalso in the violation of an important cornerstone of

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52. IS ECONOMIC FREEDOM POSSIBLE? 159

the free society—equality before the law. The unionmember, the farmer, and certain businessmen havebeen encouraged and assisted in doing preciselythat for which other businessmen are sent to jail.The blindfolded goddess of justice has been en-couraged to peek, and she now says with the jur-ists of the ancient regime, "First, tell me who youare, and then I will tell you what your rights are."

To summarize the point: although there is anatural tendency toward collusion among thosewho otherwise would be competing, there is anequally natural and ultimately stronger tendencyfor such collusive agreements to break down. Thegreatest contribution the government can make inthis regard is to stop assisting and encouragingcartel groups.

Adam Smith followed the words I quoted aboveon "people of the same trade," and so forth, by say-ing, "There is no law that would be consistent witheither liberty or justice that could prevent suchmeetings, but surely the government should donothing to encourage such meetings, or to makesuch meetings necessary."

We have in the traditions of our common lawrefusal to enforce cartel agreements all that isreally needed to prevent such agreements from de-stroying the basic competitiveness of the Amer-ican economy.

Growth in Size of Firm

I turn now to the second argument: the threat tocompetition that is said to be posed by the growthin the size of the firm. Here again, there is no dis-puting the fact that advancing technology has ledto larger and larger firms in many industries. How-ever, in some industries advancing technology hasmade it possible for small, even household units tocompete successfully with the giant firms. The de-velopment of efficient and relatively inexpensivetools, for example, has made it possible for many ahusband to run a basem*nt factory for producingfurniture, at least for use in his own home.

But rather than rest the case on this possibility,I would further point out that the growth in the sizeof the firm often has been matched, or more thanmatched, by the growth in the size of the market.It is the size of the firm relative to the market thatis important, and not the absolute size of the firm.Advancing technology also has been at work intransportation and communication, and this hashad the effect of widening all markets.

For example, as a result of the automobile, no

giant supermarket today has as much control overits market as did one small store in the small Mid-western town where I was raised. The UnitedStates Steel Corporation has less control of its mar-ket than did many a small backyard iron foundry inthe last century. Transportation costs shielded thebackyard operation from competition located nomore than a few miles away. U. S. Steel, on theother hand, faces competition from firms in everysteel producing country in the world.

In the same way, the worker living in a smalltown with only one major employer usually has thereal alternative today of driving no more than 25miles to dozens of other employment opportuni-ties. Thus, in many cases, improved transport andcommunication facilities have widened marketsmore rapidly than firms have grown in size, andcompetition has increased rather than diminished.

A second way in which markets have been wid-ened by advancing technology is through the de-velopment of substitute products and materials.Thus, the major steel companies, in almost everyuse for steel, face tremendous competition fromsubstitute materials—aluminum, wood, concrete,plastics—even glass. In fact, it is quite unrealisticto speak of this arrangement as the steel industry.There really exists an entire complex of firms andindustries, and no one firm—no one industry even—approaches monopoly power when so used. Thetypical textbook, man-on-the-street way of defin-ing industry—and hence, of evaluating monopolypower—is both unrealistic and dangerous. It leadsto a gross exaggeration of the market power ac-tually possessed by the firms involved.

But again, let us not rest the case on these pos-sibilities of widening markets. In spite of thesepowerful influences, there still can exist situationsin which a given firm, or small group of firms,dominate a given market—no matter how wide thatmarket has become. Do these not constitute hardcore cases of monopoly, calling for governmentaction to break them up or offset their conse-quences by creating counter monopolies of laboror agriculture or other business firms? My answeris no!

Success Through Service

To begin with, it is extremely unlikely that afirm can acquire market power except by laudableefficiency in serving the wishes of consumers. Isthis firm to be rewarded for its efficiency by gov-ernment antitrust action? And, if so, what of the

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160 COMPETITION, "BIG BUSINESS/' AND MONOPOLY

consumer and the service he has been receiving?Furthermore, if this firm uses its market power

to raise prices above the competitive level, otherfirms will be tempted to enter the industry. Theseother firms can include large, diversified compa-nies with adequate capital to invade any market. Inthis country in recent years we have seen manycases of large firms in a given industry suddenlyfinding themselves facing the competition of otherlarge firms, already established in other fields, butcoming into this market to reap the rewards ofdiversification and higher profit margins. The re-sult is that even the powerful firm in a dominantposition in its own market must behave as if itfaced immediate important competition, because afailure to do so would soon attract that competi-tion.

Beyond this, the very process of technologicalprogress which may have created this dominantfirm tends, over time, to weaken its position. Otherfirms with newer, better ideas will come into thefield, and the original firm will find its share of themarket shrinking. Thus, in spite of the fact that theSupreme Court decided long ago against breakingup the United States Steel Company, that com-pany's percentage share of steel sold by Americanproducers has declined steadily from over 75 percent to around 35 per cent.

It is the little foxes, indeed, who nibble away atthe market, who improvise and experiment, whoseadministrative simplicity permits daring moves,who reduce the stature of the giant to one quiteconsistent with almost any meaningful definitionof competition. This process of short-run marketpower being replaced by someone else's short-runreign, in turn supplanted by a third, and so on, waseloquently described by the late great Austrianand Harvard University economist, JosephSchumpeter. He argued, not only that the domi-nance attained through technological advance isshort-lived, but also that it is this possibility of atleast short-run market power and security that in-duces firms to undertake the technological ex-plorations which are revolutionizing the modernworld.

In summary, then, although the process is notperfect nor instantaneous, there are powerfulforces always at work in the modern world to cre-ate a dynamic and effective competitive process,protecting each element in the economy from eachother.

Turn now to the third charge, to the claim thatindividuals in the modern complex economy do not

possess the necessary knowledge and mobility toforce competitive practices on those with whomthey deal.

I would first say that the modern economy, withits advanced techniques of communication andtransportation, provides the individual with moreinformation and better and cheaper means oftransport than ever before in the history of theworld. But beyond that, it is not necessary thatall individuals in a given market be completely in-formed and completely mobile for adequate com-petitive pressures to exist.

For example, I know almost nothing about theworkings of a television set. What protects methen, when I buy a television set or have one re-paired? It is the fact that there are a substantialnumber of men who do have the required technicalknowledge. The television dealer who expects toprosper and survive must meet the demands of allwith whom he deals, or quickly lose out to othermore reputable and reliable dealers. On the otherhand, in certain areas I am the better informed buy-er, and in these areas I protect the less well-in-formed.

In the same way, I have a personal commitmentto the college where I work and the communitywhere I live which seriously reduces my mobility.Here, I am protected in part by the good will ofthose who employ me, but I am protected as wellby the fact that the college must offer a generalprogram of working conditions and salaries thatwill retain the uncommitted and that will attractthe appropriate staff replacements and additions.

Not All Must Move at Once

This same process works to effect the many ad-justments that must continually be made in a dy-namic economy. Usually, in a dying industry orarea, not all workers must leave at once. The proc-ess customarily takes years. The adjustments aremade by the sizable mobile element in every workforce, thus protecting the less mobile from loss ofemployment or exploitation. The adjustment proc-ess can be left to each individual and does not re-quire that everyone have complete knowledge andcomplete mobility.

Another variant of this argument is the chargethat the consumer is deliberately misled and con-fused by advertising, and hence falls easy prey tononcompetitive sellers. I have heard this argumentpresented by many people from all income levelsand all walks of life. But I have yet to find one of

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them who would admit that he himself was thehelpless victim of Madison Avenue. It is always"they"—a vague and never identified "they"—whoare thus bamboozled. The fact is that advertisingitself is competitive, an expression of the basiccompetitiveness of the American economy, a proc-ess through which all of us receive the necessaryinformation for the making of decisions.

In summarizing my answers to the charges thathave been made against the possibility of a trulycompetitive free market, let me repeat, I do notinsist that the processes at work produce instantpure competition, in every market in the country,at every moment of time. I say only that the forcesare sufficiently strong, and work in good enoughtime, to give us a workably competitive economy,an economy that does not need government actionto offset the noncompetitive elements.

More Harm than Good

When I have admitted that the system is not per-fect, does this not leave a case at least for govern-ment antitrust legislation to handle the imperfec-tions that remain? In theory, a case might be madefor this; but in practice, I see no evidence that anti-trust legislation and action ever can be devised tocorrect the few imperfections without the greaterpossibility of destroying dynamic competitivefirms.

How is one to distinguish between the firm thathas acquired temporary market power throughgreater efficiency and the one that has acquiredpower without being efficient? To break up thefirm that is efficient is to work against true compe-tition rather than to promote it. Nor can we seekto maintain competition by maintaining competi-tors. This has been a common thrust of our anti-trust action. Yet, in fact, it thwarts competitionrather than promotes it. Under true competition,the resources come under the control of those firmswhich have proved themselves the most efficient inserving the interests of consumers. The weeding-out process is severe and effective. To stop that

process, to try to maintain a given number ofcompetitors, is to promote inefficiency, not compe-tition.

Another direction taken by our antitrust lawshas been that of prohibiting unfair competition.Unfair competition has been defined as sellingbelow cost in order to drive out rivals and thus gaina dominant position in the market. In practice,though, it is virtually impossible to distinguishbetween low prices that are a natural part of com-petitive maneuvering and those that are designedto establish market dominance. In practice, then,this legislation has done much more to reduce thecompetitiveness of the economy than to enhanceit. In addition, it has contributed to a general cli-mate for business decision-making characterizedby uncertainty and confusion. Thus, one majorelectrical manufacturing firm recently was underindictment for charging prices that were thoughtto be too high and at the same time for chargingprices that were thought to be too low.

Antitrust legislation generally has been sub-jected to such varied interpretations that the mostexperienced legal staff in the country cannot, withany certainty, advise a company on what practiceswill be illegal under the legislation. Surely, thisreflects the basic philosophical and practical weak-ness of the antitrust approach itself.

In conclusion, then, I would offer as the onlymeaningful definition of monopoly the followingone used by Adam Smith: "Monopoly is a govern-ment grant of exclusive trading privileges." If thisdefinition be accepted, it follows that what thegovernment must do, and all that it must do, topromote competition is to stop fostering and pro-tecting monopoly, whether it be in business, or inthe professions, or in agriculture, or in labor. Inthe words of the great Belgian historian, HenriPirenne, in his study of the emergence of compet-itive capitalism from the blight of the government-protected guild economy: "Capitalism is not in it-self opposed to the tendencies of human nature,but its restriction is. Economic liberty is spontane-ous."

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53. THE PHANTOM CALLED "MONOPOLY " • i t -

F. Sennholz

In their denunciation of capitalism the socialistsuse some frightful phantoms. The oldest and per-haps the most effective one is the notion that mo-nopolistic concentration of business inheres per-manently and inseparably in capitalism. They de-pict in vivid colors the horrors of monopolistic cap-italism and then conclude that a free enterpriseeconomy obviously requires governmental re-straint lest it deteriorate to a chaotic system ofbusiness monopolies and public oppression.

Recalling the era of "trusts" and "tycoons"around the turn of this century, these socialistsvaliantly defend the Sherman Antitrust Act of1890, the Federal Trade Commission Act, and theClayton Antitrust Act of 1914 which aim at thesuppression of business monopoly. And they willbe shocked if anyone casts doubt on the wisdom ofthe antitrust legislation.

Unfortunately, even free enterprisers are dividedon this point. Some defend our antitrust legislationand the governmental supervision of big businesswhich it entails, while others summarily reject theprevailing notions on monopoly and the antitrustactivity of the government.

An unbiased investigation of the monopoly prob-lem might well begin with the question: Are mo-nopolies inherently bad? Are they identical withdestruction of competition, with enormous monop-olistic gains, and with gouging of workers and con-sumers? Under what conditions, if any, are monop-olies really the evil organizations which they areassumed to be?

In an unhampered market economy a monopolyaffords no cause for alarm. A company that hasexclusive control of a commodity or service in aparticular market is prevented from exploiting thesituation by the following competitive factors: po-tential competition, competition of substitutes,and the elasticity of demand.

•From The Freeman, March 1960

In the United States thousands of different com-modities are each produced by a single producer,i.e., by a monopolist, and no one seems to careabout it. The 5 and 10 cent stores are full of itemsproduced by monopolists. And yet, all these itemsare sold at competitive prices. Why? Because ofpotential competition. As long as there is potentialcompetition, a monopolist cannot charge monopo-listic prices.

Potential Competition

Potential competition exists in all fields of pro-duction and commerce which anyone is free to en-ter. In other words, wherever government does notprevent free entry through licenses, franchises, andother controls, potential competition exists. Mostcorporations are searching continuously for newlines and items of production. They are eager toinvade any field in which business earnings areunusually high.

The invasion of another field by a corporationmay involve no more than a simple retooling orreorganization that is achieved in a few weeks ormonths. Or, brand new facilities may be em-ployed for an invasion. Thus one producer, wheth-er he is a monopolist, duopolist, or a competitoramong many, always faces the potential compe-tition of all other producers.

Even if a corporation the size of General Motorswere a monopolist with regard to certain commodi-ties, it would have to act as if it were a single pro-ducer among many. For it continuously faces po-tential competition from the Fords, Chryslers,General Electrics, and others. These potential com-petitors undoubtedly have the resources, technicalknow-how, and marketing organizations to com-pete with General Motors.

But even if competitors of similar size and struc-ture should be absent, the monopolist must be

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mindful of the potential competition that can ariseovernight. Numerous financiers, promoters, andspeculators continuously search for opportunitiesto establish new enterprises. They have formednew giant companies in the past. And they arewilling to risk their capital again if they see an op-portunity for profits.

Dreading the promoter who may invade his field,the monopolist therefore must act as if he weresurrounded by numerous competitors. He mustbe alert and always "competitive." He must con-tinuously improve his product and reduce its price.For if he should relax, another company will sooninvade his field. The newcomer is likely to be aformidable competitor for he has new machineryand equipment. He has new ideas and applies newmethods of production. And he enjoys the goodwill of all customers. Indeed, a monopolist who re-laxes invites disaster.

If an enterprise nevertheless enjoys a monopo-listic position, it must by necessity be the mostefficient producer in the field. In other words, inan industry endowed with freedom of entrance, amonopoly is an efficiency monopoly. For the gov-ernment to impose restrictions on it or even dis-solve it by force would be to destroy the most effi-cient producer and invite the less efficient to enterthe field. In this case, the economy suffers a net lossin output and efficiency.

In my hometown a small manufacturer succeed-ed in gaining a monopolistic position in the produc-tion of creep testers, which are machines that testthe behavior of materials at elevated tempera-tures. When I inquired into the reasons for hisastonishing position, he explained with a smile: "Icompletely routed my two competitors, both bil-lion-dollar corporations, by continuously improv-ing the quality of my product and reducing itsprice. They finally abandoned the field." Obvious-ly, he would immediately invite his formidablecompetitors to re-enter the field if he failed to im-prove his product in the future, or charged monop-olistic prices.

That government has not investigated or prose-cuted this monopolist probably is due to the small-ness of his operations. Experience, however, sug-gests that such large corporations as GeneralMotors, du Pont, or U.S. Steel would face govern-mental investigation and prosecution if they werethe monopolist. If this is true—and unfortunatelythere is no reason to doubt it—governmental prose-cution aims at big business rather than at monop-olies.

But even if American enterprises failed to com-pete with each other and potential competitionfailed to exert a restraining influence on monop-olists—which is a most unrealistic assumption—thepeople would escape monopolistic pricing throughrecourse to substitutes. In many fields the compe-tition of substitutes is more important than that ofcompeting producers.

People's wants may be satisfied by a variety ofproducts and materials. In the manufacture ofclothing, for instance, a dozen different materialsvie with each other for the consumer's dollar. Themonopolist of any one material is powerless be-cause monopolistic pricing would induce consum-ers to switch immediately to other materials. Theproducers of suspenders compete not only witheach other and with potential competitors, but alsowith the producers of belts. In the transportationindustry the railroads compete with trucks, cars,airplanes, pipelines, and ships. In the building in-dustry lumber competes with aluminum, steel,bricks, and stones. And Bayer's aspirin competeswith Anacin and Bufferin.

In some cases, the adoption of substitutes re-quires large capital outlays which producers arenot willing to make immediately. Complete substi-tution then will take time, although it will ultimate-ly be as effective as immediate substitution. A rail-road that wants to substitute oil for coal needslarge capital for the purchase of diesel engines.Therefore, it may switch from coal to oil only whenit needs to replace worn-out coal locomotives. Ahouse owner may switch from coal to oil or naturalgas when his old coal furnace must be replaced.Thus, within a period of several years, substitutionwill have its restraining effect on a monopolist.

Demand Elasticity

The existence of substitutes makes for demandelasticity which, in turn, makes monopolistic pric-ing unprofitable; for higher product prices wouldgreatly curtail product demand, and thus sales andincome, of the monopolist. Therefore, he againmust act as if he were a competitor among many.

The same is true in all cases of demand elastic-ity, whether or not there are substitutes. For in-stance, electricity for heating must compete withsuch substitutes as oil, gas, and coal. However, asa source of light and of energy for power tools, itprobably faces no substitutes. An electricity mo-nopolist, nevertheless, would be greatly restrainedby potential competition and demand elasticity.

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If electricity prices would rise considerably, themost important consumers, such as industrialplants and other business organizations, wouldsoon produce their own electricity. With the properequipment anyone can produce his own. Of course,the monopolist may counteract this danger bycharging different rates to his different classes ofcustomers: low rates to all industrial users who areapt to produce their own electricity, and higherrates to all others. Assuming that residential usersdo not readily resort to independent power produc-tion, are they not liable to fall in the grip of a mo-nopolist? No! Demand elasticity would preventthis. Many people undoubtedly could reduce theirconsumption of electricity without suffering men-tionable discomfort. A house owner who may en-joy the light of a hundred bulbs on a winter eveningmight easily curtail his consumption if electricitycharges should increase greatly. But this curtail-ment of demand would reduce the sales and in-come of the monopolist.

All producers in fact compete with all other pro-ducers for the consumer's dollars. The manufactur-er of television sets competes with the manufac-turer of freezers and refrigerators. If the monop-olist of one commodity—say, television sets—shouldraise his price, the consumer may forego the pur-chase of a new set and buy instead a new refriger-ator. We consumers do not allocate our income tothe satisfaction of categories of wants but to that ofspecific wants yielding the greatest net additionto our well-being. This addition, in turn, is deter-mined by the urgency of our wants and by the costof acquisition. Rising costs obviously affect us ad-versely, which may induce us to purchase an en-tirely different product that now contributes mostto our well-being.

Consumer resistance to monopolistic pricingfinds expression in yet another form. People whosuspect monopolistic practice by a producer tendto favor any newcomer who would compete withhim. Any enterprise striving to invade the field isassured the patronage and good will of all dissatis-fied consumers. In our example of the electricitymonopolist, the industrial user producing electric-ity for his own consumption may decide to supplypower also to his workers and neighbors who, atlower rates, would gladly transfer their patronage.Thus, in a free economy, even the electricity mo-nopolist is greatly limited in his pricing policies.

The same limitations apply in all other indus-tries, including the public utilities. A mail monop-oly would face not only the people's demand elas-

ticity for mailing services but also the potentialcompetition by the numerous intercompany mail-ing systems. At the present time hundreds ofcompanies have intercompany mail delivery sys-tems that could expand their services to includetheir workers, customers, and other people intheir communities if the law allowed. The case isthe same with other "public utilities" supplyinggoods and services such as water, telephone, andtelegraph.

On Optimum Growth

In a system of unhampered economic freedom,a monopolistic market position could be attainedonly through efficiency. Without government inter-vention, an efficient enterprise tends to grow untilit reaches its optimum size at which the unit costsof production are lowest. This optimum dependson the nature of the industry, the state of the prod-uct and capital markets, the rate of taxation, andthe caliber of management. Obviously, a steel com-pany requires a much larger capital outlay andwork force than does a dentist's office or a barbershop. Also, the enterprise managed by a brilliantbusinessman has a higher point of optimum thanone managed by his mediocre successors. A mo-nopolistic position can be attained only if the opti-mum size suffices to supply completely a givenmarket.

The territorial expanse of the market which amonopoly is capable of supplying depends on twofactors: the difference between the unit costs ofproduction of the monopolist and those of his po-tential competitors, which determines the marginof superiority of the monopolist, and the unit costsof transportation, which are determined by the na-ture of the product and by the distances involved.A bulky commodity such as cement, for instance, isburdened with high costs of transportation. Conse-quently, the market of the cement monopolist willbe relatively small, for an increase in distancefrom plant to consumer rapidly increases his unitcosts. On the other hand, commodities with rel-atively low transportation costs such as watches ordiamonds can be distributed over vast marketareas.

This analysis of the territorial range of marketsalso reveals that bulky item monopolies are in arelatively favorable position to conduct monopolis-tic policies. While an American producer ofwatches must cope with foreign competitors allover the globe, a cement producer may be little

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concerned about the competition of another pro-ducer some 100 miles away. He may indeed betempted to restrict output and raise prices in orderto maximize his income. But, of course, such actionwould invite other producers to invade the territoryof the monopolist. Another corporation soon wouldbuild a modern plant in that territory. With a newplant and the good will of all consumers, it un-doubtedly would rout the monopolist.

It is apparent that a change in transportationcosts, production technology, management, or anyother cost factor can upset a monopolistic position.Also, a concentration beyond the optimum pointis an invitation to failure, for the unit costs of pro-duction tend to increase again. The monopolistwho disregards this fact invites potential competi-tors to invade his field and reduce him to his opti-mum size. There is no need for government tobreak up a giant enterprise; if it were too large, thecompetitors would reduce it.

This is not to deny that even in a capitalisteconomy a monopoly may temporarily reduce out-put and charge monopolistic prices. Havingreached a monopolistic position through efficiency,a businessman may attempt henceforth to followmonopolistic policies. But the foregoing analysisclearly indicates that his attempts are bound to beshort-lived. Soon, he will face a crucial strugglewith powerful invaders producing with new equip-ment and enjoying the good will of the public. Ofcourse, it is most unnatural and unlikely for a busi-nessman to rise to eminence through product im-provements and lower prices, and then suddenly toturn toward output curtailment and price in-creases. But if he should act in such a manner,which is conceivable, he practices self-destruction.

It cannot be denied that in our interventionistworld many monopolies actually have the power torestrict output and charge monopolistic prices. Butthe reason for this unfortunate state of affairs is tobe found in the multiplicity of government restric-tions of competition. If the government preventscompetitors from entering the field, the peoplelose their protection by potential competition. Thepublic utility that enjoys an exclusive franchise is alocal monopoly. In this case, the people's only lineof resistance is their demand elasticity and per-haps, also, their recourse to independent produc-tion. Meanwhile, the planners resort to politicalcontrols.

Through franchises, licenses, patents, tariffs,and other restrictions, modern government has infact created thousands of monopolies. Having thus

crippled and hampered competition, it then pro-ceeds to control the monopolies. Political bodiesnow decide vital economic questions in many im-portant industries. They regulate our railroads, air-lines, and other means of transportation. Theygrant exclusive franchises in radio, television, tele-phone, and telegraph. They monopolize the pro-duction and marketing of electricity, water, andgas. They issue patents that assure their recipientsmonopolistic positions. And, finally, they own andoperate the whole postal industry and preventcompetition through fines and imprisonments. Inall these cases, the government effectively restrictscompetition and thus creates local or national mo-nopolies.

Labor legislation has granted monopolistic pow-ers to labor unions, which control whole industriesemploying hundreds of thousands of workers. Theyclose down vital industries and cripple the en-tire economy. Through the union shop arrange-ment, or directly through brute force, they dictateemployment conditions in thousands of enter-prises. All this is done in perfectly legal sanctitywithout interference by the government. On thecontrary, the legal framework for this union poweris provided by the very government that professesto oppose monopolistic practices and positions inthe economy.

This frightful union power, in turn, forces enter-prises to unite. A small businessman cannot pos-sibly meet the challenge of a powerful industryunion. He therefore is tempted to sell out to a giantcorporation with greater power of resistance. Ofcourse, even the giant corporation will be closed byunions. But it cannot be destroyed as easily as cana smaller company.

Effects of Tax Policy

The confiscatory taxation imposed by the inter-ventionist state causes the same industrial con-centration. The middle-aged founder and owner ofa million-dollar enterprise is forced to sell out to alarge corporation for fear of confiscatory estatetaxation. In case of his sudden demise his widowand heirs, who may not be qualified to carry on hisbusiness, will face confiscatory inheritance taxes.They would have to liquidate the business in a veryshort time to meet the tax liabilities. As the sale ofa specialized business requires great skill and goodtiming, the sale by the widow probably would en-tail large losses. Therefore, a responsible business-man will arrange the liquidation of his own enter-

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166 COMPETITION, "BIG BUSINESS/' AND MONOPOLY

prise in good time. He himself will sell out to hiscorporate competitors and invest the proceeds inmarketable securities. Government bonds, for in-stance, can be readily sold for estate tax purposes.Thus, hundreds of small companies disappearevery year.

Especially the most efficient small enterprisestend to be liquidated on account of tax considera-tions. A going concern that generates profits istaxed at a rate of 52 per cent after which the cor-porate owner may be taxed at rates up to 91 percent. If the owner should decide to liquidate hisenterprise during the year, his profits are subjectto a capital gains tax amounting to 25 per cent. It isobvious that a businessman is tempted to generatea maximum amount of profits in a given year andthen quickly sell or liquidate his enterprise.Thus, hundreds of efficient "collapsible" compa-nies disappear every year.

Governments Create Cartels

Since the rise of political intervention in eco-nomic affairs, governments have frequently or-ganized or fostered the organization of cartels.These are combinations of enterprises for the pur-pose of controlling the output or marketing of acommodity or trade through regulation of produc-tion, allocation of markets, price fixing, or othermeans. This regulation always aims at assuring thecartel members a "fair" income, which means ahigher income than they otherwise would have.

The German government led the way towardcartelization of key industries. From about 1880 to1930 it organized more than 2,100 cartels. It wasprompted to this disastrous policy by yet anotherintervention: its labor legislation. Since the 1880's,the German government had imposed tremendous"social" costs on its industry through social secur-ity legislation and other measures that increasedlabor costs and reduced labor efficiency. Withoutfurther government intervention, this social legis-lation would have put German producers at a com-petitive disadvantage against foreign producers.Under the new burden of social costs, they wouldhave lost not only many foreign markets but prob-ably some domestic markets as well. Then therewould have been depression and unemploymentuntil German wages declined sufficiently to offsetthe social security costs.

Instead of facing depression and unemployment,the German government decided to form cartels. Itimposed high tariffs on foreign goods, which pro-

tected the German industries laboring under theheavy burden of labor legislation. Businessmenwere thus enabled to raise prices, which meantthat workers were obliged to pay for their socialbenefits through higher product prices instead oflower wages. In order to prevent unemployment inthe export industries, the government encouragedthem to sell their products at world market prices.Such sales involved losses, due to the burden of so-cial costs, so the cartels adopted profit-sharingschemes by which the producers supplying thedomestic market at higher prices were forced tosubsidize exporters. Thus, the cartels commenceddumping, which tended to destroy the world mar-ket and the world division of labor.

In the United States the formation of trusts pro-ceeded along similar lines. However, the motivat-ing force was different. There was no social legis-lation depressing the American economy. Yet, theMcKinley administration, by imposing high importrestrictions, quite unintentionally achieved thesame sort of trustification as was done intention-ally by the Bismarck administration in Germany.

The Dingley Tariff of 1697, which becameknown as "the mother of trusts," granted tariff pro-tection to basic industries. With industrial importsfrom Europe greatly reduced, the American pro-ducers enjoyed monopolistic positions. Consol-idations took place on a large scale. During the"Golden Age of Trusts" between 1897 and 1904,425 trusts were organized with a total capital ofmore than $20 billion.

This trustification of American industry was pro-moted by yet another factor for which the govern-ment was solely responsible. This was the rapidcredit expansion that culminated in the panic of1907 and the ensuing depression. "Easy money"permitted the organization of new corporations. Itmade the promotion of combinations most profit-able, as new securities could be sold at premiumprices. Consequently, Wall Street financierseagerly promoted mergers and reorganizations ona vast scale. When, in 1903, investors began toquestion the overcapitalization of the industrialcombines, a trust-share panic developed whichsignaled the temporary end of trustification.

Two decades later, when the Federal ReserveSystem was flooding the capital market withhuge quantities of new credit, gigantic trustsagain made their appearance. Easy financing per-mitted the organization of powerful holding com-panies that controlled production through severallayers of subsidiaries. They reigned supreme in all

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industries that were sheltered from healthycompetition through government franchises, char-ters, tariffs, and other restrictions. In the field ofpublic utilities, nine holding company systems—among which the Insull group was outstanding-controlled about three-quarters of the power re-sources in the United States. Holding companiesdominated one-fifth of the railroad mileage. Aswas to be expected, this period of industrial com-bination came to an end with the stock marketcrash in 1929.

A few years later, the Roosevelt administrationresorted to extensive industry combinations inorder to control the American economy. Under theNational Industrial Recovery Act, the industrieswere organized along the lines of a cartel withcodes that regulated most phases of production.The objective was shorter work hours, reducedproduction, higher prices. Under the AgriculturalAdjustment Act, American agriculture was organ-ized to reduce production by plowing under cropsand thus raise agricultural prices artificially. It is arecord of history that all these measures failed dis-mally. Instead of reviving the economy, they keptit in the grip of deep and lengthy depression. Butit was the American government that enacted andenforced these policies which the enemies of cap-italism ascribe to private corporations.

Antitrust Legislation

The failure to distinguish between the monopo-listic tendencies of government and the propen-sity of private corporations to grow to optimumsize probably underlies the American antitrustmovement. Our Founding Fathers were fully awareof this difference. They were so hostile to monopolypower granted by government that Thomas Jeffer-son wanted to include an antimonopoly provisionin the articles of the Constitution. But their hostil-ity was aimed at monopolistic policies as they wereconducted by the colonial powers of Europe beforethe age of capitalism. They condemned "mercan-tilism" which was an economic system similar tomodern socialism. As Adam Smith had pointedout, monopoly was "the chief engine of mercan-tilism."

It was entirely natural that the nineteenth cen-tury disciples of capitalism should continue to op-pose monopolistic endeavors. The common law asit developed in the United States reflected theirattitude. But during the 1880's, the prevailingideology began to change. Under the influence of

new schools of thought that were hostile to variousaspects of capitalism, the American public be-gan to view with alarm the growth of industrialenterprise. Advancing technology, especially inthe manufacturing and transportation fields, andthe rapid accumulation of capital, made privateenterprises grow by leaps and bounds. But suchgrowth in most cases merely moved toward opti-mum size. Of course, in some cases a very success-ful entrepreneur may have overexpanded his or-ganization, which sooner or later resulted in lossesand failure. In other cases, government franchises,patents, tariffs, and other trade restrictions actu-ally promoted the growth of monopolies. But pub-lic opinion, which was molded by numerous "anti-monopoly parties," by the Populist and Grangemovements, laid the blame solely on private enter-prise. Thus, while the Founding Fathers had clear-ly recognized the role of government in every mo-nopoly, their descendants from the 1880's on sawonly the "monopolizing businessman."

Kansas was the first state to enact an antitrustlaw in 1889. It was quickly followed by otherstates. In 1890, in performance of campaign com-mitments and in response to widespread publicdemand, the federal government passed the Sher-man Antitrust Act. The act set forth as a nationalpolicy the proposition that restraint of trade andmonopolistic market positions of private corpo-rations are contrary to the public interest. Laterlegislation included the Clayton Antitrust Act andthe Federal Trade Commission Act, the Robin-son-Patman Act, certain provisions of the WilsonTariff Act, the Webb-Pomerene Act, and the mis-cellaneous provisions of other acts.

Responsibility for the enforcement of the anti-trust laws was placed with the Antitrust Divisionof the Department of Justice. From a modest be-ginning, this division has grown today into a largebureaucracy with swarms of lawyers and investi-gators. During President Harrison's administrationonly seven cases were instituted against large cor-porations. President T. R. Roosevelt initiated 44cases. Taft began 80, and Wilson 90. Coolidge'sadministration instituted 83 prosecutions, Roose-velt's 332, and Truman's 169. It is significant thatthe Roosevelt administration filed its 332 formalcharges although its National Industrial RecoveryAdministration had suspended the Sherman Actand was occupied with organizing the Americaneconomy along the lines of a cartel. Under Pres-ident Eisenhower's administration, the number ofprosecutions per year promises to be even higher

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168 COMPETITION, "BIG BUSINESS/' AND MONOPOLY

than under any preceding administration.These figures suggest that the antitrust prosecu-

tion of American corporations shows a markedtendency toward acceleration. Two reasons mayaccount for this ominous development. First, thegrowing antitrust bureaucracy feels compelled tobring proof for the justification of its existence andgrowth. An antitrust lawyer knows of no better ev-idence of his worth than the number of his prosecu-tions. Consequently, he will file more and morecharges against businessmen. Then, these charges,being made in the limelight of nationwide pub-licity, poison the political atmosphere and createfurther business hostility that demands morecharges. In fact, the antitrust charges of the U.S.Justice Department have created a badly distortedpicture of our enterprise economy, which has con-tributed to the rise of a political ideology that isopposed to capitalism. Today, the Antitrust Divi-sion is an efficient arm of government omnipo-tence. It has prosecuted virtually every large cor-poration in the country and continues to embar-rass and harass thousands of businessmen, espe-cially the most eminent.

The New Ideology

Of course, the government lawyers and eagerpoliticians offer a different explanation for the ac-celeration of their antitrust activity. According tothem, the mature capitalist economy, such as theAmerican, tends to deteriorate into a monopolisticeconomy that deprives small enterprises of fair andequal chances; increased monopolization requiresincreasing antitrust prosecution; the restraint oftrade by big business is the cause, and the govern-ment actions are its effect, not vice versa.

No matter how plausible, this is a vicious line ofthought taken from the armory of Marxism. Ac-cording to Karl Marx, the proclaimed father ofmodern socialism and communism, the exploita-tion of the workers by the capitalists leads to in-dustrial concentration and monopolization. A de-clining number of industrialists grow richer andricher while the masses of the people form an ever-growing army of paupers and unemployed. Finally,this process of concentration will come to a headwhen the people expropriate the expropriators.Thus, socialism is born.

Our statist politicians and antitrust bureaucratsembrace the first half of this Marxian explanation.They subscribe to the theory that our capitalistsystem breeds monopolies. But then they part with

Marx by proclaiming their desire to save thismonopoly-breeding system from its own destruc-tion. They propose to destroy the monopoliesthrough government action.

We need not here refute this argumentation. Ourforegoing discussion of potential competition,competition of substitutes, and the optimum sizeof capitalist enterprises contains a cogent refuta-tion. But we wonder about the sincerity of the gov-ernment intention to preserve our capitalist system.How can it seriously oppose monopolies if the gov-ernment itself continuously is creating them?

A modern offshoot of the Marxian concentrationtheory is the "monopolistic competition theory"which is propagated at hundreds of our collegesand universities. It was first stated by Edward H.Chamberlin of Harvard University and Mrs. JoanRobinson of Cambridge University. Both believethat the old idea of alternative—either monopoly orcompetition—is fallacious, and that both situationsare combined in our economic system. The mono-poly of each producer in his own brand is thestarting point that gives producers the power to"administer prices," gouge consumers, and exploitworkers. Pure or perfect competition, theybelieve, can only exist if the number of competingproducers is large and if they deal in perfectlystandardized products.

The foregoing discussion of potential competi-tion clearly denies the requirement of numerouscompetitors. Competition is at work, even if therebe only one producer. For, in an industry withoutgovernment franchises or other entrance restric-tions, the monopolist must act as if he were sur-rounded by hundreds of competitors. If he were toattempt to restrict output in order to raise prices,he would invite immediate invasion by other pro-ducers.

The requirement of a perfectly standardizedproduct is based on the assumption that con-sumers can be pulled into a monopolistic grip bytrade names, minor product variations, by ad-vertisem*nt, and other producer devices. Once youdrive a Ford car, you will always be sold on Fordproducts. This consumer habit will give Ford amonopolistic position which entails the power tocharge monopolistic prices.

We reject this assumption of a dull and gulliblepublic. We believe that people continuously shoparound, comparing the quality of products with dif-ferent trade names and labels. Many consumersswitch brands and suppliers, always seeking thebetter product for their money. Consequently, the

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Ford manufacturers compete not only with Gen-eral Motors cars, Chrysler cars, American Motorscars, all foreign cars, but also with the manufac-turers of houses, freezers, washers, dryers, and soon. For the high price of one product may induceus to buy an entirely different product.

The monopolistic competition theory offers as

frail a foundation for government antitrust activityas the Marxian concentration theory itself. Bothfail to describe and explain capitalism. But they aresucceeding in destroying American big businesswhich is the mainstay of our high standard of liv-ing. In fact, they are destroying competition andindividual enterprise.

54. ADVERTISING*

Israel M. Kirzner

Advertising has been badly treated by many schol-ars who should know better. Not only Marxists andliberals, but even conservatives have given adver-tising a bad press. Let us examine some of thecriticisms.

• First, many advertising messages are said to be of-fensive—by esthetic or ethical and moral standards. Un-fettered, unhampered, laissez-faire capitalism, it iscontended, would propagate such messages in a waythat could very well demoralize and offend the tastesand morals of members of society.

• Second, advertising, it is argued, is deceitful,fraudulent, full of lies. Misinformation is spread byadvertising, in print, on the airwaves, and this doesharm to the members of society; for that reason ad-vertising should be controlled, limited, taxed away.

• Third, it is argued that where advertising is notdeceitful, it is at best persuasive. That is, it attemptsto change people's tastes. It attempts not to fulfillthe desires of man but to change his desires to fit thatwhich has been produced. The claim of the marketeconomist has always been that the free market gen-erates the flow of production along the lines thatsatisfy consumer tastes; their tastes determine whatshall be produced—briefly, consumer sovereignty. Onthe contrary, the critics of advertising argue, capital-ism has developed into a system where producers pro-duce and then mold men's minds to buy that which hasbeen produced. Rather than production being gov-erned by consumer sovereignty, quite the reverse:the consumer is governed by producer sovereignty.

• A fourth criticism has been that advertising prop-agates monopoly and is antithetical to competition.In a competitive economy, it is pointed out, there

•From The Freeman, September 1972

would be no advertising; each seller would sell asmuch as he would like to sell without having to con-vince consumers to buy that which they would nototherwise have bought. So, advertising is made pos-sible by imperfections in the market. More seriously,it is contended, advertising leads toward monopoly bybuilding up a wall of good will, a protective wall ofloyalty among consumers which renders a particularproduct immune to outside competition. Competingproducts, which do not share in the fruits of the ad-vertising campaign, find themselves on the outside.This barrier to entry may gradually lead a particularproducer to control a share of the market which isrendered invulnerable to the winds of outside compe-tition.

• Finally—and this in a way sums up all of thesecriticisms—advertising is condemned as wasteful. Theconsumer pays a price for a product which covers avery large sum of money spent on advertising. Adver-tising does not change the commodity that has beenpurchased; it could have been produced and sold at amuch lower price without the advertising. In otherwords, resources are being used and paid for by theconsumer without his receiving anything that he couldnot have received in their absence.

These are serious criticisms. We have learned toexpect them to be emphasized by contemporaryliberal economists. To Marxist thinkers, again, ad-vertising is essential for capitalism; it is seen as asocially useless device necessary in order to getexcess production sold. They see no positive ele-ments in advertising at all. But even conservativethinkers and economists have pointed out some ap-parent limitations, weaknesses, criticisms of adver-tising.

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The Free Economy and How It Functions

It is not my purpose here to defend each andevery advertising message. I would rather discussa free economy, a laissez-faire economy, pure cap-italism. I would like to show that in such a world,advertising would emerge with a positive role toplay; that it would add to the efficiency with whichconsumer wants are satisfied; and that, while thereal world is far from perfect, a large volume of thecriticism would fade away were it understood whatrole advertising, in fact, has to play in a pure mar-ket economy.

Let me imagine a world, a free market, in whichthere are no deceitful men at all. All the messagesbeamed to consumers and prospective consumerswould be, as far as the advertisers themselves be-lieve, the strict truth. We will consider later the im-plications of the fact that men are imperfect andthat men succumb to the temptation in sellingsomething to say a little bit less, a little bit more,than the exact truth. In the meantime, let us talkabout a world of honest men, men who do not tryto deceive.

Further, let us imagine a pure market economywith government intervention kept to the absoluteminimum—the night watchman role. The govern-ment stands to the sidelines and ensures the pro-tection of private property rights, the enforcementof contracts freely entered into. Everyone then pro-ceeds to play the game of the free market economywith producers producing that which they believecan be sold to the consumers at the highest pos-sible money price. Entrepreneur producers, whodetect where resources are currently being used inless than optimum fashion, take these resourcesand transfer them to other uses in the economywhere they will serve consumer wants which theentrepreneurs believe are more urgently desired,as measured by the amounts of money consumersare willing to pay for various products.

We will assume that there is freedom of entryinto all industries. No entrepreneur has sole con-trol over any resource that is uniquely necessaryfor the production of a given product. No govern-ment licenses are required in order to enter intothe practice of a given profession or to introduce aparticular product. All entrepreneurs are free toproduce what they believe to be profitable. All re-source owners are free to sell their resources,whether labor, natural resources, capital goods.They are free to sell or rent these resources to thehighest bidder. In this way the agitation of the

market gradually shuffles resources around untilthey begin to be used to produce those productswhich consumers value most highly. Consumersarrange their spending to buy the commoditiesthey believe to be most urgently needed by them-selves. And the market flows on in the way that weunderstand it.

Open Competition

We say this is a free market, a laissez-faire, com-petitive system. But we do not mean a perfectlycompetitive market, as this notion has been devel-oped by the neo-classical economists. In a perfectlycompetitive market, each seller faces a demandcurve which is perfectly horizontal. That is to say,each seller believes that he can sell as much as hewould like to sell without having to lower the price.Each buyer faces a perfectly horizontal supplycurve and each buyer believes that he can buy asmuch as he would like to buy of anything withouthaving to offer a higher price. In such a world of"perfect competition," we have what we call an"equilibrium" situation, that is a situation whereall things have already been fully adjusted to oneanother. All activities, all decisions have been fullycoordinated by the market so that there are nodisappointments. No participant in the economydiscovers that he could have done something bet-ter. No participant in the economy discovers thathe has made plans to do something which it turnsout he cannot do.

In this model of the perfectly competitive econo-my, there would in fact be no competition in thesense in which the layman, or the businessman,understands the term. The term "competition" tothe businessman, the layman, means an activitydesigned to outstrip one's competitors, a rivalrousactivity designed to get ahead of one's colleagues,or those with whom one is competing. In a worldof equilibrium, a world of "perfect competition,"there would be no room for further rivalry. Therewould be no reason to attempt to do something bet-ter than is currently being done. There would, infact, be no competition in the everyday sense ofthe term.

When we describe the laissez-faire economy ascompetitive, we mean something quite different.We mean an economy in which there is completefreedom of entry; if anyone believes that he canproduce something that can serve consumers'wants more faithfully, he can try to do it. If anyonebelieves that the current producers are producing

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at a price which is too high, then he is free to tryto produce and sell at a lower price. This is whatcompetition means. It does not mean that the mar-ket has already attained the "equilibrium" situa-tion, which goes under the very embarrassing tech-nical name of "perfectly competitive economy."

Now, economists and others understand general-ly that competition means price competition: offer-ing to sell at a lower price than your competitorsare asking, or offering to buy at a higher price thanyour competitors are bidding. Entrepreneurs willoffer higher prices than others are offering forscarce labor. They will offer to sell a product atlower prices than the competing store is asking.This is what price competition means. This is themost obvious form in which competition manifestsitself.

However, we must remember that there is an-other kind of competition, sometimes called "non-price competition," sometimes called "qualitycompetition." Competition takes the form not onlyof producing the identical product which yourcompetitors are producing and selling it at a lowerprice, not only in buying the identical resourcewhich your competitors are buying and offering ahigher price. Competition means sometimes offer-ing a better product, or perhaps an inferior prod-uct, a product which is more in line with what theentrepreneur believes consumers are in fact de-sirous of purchasing. It means producing a differ-ent model of a product, a different quality, puttingit in a different package, selling it in a store with adifferent kind of lighting, selling it along with anoffer of free parking, selling through salesmenwho smile more genuinely, more sincerely. Itmeans competing in many, many ways besides thepure price which is asked of the consumer in mon-etary terms.

With freedom of entry, every entrepreneur isfree to choose the exact package, the exact oppor-tunity which he will lay before the public. Each op-portunity, each package has many dimensions. Hecan choose the specifications for his package bychanging many, many of these variables. The pre-cise opportunity that he will lay before the publicwill be that which, in his opinion, is more urgentlydesired by the consumer as compared with thatwhich happens to be produced by others. So longas there's freedom of entry, the fact that my prod-uct is different from his does not mean that I am amonopolist.

The late Professor Edward H. Chamberlin ofHarvard did economics a great disservice in argu-

ing that because a producer is producing a uniqueproduct, slightly different from what the fellowacross the street is producing, in some sense he isa monopolist. So long as there's freedom of entry,so long as the man across the road can do exactlywhat I'm doing, the fact that he is not doing ex-actly what I'm doing is simply the result of his dif-ferent entrepreneurial judgment. He believes thathe can do better with his model. I believe I can dobetter with mine. I believe that free parking ismore important to consumers than fancy lightingin the store. He gives a different package than I do.Not because he couldn't do what I'm doing, notbecause I couldn't do what he's doing, but becauseeach believes that he knows better what the con-sumer is most anxious to acquire. This is what wemean by competition in the broadest sense, notmerely price competition, but quality competitionin its manifold possible manifestations.

Professor Chamberlin popularized a distinctionwhich was not original with him but which owesits present widely circulated popularity primarilyto his work. That is a distinction between "produc-tion costs" and "selling costs." In his book of al-most forty years ago, The Theory of MonopolisticCompetition, Chamberlin argued that there aretwo kinds of costs which manufacturers, produc-ers, sellers, suppliers incur. First, they incur thefabrication costs, the costs of producing what it isthey want to sell. Second, they incur additionalexpenditures that do not produce the product orchange it or improve it, but merely get it sold.Advertising, of course, is the most obvious examplewhich Chamberlin cited. But "selling costs" of allkinds were considered by him to be sharply differ-ent from "production costs." In his original formu-lation, Chamberlin argued that "production costs"are costs incurred to produce the product for agiven Demand Curve while "selling costs" simplyshift the Demand Curve over to the right. That isto say, the same product is now purchased in great-er quantities at a given price but the product is thesame.

A False Distinction

The fallacy in the distinction between productioncosts and selling costs is fairly easy to notice. Infact, it is impossible for the outside observer—ex-cept as he resorts to arbitrary judgments of value—to distinguish between expenditures which do, andexpenditures which do not, alter the product. Weknow as economists that a product is not an ob-

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172 COMPETITION, "BIG BUSINESS/' AND MONOPOLY

jective quantity of steel or paper. A product is thatwhich is perceived, understood, desired by a con-sumer. If there are two products otherwise sim-ilar to the outside eye which happen to be consid-ered to be different products by the consumer, thento the economist these are different products.

Ludwig von Mises gives the example, which can-not be improved upon, of eating in a restaurant. Aman has a choice of two restaurants, serving iden-tical meals, identical food. But in one restaurantthey haven't swept the floor for six weeks. Themeals are the same. The food is the same. Howshall we describe the money spent by the otherrestaurant in sweeping the floor? "Productioncosts" or "selling costs?" Does sweeping changethe food? No. Surely, then, it could be argued thatthis is strictly a "selling cost." It is like advertising.The food remains the same; but, because you havea man sweeping out the floor, more people come tothis restaurant than to that. But this is nonsense.What you buy when you enter a restaurant is notthe food alone. What you buy is a meal, served incertain surroundings. If the surroundings are moredesirable, it's a different meal, it's a different pack-age. That which has been spent to change thepackage is as much production cost as the salarypaid to the cook; no difference.

Another example that I recall was the case of thecoal being run out of Newcastle and travelingalong the railroad toward London. Every mile thatcoal travels nearer the London drawing room, theDemand Curve shifts over to the right. How shallwe describe that transportation cost? "Productioncost" or "selling cost?" Of course, it's "productioncost." In fact, it's "selling cost" too. All "produc-tion costs" are "selling costs." All costs of produc-tion are incurred in order to produce somethingwhich will be more desirable than the raw mate-rials.

You take raw meat and turn it into cooked steak.The act of changing the raw meat into cookedsteak is to make the consumer desire it more eager-ly. Does this simply shift the Demand Curve overto the right? Of course, it does that. It does it bychanging the product.

Another example supposes there are two iden-tical pieces of steel, except that one piece has beenblessed, while the other piece is subject to a spir-itual taint, which to the scientist is not there butwhich is very vivid and vital to the consumer. Howshall we describe the expenditure on the commod-ities? Shall we describe the difference betweenthem as nonexistent? Or should we not recognize

that, if something is spiritually tainted to the con-sumer—in his view, not necessarily in mine or yoursor the economist's or other than in the mind of theconsumer—then he will not buy the tainted item,even though to the objective laboratory scientistthere's no difference between the items? The econ-omist has recognized these as two different com-modities. There'll be two Demand Curves. The factthat the scientist doesn't see any difference—theylook the same, they smell the same, if you touchthem they feel the same—is irrelevant. We know,as economists, that what we find in a commodity isnot the objective matter that is inside it, but how itis received by the consumer.

Clearly then, the distinction between a so-called"selling cost" and "production cost" is quite arbi-trary. It depends entirely on the value judgmentsof the outside observer. The outside observer cansay that this particular selling effort does notchange the product, but in that situation he is ar-rogating to himself the prerogative of pronouncingwhat is and what is not a product. That is some-thing which violates our fundamental notions ofindividual consumer freedom: that a consumer'sneeds are defined by no one else other than him-self. This may seem quite a detour from advertis-ing and yet it is all relevant to the question of whatrole advertising has to play.

The Provision of Information

Let us consider how some of these notions applyto the matter of information. One of the standarddefenses for advertising is that it provides a ser-vice which consumers value: the provision ofknowledge, the provision of information. Peoplebuy books. People go to college. People enroll inall kinds of courses. Advertising is simply anotherway of providing information. To be sure, it wouldseem that the information provided by supplierscomes from a tainted source, but don't forget thatwe are imagining for the meantime a world with-out deceitful people.

We can even relax that assumption for a mo-ment. It may be cheaper for the consumer to gethis information from the supplier or the producerthan from an outside source. In other words, if you,a consumer, have the choice of acquiring informa-tion about a particular product—either more cheap-ly from the producer or more expensively from anoutside, "objective" source—you may decide that,on balance, you're likely to get a better deal,penny-for-penny, information-wise, by reading the

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54. ADVERTISING 173

information of the producer, scanning it perhapswith some skepticism, but nonetheless relying onthat rather than buying it from an outside source.Technically, this involves what is known as theproblem of transactions costs. It may be moreeconomical for the information to be packaged to-gether with the product, or at least to be producedjointly with the product, than to have the infor-mation produced and communicated by an outsidesource. This is a possibility not to be ignored.

Advertising provides information, and this goesa long way to explain the role which advertisingand other kinds of selling efforts must play. Doesthis not seem to contradict the point just made,that there is no distinction between "productioncosts" and "selling costs"? Surely informationabout a product is distinct from the product. Sure-ly the costs incurred to provide information are adifferent kind of costs than the costs incurred toproduce the product. The answer is clearly, no. In-formation is produced; it is desired; it is a product;it is purchased jointly with the product itself; it isa part of the package; and it is something whichconsumers value. Its provision is not somethingperformed on the outside that makes people con-sume something which they would not have con-sumed before. It is something for which peopleare willing to pay; it is a service.

You can distinguish different parts of a serviceYou can distinguish between four wheels and a car.But the four wheels are complementary com-modities. That is to say, the usefulness of the oneis virtually nil without the availability of the other.The car and gasoline are two separate products, tobe sure, and yet they are purchased jointly, per-haps from different producers, different suppliers,but they are nonetheless parts of a total package, atotal product. If it happens that the information isproduced and sold jointly with the product itself,then we have no reason to question the character-istics of the costs of providing information as true"production costs," not producing necessarily thephysical commodity about which information isproduced, but producing information which isindependently desired by consumers, indepen-dently but jointly demanded, complementarilyused together with the "product" itself. In otherwords, the service of providing information is theservice of providing something which is neededjust as importantly as the "product" itself.

There is another aspect of advertising which isoften overlooked. Information is exceedingly im-portant. But, surely, it is argued, information can

be provided without the characteristics of adver-tising that we know, without the color, without theemotion, without the offensive aspects of advertis-ing. Surely information can be provided in simplestraightforward terms. The address of this and thisstore is this and this place. These and these qual-ities of commodities are available at these and theseprices. Why do illustrated advertising messageshave to be projected? Why do all kinds of obvious-ly uninformative matter have to be introduced intoadvertising messages? This is what renders the in-formation aspects of advertising so suspect. TheMarxists simply laugh it away. They say it is ridic-ulous to contend that advertising provides any kindof genuine information. If one rests the defense ofadvertising on its informative role, then one has alot of explaining to do. One has to explain why in-formation that could be provided in clear cut,straightforward terms is provided in such garishand loud forms, in the way that we know it.

The answer, I think, is that advertising doesmuch more than provide information which theconsumer wishes to have. This is something whichis often overlooked, even by economists. Sup-posing I set up a gas station. I buy gasoline and Ihave it poured into my cellar, my tanks. I have apump carefully hidden behind some bushes, andcars that come down the road can buy gas if theyknow that I'm here. But I don't go to the effortto let them know I'm here. I don't put out a sign.Well, gas without information is like a car withoutgas. Information is a service required complemen-tarily with the gas.

Supposing, then, I take a piece of paper, typevery neatly in capital letters, "GAS," and stick iton my door. Cars speed down the road in need ofgas, but they don't stop to read my sign. What ismissing here? Information is missing. Don't peoplewant information? Yes. They would like to knowwhere the gas station is, but it's a well kept secret.Now, people are looking for that information. It'smy task as an entrepreneur not only to have gasavailable but to have it in a form which is knownto consumers. It is my task to supply gas-which-is-known-about, not to provide gas and infor-mation.

I have not only to produce opportunities whichare available to consumers; I have to make con-sumers aware of these opportunities. This is a pointwhich is often overlooked. An opportunity which isnot known, an opportunity to which a consumer isnot fully awakened, is simply not an opportunity.I am not fulfilling my entrepreneurial task unless

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174 COMPETITION, "BIG BUSINESS/' AND MONOPOLY

I project to the consumer the awareness of the op-portunity. How do I do that? I do that, not with alittle sign on my door, but with a big neon sign,saying GAS; and better than that I chalk up theprice; and better than that I make sure that theprice is lower than the price at nearby stations;and I do all the other things that are necessaryto make the consumer fully aware of the oppor-tunity that I am in fact prepared to put before him.In other words, the final package consists not onlyof abstract academic information but in having thefinal product placed in front of the consumer insuch a form that he cannot miss it.

Free $10 Bills!

The strange thing about the world in which welive is that it is a world in which $10 bills arefloating around, free $10 bills! The problem isthat very few of us notice these $10 bills. It is therole of the entrepreneur to notice the existence of$10 bills. An entrepreneur buys resources for $10and he sells the product for $20. He is aware thatresources available for $10 are currently beingused in less than optimum fashion, that com-modities for which consumers are willing to pay$20 are not being produced, and he puts thesethings together. He sees the $10 bill and makes thecombination which other people do not see. Any-body might do it—freedom of entry. The entre-preneur notices the $10 bill, gets it for himself byplacing in front of the consumer something whichhe had not noticed. If the consumer knew wherehe could buy resources for $10 and get the productthat is worth $20, he wouldn't buy from the en-trepreneur. He would do it himself. Since hedoesn't know, I, as entrepreneur, have to createthis opportunity and make the consumer aware.

It is not enough to buy gas and put it in theground. The entrepreneur puts it in the ground in aform that the consumer recognizes. To do this re-quires much more than fabrication. It requirescommunication. It requires more than simple infor-mation. It requires more than writing a book, pub-lishing it, and having it on a library shelf. It re-quires more than putting something in a news-paper in a classified ad and expecting the con-sumer to see it. You have to put it in front of theconsumer in a form that he will see. Otherwise,you're not performing your entrepreneurial task.

Advertising has grown. Compare the volume ofadvertising today with the volume of 100 years agoand it has grown tremendously. More! Consider

the price of a commodity that you buy in a drugstore or in a supermarket. Find out what portion ofthat price can be attributed to advertising costsand it turns out that a much larger percentage ofthe final cost to the consumer can be attributed toadvertising today than could have been attributed50 years ago, 70 years ago, 100 years ago. Whyis this? Why has advertising expenditure grown inproportion to total value of output? Why has ad-vertising expenditure grown in proportion to theprice of a finished commodity? Why has advertis-ing apparently grown more offensive, more loud,more shrill? It's fairly easy to understand.

I give, as example, the lobby walls of a collegebuilding that I know very well. At one time thiswas a handsome lobby with walls of thick marble;you could walk from one end of the building to theother and the walls would be clear. Some years agoan enterprising entrepreneur decided to use somefree advertising space. He pasted up a sign. It wasthe only sign on the wall; everybody looked at it,saw the message. I don't remember what the mes-sage was or whether it was torn down, but I doremember that soon afterward those walls werefull of signs. As you walked down the passage, youcould read all kinds of messages, all kinds of stu-dent activities, non-student activities, student non-activities. It was fairly easy to learn about whatwas going on simply by reading the signs.

At first, the signs did not have to be big. But asadvertisers saw the opportunity, the free spacegradually filled up. The Ricardian rent theory cameinto play; all the free land was in use. And as thefree land or space was taken, of course, it becamemore and more important to get up early to pasteup your sign. That was the "rent," the high price,getting up early. But more than that, it becamenecessary now to arouse all kinds of interest in mein order to get me to read these signs. In otherwords, the variety and multiplicity of messagesmake it harder and harder to get a hearing.

The Price of Affluence

We live in a world which is often described as an"affluent society." An affluent society is one inwhich there are many, many opportunities placedbefore consumers. The consumer enters a super-market and if he is to make a sensible, intelli-gent decision he is going to have to spend severalhours calculating very carefully, reading, rereadingeverything that's on the packages and doing a com-plete research job before feeding all the infor-

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54. ADVERTISING 175

mation into the computer and waiting for the opti-mum package to be read off. It's a tough job to bea consumer. And the multiplicity of opportunitiesmakes it necessary for advertisers, for producers,to project more and more provocative messages ifthey want to be heard. This is a cost of affluence.It is a cost, certainly; something that we'd muchrather do without, if we could; but we can't.

The number of commodities that have been pro-duced is so great that in order for any one partic-ular product to be brought to the attention of theconsumer a large volume of advertising is nec-essary. And we can expect to get more and more. Isit part of production costs? Very definitely, yes. Itis completely arbitrary for anyone to argue that,whether or not the consumer knows it, the com-modity is there anyway, so that when he pays theprice which includes the advertising communi-cation he is paying more than is necessary for theopportunity made available. For an opportunity tobe made available, it must be in a form which it isimpossible to miss. And this is what advertising isall about.

One more word about the offensiveness of ad-vertising. Ultimately in a free market, consumerstend to get what they want. The kinds of productsproduced will reflect the desires of the consumer.A society which wants moral objects will get moralobjects. A society which wants immoral objectswill tend to get immoral objects. Advertised com-munication is part of the total package producedand made available to consumers. The kind of ad-vertising we get, sad to say, is what we deserve.The kind of advertising we get reflects the kind ofpeople that we are. No doubt, a different kind ofadvertising would be better, more moral, more ethi-cal in many respects; but I'm afraid we have no oneto blame but ourselves, as in all cases where onedeplores that which is produced by a market so-ciety.

A final word about deceit. Of course, deceitfuladvertising is to be condemned on both moral andeconomic grounds. But we have to put it in per-spective. Let me read from one very eminent econ-omist who writes as follows:

"The formation of wants is a complex process.No doubt wants are modified by Madison Avenue.

They are modified by Washington, by the uni-versity faculties and by churches. And it is not atall clear that Madison Avenue has the advantagewhen it comes to false claims and exaggerations."1

Take with a Grain of Salt

In other words, we live in a world where youhave to be careful what you read, to whom you lis-ten, whom to believe. And it's true of everything,every aspect of life. If one were to believe every-thing projected at him, he would be in a sorry state.

It is very easy to pick out the wrong messages tobelieve. Now, this doesn't in any way condone orjustify deceitful messages of any kind. We have torecognize, however, while particular producersmay have a short-run interest in projecting a mes-sage to consumers of doubtful veracity, that solong as there's freedom of competition the consum-er has his choice not only of which product to buybut whom to believe. And notice what is the alter-native in this world of imperfect human beings.The alternative, of course, is government control—still by imperfect human beings. So there is no wayto render oneself invulnerable to the possibility offalse, fraudulent, deceitful messages.

It would be nice to live in a world where no de-ceitful men were present. It would be cheaper. Youcould believe any message received. You wouldn'thave to check out the credentials of every adver-tiser. But that is not the world in which we live. Youcheck out the credit standing of individuals, thecharacter of people with whom you deal; and thisis an unavoidable, necessary cost. To blame adver-tising for the imperfections and weaknesses ofmankind is unfair. Advertising would exist underany type of free market system. Advertising wouldbe less deceitful if men were less deceitful. Itwould be more ethical, less offensive, if men wereless offensive and more ethical. But advertising it-self is an integral, inescapable aspect of the marketeconomy.

Note1H. Demsetz, "The Technostructure, Forty-Six Years Later,'

(Yale Law Journal, 1968), p. 810.

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Interregional Trade

55. THE CANDLEMAKERS# PETITION*

Frederic Bastiat

EDITOR'S NOTE: The author did most of his writ-ing during the years before—and immediately fol-lowing—the Revolution of February 1848. This wasa period when France was adopting many social-istic policies. As a Deputy to the Legislative As-sembly, Mr. Bastiat studied each interventionistmeasure and explained how it must inevitably hurtthe people. Protective tariffs were his special tar-get. He pointed out that "protection* gives a spe-cial privilege to certain producers. He showedhow tariffs add to the cost of imports, and reducecompetition from abroad, benefiting certain pro-ducers at ike expense of other producers and ofconsumers who must pay the higher prices or gowithout.

We candlemakers are suffering from the unfaircompetition of a foreign rival. This foreign manu-facturer of light has such an advantage over us thathe floods our domestic markets with his product.And he offers it at a fantastically low price. Themoment this foreigner appears in our country, allour customers desert us and turn to him. As a re-sult, an entire domestic industry is rendered com-pletely stagnant. And even more, since the lightingindustry has countless ramifications with other na-tive industries, they, too, are injured. This foreignmanufacturer who competes against us withoutmercy is none other than the sun itself!

Here is our petition: Please pass a law orderingthe closing of all windows, skylights, shutters, cur-tains, and blinds—that is, all openings, holes, and

•Translated and slightly condensed by Dean Russell from Se-lected Works of Frederic Bastiat, Volume 1, Paris: Guillaumin,1863, pp. 58-59

cracks through which the light of the sun is able toenter houses. This free sunlight is hurting the busi-ness of us deserving manufacturers of candles.Since we have always served our country well,gratitude demands that our country ought not toabandon us now to this unequal competition.

We hope that you gentlemen will not regard ourpetition as mere satire, or refuse it without at leasthearing our reasons in support of it.

First, if you make it as difficult as possible forthe people to have access to natural light, and thuscreate an increased demand for artificial light, willnot all domestic manufacturers be stimulatedthereby?

For example, if more tallow is consumed, nat-urally there must be more cattle and sheep. As aresult, there will also be more meat, wool, andhides. There will even be more manure, which isthe basis of agriculture.

Next, if more oil is consumed for lighting, weshall have extensive olive groves and rape [varietyof mustard] fields.

Also, our wastelands will be covered with pinesand other resinous trees and plants. As a result ofthis, there will be numerous swarms of bees to in-crease the production of honey. In fact, all branch-es of agriculture will show an increased develop-ment.

The same applies to the shipping industry. Theincreased demand for whale oil will then requirethousands of ships for whale fishing. In a shorttime, this will result in a navy capable of uphold-ing the honor of our country and gratifying the pa-triotic sentiments of the candlemakers and otherpersons in related industries.

The manufacturers of lighting fixtures—candle-176

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56. FREE TRADE: DOMESTIC/FOREIGN 177

sticks, lamps, candelabra, chandeliers, crystals,bronzes, and so on—will be especially stimulated.The resulting warehouses and display rooms willmake our present-day shops look poor indeed.

The resin collectors on the heights along the sea-coast, as well as the coal miners in the depths ofthe earth, will rejoice at their higher wages and in-creased prosperity. In fact, gentlemen, the con-dition of every citizen of our country—from thewealthiest owner of coal mines to the poorest sellerof matches—will be improved by the success of ourpetition.

To this Petition of the Candlemakers,Bastiat in effect replied:

You neglect the consumer in your plea. When-ever the consumer's interest is opposed to that ofthe producer you sacrifice the consumer's—for thesake of increased work and employment. The con-sumer wants goods as cheaply as possible, evenimports, if they are inexpensive. "But," you reply,"producers are interested in excluding cheap im-

ports. Similarly, consumers may welcome free na-tural light, but producers of artificial light are in-terested in excluding it."

Nature and human labor cooperate in the pro-duction of commodities in various proportions, de-pending on the country and the climate. Nature'spart is always "free." If a Lisbon orange sells inParis for half the price of a Paris orange, it is be-cause nature and, thus, free heat does for it whatartificial and, therefore, expensive heat must do forthe other. A part of the Portuguese orange is fur-nished free.

When we can acquire goods from abroad for lesslabor than if we make them ourselves, the differ-ence is a gift. When the donor, like the sun in fur-nishing light, asks for nothing, the gift is complete.The question we would ask—and we pose it formal-ly—is this: "Do you prefer that our people have thebenefit of consuming free and inexpensive com-modities? Or would you impose on them the sup-posed advantages of hard work and expensive pro-duction?"

(Paraphrased from the original)

56. FREE TRADE: DOMESTIC/FOREIGN*

Dean Russell

The most persuasive argument I ever heard for pro-tective tariffs was offered by an Egyptian student.He pointed out correctly that the low production ofthe Egyptian workers is due primarily to theirprimitive tools. He informed me that (contrary togeneral belief) the low production standards inEgypt actually result in high labor costs whenmeasured on a realistic per unit produced basis. Hethen argued that the workers in the under-developed nations just couldn't possibly competeagainst industrial workers with their efficient ma-chines and the resulting high production and lowlabor cost per unit. And he concluded that if thegovernment didn't protect the low-paid Egyp-tian workers against competition from the more

•This article is one of a series of lectures delivered at the Cen-tro de Estudios Econdmico Sociales, Guatemala City, April6-10, 1964. Reprinted from The Freeman, July 1964

advanced industrial nations, most of them wouldsoon lose their jobs to the high-paid men with themachines.

Actually, my Egyptian friend's argument for pro-tection against so-called expensive foreign labor isnot any more valid than are the arguments by myown countrymen for protection against so-calledcheap foreign labor. In reality, the trade itself nec-essarily causes real wages to rise in all nations thatparticipate. In order to understand this better, letus start with a statement that is not subject to argu-ment: No person in Egypt or Guatemala or theUnited States will voluntarily trade with a personin another country (or even next door) unless heputs a higher value on what he gets than on whathe gives up. And thus both parties to any trade (do-mestic or foreign) necessarily benefit (or at leastexpect to benefit) from the trade.

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178 INTERREGIONAL TRADE

Actually, there is no exclusively economic ortheoretical justification for discussing domesticand foreign trade separately; they are identical inall respects—except for the purely arbitrary and ar-tificial interventions of government. For example,in the United States, a manufacturer in southernCalifornia has no particular difficulties in tradingwith a company in northern Maine, some 4,000miles away. But when the same manufacturer triesto trade with a company in Tijuana, Mexico—per-haps' 4 miles away—he encounters all sorts of frus-trating and noneconomic prohibitions and compul-sions that have been devised by the two govern-ments.

The problems of transportation and distance (assuch) are not something peculiar to internationaltrade. Nor do differences of language and religionconstitute special problems in trading across na-tional boundaries.

For example, a Catholic manufacturer whospeaks only Italian in Lugano, Switzerland, has noproblem at all in trading with a Protestant re-tailer who speaks only German in Zurich. But whenhe attempts to trade with his Italian cousin justacross the border (both speaking the same lan-guage and belonging to the same church), he en-counters problems that are often insurmountable.All of these problems are, without exception, cre-ated by government and are thus completely arti-ficial and unnecessary.

Canada offers an example of how vast distances,different wage scales, different languages, differ-ent religions, and different racial and culturalbackgrounds present no real trade problems at all.But let a Canadian try to buy an automobile fromDetroit, just across the border!

Even different moneys (lira, peso, dollar, orwhatever) present no real problem to any trader—ifthe various moneys can be freely bought and sold.But when this is forbidden, problems do appear;again, however, they are artificial problems andare due entirely to governmental rules and regula-tions.

At Home and Abroad

Any argument for free trade and the division oflabor within a nation is automatically and nec-essarily an argument for free trade and the divisionof labor internationally. If a person advocates freetrade domestically, he cannot logically advocateprotective tariffs and other similar measures thatprevent goods and services from moving freely

across national boundaries. It is simply not truethat a nation and a people are made more pros-perous by compelling themselves to pay two andthree times as much as they need to pay for thegoods and services they want. It just does not makesense to improve the means of moving goods fromone nation to another, and then to cancel out thesavings in transportation costs by passing laws tohamper the resulting trade. I am convinced thatsuch contradictions arise more from lack of under-standing than from evil intentions.

For example, the idea of creating and protectingdomestic industries and jobs by restricting foreignimports is still generally found at the bottom ofmost arguments for protective tariffs. This objec-tive is at least understandable. And it is unques-tionably true that if it were not for government pro-tection against foreign competition, many personsin Guatemala and the United States would losetheir jobs. Further, a considerable number of com-panies in both nations would be forced out of busi-ness and would suffer heavy losses of capital. Butthe persons who are quick to point out these eco-nomic realities seem unaware of the multitude ofjobs and industries in Guatemala and the UnitedStates that actually depend on foreign trade.

For example, the advocates of protective tariffsin my own country dramatize the story of the jobsand industries that are destroyed or threatened bythe $16 billion of yearly imports into the UnitedStates. But they just ignore the far larger numberof jobs and industries that are involved in our $20billion of exports—automotive and electrical equip-ment, steel mill products, machine tools, coal andcotton, petroleum products, and many others. In amanner of speaking, prohibitive tariffs could de-stroy 20 United States jobs and companies forevery 16 saved or created. And worse still, thecompanies most likely to be injured by restrictivetrade policies are our most efficient ones that tendto pay the highest wages. The advocates of protec-tive tariffs completely ignore the obvious fact thatforeigners cannot continue to buy from us unlessthey are permitted to sell to us.

A Huge Market

In reality, the absence of tariffs and similar traderestrictions among the 50 states in my countrygoes a long way to explain why our level of livingis so high. This absence of internal trade restric-tions permits and encourages competition, naturalspecialization and division of labor, survival of the

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most efficient managers and companies, and espe-cially the free movement of labor and capital fromone industry and one section of the nation to otherindustries and sections. The final result of all this isbetter jobs at higher pay for all employees, lowerprices for all consumers, and perhaps even higherprofits for those owners and managers of capitalwho are capable of operating in a free and compet-itive economy.

Just as free trade among the states of the UnitedStates has brought this result, just so would freetrade among the nations of the world bring similarresults to all of them. To help us understand whythis is so and how it would work, let us refer brieflyto the concept of trade according to the principle of"comparative advantage" as developed by DavidRicardo.

This comparative advantage idea is often con-fused with an absolute advantage, such as coffeeproduced in Guatemala but not in the UnitedStates. But according to the Ricardian example,two nations must produce the same two (or more)products before this principle applies. And still fol-lowing Ricardo, the comparison is always firstmade within one of the nations alone. The compar-ison concerns the "substitution ratio" or "alternateopportunity cost" of producing domestically oneof the two products instead of the other. Then ex-actly the same comparison is made domesticallywithin the other nation. Whenever the physicalcost or substitution ratio for the two products inone country differs from the same cost or substitu-tion ratio for the same two products in the othercountry, a "comparative advantage situation" ex-ists. Each nation can then profit by concentratingon producing one of the products at home andtrading a part of it abroad for the other.

Delivering the Paper

Now I am well aware that the above explanationof Ricardo's comparative advantage principle oftrade is too condensed and complicated for generallecture purposes. So I will merely refer you to anytextbook on international trade for the full devel-opment of it. I will here confine myself to applyingthe same idea in more familiar situations and inless technical terms. But even so, the reality be-hind my examples and conclusions are still Ri-cardian.

Here is my first example of Ricardo and his com-parative advantage idea in modern dress: As Iwrite these words, I can see my "newspaper de-

livery boy" plodding slowly toward my door. He islate as usual. And perhaps the reason I am watch-ing him is to see if he will again step on anotherone of my prized flowers planted along the side-walk. Now if you will look upon him and me asrepresenting two nations—and let lecturing and de-livering newspapers represent the two productsproduced in both countries—I can illustrate quitesimply the essential idea behind Ricardo's law ofcomparative advantage.

Positively and beyond any shadow of a doubt, Ican deliver newspapers more efficiently than mypaper boy can. Since I can deliver more of them ina given period of time, I can earn more money thanhe can. And since I would be much neater andmuch more pleasant while doing the job, doubtlessthe traditional "tips" would be larger for me thanthey are for him. In short, the market would payme more to do that delivery job than it now payshim.

1*11 also hazard the guess that I can make betterspeeches than my paper boy can. I know, however,that he can make speeches; in fact, he made acouple of them to me when I recently suggestedthat he should not leave my paper on the openporch during a rain storm. Thus, I will here main-tain that I can do both of these jobs better than hecan; I have an absolute advantage over him in de-livering lectures and in delivering newspapers.Even so (and to get at Ricardo's point), he has acomparative advantage over me in deliveringnewspapers. And based on what the market willpay me to deliver newspapers and to make lec-tures, I have a comparative advantage over him inthe speech-making business. Here is how it works.

The Scope of the Handicap

Let's say the market pays my paper boy 50 centsan hour to deliver papers. My guess is that hewould earn almost nothing as a speech-maker, butlet's be generous and allow 5 cents an hour. To fol-low Ricardo, his substitution ration is 50 to 5 or 10to 1. That is, in the same amount of time, he canearn 10 times as much delivering newspapers as hecan earn by making speeches.

I am confident that the market will pay me bet-ter for both jobs. Let's say I could earn $1 perhour delivering newspapers, and $20 an hour as alecturer. Thus, for every hour that I spend deliver-ing newspapers for $1, the alternate opportunitycost to me is the $20 I could earn as a lecturer andteacher. Thus, it clearly pays me to devote my full

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working time to lecturing, teaching, and writing in-stead of delivering papers. Even though I can do abetter job than my "competitor" in deliveringnewspapers, he still has a comparative advantageover me; or, technically, his comparative disadvan-tage is less in delivering papers than in deliveringlectures. The fact that I have an absolute advan-tage in both categories is of no consequence. Asthe Ricardian principle illustrates, I will continueto pay my so-so paper boy to deliver my newspaperbecause (comparatively) my advantage over himis far greater in lecturing than in delivering papers.

It Still Pays To Trade

And so it is with trade between nations. AsRicardo pointed out, one nation can be more effi-cient in every category than another nation—andyet because of a comparative advantage, it is stillprofitable for the more efficient nation to tradewith the less efficient nation. But how does onediscover these comparative advantages among thevarious nations in today's world?

Well, first, it is necessary that you and I andeveryone else can freely buy and sell and exchangethe moneys of the two nations being compared.For when free exchange is permitted, then pricesand wage rates in the two nations will tend to bebased on reality instead of wishful thinking. Andwhen trade is based on reality, comparative ad-vantages are not hard to find. Select two jobs ortwo products that exist in both nations. Now ex-amine the wage rates and prices paid in one of thenations for the jobs or products. Now compare thewages and prices for the same jobs and productsin the other nation.

Unless the comparative substitution ratios areidentical (highly unlikely), trade will occur be-tween the two nations. Each nation will concentrateon the production of the item in which it has thegreatest comparative advantage (or the least com-parative disadvantage). Both nations will profitfrom this trade, even when one of them has an ab-solute advantage in producing both products.

Comparative advantages can be found in genera]categories as well as in specific products and ser-vices. For example, I am confident that, comparedto the United States, the cost of capital is higherthan the cost of labor here in Guatemala. If so, theUnited States enjoys a comparative advantageover Guatemala in capital costs, and Guatemalaenjoys a comparative advantage over the UnitedStates in labor costs.

Given this situation, one would logically expect"labor intensive" products to go from Guatemalato the United States, and "capital intensive" prod-ucts to flow from the United States to Guatemala.And I am confident that such would be the case, ifour two governments would abolish the trade re-strictions that each has placed against the other.If this were done, both nations would necessarilyprofit thereby.

Again, this comparative advantage principleworks the same between persons within a nationas it does between nations. For example, the fa-mous showman, Billy Rose, was also a championtypist. But he operated on the principle of compar-ative advantage when he hired a typist and de-voted his own time to producing shows and writingnewspaper columns. The fact that he could typefaster and better than his secretary is beside thepoint. Both he and she enjoyed a higher level of liv-ing because of that division of labor, just as thelevel of living in any and all nations rises whentrade is permitted to operate according to this prin-ciple.

Likewise, a surgeon may know how to wash hissurgical instruments better than does the personhe actually hires to wash them. But obviously,everyone profits by his decision to devote his fulltime to the job (surgery) at which he enjoys thegreatest comparative advantage, as measured bythe price the market will pay him for performingthe two tasks.

As another familiar example of how Ricardo'scomparative advantage idea works in everydaylife, take the insurance salesman who pays a man$1.50 an hour to work for him in his yard duringthe day. Let's assume that the caliber of the workdone by the yardman is not as good as the ownerhimself could do—or, at any rate, thinks he coulddo. So why doesn't he do the work himself andsave $1.50 an hour? The answer is that he wouldnot necessarily save $1.50 an hour but might ac-tually lose $3.50 an hour by working in his ownyard. That development is due to the fact that hisaverage hourly earnings as an insurance salesmanare $5. He has a comparative advantage selling in-surance instead of raking leaves. The pricingmechanism of the free market shows this beyondany shadow of a doubt.

And so it is with trade among nations. Every na-tion enjoys a comparative advantage in some prod-uct or service, even though it may be due only tosome institutional or historical reason. That nation(and the people in general in that nation) would

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enjoy a higher level of living if it specialized inthose goods and services in which it enjoys such anadvantage.

Let the Market Decide

How can we citizens of Guatemala and theUnited States discover which are the products andservices in which each enjoys a comparative ad-vantage? Easy! Just remove all artificial restric-tions against trade, including monetary exchange.Then observe what the importers and exporters inGuatemala do. I doubt that many of them can ex-plain to you Ricardo's comparative advantageprinciple, but every one of them will search theworld's markets to see what and where he can

buy most advantageously. Nor do any of themneed to hear this lecture in order to know where inthe world the most profitable demand exists forGuatemalan products and services. While the pro-ducers and buyers in Guatemala and the UnitedStates may not be able to explain the Ricardiantheory on which they operate, they will still quicklyindicate to us which products and services enjoy acomparative advantage in which nation. You andI need only follow the free market price signals inour buying and selling.

We are foolish indeed to continue to impose tar-iffs and other restrictions against trade betweenour nations; the only result of such misguided anduneconomic governmental interventions is that wepay more and get less.

57. ON FOREIGN TRADE

David Ricardo

Under a system of perfectly free commerce, eachcountry naturally devotes its capital and labour tosuch employments as are most beneficial to each.This pursuit of individual advantage is admirablyconnected with the universal good of the whole.By stimulating industry, by rewarding ingenuity,and by using most efficaciously the peculiar pow-ers bestowed by nature, it distributes labour mosteffectively and most economically: while, by in-creasing the general mass of productions, it dif-fuses general benefit, and binds together, by onecommon tie of interest and intercourse, the uni-versal society of nations throughout the civilisedworld. It is this principle which determines thatwine shall be made in France and Portugal, thatcorn shall be grown in America and Poland, andthat hardware and other goods shall be manufac-tured in England.

•Excerpted from Chapter VII of Principles of Political Economyand Taxation (1817). Ricardo, an economist of the "ClassicalSchool," deserves credit for having been among the first topoint out the advantages of specialization and trade, even ifone party to the transaction could produce everything betterand cheaper than the other.

In one and the same country, profits are, gen-erally speaking, always on the same level; or differonly as the employment of capital may be more orless secure and agreeable. It is not so between dif-ferent countries. If the profits of capital employedin Yorkshire should exceed those of capital em-ployed in London, capital would speedily movefrom London to Yorkshire, and an equality of prof-its would be effected; but if in consequence of thediminished rate of production in the lands of Eng-land, from the increase of capital and population,wages should rise and profits fall, it would not fol-low that capital and population would necessarilymove from England to Holland, or Spain, or Russia,where profits might be higher.

If Portugal had no commercial connection withother countries, instead of employing a great partof her capital and industry in the production ofwines, with which she purchases for her own usethe cloth and hardware of other countries, shewould be obliged to devote a part of that capital tothe manufacture of those commodities, which shewould thus obtain probably inferior in quality aswell as quantity.

The quantity of wine which she shall give in ex-

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change for the cloth of England is not determinedby the respective quantities of labour devoted tothe production of each, as it would be if both com-modities were manufactured in England, or both inPortugal.

England may be so circ*mstanced that to pro-duce the cloth may require the labour of 100 menfor one year; and if she attempted to make thewine, it might require the labour of 120 men forthe same time. England would therefore find it herinterest to import wine, and to purchase it by theexportation of cloth.

To produce the wine in Portugal might requireonly die labour of 80 men for one year, and toproduce the cloth in the same country might re-quire the labour of 90 men for the same time. Itwould therefore be advantageous for her to exportwine in exchange for cloth. This exchange mighteven take place notwithstanding that the commod-ity imported by Portugal could be produced therewith less labour than in England. Though she couldmake the cloth with the labour of 90 men, shewould import it from a country where it requiredthe labour of 100 men to produce it, because itwould be advantageous to her rather to employ hercapital in the production of wine, for which shewould obtain more cloth from England, than shecould produce by diverting a portion of her capitalfrom the cultivation of vines to the manufacture ofcloth.

Thus England would give the produce of the la-bour of 100 men for the produce of the labour of80. Such an exchange could not take place be-tween the individuals of the same country. The la-bour of 100 Englishmen cannot be given for that of80 Englishmen, but the produce of the labour of100 Englishmen may be given for the produce ofthe labour of 80 Portuguese, 60 Russians, or 120East Indians. The difference in this respect, be-tween a single country and many, is easily ac-counted for, by considering the difficulty with

which capital moves from one country to another,to seek a more profitable employment, and the ac-tivity with which it invariably passes from oneprovince to another in the same country.1

It would undoubtedly be advantageous to thecapitalists of England, and to the consumers inboth countries, that under such circ*mstances thewine and the cloth should both be made in Portu-gal, and therefore that the capital and labour ofEngland employed in making cloth should be re-moved to Portugal for that purpose. In that case,the relative value of these commodities would beregulated by the same principle as if one were theproduce of Yorkshire and the other of London: andin every other case, if capital freely flowed towardsthose countries where it could be most profitablyemployed, there could be no difference in the rateof profit, and no other difference in the real orlabour price of commodities than the additionalquantity of labour required to convey them to thevarious markets where they were to be sold.

Experience, however, shows that the fancied orreal insecurity of capital, when not under theimmediate control of its owner, together with thenatural disinclination which every man has to quitthe country of his birth and connections, and in-trust himself, with all his habits fixed, to a strangegovernment and new laws, check the emigration ofcapital. . . .

Note*It will appear, then, that a country possessing very consid-

erable advantages in machinery and skill, and which may there-fore be enabled to manufacture commodities with much lesslabour than her neighbours, may, in return for such commod-ities, import a portion of the corn required for its consumption,even if its land were more fertile and corn could be grown withless labour than in the country from which it was imported.Two men can both make shoes and hats, and one is superior tothe other in both employments; but in making hats he can onlyexceed his competitor by one-fifth or 20 per cent, and in mak-ing shoes he can excel him by one-third or 33 per cent—will itnot be for the interest of both that the superior man should em-ploy himself exclusively in making shoes, and the inferiorman in making hats?

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58. FOREIGN INVESTMENT VS. FOREIGN AID*

Henry Hazlitt

At the beginning of Chapter HI of his History ofEngland, Thomas Babington Macaulay wrote:

"In every experimental science there is a ten-dency toward perfection. In every human beingthere is a wish to ameliorate his own condition.These two principles have often sufficed, evenwhen counteracted by great public calamities andby bad institutions, to carry civilization rapidlyforward. No ordinary misfortune, no ordinary mis-government, will do so much to make a nationwretched as the constant effort of every man tobetter himself will do to make a nation prosperous.It has often been found that profuse expenditures,heavy taxation, absurd commercial restrictions,corrupt tribunals, disastrous wars, seditions, per-secutions, conflagrations, inundations, have notbeen able to destroy capital so fast as the exertionsof private citizens have been able to create it. Itcan easily be proved that, in our own land, thenational wealth has, during at least six centuries,been almost uninterruptedly increasing. . . . Thisprogress, having continued during many ages, be-came at length, about the middle of the eighteenthcentury, portentously rapid, and has proceeded,during the nineteenth, with accelerated velocity."

We too often forget this basic truth. Would-behumanitarians speak constantly today of "thevicious circle of poverty." Poverty, they tell us,produces malnutrition and disease, which pro-duce apathy and idleness, which perpetuate pov-erty; and no progress is possible without help fromoutside. This theory is today propounded unceas-ingly, as if it were axiomatic. Yet the history ofnations and individuals shows it to be false.

It is not only "the natural effort which every manis continually making to better his own condition"(as Adam Smith put it even before Macaulay) thatwe need to consider, but the constant effort ofmost families to give their children a "better start"

•From The Freeman, October 1970

than they enjoyed themselves. The poorest peopleunder the most primitive conditions work first ofall for food, then for clothing and shelter. Oncethey have provided a rudimentary shelter, more oftheir energies are released for increasing the quan-tity or improving the quality of their food andclothing and shelter. And for providing tools. Oncethey have acquired a few tools, part of their timeand energies can be released for making more andbetter tools. And so, as Macaulay emphasized,economic progress can become accelerative.

One reason it took so many centuries before thisacceleration actually began, is that as men in-creased their production of the means of subsis-tence, more of their children survived. This meantthat their increased production was in fact mainlyused to support an increasing population. Aggre-gate production, population, and consumption allincreased; but per capita production and consump-tion barely increased at all. Not until the IndustrialRevolution began in the late eighteenth centurydid the rate of production begin to increase by somuch that, in spite of leading to an unprecedentedincrease in population, it led also to an increase inper capita production. In the Western world this in-crease has continued ever since.

So a country can, in fact, starting from the mostprimitive conditions, lift itself from poverty toabundance. If this were not so, the world couldnever have arrived at its present state of wealth.Every country started poor. As a matter of historicfact, most nations raised themselves from "hope-less" poverty to at least a less wretched povertypurely by their own efforts.

Specialization and Trade

One of the ways by which each nation or regiondid this was by division of labor within its own ter-ritory and by the mutual exchange of services andproducts. Each man enormously increased his out-

183

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put by eventually specializing in a single activity—by becoming a farmer, butcher, baker, mason,bricklayer, or tailor—and exchanging his productwith his neighbors. In time this process extendedbeyond national boundaries, enabling each nationto specialize more than before in the products orservices that it was able to supply more plentifullyor cheaply than others, and by exchange and tradeto supply itself with goods and services from othersmore plentifully or cheaply than it could supplythem for itself.

But this was only one way in which foreign tradeaccelerated the mutual enrichment of nations. Inaddition to being able to supply itself with moregoods and cheaper goods as a result of foreigntrade, each nation supplied itself with goods andservices that it could otherwise not produce at all,and of which it would perhaps not even haveknown the existence.

Thus foreign trade educates each nation that par-ticipates in it, and not only through such obviousmeans as the exchange of books and periodicals.This educational effect is particularly importantwhen hitherto backward countries open their doorsto industrially advanced countries. One of the mostdramatic examples of this occurred in 1854, whenCommodore Perry at the head of a U.S. naval force"persuaded" the Japanese, after 250 years of isola-tion, to open their doors to trade and commu-nication with the U.S. and the rest of the world.Part of Perry's success, significantly, was the resultof bringing and showing the Japanese such thingsas a modern telescope, a model telegraph, and amodel railway, which delighted and amazed them.

Some Steps May Be Skipped

Western reformers today, praising some hithertobackward country, in Africa or Asia, will explainhow much smarter its natives are than we of theWest because they have "leaped in a single decadefrom the seventeenth into the twentieth century."But the leap, while praiseworthy, is not so surpris-ing when one recalls that what the natives mainlydid was to import the machines, instruments, tech-nology, and know-how that had been developedduring those three centuries by the scientists andtechnicians of the West. The backward countrieswere able to bypass home coal furnaces, gaslight,the street car, and even, in most cases, the railroad,and to import Western automobiles, Westernknowledge of road-building, Western airplanesand airliners, telephones, central oil heaters, elec-

tric light, radio and television, refrigerators andairconditioning, electric heaters, stoves, dish-washers and clothes washers, machine tools, fac-tories, plants, and Western technicians, and thento send some of their youth to Western collegesand universities to become technicians, engineers,and scientists. The backward countries imported,in brief, their "great leap forward."

In fact, not merely the recently backward coun-tries of Asia and Africa, but every great industri-alized Western nation, not excluding the UnitedStates, owes a very great part—indeed, the majorpart—of its present technological knowledge andproductivity to discoveries, inventions, and im-provements imported from other nations. Notwith-standing the elegant elucidations by the classicaleconomists, very few of us today appreciate all thatthe world and each nation owes to foreign trade,not only in services and products, but even more inknowledge, ideas, and ideals.

International Investment

Historically, international trade gradually led tointernational investment. Among independent na-tions, international investment developed inev-itably when the exporters of one nation, in order toincrease their sales, sold on short-term credit, andlater on longer-term credit, to the importers of an-other. It developed also because capital was scarc-er in the less developed nation, and interest rateswere higher. It developed on a larger scale whenmen emigrated from one country to another, start-ing businesses in the new country, taking their cap-ital as well as their skills with them.

In fact, what is now known as "portfolio" invest-ment—the purchase by the nationals of one countryof the stocks or bonds of the companies of an-other—has usually been less important quantita-tively than this "direct" investment. In 1967 U.S.private investments abroad were estimated to total$93 billion, of which $12 billion were short-termassets and claims, and $81 billion long-term. OfAmerican long-term private investments abroad,$22 billion were portfolio investments and $59 bil-lion direct investments.

The export of private capital for private invest-ment has on the whole been extremely profitablefor the capital-exporting countries. In every one ofthe twenty years from 1945 to 1964 inclusive, forexample, the income from old direct foreign invest-ments by U.S. companies exceeded the outflow ofnew direct investments. In that twenty-year period

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new outflows of direct investments totaled $22.8billion, but income from old direct investmentscame to $37.1 billion, plus $4.6 billion from royal-ties and fees, leaving an excess inflow of $18.9 bil-lion. In fact, with the exception of 1928, 1929, and1931, U.S. income from direct foreign investmentsexceeded new capital outlays in every year since1919.1

Our direct foreign investments also greatly stim-ulated our merchandise exports. The U.S. Depart-ment of Commerce found that in 1964, for ex-ample, $6.3 billion, or 25 per cent of our total ex-ports in that year, went to affiliates of Americancompanies overseas.

It is one of the ironies of our time, however, thatthe U.S. government decided to put the entireblame for the recent "balance-of-payments deficit"on American investments abroad; and beginning inmid-1963, started to penalize and restrict such in-vestment.

The advantages of international investment tothe capital importing country should be even moreobvious. In any backward country there are almostunlimited potential ventures, or "investment oppor-tunities," that are not undertaken chiefly becausethe capital to start them does not exist. It is the do-mestic lack of capital that makes it so difficult forthe "underdeveloped" country to climb out of itswretched condition. Outside capital can enormous-ly accelerate its rate of improvement.

Investment from abroad, like domestic invest-ment, can be of two kinds: the first is in the form offixed interest-bearing loans, the second in the formof direct equity investment in which the foreign in-vestor takes both the risks and the profits. The pol-iticians of the capital-importing country usuallyprefer the first. They see their nationals, say, mak-ing 15 or 30 per cent annual gross profit on a ven-ture, paying off the foreign lender at a rate of only6 per cent, and keeping the difference as net profit.If the foreign investor makes a similar assessmentof the situation, however, he naturally prefers tomake the direct equity investment himself.

But the foreigner's preference in this regard doesnot necessarily mean that the capital-importingcountry is injured. It is to its own advantage if itsgovernment puts no vexatious restrictions on theform or conditions of the private foreign invest-ment. For if the foreign investor imports, in addi-tion to his capital, his own (usually) superior man-agement, experience, and technical know-how, hisenterprise may be more likely to succeed. He can-not help but give employment to labor in the capi-

tal-importing country, even if he is allowed tobring in labor freely from his own. Self-interestand wage-rate differentials will probably soon leadhim to displace most of whatever common or evenskilled labor he originally brings in from his owncountry with the labor of the host country. He willusually supply the capital-importing country itselfwith some article or amenity it did not have be-fore. He will raise the average marginal produc-tivity of labor in the country in which he has builthis plant or made his investment, and his enter-prise will tend to raise wages there. And if his in-vestment proves particularly profitable, he willprobably keep reinvesting most of his profits in itas long as the market seems to justify the reinvest-ment.

There is still another benefit to the capital-im-porting country from private foreign investment.The foreign investors will naturally seek out firstthe most profitable investment opportunities. Ifthey choose wisely, these will also be the invest-ments that produce the greatest surplus of marketvalue over costs and are therefore economicallymost productive. When the originally most produc-tive investment opportunities have been exploitedto a point where the comparative rate of return be-gins to diminish, the foreign investors will look forthe next most productive investment opportunities,originally passed over. And so on. Private foreigninvestment will therefore tend to promote the mostrapid rate of economic improvements.

Foreigners Are Suspect

It is unfortunate, however, that just as the gov-ernment of the private-capital-exporting country to-day tends to regard its capital exports with alarmas a threat to its "balance of payments," the gov-ernment of the private-capital-importing countrytoday tends to regard its capital imports at leastwith suspicion if not with even greater alarm.Doesn't the private-capital-exporting countrymake a profit on this capital? And if so, mustn'tthis profit necessarily be at the expense of thecapital-importing country? Mustn't the latter coun-try somehow be giving away its patrimony? Itseems impossible for the anticapitalist mentality(which prevails among the politicians of the world,particularly in the underdeveloped countries) torecognize that both sides normally benefit fromany voluntary economic transaction, whether apurchase-sale or a loan-investment, domestic orinternational.

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Chief among the many fears of the politicians ofthe capital-importing country is that foreign in-vestors "take the money out of the country." Tothe extent that this is true, it is true also of domes-tic investment. If a home owner in Philadelphiagets a mortgage from an investor in New York, hemay point out that his interest and amortizationpayments are going out of Philadelphia and evenout of Pennsylvania. But he can do this with astraight face only by forgetting that he originallyborrowed the money from the New York lendereither because he could not raise it at all in hishome city or because he got better terms than hecould get in his home city. If the New Yorkermakes an equity investment in Pennsylvania, hemay take out all the net profits; but he probablyemploys Pennsylvania labor to build his factoryand operate it. And he probably pays out $85 to$90 annually for labor, supplies, rent, etc., mainlyin Pennsylvania, for every $10 he takes back toNew York. (In 1969, American manufacturing cor-porations showed a net profit after taxes of only5.4 per cent on total value of sales.) "They take themoney out of the country" is an objection againstforeign investors resulting even more from xeno-phobia than from anticapitalism.

Fear of Foreign Control

Another objection to foreign investment by pol-iticians of the capital-importing country is that theforeign investors may "dominate" the borrowingcountry's economy. The implication (made in 1965by the de Gaulle government of France, for ex-ample) is that American-owned companies mightcome to have too much to say about the economicdecisions of the government of the countries inwhich they are located. The real danger, however,is the other way round. The foreign-owned com-pany puts itself at the mercy of the government ofthe host country. Its capital in the form of build-ings, equipment, drilled wells and refineries, de-veloped mines, and even bank deposits, may betrapped. In the last twenty-five years, particularlyin Latin America and the Middle East, as Amer-ican oil companies and others have found to theirsorrow, the dangers of discriminatory labor legis-lation, onerous taxation, harassment, or even ex-propriation, are very real.

Yet the anticapitalistic, xenophobic, and otherprejudices against private foreign investment havebeen so widespread, in both the countries thatwould gain from importing capital and the coun-

tries that would profit from exporting it, that thegovernments in both sets of countries have im-posed taxes, laws and regulations, red tape, andother obstacles to discourage it.

At the same time, paradoxically, there has grownup in the last quarter-century powerful politicalpressures in both sets of countries in favor of thericher countries giving capital away to the poorerin the form of government-to-government "aid."

The Marshall Plan

This present curious giveaway mania (it can onlybe called that on the part of the countries makingthe grants) got started as the result of an historicalaccident. During World War II, the United Stateshad been pouring supplies—munitions, industrialequipment, foodstuffs—into the countries of its al-lies and cobelligerents. These were all nominally"loans." American Lend-Lease to Great Britain,for example, came to some $30 billion and toSoviet Russia to $11 billion.

But when the war ended, Americans were in-formed not only that the Lend-Lease recipientscould not repay and had no intention of repaying,but that the countries receiving these loans in war-time had become dependent upon them and werestill in desperate straits, and that further creditswere necessary to stave off disaster.

This was the origin of the Marshall Plan.On June 5, 1947, General George C. Marshall,

then American Secretary of State, made at Har-vard the world's most expensive commencementaddress, in which he said:

"The truth of the matter is that Europe's re-quirements, for the next three or four years, offoreign food and other essential products—princi-pally from America—are so much greater than herpresent ability to pay that she must have substan-tial additional help, or face economic, social, andpolitical deterioration of a very grave character."

Whereupon Congress authorized the spendingin the following three-and-a-half years of some $12billion in aid.

This aid was widely credited with restoring eco-nomic health to "free" Europe and halting themarch of communism in the recipient countries. Itis true that Europe did finally recover from theravages of World War II—as it had recovered fromthe ravages of World War I. And it is true that,apart from Yugoslavia, the countries not occupiedby Soviet Russia did not go communist. Butwhether the Marshall Plan accelerated or retarded

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this recovery, or substantially affected the extentof communist penetration in Europe, can never beproved. What can be said is that the plight of Eu-rope in 1947 was at least as much the result of mis-guided European governmental economic policiesas of physical devastation caused by the war. Eu-rope's recovery was far slower than it could havebeen, with or without the Marshall Plan.

This was dramatically demonstrated in WestGermany in 1948, when the actions between June20 and July 8 of Economic Minister Ludwig Er-hard in simultaneously halting inflation, introduc-ing a thoroughgoing currency reform, and remov-ing the strangling network of price controls,brought the German "miracle" of recovery.

As Dr. Erhard himself described his action: "Wedecided upon and re-introduced the old rules of afree economy, the rules of laissez-faire. We abol-ished practically all controls over allocation, prices,and wages, and replaced them with a price mech-anism controlled predominantly by money."

The result was that German industrial produc-tion in the second half of 1948 rose from 45 percent to nearly 75 per cent of the 1936 level, whilesteel production doubled that year.

It is sometimes claimed that it was Germany'sshare of Marshall aid that brought on the recovery.But nothing similar occurred in Great Britain, forexample, which received more than twice as muchMarshall aid. The German per capita gross nation-al product, measured in constant prices, increased64 per cent between 1950 and 1958, whereas theper capita increase in Great Britain, similarly meas-ured, rose only 15 per cent.

Once American politicians got the idea that theAmerican taxpayer owed other countries a living,it followed logically that his duty could not be lim-ited to just a few. Surely that duty was to see thatpoverty was abolished everywhere in the world.And so in his inaugural address of January 20,1949, President Truman called for "a bold newprogram" to make "the benefits of our scientificadvances and industrial progress available for theimprovement and growth of underdeveloped areas.. . . This program can greatly increase the indus-trial activity in other nations and can raise sub-stantially their standards of living."

Because it was so labeled in the Truman address,this program became known as "Point Four." Un-der it the "emergency" foreign aid of the MarshallPlan, which was originally to run for three or fouryears at most, was universalized, and has now beenrunning for more than twenty years. So far as its

advocates and built-in bureaucracy are concerned,it is to last until foreign poverty has been abolishedfrom the face of the earth, or until the per capita"gap" between incomes in the backward coun-tries and the advanced countries has been closed-even if that takes forever.

The cost of the program already is appalling.Total disbursem*nts to foreign nations, in the fis-cal years 1946 through 1970, came to $131 bil-lion. The total net interest paid on what the U.S.borrowed to give away these funds amounted inthe same period to $68 billion, bringing the grandtotal through the 25-year period to $199 billion.2

This money went altogether to some 130 nations.Even in the fiscal year 1970, the aid program wasstill operating in 99 nations and five territories ofthe world, with 51,000 persons on the payroll, in-cluding U.S. and foreign personnel. CongressmanOtto E. Passman, chairman of the Foreign Opera-tions Subcommittee on Appropriations, declaredon July 1, 1969: "Of the three-and-a-half billionpeople of the world, all but 36 million have re-ceived aid from the U.S."

Domestic Repercussions

Even the colossal totals just cited do not meas-ure the total loss that the foreign giveaway pro-gram has imposed on the American economy. For-eign aid has had the most serious economic side-effects. It has led to grave distortions in our econ-omy. It has undermined our currency, and con-tributed toward driving us off the gold standard. Ithas accelerated our inflation. It was sufficient initself to account for the total of our Federal deficitsin the 1946-70 period. The $199 billion foreignaid total exceeds by $116 billion even the $83 bil-lion increase in our gross national debt duringthe same years. Foreign aid has also been sufficientin itself to account for all our balance-of-pay-ments deficits (which our government's policiesblame on private foreign investment).

The advocates of foreign aid may choose toargue that though our chronic Federal budgetdeficits in the last 25 years could be imputed toforeign aid, we could alternatively impute thosedeficits to other expenditures, and assume that theforeign aid was paid for entirely by raising addi-tional taxes. But such an assumption would hard-ly improve the case for foreign aid. It would meanthat taxes during this quarter-century averaged atleast $5 billion higher each year than they wouldhave otherwise. It would be difficult to exag-

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gerate the setbacks to personal working incentives,to new ventures, to profits, to capital investment,to employment, to wages, to living standards, thatan annual burden of $5 billion in additional taxa-tion can cause.

If, finally, we make the "neutral" assumptionthat our $131 or $199 billion in foreign aid (which-ever way we choose to calculate the sum) wasfinanced in exact proportion to our actual deficitand tax totals in the 25-year period, we merelymake it responsible for part of both sets of evils.

In sum, the foreign aid program has immenselyset back our own potential capital development. Itought to be obvious that a foreign giveaway pro-gram can raise the standards of living of the so-called "underdeveloped areas" of the world onlyby lowering our own living standards comparedwith what they could otherwise be. If our taxpayersare forced to contribute millions of dollars for hy-droelectric plants in Africa or Asia, they obviouslyhave that much less for productive investment inthe U.S. If they contribute $10 million for ahousing project in Uruguay, they have just thatmuch less for their own housing, or any other costequivalent, at home. Even our own socialist andstatist do-gooders would be shaken if it occurred tothem to consider how much might have been donewith that $131 or $199 billion of foreign aid tomitigate pollution at home, build subsidized hous-ing, and relieve "the plight of our cities." Free en-terprisers, of course, will lament the foreign give-away on the far more realistic calculation of howenormously the production, and the wealth andwelfare of every class of our population, couldhave been increased by $131 to $199 billion inmore private investment in new and better toolsand cost-reducing equipment, and in higher livingstandards, and in more and better homes, hospitals,schools, and universities.

The Political Arguments

What have been the economic or political com-pensations to the United States for the staggeringcost of its foreign aid program? Most of them havebeen illusory.

When our successive Presidents and foreign aidofficials make inspirational speeches in favor offoreign aid, they dwell chiefly on its alleged hu-manitarian virtues, on the need for American gener-osity and compassion, on our duty to relieve thesuffering and share the burdens of all mankind.But when they are trying to get the necessary ap-

propriations out of Congress, they recognize theadvisability of additional arguments. So they ap-peal to the American taxpayer's material self-interest. It will redound to his benefit, they argue,in three ways: 1. It will increase our foreign trade,and consequently the profits from it. 2. It will keepthe underdeveloped countries from going com-munist. 3. It will turn the recipients of our grantsinto our eternally grateful friends.

The answers to these arguments are clear:1. Particular exporters may profit on net bal-

ance from the foreign aid program, but they neces-sarily do so at the expense of the American tax-payer. It makes little difference in the end whetherwe give other countries the dollars to pay for ourgoods, or whether we directly give them the goods.We cannot grow rich by giving our goods or ourdollars away. We can only grow poorer. (I would beashamed of stating this truism if our foreign aidadvocates did not so systematically ignore it.)

2. There is no convincing evidence that our for-eign aid played any role whatever in reversing, halt-ing, or even slowing down any drift toward com-munism. Our aid to Cuba in the early years of theprogram, and even our special favoritism towardit in assigning sugar quotas and the like, did notprevent it from going communist in 1958. Our $769million of aid to the United Arab Republic did notprevent it from coming under Russian domination.Our $460 million aid to Peru did not prevent itfrom seizing American private properties there.Neither our $7,715 million aid to India, nor our$3,637 million aid to Pakistan, prevented eithercountry from moving deeper and deeper into so-cialism and despotic economic controls. Our aid,in fact, subsidized these very programs, or madethem possible. And so it goes, country after coun-try.

3. Instead of turning the recipients into gratefulfriends, there is ever-fresh evidence that our for-eign aid program has had precisely the oppositeeffect. It is pre-eminently the American embassiesand the official American libraries that are mobbedand stoned, the American flag that is burned, theYanks that are told to go home. And the head ofalmost every government that accepts Americanaid finds it necessary to denounce and insult theUnited States at regular intervals in order to proveto his own people that he is not subservient and nopuppet.

So foreign aid hurts both the economic and po-litical interest of the country that extends it.

But all this might be overlooked, in a broad hu-

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manitarian view, if foreign aid accomplished itsmain ostensible purpose of raising the living levelsof the countries that received it. Yet both reasonand experience make it clear that in the long run ithas precisely the opposite effect.

Of course, a country cannot give away $131 bil-lion without its doing something abroad (thoughwe must always keep in mind the reservation—instead of something else at home). If the money isspent on a public housing project, on a hydroelec-tric dam, on a steel mill (no matter how uneco-nomic or ill-advised), the housing or the dam or themill is brought into existence. It is visible and un-deniable. But to point to that is to point only to thevisible gross gain while ignoring the costs and theoffsets. In all sorts of ways—economic, political,spiritual—the aid in the long run hurts the recip-ient country. It becomes dependent on the aid. Itloses self-respect and self-reliance. The poor coun-try becomes a pauperized country, a beggar coun-try.

There is a profound contrast between the effectsof foreign aid and of voluntary private investment.Foreign aid goes from government to government.It is therefore almost inevitably statist and socialis-tic. A good part of it goes into providing moregoods for immediate consumption, which may donothing to increase the country's productive capac-ity. The rest goes into government projects, gov-ernment five-year plans, government airlines, gov-ernment hydroelectric plants and dams, or govern-ment steel mills, erected principally for prestigereasons, and for looking impressive in coloredphotographs, and regardless of whether the proj-ects are economically justified or self-supporting.As a result, real economic improvement is re-tarded.

The Insoluble Dilemma

From the very beginning, foreign aid has facedan insoluble dilemma. I called attention to this in abook published in 1947, Will Dollars Save theWorld?, when the Marshall Plan was proposed butnot yet enacted:

"Intergovernmental loans [they have since be-come mainly gifts, which only intensifies the prob-lem] are on the horns of this dilemma. If on theone hand they are made without conditions, thefunds are squandered and dissipated and fail to ac-complish their purpose. They may even be used forthe precise opposite of the purpose that the lenderhad in mind. But if the lending government at-

tempts to impose conditions, its attempt causes im-mediate resentment. It is called 'dollar diplomacy';or 'American imperialism'; or 'interfering in theinternal affairs' of the borrowing nation. The re-sentment is quickly exploited by the Communistsin that nation."

In the 23 years since the foreign-aid programwas launched, the administrators have not onlyfailed to find their way out of this dilemma; theyhave refused even to acknowledge its existence.They have zigzagged from one course to theother, and ended by following the worst course ofall: they have insisted that the recipient govern-ments adopt "growth policies"—which mean, inpractice, government "planning," controls, infla-tion, ambitious nationalized projects—in brief, so-cialism.

If the foreign aid were not offered in the firstplace, the recipient government would find it ad-visable to try to attract foreign private investment.To do this it would have to abandon its socialisticand inflationary policies, its exchange controls,its laws against taking money out of the country.It would have to abandon harassment of privatebusiness, restrictive labor laws, and discriminatorytaxation. It would have to give assurances againstnationalization, expropriation, and seizure.

Specifically, if the nationals of a poor countrywanted to borrow foreign capital for a privateproject, and had to pay a going rate of, say, 7 percent interest for the loan, their project would haveto be one that promised to yield at least 7 per centbefore the foreign investors would be interested. Ifthe government of the poor country, on the otherhand, can get the money from a foreign govern-ment without having to pay interest at all, it neednot trouble to ask itself whether the proposed proj-ect is likely to prove economic and self-liquidatingor not. The essential market guide to comparativeneed and utility is then completely removed. Whatdecides priorities is the grandiose dreams of thegovernment planners, unembarrassed by bother-some calculations of comparative costs and useful-ness.

The Conditions for Progress

Where foreign government aid is not freely of-fered, however, a poor country, to attract privateforeign investment, must establish an actual recordof respecting private property and maintainingfree markets. Such a free-enterprise policy by itself,even if it did not at first attract a single dollar of

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foreign investment, would give enormous stimulusto the economy of the country that adopted it. Itwould first of all stop the flight of capital on thepart of its own nationals and stimulate domesticinvestment. It is constantly forgotten that bothdomestic and foreign capital investment are en-couraged (or discouraged) by the same means.

It is not true, to repeat, that the poor countriesare necessarily caught in a "vicious circle of pov-erty," from which they cannot escape without mas-sive handouts from abroad. It is not true that "therich countries are getting richer while the poorcountries are getting poorer." It is not true that the"gap" between the living standards of the poorcountries and the rich countries is growing everwider. Certainly that is not true in any propor-tionate sense. From 1945 to 1955, for example, theaverage rate of growth of Latin American countriesin national income was 4.5 per cent per annum,and in output per head 2.4 per cent—both rates ap-preciably higher than the corresponding figure forthe United States.3

Intervention Breeds Waste

The foreign aid ideology is merely the reliefideology, the guaranteed-income ideology, ap-plied on an international scale. Its remedy, likethe domestic relief remedy, is to "abolish poverty"by seizing from the rich to give to the poor. Bothproposals systematically ignore the reasons for thepoverty they seek to cure. Neither draws any dis-tinction between the poverty caused by misfor-tune and the poverty brought on by shiftlessnessand folly. The advocates of both proposals forgetthat their chief attention should be directed to

restoring the incentives, self-reliance, and produc-tion of the poor family or the poor country, and thatthe principal means of doing this is through thefree market.

In sum, government-to-government foreign aidpromotes statism, centralized planning, socialism,dependence, pauperization, inefficiency, andwaste. It prolongs the poverty it is designed to cure.Voluntary private investment in private enter-prise, on the other hand, promotes capitalism,production, independence, and self-reliance. It isby attracting foreign private investment that thegreat industrial nations of the world were oncehelped. It is so that America itself was helped byBritish capital, in the nineteenth century, in build-ing its railroads and exploiting its great nationalresources. It is so that the still "underdevelopedareas" of the world can most effectively be helpedtoday to develop their own great potentialitiesand to raise the living standards of their masses.

Notes:!See The United States Balance of Payments (Washington:

International Economic Policy Association, 1966), pp. 21 and22.

2 Source: Foreign Operations Subcommittee on Appropria-tions, House of Representatives, July 1, 1970.

3Cf. "Some Observations on 'Gapology,' " by P. T. Bauerand John B. Wood in Economic Age (London), November-December 1969. Professor Bauer is one of the few academiceconomists who have seriously analyzed the fallacies of for-eign aid. See also his Yale lecture on foreign aid publishedby The Institute of Economic Affairs (London), 1966, and hisarticle on "Development Economics" in Roads to Freedom:Essays in Honour of Friedrich A. von Hayek (London: Rout-ledge & Kegan Paul, 1969). I may also refer the reader to myown book, Will Dollars Save the World? (Appleton, 1947),to my pamphlet, Illusions of Point Four (Irvington-on-Hudson,New York: Foundation for Economic Education, 1950), and tomy chapter on "The Fallacy of Foreign Aid" in my Man Vs.the Welfare State (Arlington House, 1969).

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59. RESTRICTIONS ON INTERNATIONAL TRADE*

W. Marshall Curtiss

A businessman is always under the necessity ofadjusting the conduct of his business to the institu-tional conditions of his country. In the long runhe is, in his capacity as entrepreneur and capitalist,neither favored nor injured by tariffs or the ab-sence of tariffs.

LUDWIG VON MISES, Human Action

If there is one point of fairly general agreementamong economists throughout the world andthroughout time, it is that trade should remain freefrom all sorts of governmental restrictions and in-terventions. It would seem unnecessary to repeatover and over why the material welfare of indi-viduals is enhanced through the division of laborand freedom to trade.

But restrictions still exist! Tariffs and other bar-riers to trade seem to move through cycles, re-laxed at times, and then reapplied. Why, in the faceof reasoned arguments by leading intellectuals, dorestrictions to trade have such an appeal to law-makers? In other words, who is it and what is itthat moves the lawmakers to take such action?

The cry for protection comes in many voices. Aglove manufacturer resents finding importedgloves in the market. It is natural for any firm totake any legal steps available to sustain profits andremain in business. If a way can be found toeliminate this foreign competition, perhaps con-vince the government to raise some sort of barrierto the foreign gloves—a tariff, or a quota, or anembargo—then the glovemaker might be able tocontinue in business, competing with domesticfirms as always, but avoiding the foreign compet-itor.

The glove industry may maintain a lobby inWashington to try to convince the lawmakers that

•From Toward Liberty, the Ludwig von Mises 90th BirthdayCollection, copyright 1971 by The Institute for Humane Studies(Menlo Park, California).

unless protection is provided, thousands of jobswill be lost, unemployment will rise, and com-panies will go bankrupt. And it may all be true!At least it often is convincing enough to the law-makers.

What happened to the logical argument of theeconomists who said protection hurts the consum-er? Well, the argument stands, but the consumer'svoice is faint. What if it does cost a few penniesmore to buy a pair of gloves? Compared with theloss of a job or a failing company, this is nothing!Or so it seems to those seeking protection.

We Accept Domestic Competition

Now, suppose a domestic firm is in financialtrouble, in no way caused by imports. Does it senda lobby to Washington and ask for help? Notordinarily. In domestic trade, we accept the ideathat a firm must compete without special favors.True enough, companies do fail; men do lose theirjobs; but the consumer is not penalized by interven-tions that reduce production and make things costmore.

If the failure of the Edsel automobile had beenbecause of foreign competition, it might have beenargued that a tariff on imports would have savedthe car and preserved thousands of jobs. Had themaker been a one-product firm, it might have beensaved from bankruptcy. But, no; it was a domes-tic firm that misjudged consumer acceptance of aproduct; and that was that! The Edsel is reportedto have cost the Ford Motor Company $250 mil-lion.

A more recent example is that of Corf am whichthe du Pont Company developed to compete withnatural leather for footwear. After seven years anda reported $100 million, du Pont discontinued pro-duction of Corf am.

Only the size of these write-offs makes thesetwo items newsworthy. Thousands of new products

191

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are tried each year, and there are many failures.Unless a company has other profitable itemswhich will carry such losses, the company mayfail, as many do.

The testing of consumer preferences goes on con-stantly. Ordinarily, we wouldn't think of askingthe government to prevent the failure of a givenproduct. We accept such failure as one of the reg-ulatory aspects of competition and the market.But let the competition be from a foreign coun-try, even though it benefit consumers the same asdomestic competition, and there arises a clamorto erect some sort of barrier to save jobs, or tosave firms, or to build a fence around our high stan-dard of living, or whatever.

Politics of International Trade

The justifications for tariffs and other forms ofprotection include the arguments that they keepour wages high, prevent unemployment, protectinfant industries, help with national defense, pro-hibit trade with the enemy, discourage dumping,and so on.

Trade barriers or threats of trade barriers areoften used in the formulation of foreign policy."We will reduce our restrictions if you will do like-wise." Or: "Let us reduce our restrictions againstunderdeveloped countries so that they can benefitfrom sales to us." Or: "Let us stop buying chromefrom an African nation whose internal policies wedo not approve." Among the reasons for traderestrictions must be included foreign policy. Or, asone author recently stated, "trade policy in theUnited States is a political matter."

But of all the pressures upon the members ofCongress and the Executive to enact trade restric-tions, few are greater than those exerted by busi-ness firms or associations representing businessfirms. Individual consumers who have the most togain through the reduction or elimination of tradebarriers, and who have voting power enough toelect or defeat any candidate for office, are prac-tically powerless in comparison with business lob-bies.

As an illustration, note the results of recent at-tempts to cut back certain phases of defensespending. Now, the production of something to bedestroyed in combat obviously is worthless so faras contributing to the level of living of a people isconcerned. If those workers and resources wereused to produce housing, build highways, providemedical care, teaching, plumbing, auto repairs,

and the like, then consumers would be that muchbetter off.

But let it be suggested that we shut down ourwar machine and the protests are deafening. Work-ers will lose their jobs; companies will fail; theentire economy will suffer.

Granted, there are difficult adjustments to bemade. But the fact that a worker is not needed inan airplane factory shouldn't preclude his findinga productive job elsewhere. One sympathizes witha worker in an industry that is being "wound down,"especially in a one-industry community. In the re-cent discussion of continuing research and de-velopment of the SST, many in Congress, andmany members of the press based their argumentchiefly on the fact that thousands of workers wouldbe disemployed and business firms would fail. Thesame arguments have been used in trying to main-tain our outer space program. Such argumentshave a strong emotional appeal and carry consid-erable persuasive force.

Many of the same arguments are used to estab-lish trade restrictions, and with equally disastrouseconomic consequences.

Five Basic Principles

h r discussing foreign trade, it is well to keep inmind certain basic principles:(1) Trade between two individuals, entered intofreely, always results in benefits to both parties.Otherwise, why should they trade? What any-one else may think of their judgment is beside thepoint.(2) There always is a comparative advantage inproducing some products and importing others.Production costs in one nation may be lower thanin another nation for every item produced in eithernation. But the people of these respective nationsmay still find it profitable to trade with one another.

It is often thought that only nations like GreatBritain or other maritime nations benefit by trade,simply because there are so many things they donot produce domestically. True, the United Statescould close its borders to all imports and exportsand still there might be a relatively high level ofliving for its citizens; but not as high as would bepossible through trade with foreigners.(3) Consumption is the sole purpose of production.Adam Smith explained this nearly 200 years ago.Production is to supply consumers' wants. It is notto make jobs, or to keep a business solvent, or tomake one nation dependent on another. Naturally,

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some of these things happen as a by-product of pro-duction and trade, but that should not be the ob-jective.(4) Trade ordinarily will be most satisfactory toall concerned when individuals or their agents whohave something to trade deal with other individ-uals or their agents who want the other side of thattrade. Governments should be involved as little aspossible; first, because they are not concerned, andsecondly, because there is always the temptationto use the trade for purposes other than satisfyingconsumers.

If an individual in this country wanted to tradesome of his own property for something offeredby a Russian citizen, we would think little aboutit, knowing that each party to the trade consideredhe was better off than before. But if governmententers one or both sides of such a trade, there isoften the suspicion, sometimes justified, that oneparty is seeking a military or political advantage.(5) Imports require exports. Foreign trade appearscomplicated because it often takes an indirect orroundabout route through several nations. In addi-tion, monies of several nations with complex ex-change rates are usually involved. But it finallyboils down to the fact that a nation which importsmust export something in exchange.

Many people appear to believe that we mighteventually be inundated with imports to the extentthat practically all production in this country, alljobs, all business firms, might be wiped out. Theyfail to see that foreign goods cannot continue tocome into this country unless something goes outto pay for them.

The Reciprocity Argument

A popular argument in support of tariffs is thatwe will reduce our obstacles to trade if other na-tions will reduce theirs. In other words, we mustdo it together.

The lack of understanding of international tradeand the effect of restrictions is reflected in thispress release in The New York Times for March31,1971. "The European Economic Community de-cided today to give generalized trade preferencesto developing countries beginning July 1." The im-plication is: "If you are poor, we will let you sell tous." The truth, of course, is that voluntary ex-change, whether the participants be rich or poor,benefits the buyer as well as the seller. Had the"developing country" previously been subject totrade restrictions, then, of course, it would gain

from the relaxation of those restrictions. But theincreased trade also would be of benefit to the"affluent" buying nation.

When diplomats from different countries discussthe reduction of trade barriers, it almost alwayshas the appearance of a high-level bargaining ses-sion. How little can we give up in reducing ourrestrictions on imports in order to gain some re-duction in their restrictions against our exports?It never seems to occur to them that we stand togain by opening our gates entirely, whatever theother nation does. Certainly our consumers wouldstand to benefit. But, always of diplomatic con-cern is the effect on firms and on jobs.

A great deal of consideration is given to "mostfavored nation" reductions. If we give one nationthe "benefit" of our reduction, then all nationsare entitled to this great benefaction. Actually, uni-lateral action in reducing our restrictions againstimports would benefit our consumers, and mightend most of the seemingly endless bargaining overreduction by other countries in return.

Who knows? It might soon be discovered thattrade policy should not be a political issue butthat free trade between citizens of all nations,rich and poor alike, benefits all consumers.

How Can Free Trade Be Achieved?

Politicians, in the legislative as well as the execu-tive branches of government, respond to pressuresof various kinds from their constituents. So longas the pressure for trade restrictions exceeds thatfor free trade, we can expect restrictions to con-tinue.

Considerable attention just now is directed attextiles, especially the textile trade with Japan.Had such trade been strictly between individualswithout the intrusion of governments, many of ourpresent problems would have been avoided. Fol-lowing World War II, our government made con-cessions to help rebuild the Japanese economy. Itdelivered cotton for less than our own textilemanufacturers had to pay for it; it practically gavenew textile mills to the Japanese. Little wonderthat American textile manufacturers resented thisunfair competition and sought to restrict importsfrom Japan. Now, a quarter of a century afterthe war, while the effects of that kind of "foreignpolicy" may have worn off, the arguments againstJapanese textiles persist and carry weight withlegislators.

Over the years, many economic injustices, in-

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eluding misuse of capital and labor, have resultedfrom trade restrictions. To remove them all atonce and go back to free trade is bound to requiredifficult adjustments on the part of business firms.No wonder they try, in any legal way they can, toprotect any remaining shelters or even increasetheir protection.

Who Speaks for the Consumer?

From the standpoint of a manufacturer, the so-called benefits of protection and disadvantages offree trade are short-run and disappear once adjust-ments to the changed situation are made. The firmstill must compete with other domestic firms aswell as with imports, even if over a tariff wall.But it is these short-run adjustments that the legis-lators hear about—the layoff of workers, the re-duced profits, and even business failures. Thelonger-run genuine benefits of free trade to con-sumers arouse little excitement. This is especiallytrue in a country like the United States whereimports are a relatively small part of all trade. Whois there to speak for the consumers? The profes-sional protectors seem so interested in auto seatbelts, unit pricing, packaging, advertising, truth-in-lending, and ecology that they aren't likely toget to the matter of free trade for some time.

Most families present a combination of con-sumer and producer interests, interests which mayseem to be in conflict with regard to trade restric-tions. For example, suppose two members of thefamily work in the local textile mill. The most im-portant day-to-day problem to the family is makingcertain that these two mill workers are employedand bring home their weekly pay checks. So, ifthey are convinced that imported textiles mayeliminate their jobs, then they are apt to be pro-tectionists. Attesting to this is a story in a recentSunday supplement headlined "Twilight of a Tex-tile Town." In this article, it was reported that amill which had been the town's leading industryfor 70 years went bankrupt and put 844 textileworkers out of work. Furthermore, "50 textileplants in the South have shut down since 1969.The Department of Labor has estimated that 27,200Southern textile workers lost their jobs in 1970alone."

This is a serious situation, apparently calling fora political solution. What is not so obvious is thateven if all imports of textiles were stopped,after a short period of adjustment, domestic firmswould find strong competition with each other and

marginal firms would continue to face failure.An illustration of how adjustments can be made

to a declining industry is related in the New Eng-land Letter for April, 1971, published by The FirstNational Bank of Boston. The study shows how,in the early 1950's, many textile mills were liqui-dated and a basic weakness was shown in theleather and shoe industries. Some of the textilemills are now among those in trouble in the South.Had the problem been handled with political solu-tions, no doubt New England textiles could havebeen "protected" in a way that would have keptthe mills going with employment and jobs as usual.

But, instead, New England industry changed,in part, to the maufacture of transportation equip-ment, electrical equipment, and instruments, toname only three. This new type of manufacturing ismore export-oriented and enjoys a better interna-tional competitive position. It has the greater "com-parative advantage" that economists have beentalking about. It uses higher skills from its workers,and the "value added in manufacturing" is relative-ly high. Thus, in the long run, the return to laborstands to exceed what it was and what it mighthave been in the production of textiles, shoes, andleather goods. True, some of the newer types ofindustry have been closely tied to governmentdefense contracts, and with a recent cutback, un-employment increased. However, a basis for ex-port and for increased production for consumers isthere.

Adjustments to changes like these are often dif-ficult and must not be passed off lightly. But suchchanges in an expanding and progressive economyare always going on. Attempts to stop them withartificial restraints are certain to be more painfulthan is the process of adjusting.

Man Must Choose Between Freedomand Protectionism

As observed earlier, most economists agree thatprotectionism is unsound. The consumer is servedbest by allowing people to trade freely with eachother, not only domestically but world wide. Butrestrictions continue to persist, placed there for po-litical reasons. The incentive to erect barriers totrade is a political response to pressure from in-dividuals, groups of workers, industrial groups,and others who think they will gain from protec-tive measures such as tariffs, quotas, and the like.

Because the consumer is the disadvantagedparty, it may be argued that the solution lies in his

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60. THE FAILURE OF INTERNATIONAL COMMODITY AGREEMENTS 195

education. But as previously shown, the con-sumer's stake as consumer of a protected productoften is much less important to him than his jobas a producer of a potentially protected product.Therefore, it seems doubtful that consumers, as agroup, can be effective in bringing political pres-sure on lawmakers to offset the pressure for pro-tection exerted by other groups.

After two centuries and more of expounding theadvantages of free trade, it must seem trite to

say that education must be relied upon to bringabout a correction of the wrongs caused by protec-tionism. Nevertheless, there seems to be no shortcut. While the consumer, qua consumer, must beincluded among those educated, it would seem thatemphasis should be placed on convincing law-makers of the advantages of free trade so that theycan better withstand the pressures put upon themby their constituents who think they need anddeserve protection from competitors.

60. THE FAILURE OF INTERNATIONALCOMMODITY AGREEMENTS*

Karl Brandt

It is, if I am not mistaken, the goal of all freecountries with government by law to diminish pov-erty, squalor, and drudgery for the greatest num-ber of their citizens, and to expand opportunitiesto all self-respecting, responsible citizens to devel-op their personal potential. This goal includes theobligation of the nation to respect die dignity andintegrity of all men of good will.

If mis national goal is accepted, the economymust have the institutional framework to promotethe gradual improvement of the real income ofthe people by improving the productivity of hu-man, natural, and man-made resources. This re-quires, in the production of goods and services,more division of labor, specialization, and in-creased efficiency from research, innovation, andbetter management. But in order to have someorientation for such endeavor it is essential to givethe consumer the sovereign power to allocate re-sources to the satisfaction of his needs and of hismore and more refined wants. This provides thepowerful incentive to all people to make the effortto earn the money to get the goods and services

•Slightly condensed from the English version of his first ad-dress as a foreign member of the Acade"mie d'Agriculture ofFrance, delivered in Paris in French, May 27, 1964. Keprintedfrom The Freeman, March 1965

they want. Such an arrangement is ideally guar-anteed in the market with freely moving pricesby the daily plebiscite in which housewives andthe consumer in general express their preference infrancs and centimes, or dollars and cents.

In the modern economy, in which this allocationof resources applies to all goods, durable and non-durable, to houses and motor vehicles, and to allservices—educational, medical, culinary, artistic,and to entertainment, travel, insurance, recreation,and multitudes of others—economic growth isbound to accelerate and to become all-pervasive.Such dynamic growth, to be stable and continuous,requires a high degree of mobility of human re-sources, such as shifts from the production ofgoods to the performance of services.

Such economic growth or development, whichrequires above all stability of the national cur-rency and the discipline of monetary and fiscalpolicies to keep inflation in check, calls also foran optimum of foreign trade. It is generally agreedthat the promotion of peaceful relations in thisturbulent and dynamic world requires economic de-velopment in all countries, particularly those withstill predominantly rural living conditions. This de-velopment in formerly colonial and other indus-trially retarded countries is definitely needed for

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196 INTERREGIONAL TRADE

the healthy development of the advanced nations,because industrial economies maintain growth andstability by a reliable flow of essential raw mate-rials.

The Need for Leadership

Of all the conditions for increasing the incomeof the people in the world's rural countries, by farthe most strategic are continued healthy and stablegrowth of the leading industrial countries and theiravoidance of prolonged economic stagnation orcontraction. Any idea of accelerating growth inunderdeveloped countries by sapping the strengthof industrial nations belongs in the moth-eatenfabric of ideas of Marxian determinism and thefata morgana of the dictatorially-ruled "paradisefor all proletarians." Since these grand ideas havebeen tried for close to 40 years in a laboratoryexperiment with several hundred million people,they have lost their luster and gaudy colors.

Today, the economies of industrial and develop-ing countries are mutually interdependent, as is theguardianship of peaceful cohabitation of nations.Hence, while the industrial countries need an ade-quate and growing flow of primary material fromdeveloping countries, they will pay for these, aswell as for manufactured goods from light indus-tries, by exporting to those countries an increasingvolume of manufactured producer and consumergoods, and will also help them to industrializegradually.

If this mutually beneficial exchange is to flour-ish, all nations must act in accordance with theiroptimal comparative advantage, i.e., the opportu-nity to produce and sell at lower unit costs. To letthis principle work requires optimal diminution orremoval of hindrances to trade expansion, not onlyimport quotas and customs duties but the wholearsenal of nontariff trade impediments in lieu ofduties.

All the proposed solutions have one common de-nominator. They suggest that, by setting up inter-national and regional world-wide administrativemachinery to control and regulate prices for opti-mal financial liquidity of developing countries, thepace of raising the income of the poorest peoplein the most agrarian countries can be acceleratedat will, and that more perfect equity and justice indistribution among independent nations can be at-tained.

Perhaps the most persuasive and yet the mostdubious proposal to remedy the instability of for-

eign exchange earnings of developing countries isthe device of international commodity agreements,abbreviated in the literature as ICA. This form ofintervention in the international market for pri-mary commodities is an excellent example thatmakes clear where the generating power originatesthat drives a national economy, and how complexand delicate a self-adjusting system the marketeconomy actually is. When I speak of the marketeconomy, I do not mean a laissez-faire system withno rules, but a competitive private enterpriseeconomy with effective enforcement by the gov-ernment of regulations, quality standards, andrules for competition.

International commodity agreements are ar-rangements between contracting governments,aimed at preventing precipitous price declines of aprimary commodity on the world market, in orderto avoid serious balance of payment and illiquidityproblems for the governments of the exportingcountries. But the attempt to forestall disastrousprice declines also demands that brakes be put ontoo steeply rising prices, because such increasesmay unduly stimulate expansion of production,with resulting sharp price declines later.

This remedy for price instability consists basicallyof a type of market intervention that was adoptedin the late twenties and early thirties on the Eu-ropean continent, in the United States, and in otherparts of the world: farm income support throughguaranteed minimum prices for specified agricul-tural commodities. These price support policiesamount to a compulsory government-controlledcartel, with innumerable variations in detail. Sincemore than 30 years of experience with this policyhave accrued in the industrially advanced coun-tries and in the world market, it is relevant for ourdiscussion to summarize the modus operandi andthe economic results of this remedial counteractionto price instability.

Once the government supports the price of acommodity, the price can theoretically still move,but only above the so-called "floor" or guaran-teed minimum. By political compromise this levelis deliberately set above equilibrium, which bydefinition is die price that would clear the market.The politically set level is meant to be remunera-tive to the high cost or marginal producers, the lowincome farmers on whose behalf price stabilizationis mainly established. It is therefore unavoidablethat the price, and the elimination of any risk ofits change by government guarantee, will act as aforceful incentive, especially to efficient pro-

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60. THE FAILURE OF INTERNATIONAL COMMODITY AGREEMENTS 197

ducers, to expand the area for the specific crop. Tocounteract this the government imposes an arealimit, the so-called "acreage allotment." Some sortof base is needed for its determination; usually ahistorical base is chosen, such as each farmer'sactual average acreage of the crop cultivated inseveral base years. However, the common experi-ence in all countries is that the combination of aprofitable guaranteed price with the acreage allot-ment acts as a still more effective incentive for in-creasing output per unit of land on limited acre-age by more intensive farming. More fertilizer, bet-ter seed, more irrigation, better pest and weedcontrol, more cultivation, and various other meth-ods are used. Hence, the government has to buyand store more grain to keep the price at the sup-port level.

The Sorry Results

Up to this point the results of this interventionare already remarkable:

1. There is no longer any mobility of the geo-graphical location of production. It is frozen fromthe moment the allotments are established.

2. The unintentionally subsidized intensifica-tion of production has created surpluses that ex-ceed effective demand.

3. Therefore, the government has to finance andoperate storage of commodity stockpiles.

4. Hence, the government at taxpayers' expensehas entered the commodity business.

5 The price can no longer move upward but istightly pinned to the "floor." Instead of a price sup-port or the guarantee of a min