Why Capitalism, Lecture 2

David GordonMises AcademyApril 30, 2013

Long Run Consequences

• A key principle of economics is that all of the consequences of a policy should be considered.

• People sometimes just look at things in isolation or consider only the short run consequences of a policy.

• It’s necessary to consider alternatives---what would happen if you did something else.

Production for Use

• Socialists and others used to criticize capitalism for not producing enough.

• If production were planned or directed by engineers, we would be able to produce much more.

• Instead, production is limited because businessmen stop producing when it is no longer profitable.

Production for Use Continued

• This argument isn’t as popular as it used to be. The Technocracy movement in the 1930s used it.

• The collapse of the Soviet Union hurt this claim. Today, most socialists defend the system using arguments about equality, etc. They don’t say, at least not as much, that socialism is more efficient than capitalism.

Problems with the Use Argument

• The production for use argument ignores the fact that resources are limited. If more of one good is produced, then less is available to produce other goods.

• Choice between alternatives is fundamental to economics. Choice is a basic feature of action.

The Price System

• In the free market, supply and demand determine prices.

• If consumers want more of a certain product than is available, they will bid up the price.

• The higher price will encourage suppliers to increase the supply of the good. The increased demand will attract new firms into producing the product.

Price System Continued

• As production of the good increases, the price will go down. This is because of the increased supply.

• When the price goes down, the higher profits that attracted new entrants will lessen. The rate of return on invested capital will return to normal.

• The rate of return on investment tends to be equal in the economy.

More Price System

• When resources move into the product with an increase in demand, it is at the expense of other products.

• The price system is the mechanism by which goods are shifted to meet changes in demand.

Costs

• Past costs don’t determine price. Once a cost has been incurred, there is nothing that can be done about it.

• Bygones are bygones.• Estimates of future cost will influence how

much of the good a producer will produce.

Consumers in Command

• Mises emphasizes that under capitalism, consumers are really in charge.

• This is true because in order to make a profit, businesses must satisfy consumer demand.

• He uses the expression “a daily repeated plebiscite” to describe the market.

• This is a slightly modified phrase taken from a famous 19th century essay on nationalism by Ernest Renan.

Property Owners

• Mises takes the idea of consumer control extremely seriously.

• He goes so far as to say that consumers are the real owners of productive property.

• If you own a business but don’t do what consumers want, you will tend to go out of business and be replaced by someone who meets consumer demand better.

Natural Rights

• Mises uses this point to defend private property. If consumers are the “real” owners, who the ostensible owners are doesn’t matter.

• Under capitalism, the socialists who call for common ownership of property are getting what they want.

• He is suspicious of appeals to a natural right to property. What if someone counters this by asserting a natural right to equality?

An Objection

• Last week, we mentioned the objection that consumers can’t order a businessman to do something. They aren’t legal owners and can’t force producers to do what they want.

• A businessman can say, “I’m going to do it my way,” even if this isn’t popular.

• Mises is aware of this objection. He says that businessmen are responding to incentives.

Power versus Market

• Mises contrasts power and market.• The free market is the means by which people

can cooperate. In doing so, they benefit from the division of labor.

• Free market capitalism is based on mutual advantage.

• This is be contrasted with the state, which rests on force. Mises would agree with Joseph de Maistre, “The state rests on the executioner.”

Capitalism and Freedom

• If you don’t rely on the free market, then the alternative is central direction of the economy.

• You can’t separate an economic sphere from a political sphere and say people can still be politically free even though the economy is centrally directed.

• In order to act, you need access to material goods. E.g., how is free speech possible if the government controls all access to print and other media?

Inequality and Power

• Mises believes that people differ greatly in ability.

• Throughout most of history, the elite groups have exploited the masses.

• Capitalism allows the masses to benefit from the creativity of elites.

More Equality?

• Socialists argue that there is too much inequality. Some people under capitalism are much richer than others.

• Rich people’s luxuries become mass products later. Mises cites the 19th century sociologist Gabriel Tarde.

• There is no natural stopping point in claims that there is too much inequality.

Exploitation

• Some people claim that workers are exploited because they don’t receive the full monetary value of what they produce.

• This objection ignores the role of capital as a factor of production.

• Gains in labor productivity are generally due to the fact that labor has access to capital goods.

Taxes on Capital

• Taxes on capital and other measures to reduce inequality don’t help the poor.

• Investment in capital goods is the main way that workers’ productivity rises.

• This is the main way wages go up.