By
the "benevolent nature of capitalism," I mean the fact
that it promotes human life and well-being and does so
for everyone. There are many such insights, which have
been developed over more than three centuries, by a
series of great thinkers, ranging from John Locke to
Ludwig von Mises and Ayn Rand. I present as many of them
as I can in my book Capitalism.
I'm going to briefly discuss about a dozen or so of
these insights that I consider to be the most important,
and which I believe, taken all together, make the case
for capitalism irresistible. I'll discuss them roughly
in the order in which I present them in my book. Let me
say that I apologize for the brevity of my discussions.
Each one of the insights I go into would all by itself
require a discussion longer than the entire time that
has been allotted to me to speak today. Fortunately, I
can fall back on the fact that, in my book at least, I
think I have presented them in the detail they deserve.
And now, let me begin.
1)
Individual freedom—an essential feature of capitalism—is
the foundation of
security, in the sense
both of personal safety and of economic security.
Freedom means the
absence of the initiation of physical force.
When one is free, one is safe—secure—from common crime,
because what one is free of or free from is precisely
acts such as assault and battery, robbery, rape, and
murder, all of which represent the initiation of
physical force. Even more important, of course, is that
when one is free, one is free from the initiation of
physical force on the part of
the government,
which is potentially far more deadly than that of any
private criminal gang. (The Gestapo and the KGB, for
example, with their enslavement and murder of millions
made private criminals look almost kind by comparison.)
The fact that freedom is the absence of the initiation
of physical force also means that peace is a corollary
of freedom. Where there is freedom, there is peace,
because there is no use of force: insofar as force is
not initiated, the use of force in defense or
retaliation is not required.
The economic security
provided by freedom derives from the fact that under
freedom, everyone can choose to do whatever he judges to
be most in his own interest, without fear of being
stopped by the physical force of anyone else, so long as
he himself does not initiate the use of physical force.
This means, for example, that he can take the highest
paying job he can find and buy from the most competitive
suppliers he can find; at the same time, he can keep all
the income he earns and save as much of it as he likes,
investing his savings in the most profitable ways he
can. The only thing he cannot do is use force himself.
With the use of force prohibited, the way an individual
increases the money he earns is by using his reason to
figure out how to offer other people more or better
goods and services for the same money, since this is the
means of inducing them voluntarily to spend more of
their funds in buying from him rather than from
competitors. Thus, freedom is the basis of everyone
being as economically secure as the exercise of his own
reason and the reason of his suppliers can make him.
2) A continuing increase
in the supply of economically useable, accessible
natural resources is possible
as man converts a larger fraction of the virtual
infinity that is nature into economic goods and wealth,
on the foundation both of growing knowledge of nature
and growing physical power over it. (For elaboration of
this important point, please see Chapter 3 of my book,
or my essay "Environmentalism in the Light of Menger and
Mises" in the 2002 summer issue of
The Quarterly Journal of Austrian
Economics.)
3) Production and economic activity, by their very
nature, serve to improve
man's environment. This
is because from the point of view of physics and
chemistry, all that production and economic activity
consist of is the rearrangement of the same nature-given
chemical elements in different combinations and their
movement to different geographical locations. The
guiding purpose of this rearrangement and movement is
essentially nothing other than to make the chemical
elements stand in an improved relationship to human life
and well-being. It puts the chemical elements in
combinations and locations where they provide greater
utility, greater benefit to human beings.
The relationship of the chemical elements iron and
copper, for example, to man's life and well-being is
greatly improved when they are extracted from beneath
the earth and made to appear in such products as
automobiles, refrigerators, and electric cable. The
relationship of chemical elements such as carbon,
hydrogen, oxygen, and nitrogen to man's life and
well-being is improved when they can be made to yield
electric light and power. The relationship of a piece of
land to man's life and well-being is improved when
instead of his having to sleep upon it in a sleeping bag
and take precautions against snakes, scorpions, and
other wildlife, he can sleep in a well-constructed
modern home that is built upon it, with all the
utilities and appliances we take for granted. The
totality of the chemical elements in their relationship
to man, constitutes man's external, material
environment, and precisely this is what production and
economic activity serve to improve, by their very
nature.
4) The division of labor, a leading feature of
capitalism, which can exist in highly developed form
only under capitalism, provides among other major
benefits, the enormous gains from the multiplication of
the amount of knowledge that enters into the productive
process and its continuing, progressive increase. Just
consider: each distinct occupation, each suboccupation,
has its own distinct body of knowledge. In a
division-of-labor, capitalist society, there are as many
distinct bodies of knowledge entering into the
productive process as there are distinct jobs. The
totality of this knowledge operates to the benefit of
each individual, in his capacity as a consumer, when he
buys the products produced by others—and much or most of
it also in his capacity as a producer, insofar as his
production is aided by the use of capital goods
previously produced by others.
Thus a given individual may work as a carpenter, say.
His specialized body of knowledge is that of
carpentering. But in his capacity as a consumer, he
obtains the benefit of all the other distinct
occupations throughout the economic system. The
existence of such an extended body of knowledge is
essential to the very existence of many products—all
products that require in their production more knowledge
than any one individual or small number of individuals
can hold. Such products, of course, include machinery,
which could simply not be produced in the absence of an
extensive division of labor and the vast body of
knowledge it represents.
Moreover, in a division-of-labor, capitalist society, a
large proportion of the most intelligent and ambitious
members of society, such as geniuses and other
individuals of great ability, choose their
concentrations precisely in areas that have the effect
of progressively improving and increasing the volume of
knowledge that is applied in production. This is the
effect of such individuals concentrating on areas such
as science, invention, and business.
5) At least since the time of Adam Smith and David
Ricardo, it has been known that there is a tendency in a
capitalist economy toward an equalization of the rate of
profit, or rate of return, on capital across all
branches of the economic system. Where rates of return
are above average, they provide the incentive and also
the means for stepped up investment and thus more
production and supply, which then operates to reduce
prices and the rate of return. Where rates of return are
below average, the result is reduced investment and
reduced production and supply, followed by a rise in
profits and the rate of return. Thus high rates of
profit come down and low rates come up. The operation of
this principle not only serves to keep the different
branches of a capitalist economy in a proper balance
with one another, but it also serves to give the
consumers the power to determine the relative size of
the various industries, simply on the basis of their
pattern of buying and abstention from buying, to use the
words of von Mises. Where the consumers spend more,
profits rise, and where they spend less, profits fall.
In response to the higher profits, investment and
production are increased, and in response to the lower
profits or losses, they are decreased. Thus the pattern
of investment and production is made to follow the
pattern of consumer spending.
Perhaps even more importantly, the operation of the
tendency toward a uniform rate of return on capital
invested serves to bring about a pattern of progressive
improvement in products and methods of production. Any
given business can earn an above-average rate of return
by introducing a new or improved product that consumers
want to buy, or a more efficient, lower-cost method of
producing an existing product. But then the high profit
it enjoys attracts competitors, and once the innovation
becomes generally adopted, the high profit disappears,
with the result that the consumers gain the full benefit
of the innovation. They end up getting better products
and paying lower prices. If the firm that made the
innovation wants to continue to earn an exceptional rate
of profit, it must introduce further innovations, which
end up with the same results. Earning a high rate of
profit for a prolonged period of time requires the
introduction of a continuing series of innovations, with
the consumers obtaining the full benefit of all of the
innovations up to the most recent ones.
6) As von Mises has shown, in a
market economy, which, of course, is what capitalism is,
private ownership of the means of production operates to
the benefit of everyone, the
nonowners,
as well as owners. The nonowners obtain the benefit of
the means of production owned by other people. They
obtain this benefit as and when they buy the products of
those means of production. To get the benefit of General
Motors' factories and their equipment, or the benefit of
Exxon's oil fields, pipelines, and refineries, I do not
have to be a stockholder or a bondholder in those firms.
I merely have to be in a position to buy an automobile,
or gasoline, or whatever, that they produce.
Moreover, thanks to the dynamic, progressive aspect of
the uniformity-of-rate-of-profit or rate-of-return
principle that I explained a moment ago, the general
benefit from privately owned means of production to the
nonowners continually increases, as they are enabled to
buy ever more and better products at progressively
falling real prices. It cannot be stressed too strongly
that these progressive gains, and the generally rising
living standards that they translate into, vitally
depend on the capitalist institutions of private
ownership of the means of production, the profit motive,
and economic competition, and would not be possible
without them. It is these that underlie motivated,
effective individual initiative in raising the standard
of living.
7) A corollary of the general benefit from private
ownership of the means of production is the
general benefit from the institution of inheritance.
Not only heirs but also
nonheirs
benefit from its existence. The nonheirs benefit because
the institution of inheritance encourages saving and
capital accumulation, to the extent that it leads people
to accumulate and maintain capital for transmission to
their heirs. The result of the existence of this extra
accumulated capital is more means of production
producing for the market, and thus more and better
products for everyone to buy.
The effect of additional capital, of course, is also an
additional demand for labor, and thus higher wage rates.
The demand for labor, it should be realized, is a major
means by which all
privately owned means
of production operate to the benefit of nonowners.
Capital underlies the demand for labor as well as the
supply of products.
8) Under capitalism, not only is one man's gain not
another man's loss, insofar as it comes out of an
increase in overall, total production, but also—in the
most important cases, namely, those of the building of
great industrial fortunes—one man's gain is positively
other men's gain.
This follows from the fact that the sheer arithmetical
requirements of building a great fortune are a
combination of the earning of a high rate of profit on
capital for a prolonged period of time, and the saving
and reinvestment of the far greater part of the profits
earned, year after year.
As we have seen, the earning of a high rate of profit
for a prolonged period of time, in the face of
competition, requires the introduction of a series of
significant innovations. These innovations represent
better and less expensive products for the consumers.
The saving and reinvestment of the profits earned on the
innovations constitute the accumulation of means of
production, which also serves the consumers. Thus both
in their origin, in high profits, and in their
disposition, in the accumulation of capital, great
industrial fortunes represent corresponding gains to the
general consuming public. For example, old Henry Ford's
starting with a capital of $25,000 in 1903 and ending
with a capital of $1 billion in 1946 was the other side
of the coin of the average person becoming enabled to
buy a greatly improved, far more efficiently produced
automobile—produced largely in factories representing
Ford's billion.
9) As von Mises has shown, the economic competition that
takes place under capitalism is radically different than
the biological competition that prevails in the animal
kingdom. In fact, its character is diametrically
opposite.
The animal species are confronted with scarce,
nature-given means of subsistence, whose supply they are
unable to increase. Man, by virtue of his possession of
reason, can increase the supply of everything on which
his survival and well-being depend. Thus, instead of the
biological competition of animals striving to grab off
limited supplies of nature-given necessities, with the
strong succeeding and the weak perishing, economic
competition under capitalism is a competition in who can
increase the supply of things the most, with the outcome
being practically everyone surviving longer and better.
Totally unlike lions in the jungle, who must compete for
a limited supply of animals such as zebras and gazelles,
by means of the power of their senses and limbs,
producers under capitalism are in competition for a
limited supply of
dollars in the hands of
consumers, which they compete for by means of offering
the best and most economical products their
minds can
devise. Since such
competition is a competition in the positive creation of
new and additional wealth, there are no genuine long-run
losers as the result of it. There are only winners.
The competition of farmers and farm-equipment
manufacturers enables the hungry and weak to eat and
grow strong; that of pharmaceutical manufacturers
enables the sick to recover their health; that of
eye-glass and hearing-aid manufacturers enables many who
otherwise could not see or hear, to do so. So far from
being a competition whose outcome is "the survival of
the fittest," the competition of capitalism is more
accurately described as a competition whose outcome is
the survival of all, or at least of more and more, for
longer and longer and ever better. The only sense in
which only the "fittest" survive is that it is the
fittest products
and fittest methods of
production that
survive, until replaced by still fitter products and
methods of production, with the effects on human
survival just described.
As von Mises has also shown, with his development of
Ricardo's law of comparative advantage into the law of
association, there is
room for all in the
competition of capitalism. Even those who are less
capable than others in every respect have a place. In
fact, in large measure, competition under capitalism, so
far from being a matter of conflict among human beings,
is a process of organizing that one great
system of social cooperation
known as the division of labor. It decides at what point
in this all-embracing system of social cooperation each
individual will make his specific contribution—who, for
example, and for how long, will be a captain of
industry, and who will be a janitor, and who will fill
all the positions in between.
In this competition, each individual, however limited
his abilities, is enabled to outcompete all others,
however superior to him in their abilities they may be,
for his special place. Quite literally, and as an
everyday occurrence, those with abilities no greater
than required to be a janitor are able to outcompete,
hands down, without question, the world's greatest
productive geniuses—for
the job of janitor. For
example, Bill Gates might be so superior an individual
that in addition to being able to revolutionize the
software industry, he might be able to clean five times
as many square feet of office space in the same time as
any janitor now living, and do it better. But if Gates
can earn a million dollars an hour running Microsoft,
and janitors can be found willing to work for, say, $10
an hour, their readiness to perform the job at one
one-hundred thousandth of the hourly rate Gates would
require, so far dwarfs their lesser abilities that it is
they who are "hors de concours" in this case.
At the same time, because productive geniuses are free
to succeed in revolutionizing products and methods of
production, those with abilities no greater than
required to be janitors are able to enjoy not only food,
clothing, and shelter, but even such products as
automobiles, television sets, and personal computers,
products whose very existence they could probably never
have even dreamed of on their own.
The losses associated with competition are at most
short-run losses only. For example, once the
blacksmiths and horse breeders put out of business by
the automobile found other lines of work on a comparable
level, the only lasting effect of the automobile on them
was that they too, in their capacity as consumers, came
to enjoy the advantages of the automobile over the
horse. Similarly, farmers using mules, who were driven
out of business by the competition of farmers using
tractors, did not die of starvation, but simply had to
change their line of work, and when they did so, they
along with everyone else enjoyed both a more abundant
supply of food and of other products as well, which
other products could be produced precisely on the
foundation of labor released from agriculture.
Even in those cases in which an
isolated competition results in an individual having to
spend the remainder of his life at a lower station than
he enjoyed before, for example, the owner of a
buggy-whip factory having to live for the rest of his
life as an ordinary wage earner after being put out of
business by the automobile—even he cannot reasonably
claim that competition has harmed him. The most he can
reasonably claim is merely that from this point on, the
immense gains he derives from competition are less than
the still more immense gains he derived from it
previously. For competition is what underlies the
production and supply of everything he continues to be
able to buy and is what is responsible for the
purchasing power of every dollar of his and everyone
else's income. And, of course, it proceeds to raise his
real income from the level to which it was set back.
Indeed, under capitalism, competition proceeds to raise
the standard of living of the average wage earner above
that of even the very wealthiest people in the world a
few generations earlier. (Today, for example, the
average wage earner in a capitalist country has a
standard of living higher than that even of Queen
Victoria, in probably every respect except the ability
to employ servants.)
10) And now, once more with credit to Mises, so far from
being the planless chaos and "anarchy of production"
that is alleged by Marxists, capitalism is in actuality
as thoroughly and rationally planned an economic system
as it is possible to have. The planning that goes on
under capitalism, without hardly ever being recognized
as such, is the planning of
each individual participant
in the economic system. Every individual who thinks
about a course of economic activity that would be of
benefit to him and how to carry it out is engaged in
economic planning. Individuals
plan
to buy homes, automobiles,
appliances, and, indeed, even groceries. They
plan
what jobs to train for and where
to offer and apply the abilities they possess. Business
firms plan
to introduce new products or
discontinue existing products; they
plan
to change their methods of
production or continue to use the methods they presently
use; they plan
to open branches or close branches; they
plan
to hire new workers or layoff workers they presently
employ; they plan
to add to their inventories or reduce their inventories.
Still more examples of routine, everyday economic
planning by private individuals and businesses could be
found. Private economic planning is everywhere around us
and everyone engages in it. But, to everyone except
students of Mises, it is invisible. To those who are
ignorant of Mises, economic planning is the province of
government.
Immense, all-pervasive private economic planning not
only exists, but it is also all
coordinated, integrated,
harmonized to produce a
cohesively planned economic system. The means by which
this is accomplished is the
price system.
All of the economic planning of private individuals and
business firms takes place on the basis of a
consideration of prices—prices constituting costs and
prices constituting revenue or income. Individuals
planning to buy goods or services of any kind always
consider the prices of those goods and services and are
prepared to change their plans in the face of price
changes. Individuals planning to sell goods or services
always consider the prices they can expect for their
goods or services and are also prepared to change their
plans in the face of price changes. Business firms, of
course, base their plans on a consideration both of
sales revenues and of costs and thus of the respective
prices constituting both, and are prepared to change
their plans in response to changes in profitability.
Thus, for example, when my wife and I first moved to
California, our housing plan was to purchase a house
high on a hill overlooking the Pacific Ocean. But after
learning the price of such houses, we quickly decided
that we needed to revise our housing plan and look for a
house several miles inland instead. In this way, we were
led to change our housing plan in a way that made it
harmonize with the plans of other people, who also
planned to buy the kind of house we were originally
planning to buy but, in addition, were willing and able
to commit to their plan more money than we were willing
and able to commit. The higher bids of others and our
consideration of those bids brought about a
harmonization of our housing plan with theirs.
Similarly, a naive college freshman might have a career
plan that calls for him to major in Medieval French
literature or Renaissance poetry. But sometime before
the start of his junior year, he comes to realize that
if he persists in such a career plan, he can expect to
live his life starving in a garret. On the other hand,
if he changes his career plan and majors in a field such
as accounting or engineering, he can expect to live very
comfortably. And so he changes his career plan and
major. In changing his career plan on the basis of a
consideration of prospective income, the student is
making a change that better accords with the plans of
others in the economic system. For execution of the
plans of others requires the services of far more
accountants and engineers than it does the services of
literary experts.
A last example: consumers change their dietary plan, and
thus plan, say, to eat more fish and chicken and less
red meat. This results in a corresponding change in
their pattern of buying and abstention from buying. Now,
in order to maintain their profitability, supermarkets
and restaurants must plan to change their offerings,
namely, to increase the respective quantities of fish
and chicken and fish and chicken entrees or sandwiches
they supply, and decrease the quantities of red meat and
red-meat entrees or sandwiches they supply. These plan
changes, and corresponding purchase changes, on the part
of supermarkets and restaurants result in further plan
changes and purchase changes, on the part of their
suppliers and on the part of their suppliers' suppliers,
and so on, until the entire economic system has been
sufficiently replanned to accord with the change in the
plans and purchases of the consumers.
The price system and the consideration of cost and
revenue that it entails on the part of all individuals
leads to the economicsystem continually being replanned
in response to changes in demand or supply in a way that
maximizes gains and minimizes losses and ensures that
each individual process of production is carried on in a
way that is maximally conducive to production in the
rest of the economic system.
For example, as the result of a decrease in the supply
of crude oil, there will be a rise in the price of crude
oil and of oil products. All individual buyers will
consider the higher prices in relation to their own
specific circumstances—in the case of consumers, their
own needs and desires; in the case of business firms,
their ability to pass along the increase to customers.
And all of them will consider the alternatives to the
use of oil or oil products available to them
specifically. Thus, on the basis of his individual
thinking and planning, each of the participants will
reduce his demand for the items in a way that least
impairs his well-being. And in this way, the thinking
and planning of all participants in the economic system
who use oil or oil products will enter into the
determination of where and by how much the quantity of
oil and oil products demanded decreases in response to a
rise in their price. This is clearly an instance of
responding to a loss of supply in a way that minimizes
the loss. The reduction in supply will be accompanied by
an equivalent reduction in its use in the least
important of the employments for the which the
previously larger supply had been sufficient.
Similarly, the price system and the individual thinking
and planning of all participants leads to the
maximization of the gains from an increase in the supply
of any scarce factor of production. The additional
supply is absorbed in those uses in which it is most
highly valued, that is, in which it can be absorbed with
the least fall in price.
Ironically, while capitalism is an economic system that
is thoroughly and rationally planned, and continuously
replanned in response to changes in economic conditions,
socialism, as Mises has shown, is incapable of rational
economic planning. In destroying the price system and
its foundations, namely, private ownership of the means
of production, the profit motive, and competition,
socialism destroys the intellectual division of labor
that is essential to rational economic planning. It
makes the impossible demand that the planning of the
economic system be carried out as an indivisible whole
in a single mind that only an omniscient deity could
possess
What socialism represents is so far from rational
economic planning that it is actually the
prohibition
of rational economic planning. In the first instance, by
its very nature, it is a prohibition of economic
planning by everyone except the dictator and the other
members of the central planning board. They are to enjoy
a monopoly privilege on planning, in the absurd,
virtually insane belief that their brains can achieve
the all-seeing, all-knowing capabilities of omniscient
deities. They cannot. Thus, what socialism actually
represents is the attempt to substitute the thinking and
planning of one man, or at most of a mere handful of
men, for the thinking and planning of tens and hundreds
of millions, indeed, of billions of men. By its nature,
this attempt to make the brains of so few meet the needs
of so many has no more prospect of success than would an
attempt to make the legs of so few the vehicle for
carrying the weight of so many... To have rational
economic planning, the independent thinking and planning
of all are required, operating in an environment of
private ownership of the means of production and the
price system, i.e., capitalism.
11) I turn now to the subject
of monopoly. Socialism is the system of monopoly.
Capitalism is the system of freedom and free
competition.
As Mises has pointed out, the essential nature-given
requirements of human life, such as drinking water,
arable land, and the accessible supplies of practically
all minerals are typically available in quantities so
great that not all available sources can be exploited.
The labor that would be required is not available. It is
employed on pieces of land and mineral deposits that are
more productive or in the numerous operations of
manufacturing and commerce, where its employment is
demonstrated by market prices to be more important than
the production of an additional supply of agricultural
commodities or minerals.
In these conditions, and in the absence of government
interference, what is required to enable any producer
(or combination of producers) to become the sole
supplier of anything is that the price he charges is too
low to make it worthwhile for other potential suppliers
to enter the field. The position of sole supplier is
secured by lowness of price, and is not the basis for
imposing a high price.
The same essential point applies to cases in which the
necessity of investing large sums of capital sharply
limits the number of suppliers. Here a large capital is
required in order to achieve low unit costs of
production, which are necessary in order to be
profitable at low selling prices.
Monopoly is actually the result of government
intervention. Specifically it is the reservation of a
market or part of a market to one or more suppliers by
means of the initiation of physical force. Exclusive
government franchises, protective tariffs, and licensing
laws are examples.
12) Capitalism is a system of progressively rising real
wages, the shortening of hours, and the improvement of
working conditions. Contrary to Adam Smith and Karl
Marx, businessmen and capitalists do not deduct profits
from what allegedly was originally all wages or what
allegedly is naturally and rightfully all wages. The
original and primary form of income is
profit, not wages.
Manual workers producing and selling products either in
Adam Smith's "early and rude state of society" or in
Karl Marx's "simple circulation" did not earn wages, but
sales revenues. When one sells a loaf of bread or a pair
of shoes, or any other product, one is not paid a wage
but a sales revenue. And precisely because those manual
workers did not behave as capitalists, i.e., did not buy
for the sake of selling but made expenditures merely as
consumers, they made no expenditures for means of
producing whatever goods they may have sold, and thus
they incurred no money costs to be deducted from their
sales revenues; i.e., the full magnitude of their sales
revenues was profit, not wages. Profit, it turns out, is
the original and primary form of labor income.
Contrary to Adam Smith and Karl Marx, it is only with
the coming of capitalists and the accumulation of
capital that the phenomenon of wages comes into
existence, along with the demand for capital goods. Both
wages and the expenditure for capital goods show up as
money costs of production which must be deducted from
sales revenues. The more economically capitalistic the
economic system, in the sense of the greater is the
buying for the purpose of earning sales revenues,
relative to sales revenues, the higher are wages and
other costs relative to sales revenues, and thus the
lower are profits relative both to sales revenues and to
wages. In other words, what capitalists are responsible
for is not the creation of the phenomenon of profit and
its deduction from wages, but the creation of the
phenomena of wages and money costs and their deduction
from sales revenues, which were originally all profit.
Capitalists are responsible for the creation of wages
and the reduction of the proportion of sales revenues
that represents profit. The more numerous and the
wealthier are capitalists, the higher are wages relative
to profits.
The fact that wage earners may be willing to work for
minimum subsistence, in the absence of any better
alternative, and that businessmen and capitalists, like
any other buyer, prefer to pay less rather than more,
are propositions that are true but utterly irrelevant to
the determination of the wages that the wage earners
must actually accept. Those wages are determined by the
competition of employers for labor, which is both the
most fundamentally useful element in the economic system
and is intrinsically scarce.
In that competition, it is against the self-interest of
any employer to allow wage rates to go below the point
corresponding to the full employment of the kind of
labor in question, in the location in question. Such low
wage rates mean that the quantity of labor demanded
exceeds the supply available, i.e., that there is a
shortage
of the labor concerned. A shortage
of labor is comparable to an auction in which there are
still two or more bidders for one and the same item. The
only way that the bidder who wants the item the most can
secure it, is by outbidding his rivals and making the
item too expensive for them, so that they must step
aside and make it possible for him to secure the item.
In the labor market there may be tens or even hundreds
of millions of workers. But the scarcity of labor means
that there are potential jobs for far more than that
number. The fact that each of us would like the benefit
of the labor of at least ten others can be taken as an
indication of the extent of the scarcity of labor.
When a wage rate goes below the point corresponding to
the full employment of the kind of labor concerned, it
becomes possible for employers not able or willing to
pay that higher rate to obtain labor at the expense of
other employers who are able and willing to pay that
higher rate. The situation is exactly the same as the
stronger bidder at an auction who is faced with the loss
of the item he wants to another, weaker bidder. The way
to secure the labor he needs is to raise the bidding and
knock out the competition of the weaker employers.
In the face of labor shortages, which appear when
ceiling prices are imposed on labor, employers actually
conspire with their employees to evade the spirit of the
wage controls, by giving out phony promotions. This
enables them to claim that they are not violating the
controls when in fact they are.
Now, given the height of money wage rates, which we have
seen is determined by the competition of employers for
scarce labor, what determines real wages, i.e., the
goods and services that the wage earners can buy with
the money they earn, is prices. Real wages are
determined fully as much by prices as they are by wages.
Real wages rise only when prices fall relative to wages.
What makes prices fall relative to wages is a rise in
the productivity of labor, i.e., the output per unit of
labor. A rise in the productivity of labor means a
larger supply of consumers goods relative to the supply
of labor, and thus lower prices of consumers' goods
relative to wage rates. If we could somehow measure the
supply of consumers' goods, a doubling of the
productivity of labor would operate to double the supply
of consumers' goods relative to the supply of labor and,
in the face of the same overall respective expenditures
to buy consumers' goods and labor, result in a halving
of the prices of consumers' goods in the face of the
same overall average wage rates. In other words, it
would double real wage rates.
The rise in the productivity of labor is always the
essential element in the rise in real wages. It is what
enables increases in the quantity of money and volume of
spending, which are responsible for higher average money
wages, being accompanied by prices that do not rise or
do not rise to the same extent as wages.
And what is responsible for the rise in the productivity
of labor is the activities of businessmen and
capitalists. Their progressive innovations and capital
accumulation underlie the rise in the productivity of
labor and thus in real wages.
13) Finally, my last point: a one-hundred-
percent-reserve, precious-metals monetary system would
make a capitalist society both inflation-proof and
deflation/depression-proof. The modest increase in the
supply of precious metals, and thus the modest rate of
increase in the volume of spending that proceeds from
it, would not be able to raise prices in the face of the
substantial rate at which the production and supply of
practically all goods other than the precious metals
increases under capitalism. Prices would most likely
tend to fall, as they did over the course of the
Nineteenth Century.
Falling prices due to increased
production, however, do not constitute deflation. They
do not signify any reduction in the average rate of
profit, that is, the average rate of return on capital
invested. Nor do they signify any greater difficulty of
repaying debts. Yet a plunge in profits and a sudden
increase in the difficulty of repaying debt are
essential symptoms of deflation/depression.
Indeed, as I show in my book, the modest increase in the
quantity of money and volume of spending that goes on
under a one-hundred- percent-reserve, precious-metals
monetary system serves to add a positive component to
the rate of return and to make debt repayment somewhat
easier, not more difficult. The falling prices caused by
increased production do not interfere with this. When
prices fall because of increased production in the face
of an increase in the quantity of money and volume of
spending, the average seller is in the position of
having a supply of goods to sell that is larger in
greater proportion than prices are lower and thus to be
able to earn more money, not less.
Genuine deflation, the accompaniment of depression, is
financial contraction—that is, a decrease in the
quantity of money and/or volume of spending. This is
what wipes out profitability and makes debt repayment
more difficult. But such contraction is precisely what a
one-hundred- percent-reserve, precious-metals monetary
system prevents. It prevents it because once
precious-metal money comes into existence, it does not
suddenly go out of existence, as occurs with fiduciary
media when the banks that issue them fail. And because
its rate of increase is modest, it does not lead to any
substantial, artificial reduction in the demand for
money for holding, which then must be followed by a
reversal when the increase in the quantity of money
stops or slows.
Nor do the continuous saving and capital accumulation
that go on under capitalism operate to reduce the rate
of return on capital. The nominal saving that takes
place out of money income, takes place largely out of a
rate of return that is elevated by the increase in the
quantity of money and volume of spending, and, so long
as the quantity of money and volume of spending go on
modestly increasing, that saving does not reduce the
rate of return.
If there were no increase in the quantity of money and
volume of spending, the rate of return would be lower,
but stable at the lower level. Capital accumulation
would proceed simply on the basis of falling replacement
prices, with unchanged expenditures buying progressively
larger quantities of capital goods.
As I show in my book, in such a context, the role of
saving exists entirely at the gross level, where it
determines such vital matters as the degree to which the
economic system concentrates on the production of
capital goods relative to the production of consumers'
goods and the length of the period of production. The
essential elements in capital accumulation then stand
revealed as a sufficiently high relative production of
capital goods, and sufficiently long period of
production, together with technological progress and
anything else that serves to increase production, above
all, economic freedom.
Here, for lack of time. I must close. I'd like to do so
by saying that if you've found my talk today to be of
interest, I hope you will explore the matters I've
discussed, at greater length and in detail in my book.
Its entire sum and substance can be understood as a
systematic exposition of the benevolent nature of
capitalism.
(C) 2002 George Reisman.
All rights reserved.
George Reisman is professor of economics at Pepperdine
University’s Graziadio School of Business & Management
in Los Angeles, and is the author of
Capitalism: A Treatise on
Economics (Ottawa,
Illinois: Jameson Books, 1996). His book is available
through
Mises.org
or
Amazon.com.
His web site is
www.capitalism.net.
You may contact Dr. Reisman by
MAIL.
See his Mises.org Daily Articles Archive, and read his
interview in the Austrian Economics Newsletter.
