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The Myth of the Failure of Capitalism

Tink123 2012/09/24 16:01:58

The Myth of the Failure of Capitalism


Mises Daily:
Monday, September 24, 2012
by

[This essay was originally published as "Die Legende von Versagen des Kapitalismus" in Der Internationale Kapitalismus und die Krise, Festschrift für Julius Wolf (1932)[1]]

The nearly universal opinion expressed these days is that the
economic crisis of recent years marks the end of capitalism. Capitalism
allegedly has failed, has proven itself incapable of solving economic
problems, and so mankind has no alternative, if it is to survive, then
to make the transition to a planned economy, to socialism.


This is hardly a new idea. The socialists have always maintained that
economic crises are the inevitable result of the capitalistic method of
production and that there is no other means of eliminating economic
crises than the transition to socialism. If these assertions are
expressed more forcefully these days and evoke greater public response,
it is not because the present crisis is greater or longer than its
predecessors, but rather primarily because today public opinion is much
more strongly influenced by socialist views than it was in previous
decades.


I


When there was no economic theory, the belief was that whoever had
power and was determined to use it could accomplish anything. In the
interest of their spiritual welfare and with a view toward their reward
in heaven, rulers were admonished by their priests to exercise
moderation in their use of power. Also, it was not a question of what
limits the inherent conditions of human life and production set for this
power, but rather that they were considered boundless and omnipotent in
the sphere of social affairs.


The foundation of social sciences, the work of a large number of
great intellects, of whom David Hume and Adam Smith are most
outstanding, has destroyed this conception. One discovered that social
power was a spiritual one and not (as was supposed) a material and, in
the rough sense of the word, a real one. And there was the recognition
of a necessary coherence within market phenomena which power is unable
to destroy. There was also a realization that something was operative in
social affairs that the powerful could not influence and to which they
had to accommodate themselves, just as they had to adjust to the laws of
nature. In the history of human thought and science there is no greater
discovery.


If one proceeds from this recognition of the laws of the market,
economic theory shows just what kind of situation arises from the
interference of force and power in market processes. The isolated
intervention cannot reach the end the authorities strive for in enacting
it and must result in consequences which are undesirable from the
standpoint of the authorities. Even from the point of view of the
authorities themselves the intervention is pointless and harmful.
Proceeding from this perception, if one wants to arrange market activity
according to the conclusions of scientific thought — and we give
thought to these matters not only because we are seeking knowledge for
its own sake, but also because we want to arrange our actions such that
we can reach the goals we aspire to — one then comes unavoidably to a
rejection of such interventions as superfluous, unnecessary, and
harmful, a notion which characterizes the liberal teaching. It is not
that liberalism wants to carry standards of value over into science; it
wants to take from science a compass for market actions. Liberalism uses
the results of scientific research in order to construct society in
such a way that it will be able to realize as effectively as possible
the purposes it is intended to realize. The politico-economic parties do
not differ on the end result for which they strive but on the means
they should employ to achieve their common goal. The liberals are of the
opinion that private property in the means of production is the only
way to create wealth for everyone, because they consider socialism
impractical and because they believe that the system of interventionism
(which according to the view of its advocates is between capitalism and
socialism) cannot achieve its proponents' goals.


The liberal view has found bitter opposition. But the opponents of
liberalism have not been successful in undermining its basic theory nor
the practical application of this theory. They have not sought to defend
themselves against the crushing criticism which the liberals have
leveled against their plans by logical refutation; instead they have
used evasions. The socialists considered themselves removed from this
criticism, because Marxism has declared inquiry about the establishment
and the efficacy of a socialist commonwealth heretical; they continued
to cherish the socialist state of the future as heaven on earth, but
refused to engage in a discussion of the details of their plan. The
interventionists chose another path. They argued, on insufficient
grounds, against the universal validity of economic theory. Not in a
position to dispute economic theory logically, they could refer to
nothing other than some "moral pathos," of which they spoke in the
invitation to the founding meeting of the Vereins für Sozialpolitik [Association for Social Policy]
in Eisenach. Against logic they set moralism, against theory emotional
prejudice, against argument the reference to the will of the state.


Economic theory predicted the effects of interventionism and state and municipal socialism exactly as they happened.
All the warnings were ignored. For 50 or 60 years the politics of
European countries has been anticapitalist and antiliberal. More than 40
years ago Sidney Webb (Lord Passfield) wrote,



it can now fairly be claimed that the socialist philosophy of to-day
is but the conscious and explicit assertion of principles of social
organization which have been already in great part unconsciously
adopted. The economic history of the century is an almost continuous
record of the progress of Socialism.[2]



That was at the beginning of this development and it was in England
where liberalism was able for the longest time to hold off the
anticapitalistic economic policies. Since then interventionist policies
have made great strides. In general the view today is that we live in an
age in which the "hampered economy" reigns — as the forerunner of the
blessed socialist collective consciousness to come.


Now, because indeed that which economic theory predicted has
happened, because the fruits of the anticapitalistic economic policies
have come to light, a cry is heard from all sides: this is the decline
of capitalism, the capitalistic system has failed!


Liberalism cannot be deemed responsible for any of the institutions
which give today's economic policies their character. It was against the
nationalization and the bringing under municipal control of projects
which now show themselves to be catastrophes for the public sector and a
source of filthy corruption; it was against the denial of protection
for those willing to work and against placing state power at the
disposal of the trade unions, against unemployment compensation, which
has made unemployment a permanent and universal phenomenon, against
social insurance, which has made those insured into grumblers,
malingers, and neurasthenics, against tariffs (and thereby implicitly
against cartels), against the limitation of freedom to live, to travel,
or study where one likes, against excessive taxation and against
inflation, against armaments, against colonial acquisitions, against the
oppression of minorities, against imperialism and against war. It put
up stubborn resistance against the politics of capital consumption. And
liberalism did not create the armed party troops who are just waiting
for the convenient opportunity to start a civil war.


II


The line of argument that leads to blaming capitalism for at least
some of these things is based on the notion that entrepreneurs and
capitalists are no longer liberal but interventionist and statist. The
fact is correct, but the conclusions people want to draw from it are
wrong-headed. These deductions stem from the entirely untenable Marxist
view that entrepreneurs and capitalists protected their special class
interests through liberalism during the time when capitalism flourished
but now, in the late and declining period of capitalism, protect them
through interventionism. This is supposed to be proof that the "hampered
economy" of interventionism is the historically necessary economics of
the phase of capitalism in which we find ourselves today. But the
concept of classical political economy and of liberalism as the ideology
(in the Marxist sense of the word) of the bourgeoisie is one of the
many distorted techniques of Marxism. If entrepreneurs and capitalists
were liberal thinkers around 1800 in England and interventionist,
statist, and socialist thinkers around 1930 in Germany, the reason is
that entrepreneurs and capitalists were also captivated by the
prevailing ideas of the times. In 1800 no less than in 1930
entrepreneurs had special interests which were protected by
interventionism and hurt by liberalism.


Today the great entrepreneurs are often cited as "economic leaders."
Capitalistic society knows no "economic leaders." Therein lies the
characteristic difference between socialist economies on the one hand
and capitalist economies on the other hand: in the latter, the
entrepreneurs and the owners of the means of production follow no
leadership save that of the market. The custom of citing initiators of
great enterprises as economic leaders already gives some indication that
these days it is not usually the case that one reaches these positions
by economic successes but rather by other means.


In the interventionist state it is no longer of crucial importance
for the success of an enterprise that operations be run in such a way
that the needs of the consumer are satisfied in the best and least
expensive way; it is much more important that one has "good relations"
with the controlling political factions, that the interventions redound
to the advantage and not the disadvantage of the enterprise. A few more
marks' worth of tariff protection for the output of the enterprise, a
few marks less tariff protection for the inputs in the manufacturing
process can help the enterprise more than the greatest prudence in the
conduct of operations. An enterprise may be well run, but it will go
under if it does not know how to protect its interests in the
arrangement of tariff rates, in the wage negotiations before arbitration
boards, and in governing bodies of cartels. It is much more important
to have "connections" than to produce well and cheaply. Consequently the
men who reach the top of such enterprises are not those who know how to
organize operations and give production a direction which the market
situation demands, but rather men who are in good standing both "above"
and "below," men who know how to get along with the press and with all
political parties, especially with the radicals, such that their
dealings cause no offense. This is that class of general directors who
deal more with federal dignitaries and party leaders than with those
from whom they buy or to whom they sell.


Because many ventures depend on political favors, those who undertake
such ventures must repay the politicians with favors. There has been no
big venture in recent years which has not had to expend considerable
sums for transactions which from the outset were clearly unprofitable
but which, despite expected losses, had to be concluded for political
reasons. This is not to mention contributions to non-business concerns —
election funds, public welfare institutions, and the like.


Powers working toward the independence of the directors of the large
banks, industrial concerns, and joint-stock companies from the
stockholders are asserting themselves more strongly. This politically
expedited "tendency for big businesses to socialize themselves," that
is, for letting interests other than the regard "for the highest
possible yield for the stockholders" determine the management of the
ventures, has been greeted by statist writers as a sign that we have
already vanquished capitalism.[3]
In the course of the reform of German stock rights, even legal efforts
have already been made to put the interest and well-being of the
entrepreneur, namely "his economic, legal, and social self-worth and
lasting value and his independence from the changing majority of
changing stockholders,"[4] above those of the shareholder.


With the influence of the state behind them and supported by a
thoroughly interventionist public opinion, the leaders of big
enterprises today feel so strong in relation to the stockholders that
they believe they need not take their interests into account. In their
conduct of the businesses of society in those countries in which statism
has most strongly come to rule — for example in the successor states of
the old Austro-Hungarian Empire — they are as unconcerned about
profitability as the directors of public utilities. The result is ruin.
The theory which has been advanced says that these ventures are too
large to be run simply with a view toward profit. This concept is
extraordinarily opportune whenever the result of conducting business
while fundamentally renouncing profitability is the bankruptcy of the
enterprise. It is opportune, because at this moment the same theory
demands the intervention of the state for support of enterprises which
are too big to be allowed to fail.



III


It is true that socialism and interventionism have not yet succeeded
in completely eliminating capitalism. If they had, we Europeans, after
centuries of prosperity, would rediscover the meaning of hunger on a
massive scale. Capitalism is still prominent enough that new industries
are coming into existence, and those already established are improving
and expanding their equipment and operations. All the economic advances
which have been and will be made stem from the persistent remnant of
capitalism in our society. But capitalism is always harassed by the
intervention of the government and must pay as taxes a considerable part
of its profits in order to defray the inferior productivity of public
enterprise.


The crisis under which the world is presently suffering is the crisis
of interventionism and of state and municipal socialism, in short the
crisis of anticapitalist policies. Capitalist society is guided by the
play of the market mechanism. On that issue there is no difference of
opinion. The market prices bring supply and demand into congruence and
determine the direction and extent of production. It is from the market
that the capitalist economy receives its sense. If the function of the
market as regulator of production is always thwarted by economic
policies in so far as the latter try to determine prices, wages, and
interest rates instead of letting the market determine them, then a
crisis will surely develop.


Bastiat has not failed, but rather Marx and Schmoller.


Ludwig von Mises was the acknowledged leader of the Austrian School of
economic thought, a prodigious originator in economic theory, and a
prolific author. Mises's writings and lectures encompassed economic
theory, history, epistemology, government, and political philosophy.

Copyright © 2012 by the Ludwig von Mises Institute. Permission to
reprint in whole or in part is hereby granted, provided full credit is
given.


Read More: http://mises.org/daily/6202/The-Myth-of-the-Failur...

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Top Opinion

  • hayesml47 2012/09/24 17:30:12 (edited)
    hayesml47
    +4
    Capitalism is no different than socialism/communism! Any type of government/economic system by itself is not perfect and must be regulated/contolled. Our version of capitalism has merely run its logical course since our government has refused to apply the anti-monopoly and anti-trust laws that were made to keep it under control! When governing any large and varied group of citizens such as we have many types of government must be used for each level! One style of government will not properly suffice to attend to the needs of the many!

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  • Warren - Novus Ordo Seclorum 2012/09/25 13:54:05
    Warren - Novus Ordo Seclorum
    +1
    Pseudointellectual gobbledygook. The author is too ignorant to realize that the dichotomy between capitalism and socialism is a false one. Capitalism will fail because it is an unsustainable ponzi scheme. It is mathematically certain that it will end incollapse, just like all ponzi schemes. Infinite growth in a finite world is physically impossible.
  • kaZappoo 2012/09/24 20:25:06
    kaZappoo
    +1
    but the programmed socialists are struggling as well !
  • Katfish 2012/09/24 19:40:25
    Katfish
    +1
    Corporatism is the origin of unfairness and ultimately eventual failure.
  • Tink123 Katfish 2012/09/24 20:42:26
    Tink123
    +1
    Well said.
  • Tombo 2012/09/24 19:03:32
    Tombo
    Here's a book every American should read to understand Capitalism.

    The politically incorrect guide to capitalism
  • hayesml47 2012/09/24 17:30:12 (edited)
    hayesml47
    +4
    Capitalism is no different than socialism/communism! Any type of government/economic system by itself is not perfect and must be regulated/contolled. Our version of capitalism has merely run its logical course since our government has refused to apply the anti-monopoly and anti-trust laws that were made to keep it under control! When governing any large and varied group of citizens such as we have many types of government must be used for each level! One style of government will not properly suffice to attend to the needs of the many!
  • Fred Ro... hayesml47 2012/09/24 19:44:08
    Fred Rogers
    +1
    It's hard to argue with ideologues. Their easy answer has been accepted on faith and rationalized to no end.
  • Matt 2012/09/24 17:14:00
    Matt
    Our bought-and-paid-for government interferes with domestic businesses while it runs interference for multinational corporations who exploit slave labor and pay little if any taxes here.
  • g_byst 2012/09/24 16:57:33
    g_byst
    +1
    The only thing that failed is our education system. We have a long history the success of the free market and the failure of socialism, but we don't teach our children about it. We keep talking about our market like it is free and do not acknowledge the cronyism occurring at such a high level. We keep talking about the difference between what is said and what is done by our highest government officials, yet we vote for them anyway.
    There is nothing wrong with a free market. We just haven't had one.
  • Jasmine 2012/09/24 16:51:34
    Jasmine
    +2
    We no longer have capitalism as originally envisioned. What we have now, crony capitalism, is not true capitalism and is destructive. There are those who would like us to believe that the Corporate tax rate (35%) is too high and that it impedes growth. That is a fallacy. See below:

    GE has paid an average tax rate of just 2.3 percent over the past decade, according to an analysis by the non-profit advocacy group Citizens for Tax Justice.

    General Electric is not the only firm reaping enormous profits while paying far less than 35 percent to the government. Twenty-nine other major corporations joined GE in paying no taxes between 2008 and 2010, among them Wells Fargo, Verizon, Boeing and DuPont, according to a separate Citizens for Tax Justice report. They were part of a larger group of 280 corporations that, due to a variety of legal loopholes, reportedly paid an average tax rate of just 18.5 percent during that time, the report said.

    effective corporate tax rate
  • sbtbill Jasmine 2012/09/24 17:57:30
    sbtbill
    +2
    The tax system needs a re-write and simplification. Most people don't understand the effective rate vs the stated rate. People with money have learned to game the system.
  • irish 2012/09/24 16:16:09
    irish
    +2
    "Because many ventures depend on political favors, those who undertake
    such ventures must repay the politicians with favors. There has been no
    big venture in recent years which has not had to expend considerable
    sums for transactions which from the outset were clearly unprofitable
    but which, despite expected losses, had to be concluded for political
    reasons. This is not to mention contributions to non-business concerns —
    election funds, public welfare institutions, and the like."

    and this ,this is the entire problem in one paragraph!

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