The Actual Nature of Offshoring and of Our Balance of Trade Deficits

Few issues are more frequently commented on than the shifting of American manufacturing to locations outsides the United States, in order to take advantage of lower foreign wage rates, particularly in Asia. This shifting is what is meant by “offshoring.” With equal or greater frequency lamentations are heard concerning the United States’ chronic excess of imports over exports, i.e., its so-called “unfavorable” balance of trade.

Here’s an example that will help to put both matters in proper perspective.

Assume that an American firm is contemplating the investment of $10 million of capital, to build a factory. Construction materials and the use of construction equipment, along with the machinery to be installed in the factory, will cost $5 million of those $10 million. The remaining $5 million will have to be paid to cover the wages and benefits of 100 American construction workers for a year, at the rate of $50,000 per man.

In an impoverished country in Asia, however, the cost of equally capable construction workers is only $1,000 per man. In other words, a total labor cost of $100 thousand, instead of $5 million. The construction materials, construction equipment, and the machinery for the factory can all be shipped there. To make it simple, let’s ignore the costs of transportation and any other costs associated with set up abroad. Thus, the total cost of constructing the plant in Asia would be just $5.1 million, instead of $10 million. This, of course, is a powerful incentive for building the plant in Asia. And, then, once the plant is built, whatever the number of workers it needs for its operation can be found locally at a comparably small fraction of the cost of employing American workers.

Exactly such considerations explain why a very substantial amount of American manufacturing has moved offshore. It’s just so much cheaper.

Commentators, who are almost invariably critics, see this movement of capital offshore. But strangely, what they do not see is that the process is much more than just a movement of a given amount of capital from one place to another. That much, or, better, that little, is true in terms of monetary value, but in terms of actual physical wealth, and, in this case, physical capital, there is a substantial increase. Being able to obtain for $5.1 million what one would otherwise need to spend $10 million for, makes it possible to buy practically twice as much for the same $10 million. Our firm can build practically two factories in Asia for the price of one in the United States.

An American firm which invested in this way, would be in a position to supply its customers with approximately double the output for the same money, because it conducted its manufacturing operations in Asia rather than in the US. Even if it were the case, as is so often claimed, that displaced American factory workers must end up as mere hamburger flippers, the American economic system would still have this doubled output; plus it would have all the extra hamburgers the displaced factory workers would produce.

This sounds to me like quite an overall gain to the American economic system.

In the nature of the case, the gain enters the American economy in the form of imports. In essence, we’re getting the output of two factories in Asia instead of one in the United States, and the doubled output is coming into our economy in the form of imports. Absurdly, this gain in our wealth is what is called “unfavorable.” It’s certainly not unfavorable to American consumers. The only thing I can imagine that would be more favorable and, at the same time, would be ignorantly denounced as more unfavorable, would be imports simply washing up on our shores for free, but recorded by the customs bureau as having substantial value.

Offshoring has not resulted in a decline in the American economic system but just the opposite. It’s provided the American people with access to vastly increased manufacturing capacity, which is providing much larger quantities of goods at sharply lower prices. And this last is despite substantial inflation of the American money supply.

Thanks to offshoring, we are supplied with shoes and clothing, television sets, computers, CD and DVD players, microwave ovens, and many other goods in unprecedented quantities and at extremely low prices. In the nature of the case, this abundance comes to us in the form of imports.

What is the economic problem in this?

I say, “economic” problem, because I can imagine something arising that could cause a problem. That would be the loss of the offshore factories and the imports they provide, say, as the result of seizure by foreign governments and the inept, chaotic management the governments would impose. That would be a catastrophe.

But it cannot be stressed too strongly, the problem is not in offshoring or in imports; the problem is in anything that would threaten offshoring and the imports it provides.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site http://www.capitalism.net/ is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

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WSJ Article "Climate of Fear"

Prof. Richard Lindzen, a genuine climate expert from MIT, has written a very valuable op-ed piece in The Wall Street Journal describing the role of government funding and media hype in discussions of global warming. The article can be accessed at http://www.opinionjournal.com/extra/?id=110008220. The article appeared yesterday, April 12, 2006.

Immigration Plus Welfare State Equal Police State

Illegal immigrants are overwhelming the resources of the Welfare State: government–funded hospital emergency rooms are filled with them; public schools are filled with their children. On the basis of such complaints, many people are angry and want to close the border to new illegal immigrants and deport those who are already here.

They want to keep new illegal immigrants out with fences along the border. It is not clear whether the fences would contain intermittent watchtowers with searchlights and machine guns. The illegal immigrants who are already here would be ferreted out by threatening anyone who employed them with severe penalties and making it a criminal offense not to report them.

This is a classic illustration of Mises’s principle that prior government intervention into the economic system breeds later intervention. Here the application of his principle is, start with the Welfare State, end with the Police State. A police state is what is required effectively to stop substantial illegal immigration that has become a major burden because of the Welfare State.

The philosophy of individual rights and capitalism implies that foreigners have a right to come and to live and work here, i.e., to immigrate into the United States. The land of the United States is owned by individuals and voluntary associations of individuals, such as private business firms. It is not owned by the United States government or by the American people acting as a collective; indeed many of the owners of land in the United States are not Americans, but foreign nationals, including foreign investors.

The private owners of land have the right to use or sell or rent their land for any peaceful purpose. This includes employing immigrants and selling them food and clothing and all other goods, and selling or renting housing to them. If individual private landowners are willing to accept the presence of immigrants on their property as employees, customers, or tenants, that should be all that is required for the immigrants to be present. Anyone else who attempts to determine the presence of absence of immigrants is simply an interfering busybody ready to use a gun or club to impose his will.

At the same time, however, the philosophy of individual rights and capitalism implies that the immigrants do not have a right to be supported at public expense, which is a violation of the rights of the taxpayers. Of course, it is no less a violation of the rights of the taxpayers when native-born individuals are supported at public expense. The immigrants are singled out for criticism based on the allegation that they in particular are making the burden intolerable.

The implementation of the rights both of the immigrants and of the taxpayers requires the abolition of the Welfare State. Ending the Welfare State will end any problem of immigrants being a public burden.

Of course, ending the Welfare State is much easier said than done, and it is almost certainly not going to be eliminated even in order to avoid the environment of a police state.

But the burdens of the Welfare State and the consequent resentment against immigrants could at the very least be substantially reduced by means of some relatively simple, common-sense reforms in the direction of greater economic freedom.

In a future posting, I’ll explain how not only the problem of chronically crowded hospital emergency rooms but also the whole so-called crisis of the medically uninsured, which certainly applies to all illegal immigrants, could be radically reduced, if not entirely eliminated, by introducing some simple economic freedoms into medical care.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

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First, Witchcraft Trials; Now, Impending Health Insurance Fiasco: Massachusetts Leads the Way

Having just read today’s New York Times’ lead page-one article titled “Massachusetts Sets Health Plan for Nearly All,” I think I know what it must be like to live in some place like Caracas and participate in a popular celebration of the joyous wonders wrought by La Revolución. That’s certainly the spirit of the article.

It claims in essence to describe how the Governor and Legislature of Massachusetts have managed to make medical insurance both available and affordable for nearly all, at hardly any cost. “The bill,” The Times’ reporter breathlessly gushes,

does what health experts say no other state has been able to do: provide a mechanism for all of its citizens to obtain health insurance. It accomplishes that in a way that experts say combines methods and proposals from across the political spectrum, apportioning the cost among businesses, individuals and the government.

The Times did not print a copy of the bill, and so I have not read it. But judging from the article, I’m sure it must be one incredible mishmash of contradictions, deceptions, and distortions that are going to cost the people of Massachusetts dearly. The bill is openly touted, in effect, as being all things to all men. An alleged expert is quoted as saying, “`For a conservative Republican, this is individual responsibility. For a Democrat, this is government helping those that need help.’” So the bill simultaneously satisfies those who supposedly want to keep the government out of our wallets and those who eagerly want to let it in, those who want it to take less from us and those who want it to take more from us. (Guess which side will win, when the government is assigned a new and additional task—in this case, being sure that almost everyone has health insurance.)

If that were not enough, the article actually talks of part of the cost of the bill being apportioned to the government. That’s what allegedly helps to make the bill so affordable: the government will pay part of its cost. The article’s actual words, which bear repeating, are “apportioning the cost among businesses, individuals and the government.” This treats the government as some kind of rich fairy godmother, who is helping to take care of her people. And to be sure that this claim is not lost, the print edition of The Times brazenly states this fable in a callout set in large, bold type: “A health care plan paid for by businesses, individuals and the government.” One of the surprises apparently in store for many people in Massachusetts is going to be learning that whatever is paid for by their government is going to be paid for by them.

The article makes clear that those who have not purchased medical insurance, because they think it’s too expensive, but who are nevertheless deemed capable of “affording” it, are going to have it rammed down their throats. It will be illegal not have medical insurance.

But never mind. The bill is not always so nasty. It treads relatively lightly on businesses. “Businesses with more than 10 workers that do not provide insurance will be assessed up to $295 per employee per year.” This is probably enough to cover the cost of first-class insurance for aspirin tablets and band aids. The difference between this and any serious medical insurance will either be paid for by the taxpayers of Massachusetts or it will turn out that the whole bill is just a band aid.

There is, however, a bright spot in this bill. And that is, that if it is enacted, as is virtually certain, it will be in the state that is the locale of a major portion of the leftwing intellectual establishment. So, to that extent, it really couldn’t happen to a more deserving bunch of people. But, unfortunately, there are many, many more people in Massachusetts who do not deserve such legislation and who will suffer as the result of it.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site http://www.capitalism.net/ is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

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They Still Don’t Know What They’re Doing, But They Want to Do It at the Point of a Gun

Here’s a message from an environmentalist who hides under the name “Tokyo Tom.” He says it comes “off of the web page of the world-renowned Wood`s Hole Oceanographic Institute”:

[W]orld leaders may be planning for climate scenarios of global warming that are opposite to what might actually occur.

It is important to clarify that we are not contemplating a situation of either abrupt cooling or global warming. Rather, abrupt regional cooling and gradual global warming can unfold simultaneously. Indeed, greenhouse warming is a destabilizing factor that makes abrupt climate change more probable.

What this means is that “world leaders” simultaneously want to deprive people of the fossil fuels needed to keep them warm, in the name of combating global warming, while subjecting them to freezing cold. They call that government “planning.” Well, I guess they’re right: it’s par for government “planning.”

I point out such problems and say that “Economic freedom is what is required to cope with global warming, global freezing, or any other form of large-scale environmental or social change.” And I explain precisely how it would do so. (See my recent post “Collectivism, Climate Change, and Economic Freedom.”) But when I explain how a free market would solve such problems, I’m accused of simply denying the existence of global warming and refusing to face the facts. The truth is the collectivists don't want to face the fact that the free market is the solution.

And yes, the environmentalists are collectivists. They blame and seek to punish the individual for the cumulative by-products of the actions of all of mankind, as though the individual and the human race were one and the same. If such a thing is possible, they’re a lower, more lunatic form of collectivist than were the old socialists. The Marxists in Russia at least claimed to be concerned with building up the material means of production—hydroelectric stations, power plants, steel mills, and so forth, things that if built on a foundation of voluntary saving and free labor, really do enormously contribute to human life and well-being. The environmentalist witch-doctors in contrast want to compel a massive global sacrifice of means of production, in the hope that that will improve the weather. Maybe they don’t really believe in some kind of “Weather God” whom their forced sacrifice will placate, but they’re sure behaving as though they did.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site http://www.capitalism.net is included. (Email notification is requested.) All other rights reserved. The author is Pepperdine University Professor Emeritus of Economics.

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Different Flag, Different Lyrics, But the Same Old Tune

The flag is Green now, instead of Red. And the lyrics are different. But the tune is still the same old tune.

When the Reds sang it, the lyrics were that the individual could not be left free because the result would be such things as “exploitation,” “monopoly,” and depressions. When the Greens sing it, the lyrics are that the individual cannot be left free because the result will be such things as destruction of the ozone layer, acid rain, and global warming. (Add an extra chorus now for global warming.)

The tune is still that the individual cannot be left free, that he cannot be left free because his peaceful pursuit of his own happiness and prosperity somehow inflicts harm on others, and that only the government’s pointing a gun at his head will save the rest of mankind from some dreadful calamity.

The Red thugs wanted to control the economic system to set things right. The Green thugs want to control the environment, especially the climate, to set things right.

The Red thugs had no idea of what they were doing and neither do the Green thugs. Just consider this statement from a supporter of prohibitions on carbon dioxide emissions in order to stop global warming:

One of the ironies of the Arctic melting is that it runs the risk of flipping the switch on oceanic thermohaline circulation and shutting down the Atlantic current - this could lead to a sharp cooling in Europe (which lies further north than the US), and appears to have happened in the past. (Posted by “Tokyo Tom” on the Ludwig von Mises Institute’s Blog on March 30, 2006 08:24PM)

Here is someone who doesn’t even know if the global warming he wants to stop will turn out to be a continent-wide cooling instead. But that gives him no pause. He still thinks he knows enough to send the police out to stop people from acting on the knowledge they have about the good they can achieve for themselves by producing and buying goods that happen to emit some carbon dioxide into the air. Their knowledge is to count for nothing. The allegedly superior knowledge of “scientists” is to prevail—at the point of a gun.

That’s the bottom line. Pointing guns at people in the name of some higher collective good, and prohibiting them from achieving their own good. That’s socialism. That’s environmentalism.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site http://www.capitalism.net/ is included. (Email notification is requested.) All other rights reserved. This article was adapted in part from p. 102 of the author’s Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). The author is Pepperdine University Professor Emeritus of Economics

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Collectivism, Climate Change, and Economic Freedom

An individual kills someone—for money, out of jealousy, as an act of revenge, or because he doesn’t like his victim’s looks. A chorus of left-“liberals” rushes in to excuse his act, especially if he is poor. He is not responsible, they say. The real criminal is “Society,” for having allowed him to live in the conditions that led him to kill.

Another individual owns a refrigerator, an air conditioner, and an automobile or SUV. This time, a chorus of left-“liberals” rushes in and pronounces him guilty. He is allegedly guilty of causing “global warming,” by virtue of the carbon dioxide emitted into the atmosphere by the burning of the fossil fuels required to produce and operate his goods.

The “innocent” killer is not to be punished but “rehabilitated.” The “guilty” owner of the appliances and automobile or SUV, however, is to be punished. He is to be prohibited from continuing with his evil ways. He is to be compelled by the force of law to do his part in reducing global carbon dioxide emissions, which means, he is ultimately to be deprived of his goods or, at best, to be made to accept radically smaller, less effective substitutes for them.

Clearly, there is something very wrong here. What is wrong is the influence of the philosophy of collectivism.

Collectivism considers the group—the collective—to be the primary unit of social reality. It views the collective as having real existence, separate from and superior to that of its members, and as thinking and acting, and as the source of value. At the same time, it regards the individual as an essentially inconsequential cell in the superior, living collective organism. It is on this basis that the loss of an individual’s life is considered to be of no great consequence, with the result that whatever the killer of an individual might be guilty of, it is viewed as not all that serious in the first place. And then, the killer’s actions, it is held, do not emanate from within himself but from the collectively determined circumstances in which he lives.

By the same token, if the collective, consisting of billions of individuals consuming fossil fuels over two centuries or more, is responsible for releasing enough carbon dioxide and other gases into the atmosphere to raise the average surface temperature of the Earth, then each and every individual now alive and who consumes fossil fuels is held to be responsible for the phenomenon, because no distinction is made between the individual and the collective. This is the basis on which the owner of the appliances and vehicle is held to be “guilty.” His individual emissions of carbon dioxide are seen as part and parcel of the emissions of carbon dioxide by all the members of the carbon-dioxide emitting collective taken together and as responsible for their effect.

There is a different, diametrically opposed philosophy, which has all but been forgotten. It is rarely, if ever, taught in our “culturally diverse” educational system, whose diversity consists in the teaching of numerous varieties of collectivism and the employment of many varieties of collectivists, all the while almost totally excluding this fundamentally different point of view. The name of this different philosophy is individualism. Its most important advocates are Ludwig von Mises and Ayn Rand.

According to individualism, only individuals exist; collectives consist of nothing but individuals. Only the individual thinks; only the individual acts; only the life of the individual has value and is important. All rights are rights of individuals.

On the basis of individualism, the life taken by a killer is the worst possible loss to the victim and an enormous loss to anyone who loved him. Moreover, that loss of life is the result of action that the killer chose to perform and did not have to perform. He is therefore responsible for a terrible loss and deserves to be severely punished, even to the point of losing his own life.

In contrast, no individual, and no voluntary association of individuals acting for a common purpose, such as a business corporation, is responsible for any perceptible rise in the surface temperature of the world or for any harm that could result to anyone from such a rise. When it comes to global warming, the human individual is innocent! Nor is the human “race” guilty. There is no human race apart from the individuals who comprise it. Any attempt to punish an allegedly guilty human race reduces to the attempt to punish innocent individuals.

Thus everyone must stand back and keep his hands off our appliance and vehicle owner. He has done absolutely nothing wrong. In fact, the very existence of his possessions implies that he has done a considerable amount that is right and good. He has improved his own life and probably that of family members and friends by his acquisition and use of his goods. And he has had to do good to others, in order to be able to earn the money that enabled him to buy his goods. To earn that money, he had to produce goods and services that others judged to be of more value to them than the money they paid him.

The conclusion that follows from this is that we should wish this individual well and hope for his continued and even greater success and good fortune in the future, and wish the same for all other peaceful individuals. This is known as having good will toward one’s fellow man.

Having introduced the perspective of individualism, let us now concede for the sake of argument that there actually is global warming and that the currently prevailing estimates of its future extent and consequences for rising sea levels are all perfectly accurate. (In case anyone has forgotten, those estimates are a rise in average temperature of 4 degrees Fahrenheit by 2100, accompanied by a 1 to 3 feet rise in sea-levels by that time, culminating in a cumulative rise in sea-levels of 13 to 20 feet in following centuries.) Let us also concede that if the human race did not exist or existed in the much smaller numbers and abject poverty and misery characteristic of the pre-industrial era, there would be no global warming or at least significantly less of it.

We have shown that this global warming, and any damage it may do, is still not the product of any individual human being. Nor is it the product of any such actual entity as “the human race.” There is no such actual entity. At the very most, global warming is a cumulative, unintended byproduct of human behavior for which no one is responsible.

A phenomenon for which no human being is responsible is an act of nature. That is the category to which all global warming belongs. It is an act of nature. It is an act of nature whether it comes about, as it did more than once in geologic time, in the absence of human beings from the planet, or in the presence of human beings. To repeat, it is an act of nature even when it is the unintended cumulative byproduct of the actions of billions of human beings. None of those human beings is responsible as an individual and there is no human “race” that is responsible.

With the interfering cobwebs of collectivism out of the way, and seeing global warming now as a phenomenon of nature, we are in a position to consider the question of how human beings should deal with global warming and with the wider question of how they should deal with climate change in general. For someday, there certainly will be climate change. If not global warming in this century, then, certainly, in some other century. And if not global warming, then a new ice age, which, according to some accounts is already overdue, and which mankind’s carbon dioxide emissions may have served merely to postpone.

The question of how to deal with climate change, in turn, is subsumed by the broader question of how should human beings deal with physical reality in meeting their needs and wants. It is part of that question.

And that question has already been answered—by the science of economics—and answered beyond all honest dispute. The only way for human beings to meet their needs and wants in an efficient and progressively improving way is if they produce under a system of division of labor and monetary exchange, which in turn rests on a foundation of private ownership of the means of production and economic freedom. The name for this system, of course, is capitalism. (A much smaller number of human beings than are now alive could survive without this system, as our ancestors survived, namely, as essentially self-sufficient farmers. But they would live in the poverty and misery of our ancestors, and, as stated, their number would be relatively small—a billion or so versus our present six billion or more.) For the present number of human beings to survive and to be able to enjoy the comforts, conveniences, and luxuries now found throughout the modern, industrial economies of the world, capitalism and its economic freedom are essential.

Economic freedom is what is required to cope with global warming, global freezing, or any other form of large-scale environmental or social change. If global warming turns out to be a fact, the free citizens of an industrial civilization will have no great difficulty in coping with it—that is, of course, if their ability to use energy and to produce is not crippled by the environmental movement and by government controls otherwise inspired. (This applies even to responses to natural disasters, such as hurricanes and floods, that allegedly will occur in connection with global warming. The response of a free market would be typified by that of the Biloxi, Mississippi gambling casinos in the aftermath of hurricane Katrina. Within months of being freed of restriction to riverboats and being allowed for the first time to locate on land, they sprang into existence ready and eager for action, in the midst of otherwise unrelieved devastation and paralysis, as most property owners waited for government aid from FEMA. The casino owners were fortunate in being ineligible for such aid and so took immediate action on their own. On this subject, see my blog post of March 14, 2006.)

The seeming difficulties of coping with global warming, or any other large-scale change, arise only when the problem is viewed from the collectivist perspective of government central planners. It would be too great a problem for government bureaucrats to handle, as is the production even of an adequate supply of wheat or nails, as the experience of the whole socialist world has shown. But it would certainly not be too great a problem for tens and hundreds of millions of free, thinking individuals living under capitalism to solve. It would be solved by means of each individual being free to decide how best to cope with the particular aspects of global warming that affected him.

Individuals would decide, on the basis of profit-and-loss calculations, what changes they needed to make in their businesses and in their personal lives, in order best to adjust to the situation. They would decide where it was now relatively more desirable to own land, locate farms and businesses, and live and work, and where it was relatively less desirable, and what new comparative advantages each location had for the production of which goods. Factories, stores, and houses all need replacement sooner or later. In the face of a change in the relative desirability of different locations, the pattern of replacement would be different. Perhaps some replacements would have to be made sooner than otherwise. To be sure, some land values would fall and others would rise. Whatever happened, individuals would respond in a way that minimized their losses and maximized their possible gains. The essential thing they would require is the freedom to serve their self-interests by buying land and moving their businesses to the areas rendered relatively more attractive, and the freedom to seek employment and buy or rent housing in those areas.

Given this freedom, the totality of the problem would be overcome. This is because, under capitalism, the actions of the individuals, and the thinking and planning behind those actions, are coordinated and harmonized by the price system (as many former central planners of Eastern Europe and the former Soviet Union have come to learn). As a result, the problem would be solved in exactly the same way that tens and hundreds of millions of free individuals have solved much greater problems than global warming, such as redesigning the economic system to deal with the replacement of the horse by the automobile, the settlement of the American West, and the release of the far greater part of the labor of the economic system from agriculture to industry.

This is not to deny that important problems of adjustment would exist if global warming did in fact come to pass. But whatever they would be, they would all have perfectly workable solutions. The most extreme case would be that of the Maldive Islanders, in the Indian Ocean, all of whose land might disappear under water. The population of the Maldive Islands is less than two hundred thousand people. In 1940, in a period of a few days, Great Britain was able to evacuate its army of more than three hundred thousand soldiers from the port of Dunkirk, under the threat of enemy gunfire. Surely, over a period of decades, the opportunity for comfortable resettlement could be arranged for the people of the Maldives.

Even the prospective destruction of much of Holland, if it could not be averted by the construction of greater sea walls, could be dealt with by the very simple means of the United States and Canada joining with the European Union in extending the freedom of immigration to Dutch citizens. If this were done, then in a relatively short time, the economic losses suffered as the result of physical destruction in Holland would hardly be noticed, and least of all by most of the former Dutchmen.

For densely populated, impoverished countries with low-lying coastal areas, like Bangladesh and Egypt, the obvious solution is for those countries to sweep away all of the government corruption and underlying irrational laws and customs that stand in the way of large-scale foreign investment and thus of industrialization. This is precisely what needs to be done in these countries in any case, with or without global warming, if their terrible poverty and enormous mortality rates are to be overcome. If they do this, then the physical loss of a portion of their territory need not entail the death of anyone, and, indeed, their standard of living will rapidly improve. If they refuse to do this, then nothing but their own irrationality should be blamed for their suffering. The threat of global warming, if there is really anything to it, should propel them into taking now the actions they should have taken long ago.

Indeed, it would probably turn out that if the necessary adjustments were allowed to be made, global warming, if it actually came, would prove highly beneficial to mankind on net balance. For example, there is evidence suggesting that it would postpone the onset of the next ice age by a thousand years or more and that the higher level of carbon dioxide in the atmosphere, which is supposed to cause the warming process, would be highly beneficial to agriculture by stimulating the growth of vegetation. Growing seasons too might be extended. Furthermore, any loss of agricultural land, such as that which is supposed to take place in low-lying areas as the result of higher sea levels, would be far more than compensated for by vast quantities of newly useable land in central Canada, Alaska, Siberia, and Greenland.

Whether global warming comes or not, it is certain that nature will sooner or later produce major changes in the climate. To deal with those changes and virtually all other changes arising from whatever cause, man absolutely requires individual freedom, science, and technology. In a word, he requires the industrial civilization constituted by capitalism. What he does not require is the throttling of his ability to act, by the environmental movement. If it really is the case that the average mean temperature of the world will rise a few degrees in the next century as the result of the burning of fossil fuels and of other modern industrial processes, the only appropriate response is along the lines of being sure that more and better air conditioners are available.

In absolutely no case would the appropriate response be that of the environmentalists, who seek to throttle and destroy industrial civilization by means of massive restrictions on the use of energy. The environmentalist solution to global warming is the diametric opposite of economic freedom and the pursuit of material self-interest that it allows and the economic success that that pursuit brings. The environmentalist solution is the massive violation of economic freedom and the imposition of massive economic sacrifice, in the insane belief that the way to cope with the destructive forces of nature is to deprive man of his means of coping with them, as though he, and not nature were the cause of those destructive forces, as though nature, left to itself, were benign.

Yes, man’s economic activity can sometimes have negative by-products, on the scale of droplets of harm compared with tank-car loads of good. There have been two centuries of the most rapid economic progress and improvement in the history of the world, elevating the lives of hundreds of millions of people above that of the kings and emperors of history, and holding out the potential for the whole population of the world to be similarly elevated. If the price of this scale of good is to be the existence of higher sea-levels and some very bad weather, that is a tiny price indeed. And the answer to the bizarre fears of such things is that under capitalism, man will deal with any such negative forces of nature resulting as by-products of his activity in precisely the same successful way that he regularly deals with the primary forces of nature.

Primitive man, the ideal of the environmentalists, was incapable of successfully coping with climate changes. Modern man, thanks to industrial civilization and capitalism, is capable of successfully coping with climate changes. To do so, it is essential that he ignore the environmentalists and not abandon the intellectual and material heritage that elevates him above primitive man. The grandchildren of those who endured World War II and its massive air raids and battles on land and sea, to preserve the freedom and way of life of the Western World from tyranny, should not now run away in terror from the threat of hurricanes and floods. Moreover, adopting the program of the environmentalists and throttling the production of energy, will not save the condos in South Florida or the Malibu beachfront, or any thing else of value. They will be useless without the energy production required for people to access them and enjoy them. And when hurricanes and floods come, as they inevitably do, those who have adopted the environmentalists’ program will simply be unable to cope with them.

Marxian “scientific socialism” was collectivism in its boisterous, arrogant youth. Environmentalism is collectivism in its demented old age. It will be much easier to overcome than was Marxism. Marxism, however falsely and dishonestly, at least promised major positives: the unlocking of human potential and the achievement of future material prosperity. Environmentalism is reduced to trying to find terrified people with less than the mentality of children, to whom it can offer the prospect of avoiding wind and rain. It is the intellectual death rattle of collectivism. When it has been overcome, a world-embracing capitalist economy will be able to come into existence and be capable in fact of achieving unprecedented economic progress and prosperity across the entire globe.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. Most of the material in this article has been taken from Chapter 3 of Capitalism.

On Showing Proper Respect for Multi-Cultural Values

I quote the following from Mark Steyn’s column in today’s (March 26, 2006) Orange County Register (his column dealt with the threatened death penalty for a Moslem convert to Christianity):

“In a more culturally confident age, the British in India were faced with the practice of `suttee’ - the tradition of burning widows on the funeral pyres of their husbands. Gen. Sir Charles Napier was impeccably multicultural: `You say that it is your custom to burn widows. Very well. We also have a custom: When men burn a woman alive, we tie a rope around their necks, and we hang them. Build your funeral pyre; beside it, my carpenters will build a gallows. You may follow your custom. And then we will follow ours.’"

The Environmentalists Are Trying to Frighten the Natives

In a manner reminiscent of witch doctors urging primitive people to sacrifice their sheep and goats in order to mollify the wrath of the gods, today’s environmentalists and their shills in the media and academe repeatedly urge the people of the United States and the rest of the modern world to sacrifice their use of energy and their standard of living in order to avoid the wrath of the Earth and its atmosphere. That wrath will allegedly take one form or another: a new ice age (recall the predictions of Paul Ehrlich) or, if not a new ice age, then global warming and a resulting rise in sea levels. And if global warming and a rise in sea levels of 1 to 3 feet over the next 100 to 150 years is not sufficiently frightening, then a rise in sea levels of 13 to 20 feet over centuries lying still further in the future is projected. Both of these sea-level results are supposed to proceed from a projected rise in average global temperature of 4 degrees, and of average temperature in the Arctic specifically of 5 to 8 degrees. (See “Melting Ice Threatens Sea-Level Rise” and “Climate Data Hint at Irreversible Rise in Seas” in today’s [March 25, 2006] New York Times.)

None of these predictions is based on any kind of scientific experiment. Nor could they be. A scientific experiment would require a laboratory somewhere that contained two identical planets, Earth 1 and Earth 2. There would be just one difference between them. The human population of Earth 1 achieves an Industrial Revolution and rises to the level of energy use and standard of living of our own present-day Earth and its likely level of energy use within the next century. In contrast, the human population of Earth 2 fails to advance beyond the energy use of the Dark Ages or pre-industrial modern times. And then the scientists in the laboratory observe that the average temperature of Earth 1 comes to exceed the average temperature of Earth 2 by 4 degrees, and that of its Arctic region by 5 to 8 degrees, and that its sea level proceeds to rise by the number of feet described, while the sea level of Earth 2 remains unchanged.

Obviously, this is not how such temperature and sea-level projections are arrived at. They are reached on the basis of combining various bits and pieces of actual scientific knowledge with various arbitrary assumptions, which combinations are then fed into computers and come out as the results of “computer models.” Different assumptions produce different results. The choice of which bits and pieces of scientific knowledge to include also produces different results. The process is very similar to an individual with a spreadsheet combining various financial formulas with various assumptions about rates of return, periods of time, tax rates, and so forth, and then coming out with projections of his retirement income.

Imaging being a member of a jury, charged with deciding the guilt or innocence of a defendant on the basis of such computer models. Would it then be even remotely possible to render a verdict that met the standard of “guilty beyond a reasonable doubt.”

Yet this is the caliber of the evidence on the basis of which the environmentalist prosecutors/persecutors of Industrial Civilization want us to convict it and condemn it to death. Yes, the death of the Industrial Revolution and Industrial Civilization. That is what is meant by such statements as, “`we will have to commit soon to a major effort to stop most emissions of carbon to the atmosphere,’” i.e., to stop the consumption of most or all oil, coal, and natural gas, and thus throw the world back to the pre-Industrial ages. (This particular statement was made by Dr. Jonathan T. Overpeck of the University of Arizona, one of the “scientists” referred to in The Times’ articles. Its meaning is supported by major segments of the environmental movement with little or no opposition from the rest of the movement.)

Industrial Civilization is not a disembodied concept. It is the foundation of the material well-being and of the very lives of the great majority of the 6 billion or more people now living. It’s destruction would mean the collapse of the production of food and medicine and literally result in worldwide famines and plagues. This is a result that would be of great satisfaction to those environmentalists who believe that the pre-Industrial World’s population limit of about a billion people was somehow more desirable than the subsequent growth in population to its present size. But it would not be of any comfort or joy to those who had to suffer and die in the process and who saw their loved ones suffer and die. Nor would it be of any comfort or joy to the survivors, who would have to live lives of abject poverty and misery.

There are juries that bring in verdicts in defiance of all reason. The question is, is the jury of contemporary public opinion in the developed world in general and in the United States in particular so simple minded and irrational as to bring in a totally unjustified death-penalty verdict not only against modern Industrial Civilization, but against most of the human race at the very same time?

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site http://www.capitalism.net/ is included. (Email notification is requested.) All other rights reserved.

You Can Earn College Credit for Studying the Works of George Reisman and Ayn Rand! Click here for Details.

My Pepperdine Syllabi, One "Micro" and One "Macro"

Now that my relationship with Pepperdine University has been finalized (I was given the title of “Professor Emeritus”), I want to make my syllabi available to anyone who may be interested. I’ve got basically two of them (one “micro” and the other “macro”). Each of them has eight supplements. The arrangement is somewhat complex and the way I handled it was with a course web site. I’ve now recreated and somewhat updated that web site. The link is www.georgereisman.com/Pepperdine/. The site also contains many hundreds of essay and short-answer questions on my book Capitalism. In my judgment, which others will doubtless dispute, these syllabi are useable in Economics 101 to 801 and 102 to 802.

Much of this material has been incorporated into the manual for my Program of Self-Education in the Economic Theory and Political Philosophy of Capitalism. But I think it’s much more effective in this format. I’ve added to the above syllabi my syllabus for the Program, which incorporates numerous supplementary readings that I recommend.

Judging from the hit counter on its home page, the response to my Pepperdine website with its syllabi and syllabus supplements has already been much greater than I expected. This has motivated me to start making the supplements as fully functional as they were when I used them in my classes.

I’ve begun with material directly related to my most recent post "Production Versus Consumption.” So, if anyone is interested in a look at the Productionist and Consumptionist aggregate demand curves, please go to the site, come down in the left hand frame until you get to the link “477_Supplement_2.” When you click on it, the pdf file that comes up will have hyperlinks of its own, indicated either by a thin blue box or a blue underline, depending on the version of the Adobe Reader that you have. Clicking on the first link will take you to the Productionist aggregate demand curve and the surrounding discussion in Capitalism, clicking on the second one will take you to the Consumptionist aggregate demand curve and surrounding discussion.

There are five additional links in the supplement, which go to figures and tables in Capitalism illustrating Say’s Law.

The operation of the links is quirky and it’s possible they may not even work for everyone. I’m trying to get the kinks out and I welcome reports of any problems (and also successes). Whether the links work well or poorly, I’d appreciate knowing your operating system, version of Acrobat or Acrobat Reader, and the browser you’re using, including its version number.

Thank you for your help.
George Reisman

P. S. Please send the results to me at georgereisman@georgereisman.com

P.P.S. The pagination in the online version of Capitalism has now been greatly improved, because the Acrobat Reader now distinguishes between Roman and Arabic numerals.

Production Versus Consumption

There are two fundamental views of economic life. One dominated the economic philosophy of the nineteenth century, under the influence of the British Classical Economists, such as Adam Smith and David Ricardo. The other dominated the economic philosophy of the seventeenth century, under the influence of Mercantilism, and has returned to dominate the economic philosophy of the twentieth century, largely under the influence of Lord Keynes. What distinguishes these two views is this: In the nineteenth century, economists identified the fundamental problem of economic life as how to expand production. Implicitly or explicitly, they perceived the base both of economic activity and economic theory in the fact that man’s life and well-being depend on the production of wealth. Man’s nature makes him need wealth; his most elementary judgments make him desire it; the problem, they held, is to produce it. Economic theory, therefore, could take for granted the desire to consume, and focus on the ways and means by which production might be increased.

In the twentieth century, economists have returned to the directly opposite view. Instead of the problem being understood as how continuously to expand production in the face of a limitless desire for wealth resulting from the limitless possibilities of improvement in the satisfaction of man’s needs, the problem is erroneously believed to be how to expand the desire to consume so that consumption may be adequate to production. Economic theory in the twentieth century takes production for granted and focuses on the ways and means by which consumption may be increased. It proceeds as though the problem of economic life were not the production of wealth, but the production of consumption.

These two diametrically opposed and mutually exclusive basic premises concerning the fundamental problem of economic life play the same role in economic theory as do conflicting metaphysics in philosophy. Point for point, they result either in opposite conclusions or in the advancement of opposite reasons for the same conclusion. So thoroughly and fundamentally do they determine economic theory that they give rise to two completely different systems of economic thought.

Two Views of Employment

If one is on the nineteenth century, productionist premise, one realizes first of all that there is no such thing as a problem of “creating jobs.” There is a problem of creating remunerative jobs, but not jobs. At all times, the productionist holds, there is as much work to be done—as many potential jobs to be filled—as there are unsatisfied human desires which could be satisfied with a greater production of wealth; and as these desires are limitless, the amount of work to be done—the number of potential jobs to be filled—is also limitless. The employment of more and better machinery, therefore, argues the productionist, does not cause unemployment. It merely allows men, to the extent that they do not prefer leisure, to produce more and thus to provide for their needs more fully and in a better way. Nor does the working of longer hours or the employment of women, children, foreigners, or people of minority races or religions deprive anyone of employment. It simply makes possible an expansion of production.

If one is on the twentieth century, consumptionist premise, one takes another view of machinery and the employment of more people. One regards every expansion of production as a threat to some portion of what is already being produced. One imagines that production is limited by the desire to consume. One fears that this desire may be deficient and, therefore, that an expansion of production in any one segment must force a contraction of production in some other segment. Hence, one fears that the work performed by machines leaves less work to be performed by people, that the work performed by women leaves less work to be performed by men, that the work performed by children leaves less to be performed by adults, that the work performed by Jews leaves less to be performed by Christians, that the work performed by blacks leaves less to be performed by whites, and that the extra work of some means a deficiency of work available for others.

Neither the productionist nor the consumptionist desires long hours or child labor. Here, to this extent, both reach the same conclusion. But their reasons are completely different. The consumptionist does not desire them because he thinks there is a problem of what to do with the resulting products, unless other products are to cease being produced and other workers are to become unemployed. The productionist does not desire long hours or child labor because he attaches no value to fatigue or premature exertion. The problem, in the eyes of the productionist, is not what to do with the additional products produced by longer hours or by child labor—only the intense need for the additional products calls forth this additional labor—but how to raise the productivity of labor to a level at which people can afford to have time for leisure and to dispense with the labor of their children.

Wealth Through Scarcity?

Because he imagines production to be limited by the desire to consume (rather than consumption being limited by the ability to produce), the consumptionist values not wealth but the absence of wealth. For example, after World War II, he imagined that the relative absence of houses, automobiles, television sets, and refrigerators in Europe was an asset of the European economy because it represented a large supply of unused consumer desire, thereby supposedly ensuring a strong consumer demand. By the same token, he imagined that the relative abundance of these goods in the United States was a liability of the American economy because it represented a depleted supply of consumer desire, thereby supposedly ensuring only a weak consumer demand. Prosperity depends on the absence of wealth, and poverty follows from its abundance, the consumptionist concludes, because that priceless commodity, consumer desire, more limited in supply than diamonds, is produced by the absence and consumed by the presence of wealth. It is on this principle that the consumptionist relishes war and destruction as sources of prosperity and attributes the poverty of depressions to “overproduction.”

The consumptionist does not believe that the destruction of wealth is the only means of achieving prosperity. Though he believes it difficult of accomplishment, he has hopes that the supply of his commodity, consumer desire, may nevertheless be increased by positive measures. One such measure is a high birth rate. By bringing more people into the world, one brings more consumer desire into the world. The existence of a larger number of people, the consumptionist tells businessmen, will make it possible for business to find someone upon whom to unload its otherwise superfluous goods. Business will prosper because its supply of goods will find a counterpart in an adequate supply of desire for goods. In the absence of a high birth rate, or along with a high birth rate, the consumptionist believes advertising may suggest to the otherwise fully sated consumers some new desire. And, on a somewhat different plane, technological progress, the consumptionist argues, may provide new uses for an expanding supply of capital goods, which otherwise would find no “investment outlets.” Or, if all else fails, the government may be counted upon to supply an unlimited consumption—even in the absence of desire. Or perhaps, the consumptionist hopes, a country may be fortunate enough to be in danger of attack by foreign enemies and therefore stand under the necessity of maintaining a large defense establishment. In either case, the consumptionist imagines that the government will be able to promote prosperity by exchanging its consumption for the people’s products.

Production Limits Consumption

The productionist, of course, takes a different view of matters. He argues that the birth and upbringing of children always constitutes an expense to the parents. In raising children, the parents must spend money on them which they otherwise would have spent on themselves. Of course, the parents may, and hopefully will, consider the money better and more enjoyably spent on their children; but still, it is an expense. And if they have a large enough number of children; they will be reduced to poverty. This is a fact, the productionist argues, that anyone may observe in any large family which does not possess a correspondingly large income. The presence of children does not make the parents spend more than they otherwise would have, but only spend differently than they otherwise would have. They buy baby food, toys, and bicycles instead of more restaurant meals, a better car, or costlier vacations. There is no stimulus given to production. Production is merely differently directed, to the different distribution of demand.

The only increase in production that could take place, the productionist maintains, would be as a result of the parents having to take an extra job or work longer hours to support their children and still be able to maintain their own previous standard of living. And when the children grow up, the additional market which they are supposed to constitute for houses and automobiles and the like will only materialize to the extent that they themselves are able to produce the equivalent of these things and thereby earn the money with which to purchase them. It will only be by virtue of their production, and not by virtue of their desire to consume, that they will be able to constitute an additional market.

Advertising and the Consumer

Advertising, the productionist holds, does not create consumer desire where no desire for additional goods would otherwise have existed. It is not the case that, in the absence of advertising, people would be at a loss as to how to spend their money. Advertising is not required, and would not be sufficient, to rouse vegetables into men. What advertising does is to lead people to consume differently and in a better way than they otherwise would have. Advertising is a tool of competition, and, as such, for every competing product whose sale is increased by it, there is another competing produce whose sale is decreased by it.

The consumptionist’s attitude toward advertising brings into clear relief some further corollaries and implications of his basic premise. His estimate of advertising, like that of war and destruction, is ambivalent, and necessarily so. On the one hand, he approves of it, on the grounds that by creating consumer desires, it creates the work required to satisfy those desires. However, this very belief, that advertising creates desires where absolutely no desires would otherwise exist, also makes him condemn advertising. For if it were true that, in the absence of advertising, men would be perfectly content with very little, the desires created by advertising must appear to be only superficial and basically unnecessary and unnatural.

And this is precisely how the consumptionist regards such desires. In his eyes, all desires men have for goods, beyond what is necessary to make possible bare physical survival and a vegetative existence, represent an unnatural taste for “luxuries.” These desires the consumptionist considers to be inherently unimportant. Their only justification is the creation of work. The consumptionist’s conception of the greater part of economic activity, therefore, is that it represents senseless motion, with deceit and deception required to make people desire goods for which they have no need, in order to enable them to pass their lives in the production of those very same goods.

Paradoxical as it may first appear, it is the productionist who attaches importance to consumer desires. In his view, the desire for “luxuries” is important; it is necessary and natural; for it is nothing but the desire to satisfy one’s inherent needs (including the need for aesthetic satisfaction) in an ever more improved way. It is from the importance which attaches to the satisfaction of the desire for “luxuries,” the productionist maintains, that the importance of the work required to produce them is derived, and not vice versa.

Technology and Capital Goods

The value of technological progress, the productionist holds, does not lie in the creation of “investment outlets” or “investment opportunities” for an expanding supply of capital goods. If the concept of capital goods is properly understood, as denoting all goods which the buyer employs for the purpose of producing goods which are to be sold, then, the productionist maintains, there is no such thing as a lack of “investment opportunity" for capital goods. So long as more or improved consumers’ goods are desired, there is need of a larger supply of capital goods.

For example, ten million automobiles of a given quality require the employment of twice the quantity of capital goods—twice the quantity of steel, glass, tires, paint, engines, and machinery—in their production as do five million automobiles. If the quality of the automobiles is to be improved, then a larger quantity of capital goods is required for the production of the same number of automobiles. For example, a given number of cars of Chevrolet quality require a larger quantity of capital goods in their production than the same number of cars of Volkswagen quality; the same number of cars of Cadillac quality require still a larger supply of capital goods; and the same number of cars of Rolls Royce quality require yet an even more enlarged supply.

The identical principle applies to houses of different size and quality. A given quantity of eight-room houses of a given quality requires the employment of a larger supply of capital goods than the same number of seven-room houses of the same quality. A given number of brick houses requires a larger supply of capital goods than the same number of wooden houses of the same size; the bricks or any more expensive material constitute a larger supply of capital goods because a larger quantity of labor is required to produce it. The principle applies to food and clothing, to furniture and appliances, to every good. So long asmore of any consumers’ good is desired, so long as not every consumers’ good that is produced is of the very best known quality, there is a need for a larger supply of capital goods.

As Technology Advances

It is not the case that in the absence of technological progress, the supply of capital goods would continue to expand, but find no “investment outlet.” It is not the case that what we have to fear from a lack of technological progress is a flood of goods in which every car produced will be the equivalent of the finest known model Rolls Royce, in which every house that is built will be a palatial mansion, in which every suit of clothes produced will be fit for the Duke of Windsor, and in which every morsel of food will be a rare delicacy, and that then we shall be at a loss as to how to employ our expanding supply of capital goods. On the contrary, what we have to fear from a lack of technological progress, the productionist argues, is that we shall not have an increase in the supply of capital goods, that we shall not be able to exploit any considerable portion of the virtually limitless “investment outlets” which already exist, within the framework of known technology.

The value of technological progress, the productionist maintains, consists in the fact that it enables us to obtain a larger supply of capital goods, and not that it solves the problem of what to do with a larger supply. The technological advances which made possible the canal building and railroad building of the nineteenth century and the development of the steel industry were valuable, not because they absorbed capital goods, as the consumptionist maintains, but because they made possible the accumulation of capital goods. The consumptionist does not realize that capital goods can only be expanded in supply by means of an expansion in their production, and that precisely this is what technological progress makes possible. Had the technological advances which made possible the first railroads in the 1830s not taken place, the supply of capital goods required for the expanded and improved railroad building of the 1840s would not have been obtainable; or, if obtainable, only at the price of the expansion of some other industry. Had no technological advances been made in railroading in the 1840s, the supply of capital goods in the 1850s would have been less, both for railroads and for all other industries. And so it would have been decade by decade, had the technological advances made in railroading or in any other industry not taken place.

For capital accumulation to continue for any period of time, technological progress is indispensable. Only it can make possible continued increases in production, and only continued increases in production can make possible continued capital accumulation. The consumptionist is not aware that the very thing which he considers to be the solution to his imagined problem is the source of what he imagines to be the problem. Nor is he aware that when he advances technological progress as the solution to the problem of what to do with more capital goods, he is confronting himself with the problem of what to do with the larger supply of consumers’ goods, which even he admits results from technological progress. The consumptionist is faced, in addition to other quandaries, with the dilemma of explaining how it is that technological progress may raise the rate of profit by, as he puts it, “increasing the demand for capital,” while at the same time, as he admits, it increases the production of consumers’ goods, which, he maintains, lowers the rate of profit through “overproduction.”

Consumptionism and Parasitism

The idea that by consuming his product, one benefits the producer, by giving him the work to do of making possible one’s consumption, is absurd, the productionist holds. Only the use of money lends it the least semblance of plausibility. If it were true, then every slave who ever lived should have cherished his master’s every whim, the satisfaction of which required of him more work. A slave should have been grateful if his master desired a larger house, an improved road, more food, more parties, and so on; for the provision of the means of satisfying these desires would have given him correspondingly more work to do.

The belief that the consumption of the government benefits and helps to support the economic system is on precisely the same footing, the productionist argues, as the belief that the consumption of the master benefits and supports the slave. It is a belief the absurdity of which is matched only by the injustice it makes possible. It is the means by which parasitical pressure groups, employing the government as an agent of plunder, seek to delude their victims into imagining that they are benefitted and supported by those who take their products and give them nothing in return.

The only economic benefit which one can give to a producer, argues the productionist, consists in the exchange of one’s own products or services for his products or services. It is by means of what one produces and offers in exchange that one benefits producers, not by means of what one consumes. To the extent that one consumes the products or services of others without offering products or services in exchange, one consumes at their expense.

The use of money makes this point somewhat less obvious but no less true. Where money is employed, producers do not exchange goods and services directly, but indirectly. The buyer exchanges money for the goods of a seller. The seller then exchanges the money for the goods of other sellers, and so on. But every buyer in the series must either himself have offered goods and services for sale equivalent to those he purchases, or have obtained his funds from someone else who has done so.

The fact that in a monetary economy everyone measures his benefit by the amount of money he obtains in exchange for his goods or services is interpreted by the consumptionist to imply that the mere spending of money is a virtue and that economic prosperity is to be found through the creation and spending of new and additional money—i.e., by a policy of inflation.

In rebuttal, the productionist argues that for everyone who spends newly created money and thereby obtains goods and services without having produced equivalent goods and services, there must be others who suffer a corresponding loss. Their loss, says the productionist, takes the form either of a depletion of their capital, a diminution of their consumption, or a lack of reward for the added labor they perform—a loss precisely corresponding to the goods and services obtained by the buyers who do not produce.

The consumptionist’s advocacy of consumption by those who do not produce, to ensure the prosperity of those who do, is, the productionist argues, a pathological response to an economic world which the consumptionist imagines to be ruled by pathology. The consumptionist has always before him the pathology of the miser. His reasoning is dominated by the thought of cash hoarding. He believes that one part of mankind is driven by a purposeless passion for work without reward, which requires for its fulfillment the existence of another part of mankind eager to accept reward without work. This is the meaning of the belief that one set of men desire only to produce and sell, but not to buy and consume, and the inference that what is required is another set of men who will buy and consume, but who will not produce and sell. In the consumptionist’s world, the producers are imagined to produce merely for the sake of obtaining money. The consumptionist stands ready to supply them with money in exchange for their goods—he proposes either to take from them the money he believes they would not spend, and then have someone else spend it, or to print more money and allow them to accumulate paper as others acquire their goods.

Hoarding is not the only phenomenon upon which the consumptionist seizes. Where nothing in reality will serve, the consumptionist is highly adept at bringing forth totally imaginary causes of economic catastrophe. Invariably, the solution advanced is consumption by those who have not produced, for the sake of those who have. Always, the goal is to demonstrate the necessity and beneficial effect of parasitism—to present parasitism as a source of general prosperity.

The Rationality of Economic Life

In view of the overwhelming absurdities and contradictions of consumptionism and the gross perversion of values which it engenders, one may only conclude that its support is founded on the interest which it obviously serves: parasitism. This, of course, does not relieve the economist of the duty of identifying the particular errors of every consumptionist argument. It does, however, disqualify every consumptionist as an economist. No scientist, in any field, can accept the view that reality is irrational or that irrational action is required to deal with it.

Those economists of the present day who openly and defiantly proclaim that the economic world is “non-Euclidean,” do so happily. That is the way they would like the economic world to be. If they merely believed that economic life appeared to be irrational, and did not at the same time desire it to be irrational, they would never proclaim it to be so in fact. Instead of leaping to the support of consumptionism after only the most casual examination of their subject, they would not rest until they had identified the errors which could make them believe that economic life possessed the appearance of irrationality; and the greater such an appearance might be, the greater would they realize their own ignorance to be, and the harder would they work to overcome it and expose the errors. It is this which distinguishes an economist from a Lord Keynes.



This essay originally appeared in the October 1964 issue of The Freeman. It is available as a pamphlet from The Jefferson School of Philosophy, Economics, and Psychology. The author wishes to note that his book Capitalism contains a far more comprehensive treatment of the subjects dealt with here. (See in particular, Chapter 13 “Productionism, Say’s Law, and Unemployment.”)

Copyright © 1964, 1991 by George Reisman. Provided that credit is given to the author and he is notified by e-mail, permission is hereby granted to post this essay, uncut, on the internet and otherwise noncommercially distribute it electronically or in print. All other rights reserved.

You Can Earn College Credit for Studying the Works of George Reisman and Ayn Rand! Click here for Details.

Debunking a Reported Defiance of Economic Law in South Korea

Today’s [March 16, 2006] New York Times reports as news a story which, if true, would be an event in defiance of economic law and thus a literal miracle, comparable to the raising of the dead or a virgin birth. This alleged miracle is contained in the headline “In Korea, Bureaucrats Lead the Technology Charge.”

The opening paragraph of the article gushes, “With Korea's aggressive electronics conglomerates leading the world's markets into the next frontiers of high technology, an unlikely commander is heading the charge: the government.” This supposedly is the same government and the same bureaucrats who, in the article’s words, led “a push into biotechnology that produced a national scandal over faked stem cell research.” (The scandal first became public last December.)

Reading further into the article, however, one learns some very significant information. Namely, the head of the country’s Ministry of Information and Communication—the ministry described as the leading governmental actor in information technology in South Korea, “with a budget of nearly $1 billion to promote new technologies”—is one Chin Dae Je. Apparently with no awareness of its significance, the article mentions that before becoming minister of information three years ago, Mr. Chin was an executive of Samsung Electronics. The same paragraph in the article also reveals that he “consulted with his former Samsung colleagues, along with other big Korean companies, to pick technologies that would help the nation `leap into the leadership position in the I.T. field.’”

Based on this information, here’s my hypothesis, which I think is far more plausible than financially disinterested Korean bureaucrats glued to following government regulations, somehow suddenly, causelessly, becoming responsible for the country’s economic success: The parties leading the technology charge, and at the same time using the Korean government as a vehicle serving their financial self-interests, are Samsung Electronics and other Korean firms. Their executives tell the bureaucrats what to do. All that’s happened is that they’ve managed to obtain government financing for some of their research. (Of course, sometimes, acting through the government, they may also tell some competitors what to do, which makes it looks like initiative is coming from the government.)

On other occasions, they’ve no doubt managed to obtain other forms of government subsidization, such as, perhaps, some road construction or river and harbor improvements. Looked at in this light, there’s actually nothing more surprising going on in Korea today than went on in our own country in much of the 19th Century, when businessmen used the government under Republican administrations to enact protective tariffs on their behalf. (This, of course, still goes on today in our country, in far more varied forms than tariffs and on a much larger scale than in the 19th Century.)

The same principle of businessmen using the government for their own ends undoubtedly applies to Japan and the alleged role of its Ministry of International Trade and Industry in the success of the Japanese economy. And it applies to every other case of alleged government responsibility for the economic success of a country.

Such behavior on the part of businessmen is morally wrong and economically debilitating. It is morally wrong because it entails initiating physical force against others, for example, in the collection of taxes to pay for the subsidies. It is economically debilitating in all of its forms: Government sponsorship of research easily becomes government control of research and the destruction of research. Protective tariffs distort production and hold down real incomes, living standards, and the ability to save and invest. Roads and river and harbor improvements would be more efficiently built and operated by private firms than by the government.

But such behavior on the part of businessmen is at least intelligible and proceeds from the operation of financial self-interest, albeit misguided financial self-interest. With a proper limitation on the powers of government, it is capable of being rechanneled into morally proper and economically sound forms. It stands on a much higher rung in hell than the dull, dead hatred of self-interest, success, and wealth that so often proceeds from within government itself and always proceeds from ideologues seeking to use government to impose their wealth and life-hating philosophies.

Corrupt businessmen are infinitely cleaner and better than corrupt ideologues. They’re still willing to take money to do what a customer wants. The corrupt ideologue in contrast is unwilling to take money to stop doing what his victim does not want. If I had to choose, I’d take the corrupt businessman any day.

It’s sign of the corruption of our culture that today, businessmen feel the need to hide behind the mantle of corrupt ideology and pretend that what springs from their fundamentally life-giving self-interest comes instead from the government, the agency that can give only destruction and death.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved.

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In the U.S. Senate the Guilty Interrogate the Innocent

In an article titled “A Senate Panel Interrogates Wary Oil Executives” today’s New York Times reports that “The nation's top oil executives were called before Congress again yesterday to defend their industry's recent mergers and record profits, in the face of public outrage over high oil and gasoline prices.”

Judging from The Times’ article, the hearings touched on everything but the simple, obvious cause of high oil and gasoline prices. They dealt with mergers in the oil industry, which, it was recognized by Senator Feinstein (Democrat from California), have served to lower costs of production in the industry. Somehow neither she nor, apparently, any of the other senators present, could see that the resulting lower costs would naturally result in lower prices if that were the only factor operative. (Lower prices would be necessary in order to derive competitive advantage from the lower costs and the mergers that produced them. Absent lower prices, smaller-scale, higher-cost firms would be just as profitable as before. But with lower prices, they would not be and would thus have to yield market share to the merged and now lower-cost producers.)

A witness (a professor in the business school at UC Berkeley) seemed to want to say that gasoline prices had risen because the world price of oil had risen, which, in The Times’ reporter’s words at least, made the oil companies “not solely responsible for high gasoline prices.”

Two Republican senators, Specter from Pennsylvania and DeWine from Ohio, placed the blame on OPEC. And Senator Specter has apparently proposed legislation to allow the U.S. government to take legal action against OPEC for its fixing of oil prices.

I titled this article “In the U.S. Senate the Guilty Interrogate the Innocent.” A more complete title would be, “In the U.S. Senate, Senators Serving the OPEC Cartel Interrogate American Energy Producers Whom They Prevent from Breaking that Cartel.”

How do U.S. Senators, and the whole US government, do this? They do it by preventing the expansion in domestic oil production that could take place in Alaska, offshore on the continental shelf, and in the vast territories that have arbitrarily been set aside as wildlife preserves and wilderness areas and closed to oil drilling. They also do it by preventing the construction of new atomic power plants and by impeding the mining of coal and the development of additional supplies of natural gas.

Larger supplies of domestically produced oil would increase the world supply of oil and drive down its price. And they could do so very dramatically, because just as a few percent decrease in the supply of oil is capable of increasing its price by a multiple of several times that few percent, so a few percent increase in the supply of oil would work just as powerfully in the opposite direction.

At the same time, the availability of larger supplies of atomic power, coal, and natural gas, would reduce the demand for oil, since the additional supplies of these fuels would replace oil to an important extent. The oil no longer needed by an electric utility, for example, because that utility would now use atomic power or burn coal, that oil would have to find some alternative use, and to open up that use its price would have to be substantially lower.

Our government’s policy of preventing the increase in the supply of oil, atomic power, coal, and natural gas, is what is responsible for the high prices of oil and gasoline that we must now pay. Let it just get out of the way, and the supply of all these forms of energy will dramatically increase and the price of oil and gasoline will fall, even more dramatically.

Every senator who votes to place obstacles in the way of U.S. energy production, who helps to harass U.S. energy producers, is voting to hamper OPEC’s most important competitors and to allow OPEC to go on obtaining high prices. Such senators are the ones who bear responsibility for the high price of oil and gasoline. They are senators serving OPEC not the American people.

They are the ones who deserve to be interrogated, in order to learn how they could be so blind, so stupid, and so destructive.


This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site http://www.capitalism.net/ is included. (Email notification is requested.) All other rights reserved.

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