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'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.
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 productionthat 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
economic system 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 theprohibition 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.
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