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The Marvel That Is Capitalism / Artikel, engl.

verfasst von JÃœKÃœ, 09.04.2002, 18:09

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The Marvel That Is Capitalism
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by Llewellyn H. Rockwell, Jr.

[Posted April 8, 2002]



This speech by the president of the Mises Institute was
given before students, professors, trustees, and others at an awards dinner
sponsored by the Adam
Smith Club, Campbell University, Buies Creek, North Carolina, April 4, 2002.
Rockwell and entrepreneur Lewis Fetterman recieved the club's Free Enterprise
Award.

[img][/img] Free-market
economics, of which the Austrian School is the preeminent exponent, asserts that
every government intervention in the market generates consequences that are
deleterious for prosperity and human liberty. However much such interventions
may assist one group in the short run, everyone is made worse off in the long
run. Government intervention destabilizes economic life in artificial ways, and
ultimately does not work to bring about the results that its exponents claim to
desire.

Rather than dwelling on the theoretical apparatus that
demonstrates this, I would give some examples of how this works, based on recent
issues you may have read about in the news, and draw some broad lessons from
them.

Let us begin with the economic recovery. The headlines of the
business pages have been trumpeting its arrival now for months. How do the
experts decide when recession has turned to recovery? By looking at the data,
which come in packages labeled in various ways: the GDP, the leading indicators,
the unemployment rate, industrial production, housing starts, commercial
borrowings, office vacancy rates, and a host of others. If these tend in the
negative direction, we are said to be entering a recession. If they move in a
positive direction, it is said that we are recovering.

Let?s grant, first, that the larger the data set, the more
subject to manipulation it is. We can count housing starts, but measuring
something like national productivity is very tricky business. The great scandal
of the way that GDP is collected is that it does not measure wealth destruction,
as caused by something like September 11 or the 40 percent of private wealth
consumed by government at all levels every year, and neither does it make a
distinction between private production and outright government spending. Because
of this, looking at the data alone, without a proper theory of economics, can
produce a highly misleading picture.

For about a year, the government has been engaged in a serious
effort to bring us out of recession through a variety of fiscal and monetary
policies. If recovery is really here, can we say that these policies have worked?
Not necessarily, because we must establish a firm relationship between cause and
effect to draw such a conclusion. The economy might have recovered without such
stimulus efforts. In fact, such stimulus efforts might make the recovery weaker
than it otherwise might be.

Is It Real?

A more serious possibility is that the stimulus efforts have
actually created an illusion. While everyone is celebrating the unexpected
economic recovery, which is also unexpectedly robust, it serves us to look
beneath the surface. There are aspects of this recovery that are highly unstable
because they were brought about through artificial means. There are also certain
policy trends which suggest that it might not last or that it will not be as
robust as it might otherwise be.

Look at a new report from the Congressional Budget Office. The
report points out that new government spending has surpassed the amounts
envisioned in the stimulus measure, exceeding what even the most spendthrift
law-makers dared demand. The spending surge along with consumer debt helps to
explain why the recession seemed mild and why everyone is talking about recovery.

The government spending, which has very quickly pumped an
extra $100 billion into the economy, began in October. Outlays are up over last
year?s increases by 13.1 percent. In terms of GDP, it accounts for fully 1
percent. As for consumer spending, it is financed almost entirely by new
borrowing fueled by artificially lower interest rates.

Looking even deeper, we can see that Federal Reserve policy
has been astonishingly loose since the beginning of 2001, reaching as high as 20
percent per annum by some measures. Let?s say I set out to stimulate economic
production in this room. We could all gather together to write some software
that is valued by the market, or we could teach each other new skills that
increase our labor productivity.

But what if I stood here with a photocopying machine and made
a thousand copies of the $20 bill I have in my pocket, passed them around, and
then announced that we are all $20,000 richer than before? I would hope you
would be skeptical of this claim. When the Federal Reserve does this same thing
with its money-creation machine, we should be also skeptical.

While recognizing that some of the rebound may consist of
sustainable investment begun after the great shakeout of 2000, these factors
just cited strongly suggest that the current economic recovery consists of more
myth than reality. We need to ask ourselves whether and by what means it can be
sustained.. The only means for doing so is for it to be supported through strong
economic development and sound investment--investment that is born out in
consumer purchases and long-term profits.

Mercantilism

It turns out, however, that the federal government seems to be
doing everything possible to undermine the likelihood of a sustainable recovery.
Last month, the U.S. imposed a 30-percent tariff on steel. The idea here is to
help one inefficient, bloated, and pampered industry at the expense of all U.S.
consumers of steel, including U.S. businesses, and all producers in Europe, Asia,
Brazil, and Australia. This is brazen protectionism, deeply harmful all around,
not to mention morally repugnant.

Will it help the steel industry? In the short run, yes. But we
have to ask ourselves whether this kind of help is a good thing in the long run.
The tariffs permit an inefficient industry to continue to produce inefficiently,
and forestall improvements in technology and cutbacks in wages that are
necessary if the industry is to adjust to 21st-century realities. There is no
virtue to keeping dying and inefficient technology humming along so that workers
who might be better employed elsewhere can continue to enjoy fat checks doing
outmoded work.

How long must such tariffs remain in place? The steel industry
says they are only necessary in order to get it back on its feet. But that
belies that question of what, precisely, is going to inspire this sector to
clean up its act? Protecting an industry from competition is a method that
permits everything wrong with the industry to persist and not change. Either
this tariff will have to be in place permanently, or the industry will have to
be shaken up.

If you think about it, Soviet socialism survived for 72 years
on precisely such policies. The Soviet state protected all its industries from
market competition under the alleged need to build socialism. Factories were
never closed, and workers were never let go except for political reasons, when
their services were employed in the Gulag. The system worked only if your
standard is not efficiency but merely the guarding of the status quo. Eventually
this system collapsed, as they must, and the Soviets woke up to a world that was
backward and decayed.

The steel tariff imposed by the Bush administration is
different >from Soviet socialism only in degree, not in kind. It is an
attempt to circumvent the market process through a centrally administered system
of rewards and subsidies for industry to abide by political priorities rather
than market dictates. In the meantime, all purchasers of steel, whether
consumers or other businesses, are harmed by being forced to pay a higher price
for an inferior product.

Most recently the U.S. also imposed massive punitive duties on
softwood imports from Canada. Why? Because Canada refused to obey a U.S. demand
that it place a new tax on its softwood. The new duties raise the price of
softwood, used for building nearly every home in America, by 27 percent. This is
going to distort the housing market, among many others sectors that use wood.
Higher prices for steel and wood put additional pressure on other businesses
that use these products in production.

In economic terms, tariffs are indistinguishable from taxes.
They take people's property by force by requiring businesses and consumers to
pay higher prices for goods than they would otherwise pay in a free market. To
that extent, they harm the prospects for economic growth. If anyone says
otherwise, he is ignoring hundreds of years of scholarship and the entire sorry
history of government interference with international trade.

The repercussions of these two actions are already being felt
via damaged relations in Latin America and Europe. The World Trade Organization
will likely give the green light for retaliation. Protectionist lobbies all over
the world are rushing to take advantage of the opportunity. The EU has imposed
tariffs on U.S. steel, and Canada is considering retaliatory measures. This way
lies trade war, which is the worst thing that can happen to an economy outside
hot war.

War Against the Economy

And speaking of war, another policy that endangers recovery is
the war on terrorism. I?m not taking issue with the need for justice after
September 11. But it seems clear that the government is using this tragedy as an
excuse to vastly increase spending and regulation over the American and world
economy. President Bush, who campaigned on a platform of cutting government, has
asked for another $28 billion to pour into the military, even as he is pushing
for more regulations on banks and financial privacy in the name of rooting out
terrorism. The total increases for 2002 could be as high as $250 billion,
depending on whom the U.S. plans to conquer next.

Here again, this spending can create the illusion of
prosperity, but we must also remember that first lesson of economic science: the
world is a finite place where the use of any and all resources are constrained
by scarcity. This is just another way of saying that you can?t always get want
you want, and when you do, it must come from somewhere. When the government
spends resources, it must drain them from the private economy through taxation,
borrowing, or inflating the money supply to pay for the new spending.

Economics doesn?t deny that redirecting resources from one
sector where they are valued by consumers, to another sector where they are
valued by government, cannot create pocket of expansion. What economics suggests
is that this is not an efficient or sustainable use of such resources. Only the
unhampered competitive market economy, with its system of market prices, profits,
and losses, can reveal to us with any certainty the most desirable destination
of economic goods.

But in the examples I have just given, you can see how
government intervention is redirecting resources from their most desired uses to
purposes deemed desirable by political planners. The politicians believe that
the military needs resources more than you and I, so they take them. They
believe that the profits of the steel industry are more important than the
international division of labor, so they protect that industry. They believe
that the softwood industry deserves to obtain the highest possible prices for
its products, so they intervene to hamper imports.

As for the explosion of consumer spending that has taken place
over the last six months, this does indeed encourage businesses to expand. If
low interest rates are encouraging consumers to dig deep to borrow for and buy
new homes, this will encourage more investment in housing on the production side
as well, and this too will be encouraged by the interest rates being depressed
by the Federal Reserve. Artificially low interest rates also tend to discourage
savings, and encourage people to put money back into the stock market where,
they hope, it can earn a higher rate of return.

If credit expansion, protectionism, and government spending
were a path to prosperity, mankind would have long ago created heaven on earth.
But the politicians engaged in this activities have to contend with reality, and
the reality is that economic forces in society must be mutually sustaining. To
have production and borrowing, there must be savings, which only occur when
people forestall consumption today to prepare for tomorrow, and in investment
that pans out in the form of consumption. Absent such conditions, economic
growth lacks a foundation in reality and turns to dust when economic conditions
change.

We have seen many examples of this in recent years. The
Internet bubble was one such case. There was nothing unreal about the technology
nor its potential to provide massive gains in efficiency, as well as a vibrant
new commercial marketplace and information delivery service. Nor was there
anything ignoble about investors who pumped money into dot-coms on the promises
of future profits. What distorted the picture was too much credit, courtesy of
the Federal Reserve, chasing too few capitalized companies.

When the Fed began to reduce the pace of monetary pumping,
lenders pulled back, investors pulled back, and dot-coms and their support
infrastructure found themselves overextended, well beyond what the market would
have born if it had not been subsidized by a reckless Fed policy. The collapse
of the Nasdaq was nothing more than reality reasserting itself. Some
malinvestments were cleaned out and the ground was prepared for new investment.

Dot-coms weren?t the only ones affected by the bubble. Enron
is another case in point. This company profited and dramatically expanded at a
time when investors were encouraged to recklessly purchase stocks without regard
to balance sheets. The auditors are catching the blame, but the truth is that
Enron profited in a time when portfolio managers weren?t paying very close
attention either. The only way such a"cluster of errors" comes to
predominate in a market economy is when the central bank unleashes new money and
credit beyond anything that the market can sustain.

Prior to our own bubble, we saw a similar situation in Asia,
and, before that, in Mexico. In each of these cases, what we find is not market
failure but a failure of the system of money and credit to provide reliable
signals for investors and lenders. It is helpful to think of the interest rate
as a price signal, so that Fed attempts to drive down rates simply mis-price
credit. In the same way that a government price ceiling would cause
overconsumption of any good?whether eggs, gas, or electricity--distortions of
the interest rate encourage overconsumption of credit.

It is not surprising, then, that we are seeing a spending boom
take place today among consumers even as producers are pulling back in many
areas. Certain sectors have prospered since the reflation began after mid-2001.
Housing, in particular, has boomed all out of proportion to what it would
otherwise do in a free market. If any sector is being set up for a fall today,
it is this one.

But I don?t want to make a series of quantitative
predictions concerning the future of the macroeconomy. Instead, I would like to
help you come to think about the issue of economic intervention in a way you
might not have thought about it before. Carl Menger, the founder of the Austrian
School of economics, was a firm believer in the law of cause and effect. He
believed that economic affairs could be analyzed in these terms as well.

The Laws of Economics

His followers in this tradition of thought, including Ludwig
von Mises and Murray N. Rothbard, spelled out the implications of this idea for
a huge range of issues that confront us on a daily basis in the world of
economics and politics. They focused on universal principles that can be derived
from the teaching of economics. The laws of supply and demand, for example,
cannot be repealed by any legislature or court. Government regulators can impose
price ceilings, price floors, or limits to the size of firms like Microsoft, but
economic law bites back by yielding shortages, surpluses, and reduced
profitability.

It is important that we think of economic life as an intricate
global system of exchange, one that works without any central direction, and
which generates prosperity and its own form of order within the framework of
liberty. This is what is sometimes termed the magic of the marketplace, and we
should never underestimate its power. We can see by looking south to Argentina
how a failing economy, one thrown into shock by bad legislation and monetary
policy, has destroyed the livelihoods of the entire population.

We are not just talking about the earnings in people?s stock
portfolio. We are talking about whether mothers can afford to buy milk for their
children, and whether the businesses that deliver milk have the freedom to be
entrepreneurial and find the least-cost methods to make such deliveries possible.
When we speak of economics, we are talking about the health of society, and
whether medical equipment is working and affordable, and whether the labor
market is sufficiently free to permit everyone a place within the division of
labor.

People who dismiss the teachings of economics forget that many
of the world?s wars and ethnic slaughters began in economic intervention.
Before warfare broke out in Yugoslavia in the 1990s, the country was afflicted
by one of the most extreme hyperinflations in the history of the world. This
literally destroyed the standard of living and helped turn a previously settled
society into a killing field.

If we look back at history, we can see that many wars began in
trade disputes, when governments attempted to reward some producers at the
expense of others. This was the origin of the Civil War, for example. Even in
our own times, the perception in the Muslim world that U.S./U.N. sanctions
against Iraq have slaughtered hundreds of thousands of children has fueled
hatred that has culminated in terrorism. The general lessons we can draw is that
economics is really just a fancy word for the quality of our lives, and that the
quality of our lives has no greater enemy than the governments that attempt to
restrict economic liberty.

The Quality of Life

Looking at people?s life spans, we see the hidden history of
the rise of economic development. Throughout the first huge period of human
history >from the beginning until the birth of your father?s
great-grandfather, the average life span was 20 to 35 years, and a third to half
of all children died before reaching the age of 5. Economic conditions before
very recently in the history of man could not sustain a world population that
rose above a few million. Even by the year 1800, the average life span was only
40.

The standard of living for the average person throughout all
but the smallest slice of human history can be aptly summed up in the words of
Thomas Malthus:"At nature's mighty feast there is no vacant cover for him.
She tells him to be gone, and will quickly execute her own orders." That
was life as everyone but kings knew it after the Fall and before the Industrial
Revolution.

But in the last tiny fragment of the history of the world,
life spans have more than doubled and the world population has increased one
thousand times. By far the largest improvements in these vital statistics have
occurred since 1800, at a time when the division of labor expanded dramatically
around the world; when property rights were secure; when capital could be
accumulated, invested, and a return paid and reinvested; when technological
improvements permitted new forms of productivity. What made this possible was
the free market.

We take for granted such luxuries as refrigeration, the air
conditioner, the internal combustion engine, and electricity, to say nothing of
email, the web, and fiber-optics. But we rarely reflect on the fact that all of
these technologies, so integral to our lives, were absent when our
great-great-grandfathers were alive, along with every previous generation in the
history of the world. What set this revolution in motion was the world of ideas,
when great thinkers began to understand the internal logic of the market economy
and its potential for liberating mankind from poverty, dependency, and despotic
rule.

Given this history, one might think that everyone would sit
and marvel at the products of capitalism. We might think that intellectuals
would dedicate their lives to defending this system and explaining its merits.
We might imagine that statesmen would dedicate themselves to protecting this
system of economic progress from every attempt to curb it or abolish it.

Alas, that is not true. Quite the opposite. The intellectual
world often appears to be a conspiracy against market economics, and the media
routinely ridicule capitalism. Statesmen spend every waking minute trying to
curb, regulate, hamper, or otherwise loot the capitalist system.

Those who attacked the World Trade Center were driven by
revenge but also by a belief that the towering products of the commercial
society somehow represent an evil that must be destroyed rather than a virtue
that should be emulated. They were merely absorbing a view of that is pervasive
in our culture today, where the anticapitalistic mentality runs rampant.

In our own times, we have seen the evil produced by this
mentality, in the former Soviet Union and in many Third World countries, where
politicians do everything possible to keep the entrepreneurial spirit penned up,
where property rights are not secure, and where investment for the long term is
not permitted. The result is always the same: poverty, despotism, death.

Mises: His Life and Work

As the founder and president of the Mises Institute, I have a
special attachment to the ideas of Mises and to the courageous life he lived in
defense of the idea of freedom. He began his career in Vienna, writing about the
problem of the business cycle and the role of money and credit in fostering it.

The core point he made in his great 1912 book, A Theory of
Money and Credit, was that artificial increases in the money supply are not
a substitute for real economic production; indeed such increases cause economic
damage that can only be rectified through painful economic contractions. His
point has continuing relevance.

His next book, from 1919, sought to defend the idea that
governments ought to be small and geographically limited, for the sake of social
peace. Next, in 1920 and 1922, he proved that socialism could not work as an
economic system because it abolished property rights in capital and thus
destroyed the system of profit and loss that allows for economic calculation.
His methodological and business cycle writings from the 1930s are some of the
most most profound in the history of the social sciences. Finally in 1940 and
1949, he produced what is quite possibly the finest product of any economist in
history: his monumental treatise called Human Action.

Incidentally, he wrote most of his treatise in exile in Geneva
>from his native Austria. The invading German armies deemed his work
dangerous. They entered Mises?s apartment and looted his files and papers.
Mises, you see, was against socialism, whether Bolshevik or Nazi. Reflect on
that and begin to understand the absurdity of calling communism leftist and
Nazism rightest, as if they were polar opposites. They are both varieties of the
very opposite of freedom itself.

If I were able, with Professor Cwik?s permission, to give
you a reading assignment today, I would recommend Human Action above
all else. Yes, at nearly 1,000 pages, it can be intimating, and you will
probably need to read with a dictionary nearby. But it will open up new vistas
of thought for you, and help you to rise above conventional wisdom. I continue
to believe that this book points the way for us to bring about rising and
sustainable prosperity, and also to guard civilization against its enemies.

Mises believed that no power on earth is as strong as ideas.
You live in the world of ideas, so take your responsibilities very seriously
while you are here at Campbell University. The achievements of freedom should
speak for themselves, but sadly they do not. Freedom needs courageous
individuals who are willing to stand apart from the mob, and state an
unconventional truth.


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Llewellyn H. Rockwell, Jr., is president of the Ludwig von Mises Institute in
Auburn, Alabama, and is the editor of LewRockwell.com.
Send him MAIL and see his Mises.org Article
Archive



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The Marvel That Is Capitalism / Artikel, engl. - JÃœKÃœ, 09.04.2002, 18:09