Broken Capitalism, Lecture 6

David GordonMises Academy

July 29, 2013

Effects of Taxation

• Many people favor very heavy taxes on the rich.

• These taxes make it more difficult for the rich to save and build up accumulations of capital.

• If capital grows, this raises the productivity of workers. This makes wages rise.

• Taxes on the rich thus hurt the poor.

Value Judgment

• Note what Mises is doing in this argument. He is not saying, “I don’t like high taxes on the rich” or claiming that these taxes are morally bad.

• He is not making a value judgment.• He is saying, “Here is the consequence of high

taxation.” This is a strictly scientific, value-free statement.

Value Judgment Continued

• Even though Mises’s statement is value-free, it sounds like there’s a trick involved.

• Wouldn’t almost everybody think that something that hurts the poor is, to that extent, bad? If so, is the judgment really value free?

• Yes it is. It is like a doctor’s claim “smoking causes lung cancer”, where (almost) no one wants lung cancer.

Borrowing

• Some people think that the government can escape the harmful effects of taxes by borrowing.

• If the government borrows, it is claimed, people don’t have to pay for government expenses through taxes now.

• The taxes will be delayed to the future, when they will be needed to pay off the government’s creditors.

Borrowing and Inflation

• Government borrowing is not the same as inflation.

• Inflation means that the government issues new money.

• In government borrowing, people give the government money in return for a promise to pay later.

A Problem with Borrowing

• Borrowing isn’t a way in which people today can “get something for nothing” by passing on the cost to a future generation.

• When the government borrows, it takes resources away. These resources would have been used for other projects.

• Resources are finite. Borrowing, or creating new money, doesn’t change this.

Armaments and War

• Defenders of the state claim that only the government can run a modern war.

• Mises wrote during WWII. At the time, people stressed the great achievements of the of the German and Russian military machines.

Armaments Continued

• Mises does not agree that only powerful states can finance war.

• During the 19th century, private arms makers outperformed the state in producing arms.

• Armaments are like other products. If there is a demand for the product, the market will supply it.

Merchants of Death

• The fact that arms merchants respond to the demands of governments for arms does not imply that the arms merchants cause or encourage wars.

• The “merchants of death” view was popular in the 1930s, but Mises doesn’t accept it.

• Engelbrecht and Hanighen, The Merchants of Death, (1934) was a famous attack on the arms merchants. http://library.mises.org/books/HC%20Engelbrecht/The%20Merchants%20of%20Death.pdf

World War II

• Mises suggests that if France had relied on private arms makers, the German invasion of 1940 could have been stopped.

• One reason France failed in 1940 was that socialist measures in the 1930s crippled private enterprise.

Germany versus France

• Another reason that Germany did well was that Germany had been building up arms in the 1930s.

• Doing this required that civilian consumption been reduced.

• The Nazi leader Hermann Goering was correct that there is a choice: guns or butter.

Profit

• The driving force of capitalism is the efforts of business people to make a profit.

• Efforts to curb profits inhibit the ability of entrepreneurs to respond to changing preferences of consumers.

A “Fair” Margin of Profit

• One proposal is that a business should get a “fair” profit, added to its costs.

• An obvious problem is that there is no criterion for what a “fair” profit is.

• This system will give an incentive to business to be wasteful on costs, rather than to cut them.

• People will have a different attitude to risk if they have to bear losses from what will happen if their profit margin is guaranteed.

Another Problem

• On the “cost + fair rate of profit” view, every business subject to the rule gets the same rate of profit.

• But it is differences in profit, including losses, that guide entrepreneurs in their efforts to satisfy consumers.

Subsidies

• Subsidies to help one industry come at the expense of others.

• This is an application of the broken window fallacy.

• Hazlitt mentions that argument that subsidies should be given to an industry if overcrowding leaves profits low. Here the market remedy is for firms to move elsewhere.

Subsidies

• The basic point on all subsidies is again an application of the broken window fallacy.

• You can’t help one product except at the expense of something else.