Stiglitz in The Times: A Study in Confusion

In today’s New York Times, Joseph Stiglitz, a Nobel prize winner in economics, has an article titled “How to Fix the Global Economy.” Judging from his article, Stiglitz appears to believe that the main problem of the global economy is ”global financial imbalances.” By this, he means “America’s enormous trade deficits,” which he states are close to $3 billion a day, and “China’s growing trade surplus of almost $500 million a day.”

An indication of the level of analysis to expect in the article is given in its second paragraph, when he says that while the United States blames China’s undervalued currency for its trade deficit, “the rest of the world singles out the huge American fiscal and trade deficits.” The meaning of this statement, and of its acceptance by Stiglitz without challenge, is that it is legitimate to argue that what is to be blamed for America’s trade deficit is America’s trade deficit—at least in large part. Whether or not this is Stiglitz’s own view is irrelevant here. What is relevant is that he’s willing to let it go by as though it were legitimate and required no comment.

In typical Keynesian fashion, Stiglitz confuses saving with hoarding, as when he says, “No one seriously proposes that businesses save money instead of investing in expanding production simply to correct the problem of the trade deficit . . . .” How can saving itself not mean investment, unless the savings are hoarded? How can saving be an alternative to investment, unless saving means simply non-spending, i.e., hoarding? Indeed, Stiglitz makes no secret of his Keynesianism. He concludes his article by urging the imposition of an updated version of Keynes’ scheme for global credit expansion based on a new global currency. Only that will allegedly solve the “fundamental structural problems with the global reserve system” and end the “imbalances that threaten the financial stability and economic well-being of us all.”

Until then, the best that we can do, according to Stiglitz, is impose a Keynesian-inspired scheme of government “expenditure cuts combined with an increase in taxes on upper-income Americans and a reduction in taxes on lower-income Americans. The expenditure cuts,” says Stiglitz, “would, of course, by themselves reduce spending, but because poor individuals consume a larger fraction of their income than the rich, the `switch’ in taxes would, by itself, increase spending. If appropriately designed, such a combination could simultaneously sustain the American economy and reduce the deficit.”

The content of this last paragraph needs to be gone over carefully. The government will cut its spending. (Amazing that Stiglitz would even consider this.) This will not reduce overall, economy-wide spending, however, because it will be accompanied by tax reductions. As the result of reduced taxes, the taxpayers will spend more while the government spends less. So much is true, and good for Stiglitz for recognizing so much as the possibility of this happening. But Stiglitz thinks it’s essential that the taxpayers be poor, low-income tax payers, because only such taxpayers, he believes, engage in significant spending. What do the richer, higher-income tax payers do with their funds? All they do, Stiglitz thinks, is hoard them. That’s why, when their taxes are increased, Stiglitz sees no fall in spending anywhere. All he sees is funds coming into the hands of the government and reducing its deficit—funds that allegedly would otherwise have been hoarded.

The fact is, of course, as John Stuart Mill pointed out in the middle of the 19th Century, that what is saved, i.e., not spent in purchasing consumers’ goods, is spent. But it is spent productively, i.e., in buying capital goods and in paying the wages of workers employed by business firms. These workers, of course, then consume their wages.

Moreover, some significant part of the funds that are saved is lent to consumers. It should be realized that it is only on a foundation of savings, partly their own, but mainly those of others, which they borrow, that most people can afford to buy expensive consumers’ goods. In this category are major appliances, automobiles, and, above all, homes. Such consumers’ goods, which cost the income of months or years, could not be purchased in any other way except on a foundation of savings—either those of the purchasers themselves or those from whom the purchasers borrow.

Because their funds are spent in these ways, taxing the rich to reduce the government’s deficit actually means reducing the spending of business firms for capital goods and labor, the spending of business’s employees for consumers’ goods, and the spending of all consumers for expensive consumers’ goods.

Because what is saved is spent, simply reducing government spending, and thus the government’s need to borrow, makes correspondingly more funds available to business firms and consumers to be spent in these ways. The savings the government would have absorbed through its sale of securities are instead available for these vital purposes. There is no need to complicate matters with accompanying tax decreases and tax increases, especially when the tax increases have the negative effects that I’ve shown.

The point here is that to reduce the government’s budget deficit, all that needs to be done is to reduce its spending, nothing more. It would be a further improvement if government spending were reduced not only to the point of eliminating its deficit, but to the point of making possible the radical reduction, indeed, complete elimination, of taxes that fall on savings and the greatest possible decrease in taxes that fall on private consumption. In that way the demand for capital goods and labor by business would be at a maximum consistent with the citizens’ degree of time preference, and everyone would enjoy as much as possible of the benefit of his own wealth and income. The effect of the rise in saving and investment would be a sharp increase in the rate of economic progress in the United States. A further, indirect effect would be an increase in the size of the American economy relative to that of the rest of the world.

It never occurs to Stiglitz that America’s trade deficit is actually benign and doesn’t need to “fixed”–by him or anyone else. In part it is the result of the fact that the US dollar is a global currency. As the supply of dollars is increased in the US, a substantial proportion of them flows abroad, where they are held by individuals and businesses who do not want to hold the more rapidly inflated currencies of their own countries. These individuals use these dollars to a considerable extent in making purchases in their own countries, from other individuals who are eager to acquire them. To the extent that these dollars leave the US in the purchase of goods and services from abroad, they represent imports. The fact that they are then held abroad and do not return, means that there are no corresponding exports. Hence, the balances of trade and payments are “unfavorable.”

Of course, there is nothing really “unfavorable” to the United States about such a situation. It exports paper dollars that cost it virtually nothing to produce in exchange for actual goods and services. It is in the position of a gold mining country under an international gold standard, with a principal difference being that it does not incur the substantial costs of gold mining.

To be sure, there is a major danger in this situation. And that is, that the United States government will increase the supply of dollars rapidly enough to deprive them of their desirability for being held abroad. In that case, the dollars that have gone out will come rushing back in. We will then have to exchange a mass of goods and services for these little pieces of paper. Our economy will be impoverished, but the goods and services leaving in exchange for the little pieces of paper flooding back in will count as “exports,” and so our balance of trade will turn from “unfavorable” to “favorable.” Then, in the midst of impoverishment and major inflation, we shall allegedly know the meaning of prosperity—Keynesian style.

It should be obvious that the present “unfavorable” balance of trade is much preferable to such a “favorable” balance of trade.

For the rest, our “unfavorable” balance of trade is the result of nothing more than the relative desirability of the United States as a country in which to invest. Despite our substantial and continuing loss of economic freedom and respect for property rights, the United States still compares very favorably in these vital respects with practically all other countries. The laws here still cannot be changed at the whim of a government official. Contracts are almost always still enforced. As a result, the United States continues to be the best country in which to invest for enough people, enough of the time so that each year substantially more capital enters the country from abroad than leaves it. This net investment of foreign capital is what mainly finances our continuing excess of imports over exports.

The way to grasp the connection between foreign investment and our trade deficit, in terms of principle, is to think back a few generations, to the time when Western geologists first discovered vast oil reserves in Saudi Arabia. At the time, that country was essentially an empty desert. Oil wells, refineries, and pipelines did not yet exist there. They first needed to be built. To do this, a mass of construction equipment and construction materials needed to be brought into the country, along with substantial supplies of consumers’ goods for the Western construction workers required. All of these goods coming in were imports. They were also the physical constituents of the capital being invested in Saudi Arabia.

Could Saudi Arabia possibly have avoided an “unfavorable” balance of trade. It could not even if it had exported all of the sheep, goats, tents, and camels in the country. In fact, of course, it did not have to export anything to pay for these imports—not until the oil began flowing, and then it exported that. Its “unfavorable” balance of trade and the accompanying foreign investment were in fact as genuinely favorable an economic development for that country as it is possible to imagine.

Like all foreign investment, the foreign investment coming into the United States today is necessarily in the form of an excess of imports over exports. It and the capital accumulation it makes possible is no more genuinely unfavorable to us than was the excess of imports over exports that came into Saudi Arabia, and the capital accumulation it made possible.

Unfortunately, today, in the United States, part of the foreign investment being made finances our government’s budget deficits. But in so doing it prevents those deficits from stripping away savings and capital from the rest of the economic system. It would certainly be much more desirable if those deficits could be eliminated. Then that foreign capital would simply add to the savings and capital invested in our country, instead of, to a considerable extent, merely maintaining it. Foreign investment and the excess of imports over exports that it makes possible also serves to make up for the lack of savings and capital accumulation on the part of the United States’ own citizens. Our economy would be vastly worse off without it.

Such global “trade imbalances” are not a problem. They are a profoundly important means of preventing problems. What will cause a problem is allowing wreckers, devoid of serious knowledge of economics, to “fix” things.


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.

Ludwig von Mises: Defender of Capitalism

Today, September 29, 2006 is the one-hundred-and-twenty-fifth anniversary of the birth of Ludwig von Mises, economist and social philosopher, who passed away in 1973. Mises was my teacher and mentor and the source or inspiration for most of what I know and consider to be important and worthwhile in these fields—of what enables me to un­derstand the events shaping the world in which we live. I want to take this opportunity to pay tribute to him, because I believe that he deserves to occupy a major place in the intellectual history of modern times.

Mises is important because his teachings are nec­essary to the preservation of material civilization. As he showed, the base of material civilization is the division of labor. Without the higher productivity of labor made possible by the division of labor, the great majority of mankind would simply die of starvation. The existence and successful functioning of the division of labor, how­ever, vitally depends on the institutions of a capitalist society—that is, on limited government and economic freedom, private ownership of land and all other prop­erty, exchange and money, saving and investment, eco­nomic inequality and economic competition, and the profit motive—institutions everywhere under attack for several generations.

When Mises appeared on the scene, Marxism and the other socialist sects enjoyed a virtual intellectual monopoly. Major flaws and inconsistencies in the writ­ings of Smith and Ricardo and their followers enabled the socialists to claim classical economics as their actual ally. The writings of Jevons and the earlier “Austrian” economists—Menger and Böhm-Bawerk—were insuf­ficiently comprehensive to provide an effective counter to the socialists. Bastiat had tried to provide one, but died too soon, and probably lacked the necessary theo­retical depth in any case.

Thus, when Mises appeared, there was virtually no systematic intellectual opposition to socialism or de­fense of capitalism. Quite literally, the intellectual ram­parts of civilization were undefended. What Mises undertook, and which summarizes the essence of his greatness, was to build an intellectual defense of capi­talism and thus of civilization.

The leading argument of the socialists was that the institutions of capitalism served the interests merely of a handful of rugged “exploiters” and “monopolists” and operated against the interests of the great majority of mankind, which socialism would serve. While the only answer others could give was to devise plans to take away somewhat less of the capitalists’ wealth than the socialists were demanding, or to urge that property rights nevertheless be respected despite their incompat­ibility with most people’s well-being, Mises chal­lenged everyone’s basic assumption. He showed that capitalism operates in the material self-interests of all, including the non-capitalists—the so-called proletari­ans. In a capitalist society, Mises showed, privately owned means of production serve the market. The phys­ical beneficiaries of the factories and mills are all who buy their products. And, together with the incentive of profit and loss and the freedom of competition that it implies, the existence of private ownership ensures an ever-growing supply of products for all.

Thus, Mises showed to be absolute nonsense such clichés as “poverty causes communism.” Not poverty, he explained, but poverty plus the mistaken belief that communism is the cure for poverty, causes communism. He showed that if the mis­guided revolutionaries of the backward countries and of impoverished slums understood economics, any desire they might have to fight poverty would make them advocates of capitalism.

Socialism, Mises demonstrated, in his greatest original contribution to economic thought, not only abolishes the incentive of profit and loss and the freedom of competi­tion along with private ownership of the means of pro­duction, but makes economic calculation, economic co­ordination, and economic planning impossible, and therefore results in chaos. For socialism means the abo­lition of the price system and the intellectual division of labor; it means the concentration and centralization of all decision-making in the hands of one agency: the Central Planning Board, or the Supreme Dictator.

Yet the planning of an economic system is beyond the power of any one consciousness: the number, variety and locations of the different factors of production, the various technological possibilities that are open to them, and the different possible permutations and combina­tions of what might be produced from them, are far beyond the power even of the greatest genius to keep in mind. Economic planning, Mises showed, requires the cooperation of all who participate in the economic system. It can exist only under capitalism, where, every day, businessmen plan on the basis of calculations of profit and loss; workers, on the basis of wages; and consumers, on the basis of the prices of consumers’ goods.

Mises’s contributions to the debate between cap­italism and socialism—the leading issue of modern times—are overwhelming. Before he wrote, people did not realize that capitalism has economic planning. They uncritically accepted the Marxian dogma that capitalism is an anarchy of production and that socialism repre­sents rational economic planning. People were (and most still are) in the position of Moliere’s M. Jourdan, who never realized that what he was speaking all his life was prose. For, living in a capitalist society, people are literally surrounded by economic planning, and yet do not realize that it exists.

Every day, there are countless businessmen who are planning to expand or contract their firms, who are planning to introduce new products or discontinue old ones, planning to open new branches or close down existing ones, planning to change their methods of production or continue with their present methods, planning to hire additional workers or let some of their present ones go. And every day, there are countless workers planning to improve their skills, change their occupations or places of work, or to con­tinue with things as they are; and consumers, planning to buy homes, cars, stereos, steak or hamburger, and how to use the goods they already have—for example, to drive to work or to take the train, instead.

Yet people deny the name planning to all this activity and reserve it for the feeble efforts of a handful of government officials, who, having prohibited the plan­ning of everyone else, presume to substitute their knowledge and intelligence for the knowledge and intel­ligence of tens and hundreds of millions. Mises identified the existence of planning under capitalism, the fact that it is based on prices (“economic calculations”), and the fact that the prices serve to coordinate and harmonize the activities of all the millions of separate, independent planners.

He showed that each individual, in being concerned with earning a revenue or income and with limiting his expenses, is led to adjust his particular plans to the plans of all others.

For example, the college student who decides to become an accountant rather than an artist, because he values the higher income to be made as an accountant, changes his career plan in response to the plans of others to purchase accounting services rather than paintings. The individual who decides that a house in a particular neighborhood is too expensive and who therefore gives up his plan to live in that neighborhood, is similarly engaged in a process of adjusting his plans to the plans of others; because what makes the house too expensive is the plans of others to buy it who are able and willing to pay more. And, above all, Mises showed, every business, in seeking to make profits and avoid losses, is led to plan its activities in a way that not only serves the plans of its own customers, but takes into account the plans of all other users of the same factors of production throughout the economic system.

Thus, Mises demonstrated that capitalism is an economic system rationally planned by the combined, self-interested efforts of all who participate in it. The failure of socialism, he showed, results from the fact that it represents not economic planning, but the destruction of economic planning, which exists only under capital­ism and the price system.

Mises was not primarily anti-socialist. He was pro-capitalist. His opposition to socialism, and to all forms of government intervention, stemmed from his support for capitalism and from his underlying love of individual freedom and conviction that the self-interests of free men are harmonious—indeed, that one man’s gain under capitalism is not only not another’s loss, but is actually others’ gain. Mises was a consistent champion of the self-made man, of the intellectual and business pioneer, whose activities are the source of progress for all mankind and who, he showed, can flour­ish only under capitalism.

Mises demonstrated that competition under capi­talism is of an entirely different character than competi­tion in the animal kingdom. It is not a competition for scarce, nature-given means of subsistence, but a compe­tition in the positive creation of new and additional wealth, from which all gain. For example, the effect of the competition between farmers using horses and those using tractors was not that the former group died of starvation, but that everyone had more food and the income available to purchase additional quantities of other goods as well. This was true even of the farmers who “lost” the competition, as soon as they relocated in other areas of the economic system, which were enabled to expand precisely by virtue of the improvements in agriculture. Similarly, the effect of the automobile’s supplanting the horse and buggy was to benefit even the former horse breeders and blacksmiths, once they made the necessary relocations.

In a major elaboration of Ricardo’s Law of Compara­tive Advantage, Mises showed that there is room for all in the competition of capitalism, even those of the most modest abilities. Such people need only concen­trate on the areas in which their relative productive inferiority is least. For example, an individual capable of being no more than a janitor does not have to fear the competition of the rest of society, almost all of whose members could be better janitors than he, if that is what they chose to be. Because however much better janitors other people might make, their advantage in other lines is even greater. And so long as the person of limited ability is willing to work for less as a janitor than other people can earn in other lines, he has nothing to worry about from their competition. He, in fact, outcompetes them for the job of janitor by being willing to accept a lower income than they. Mises showed that a har­mony of interests prevails in this case, too. For the existence of the janitor enables more talented people to devote their time to more demanding tasks, while their existence enables him to obtain goods and services that would otherwise be altogether impossible for him to obtain.

On the basis of such facts, Mises argued against the possibility of inherent conflicts of interest among races and nations, as well as among individuals. For even if some races or nations were superior (or inferior) to others in every aspect of productive ability, mutual cooperation in the division of labor would still be ad­vantageous to all. Thus, he showed that all doctrines alleging inherent conflicts rest on an ignorance of eco­nomics.

He argued with unanswerable logic that the economic causes of war are the result of government interference, in the form of trade and migration barriers, and that such interference restricting foreign economic relations is the product of other government interference, restricting domestic economic activity. For example, tariffs become necessary as a means of preventing unemployment only because of the existence of minimum wage laws and pro-union legislation, which prevent the domestic labor force from meeting foreign competition by means of the accep­tance of lower wages when necessary. He showed that the foundation of world peace is a policy of laissez-faire both domestically and internationally.

In answer to the vicious and widely believed accusa­tion of the Marxists that Nazism was an expression of capitalism, he showed, in addition to all the above, that Nazism was actually a form of socialism. Any system characterized by price and wage controls, and thus by shortages and government controls over production and distribution, as was Nazism, is a system in which the government is the de facto owner of the means of pro­duction. Because, in such circumstances, the govern­ment decides not only the prices and wages charged and paid, but also what is to be produced, in what quantities, by what methods, and where it is to be sent. These are all the fundamental prerogatives of ownership. This identi­fication of “socialism on the German pattern,” as he called it, is of immense value in understanding the na­ture of all demands for price controls.

Mises showed that all of the accusations made against capitalism were either altogether unfounded or should be directed against government intervention, which destroys the workings of capitalism. He was among the first to point out that the poverty of the early years of the Industrial Revolution was the heritage of all previous history—that it existed because the productiv­ity of labor was still pitifully low; because scientists, inventors, businessmen, and savers and investors could only step by step create the advances and accumulate the capital necessary to raise it. He showed that all the policies of so-called labor and social legislation were actually contrary to the interests of the masses of work­ers they were designed to help—that their effect was to cause unemployment, retard capital accumulation, and thus hold down the productivity of labor and the stan­dard of living of all.

In a major original contribution to economic thought, he showed that depressions were the result of government-sponsored policies of credit ex­pansion designed to lower the market rate of interest. Such policies, he showed, created large-scale malinvest­ments, which deprived the economic system of liquid capital and brought on credit contractions and thus de­pressions. Mises was a leading supporter of the gold standard and of laissez-faire in banking, which, he believed, would virtually achieve a 100% reserve gold standard and thus make impossible both inflation and deflation.

What I have written of Mises provides only the barest indication of the intellectual content that is to be found in his writings. He wrote approximately twenty books. And I venture to say that I cannot recall reading a single paragraph in any of them that did not contain one or more profound thoughts or observations. Even on the occasions when I found it necessary to disagree with him (for example, on his view that monopoly can exist under capitalism, his advocacy of the military draft, and certain aspects of his views on epistemology, the nature of value judgments, and the proper starting point for economics), I always found what he had to say to be extremely valuable and a powerful stimulus to my own thinking. I do not believe that anyone can claim to be really educated who has not absorbed a substantial mea­sure of the immense wisdom present in his works.

Mises’s two most important books are Human Action and Socialism, which best represents the breadth and depth of his thought. These are not for beginners, however. They should be preceded by some of Mises’s popular writings, such as Bureaucracy and Planning For Freedom.

The Theory of Money and Credit, Theory and History, Epistemological Problems of Economics, and The Ulti­mate Foundations of Economic Science are more spe­cialized works that should probably be read only after Human Action. Mises’s other popular writings in English include Omnipotent Government, The Anti-Capitalistic Mentality, Liberalism, Critique of Interven­tionism, Economic Policy, and The Historical Setting of the Austrian School of Economics. For anyone seriously interested in economics, social philosophy, or modern history, the entire list should be considered required reading.

Mises must be judged not only as a remarkably brilliant thinker but also as a remarkably courageous human being. He held the truth of his convictions above all else and was prepared to stand alone in their defense. He cared nothing for personal fame, position, or finan­cial gain, if it meant having to purchase them at he sacrifice of principle. In his lifetime, he was shunned and ignored by the intellectual establishment, because the truth of his views and the sincerity and power with which he advanced them shattered the tissues of falla­cies and lies on which most intellectuals then built, and even now continue to build, their professional careers.

It was my great privilege to have known Mises personally over a period of twenty years. I met him for the first time when I was sixteen years old. Because he recognized the seriousness of my interest in economics, he invited me to attend his graduate seminar at New York University, which I did almost every week there­after for the next seven years, stopping only when the start of my own teaching career made it no longer possi­ble for me to continue in regular attendance.

His seminar, like his writings, was characterized by the highest level of scholarship and erudition, and al­ways by the most profound respect for ideas. Mises was never concerned with the personal motivation or character of an author, but only with the question of whether the man’s ideas were true or false. In the same way, his personal manner was at all times highly re­spectful, reserved, and a source of friendly encourage­ment. He constantly strove to bring out the best in his students. This, combined with his stress on the import­ance of knowing foreign languages, led in my own case to using some of my time in college to learn German and then to undertaking the translation of his Epistemologi­cal Problems of Economics—something that has always been one of my proudest accomplishments.

Today, Mises’s ideas at long last appear to be gaining in influence. His teachings about the nature of socialism have been confirmed in the most spectacular way possible, namely, by the collapse of the former Soviet Union, and by the substantial conversion of Mainland China, Russia, and the rest of the Soviet Empire to capitalism.

Some of Mises’s ideas have been propounded by the Nobel prizewinners F.A. Hayek (himself a former student of Mises) and Milton Friedman. His ideas inspired the “miracle” of Germany’s economic recovery after World War II. They have exerted a major influence on the writings of Henry Hazlitt, Murray Rothbard, and the staff of the Foundation for Economic Education, as well as such prominent former students as Hans Sennholz and Israel Kirzner. They live on with increasing power and influence in the daily work of The Ludwig von Mises Institute, which publishes books and journals and holds conferences, seminars, and classes on his ideas.

Mises’s works deserve to be required reading in every college and university curriculum—not just in departments of economics, but also in departments of philosophy, history, government, sociology, law, busi­ness, journalism, education, and the humanities. He himself should be awarded an immediate posthumous Nobel Prize—indeed, more than one. He deserves to receive every token of recognition and memorial that our society can bestow. For as much as anyone in history, he labored to preserve it. If he is widely enough read, his labors may actually succeed in saving it.

George Reisman is Pepperdine University Professor Emeritus of Economics. He is the translator of Mises’s Epistemological Problems of Economics (New York: D. Van Nostrand, 1960) and is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). His web site is www.capitalism.net.

Armed and Dangerous

The New York Times has reported that California’s Attorney General, Bill Lockyer, is suing the six largest automobile manufacturers because of their alleged contribution to “global warming” and its resulting damage to the State of California.

“Global warming,” it reports the attorney general as saying, “is causing significant harm to California’s environment, economy, agriculture and public health. . . . Vehicle emissions are the single most rapidly growing source of the carbon emissions contributing to global warming . . . .”

The suit accuses the auto companies, in the words of The Times, “of creating a public nuisance by building millions of vehicles that collectively discharge 289 million metric tons of carbon dioxide into the atmosphere annually.”

Mr. Lockyer and his supporters apparently to not think in terms of principles. If they did, they would realize that the logic on the basis of which he is suing the automobile companies would also enable him to sue Caltrans, the state agency responsible for highway, planning, construction, and maintenance. He could sue Caltrans for its role in making possible the presence of the millions of automobiles in the state emitting carbon dioxide. After all, if Caltrans had not built its roads, the number of automobiles that would have been sold in California would have been far less, and thus the problems that Mr. Lockyer complains of would also have been far less. By extension, he could add to the list of defendants the state legislators who voted for the annual budgets of Caltrans.

And by the same logic, applied at a more fundamental level, he could sue all the millions of individual California residents whose purchases of automobiles over the years provided the automobile manufacturers with the incentive and financial means to continue their allegedly destructive activity of providing people with convenient, low-cost means of transportation. Few things are more certain than that in the absence of their purchases, very few automobiles would ever have come into California.

As the chief law enforcement officer of the state, Mr. Lockyer is armed. His utterly bizarre lawsuit shows that he is also dangerous.

In an earlier era, when confronted with the possibility of encountering an armed and dangerous man, citizens were cautioned not to attempt to approach him but to summon law enforcement instead. The tragedy—the joke—is that today Mr. Lockyer and others of his ilk so often are law enforcement.


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.

Britain’s Royal Society Seeks to Squelch Opposition to Greens on Global Warming

From The New York Times of September 21:

LONDON, Sept. 20 — A British scientific group, the Royal Society, contends that Exxon Mobil is spreading “inaccurate and misleading” information about climate change and is financing groups that misinform the public on the issue.

The Royal Society, a 1,400-member organization that dates back to the 1600’s and has counted Isaac Newton and Albert Einstein as members, asked Exxon Mobil in a letter this month to stop financing these groups and to change its public reports to reflect more accurately the opinions of scientists on the issue.

There is a “false sense somehow that there is a two-sided debate going on in the scientific community” about the origins of climate change, said Bob Ward, the senior manager for policy communication at the Royal Society.

The reality is that “thousands and thousands” of scientists around the world agree that climate change is linked to greenhouse gases, he said, with “one or two professional contrarians” who disagree.

The Royal Society is totally dishonest in its claims and is out to intimidate and silence those with whom it disagrees. There are not one or two “contrarians” who dispute the claims of the Greens concerning global warming but over 17,000 scientists. These scientists in fact have actually signed a petition stating their opposition in no uncertain terms. As the organizers of the petition point out, the signers “so far include 2,660 physicists, geophysicists, climatologists, meteorologists, oceanographers, and environmental scientists who are especially well qualified to evaluate the effects of carbon dioxide on the Earth's atmosphere and climate.” As they further point out, the signers “also include 5,017 scientists whose fields of specialization in chemistry, biochemistry, biology, and other life sciences make them especially well qualified to evaluate the effects of carbon dioxide upon the Earth's plant and animal life.” (The complete list of signatories is on line, organized both alphabetically and by state of residence of the signers, at http://www.oism.org/pproject/pproject.htm#357. The list of the 2,660 signers who are physicists, geophysicists, et al. is on line at http://www.oism.org/pproject/a_sci.htm. The list of the 5,017 signers who are scientists specialized in chemistry, biochemistry, et al. is on line at http://www.oism.org/pproject/b_sci.htm.)


The petition was organized by Frederick Seitz, who is the Past President of the National Academy of Sciences and President Emeritus of Rockefeller University. The petition itself is online, at http://www.oism.org/pproject/s33p37.htm. It reads:

We urge the United States government to reject the global warming agreement that was written in Kyoto, Japan in December, 1997, and any other similar proposals. The proposed limits on greenhouse gases would harm the environment, hinder the advance of science and technology, and damage the health and welfare of mankind.

There is no convincing scientific evidence that human release of carbon dioxide, methane, or other greenhouse gasses is causing or will, in the foreseeable future, cause catastrophic heating of the Earth's atmosphere and disruption of the Earth's climate. Moreover, there is substantial scientific evidence that increases in atmospheric carbon dioxide produce many beneficial effects upon the natural plant and animal environments of the Earth.

The petition is accompanied by an eight page review of scientific information on the subject of "global warming" titled “Environmental Effects of Increased Atmospheric Carbon Dioxide.” I will make no attempt to summarize that review here. I will content myself merely with endorsing one of its essential conclusions, namely, that “Predictions of global warming,” which the Royal Society alleges to be indisputable, scientifically proven fact, “are based on computer climate modeling, a branch of science still in its infancy.”

There is absolutely no empirical basis for the Royal Society’s assertion. It is certainly not the case that a laboratory experiment has ever been performed, or could ever be performed, based on a side-by-side comparison of two identical planet Earths. In one of these planet Earths, an Industrial Revolution takes place and is followed by a catastrophic rise in temperature, while in the other, in which there is no Industrial Revolution, there is no catastrophic rise in temperature. That would be an experimentally established fact. There simply is no such experimentally established fact.

Moreover, repeated long periods of global warming have taken place on the one and only planet Earth that does exist, without any contribution whatever by Man, his industry, or by increases in atmospheric carbon dioxide caused by nature itself. In other words, the Royal Society has no actual empirical basis for its claims. All it has is computer climate modeling, which is no more reliable and accurate than weather forecasting, which is actually all that it is, only on a scale of centuries rather than days. This is the basis on which the Royal Society wants to squelch opposition to the Greens and their agenda of global government control and massive economic deprivation.

What we have in the Royal Society’s behavior is an obvious attempt at intimidation and the imposition of a conformity of thought on a major public issue. Imagine the uproar if the kind of letter sent by the Royal Society to Exxon had instead been sent by Exxon to the 1,400 members of the Royal Society urging them to stop their support of that organization because of its views on global warming. I can hear the denunciations now: “Inquisition,” “violations of free speech,” “strong-arm tactics,” “Fascism,” . . . .

Well, all of that is precisely what all of the world’s alleged defenders of freedom of speech and press should be saying right now about the tactics of the Royal Society. Those tactics are a perfect illustration of what noted MIT climate expert Prof. Richard Lindzen described last April in his Wall Street Journal article “Climate of Fear.” Joined with the arbitrary power of a host of government agencies that between them control virtually every aspect of its existence, they are capable of forcing Exxon to submit. In fact, I for one will not be surprised if Exxon ends up being compelled to be to the oil industry what Philip Morris has become to the tobacco industry, namely, a company that seems to exist for no other purpose than to discourage as much as possible the purchase of its products. Such self-abasing behavior is what can result when a company is at the mercy of arbitrary government power inflamed against it by vicious propaganda coming from those, such as the Royal Society, who pose as the fount of intellect and morality.

As it happens, the petition I have referred to has no financial support from Exxon or any other company in the oil, coal, or natural gas industries. Can the same thing be said about governmental support of The Royal Society and the endless “studies” dedicated to advancing the Green agenda?

The Royal Society should apologize to Exxon and to the respected scientists—Seitz, Lindzen, and the more than 17,000 others who oppose its views—whose reputations it has besmirched.


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.

Betting California

Earlier this month, the California Legislature and Governor Arnold Schwarzenegger decided to put up the economic future of their state’s citizens as proof of what can perhaps best be called their personal “good global citizenship.” In a move reminiscent of television’s popular “World Poker Tour,” in which a player announces that he is “all in,” their new law mandates that by the year 2020, California will emit 25 percent less carbon dioxide than it now does. The bet is that somehow, merely by virtue of the bet’s having been made, new technologies will be developed that will make it possible to comply with the law without any great increase in cost or major economic loss.

In fact, the law’s authors are so confident of their good luck that they took pains to prevent their law from being largely circumvented by the simple device of building conventional power plants outside the state which would then transmit their power to customers within the state. The law makes it illegal for any new power to be sold within the state that, in the words of Michael R. Peevey, the president of the state’s Public Utilities Commission, is not comparable to that produced from “the newest combined-cycle gas turbine.” It will be interesting to see if California again has brownouts and blackouts like it did a few years ago, but this time will refuse to allow power produced outside the state to enter, and how much such power will then even be available in the absence of California as a normal market for it.

In a poker game, when an intelligent player makes a bet, he generally takes into account not only the odds of winning the hand, but also the size of the pot that he will collect if he does win. In this case, the pot is absurdly small. California accounts for about 2.5 percent of the world’s man-made carbon-dioxide emissions. Thus, if the new law achieves its objective, then, other things being equal, global man-made carbon dioxide emissions will be reduced by slightly more than six-tenths of one percent. This is an amount which would scarcely be noticeable in any case and will be utterly lost alongside the vastly greater increases in emissions that are almost certain to take place in China, India, and elsewhere.

But never mind. California’s officials apparently believe that they have a proverbial “ace up their sleeve.” That ace, according to The New York Times, is the hope that its action will inspire other states to follow suit. If that were to happen and the whole United States, which accounts for roughly 25 percent of global man-made carbon dioxide emissions, mandated the same percentage reduction as California, the reduction would amount to a about six and a quarter percent of global man-made carbon dioxide emissions. This is an amount more significant but still one that will be far more than offset by increases in emissions from the rest of the world. And, of course, it would require betting the whole American economy.

Continuing with the analogy to poker, it is not possible in this case to compute any actual odds, because the development or lack of development of new technology is simply not the same thing as a given card turning up or not turning up. It’s a matter of the intelligence and motivation of scientists, inventors, and businessmen operating in the context of the facts of reality. That the officials of the state of California want an invention or, indeed, a whole series of inventions, to be made does not add anything worthwhile into this mix. The market is already fully motivated to make and implement cost-saving inventions and has done so with spectacular success since the beginning of the Industrial Revolution. It has done so because such inventions add to profits—until competition passes the lower costs on to consumers. All that the government can do is subsidize the making and implementing of inventions that the market would not make, namely the kind that increase costs rather than decrease them. Already, California’s electricity rates are 40 percent above the national average because of its government’s intervention. And because the effect of the new legislation is likely to be to rule out all sources of power but natural gas, California’s electricity rates are likely to go much further above the national average.

Imagine a publicly traded private corporation treating its stockholders’ capital with such reckless disregard of facts and rational calculation. Imagine that it invested its stockholders’ capital based on the hope that technologies not yet in existence would somehow come into existence to make the investment worthwhile. Imagine further that if those technologies somehow did come into existence, the return would still be virtually nil. Wouldn’t the officers and directors of that corporation be bombarded with lawsuits by stockholders? Wouldn’t they be summarily dismissed for their behavior as soon as the case came before any reasonable judge?

That’s what should happen to most of the officials of the state of California. Unfortunately, it’s not likely to. That’s because the role of judge is exercised by an electorate that is largely the product of the state’s system of public education. As a result, it apparently has no more capacity to judge that it is being led to the slaughter than does a herd of sheep.


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.

The Looming Lactation-Station Crisis and How to Solve It

A new crisis may be brewing, even though until very recently it appears to have been known only to very few people, possibly just to a single New York Times reporter and her editors. But on September 1, it was made public knowledge, when the Times published the story on its front page. Here is the gist of the Times’ report:

On the Job, Nursing Mothers Find a 2-Class System
By JODI KANTOR

When a new mother returns to Starbucks’ corporate headquarters in Seattle after maternity leave, she learns what is behind the doors mysteriously marked “Lactation Room.”

Whenever she likes, she can slip away from her desk and behind those doors, sit in a plush recliner and behind curtains, and leaf through InStyle magazine as she holds a company-supplied pump to her chest, depositing her breast milk in bottles to be toted home later.

But if the mothers who staff the chain’s counters want to do the same, they must barricade themselves in small restrooms intended for customers, counting the minutes left in their breaks. . . .

. . . as pressure to breast-feed increases, a two-class system is emerging for working mothers. . . . It is a particularly literal case of how well-being tends to beget further well-being, and disadvantage tends to create disadvantage — passed down in a mother’s milk, or lack thereof.

This should be enough to give everyone the idea.

I don’t want to say how much sleep I’ve lost in my efforts to find a solution for this newest crisis of what the left describes as “social injustice.” But I have come up with a solution, in fact, three solutions. Here they are:

1. The government should immediately order the closing of all corporate-financed lactation stations. That way, there will be no 2-class system. There will be only one class: the class of those who do not have access to such stations.

2. Legislation should be enacted compelling the installation of lactation stations in all of Starbucks’ coffee shops and within a convenient walking distance of every nursing mother wherever she may be, such stations to afford the same degree of comfort and convenience as the one the Times reporter observed at Starbucks’ headquarters.

3. The Times should stop publishing stupid articles whose sum and substance is a pathetic metaphysical whine at the fact that some people are better off than others. It and the rest of the left should finally learn to live with the fact that if everyone is free to pursue his (or her) own happiness, virtually everyone will succeed, and do so to an ever greater extent, though never equally. They should learn that there is absolutely no injustice in this, “social” or otherwise, but that there is profound injustice in the only other alternatives that they leave open, namely, preventing the success of the more successful (as in 1, above) and in forcing some people to provide for others at the point of a gun (as in 2, above).

In fact, there’s a further lesson for the Times and the rest of the left to learn here. Namely, they need to apply their alleged support of “gun control,” which they trumpet ad nauseam, to themselves and the programs they advocate. Those programs invariably come down to having the government point its guns at innocent people. About half the time it’s in order to compel them, against their will, to do something they do not want to do but which the Times and the rest of the left want them to do nonetheless. The rest of the time, it’s a case of forcibly preventing people from doing something they do want to do but which the Times and the rest of the left don’t want them to do. The Times et al. need to stop calling for the use of guns against people, whether in connection with lactation or anything else.


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.

Competition, European Style

The New York Times reports that the European Commission has “ordered Microsoft to disclose secret code in Windows XP needed by rivals to allow them to write programs that work properly with Windows. And it required the company to introduce a second version of Windows XP with its audio and video player removed.”

The European Commission is also reported to be drafting a ruling that will require the world tennis champion Roger Federer to share the secrets of his play with rivals, to enable them, for example, to better integrate their returns with his serves.

In still another development, the European Commission is reported to be contemplating barring the sale of automobiles and other motor vehicles equipped with radios, CD players, or video players. The ruling is held to be necessary to preserve the separate markets of the suppliers of these devices and not allow them to be monopolized by automakers.

Intertwined Insanities

In the Middle East, young men, inspired by religious fanaticism the likes of which have not been seen since the Dark Ages, blow themselves up in order to murder innocent victims. At the same time, their leaders claim that their murderous Islamic creed is morally superior to the values of the West.

In the West meanwhile, another religious creed, one that harks back to the Stone Age, views Man as just another “biota” along with snail darters, spotted owls, and worms, all with equal “rights.” Again and again, it seeks to sacrifice the interests of Man to the alleged interests of the “environment”—an environment comprised not only of all the rest of the Earth’s “biota” but also of swamps, jungles, deserts, and rock formations, all of which allegedly possess “intrinsic value” and therefore must not be destroyed by Man.

Both creeds hate human reason, the individual freedom that reason inspires and requires, and the science, technology, and economic progress and prosperity that it makes possible. Because these values have become so closely identified with Western culture, and at the same time threaten the mindless rule of the Islamic clergy, the West, in the view of contemporary Islam, is Satan.

In the view of environmentalism, Man is Satan. Man is Satan, environmentalism holds, because his reason, science, and technology, that enable him ever more to adapt his environment to himself, equivalently destroy the alleged intrinsic values present in nature before Man’s intervention. Strictly speaking, from the perspective of the doctrine of the intrinsic value of nature, Man is a destroyer when he leaves his footprints in the sand: he has destroyed the alleged intrinsic value of the undisturbed sand; he is a destroyer when he breathes and converts preexisting oxygen molecules into carbon dioxide, thereby destroying the alleged intrinsic value of the oxygen molecules. But so long as Man is incapable of acting on a scale much beyond that of other animals, his alleged inherent destructiveness can apparently be tolerated by the environmentalists. It is when his reason, science, technology, and freedom allow him to act on the vast scale of modern capitalism, a scale incalculably beyond that of which any other species is capable, and to transform nature accordingly, that he is damned.

The insanities of contemporary Islam and of environmentalism are connected. The one is the father of the other.

For several centuries prior to the 1970s, hardly anything was heard from Islam. It was the religion of impoverished people in impoverished countries. It was obvious to everyone with intelligence and education that such countries must throw off the shackles of religious superstition and enter the modern world. Only then might their people prosper. This was the knowledge on which modern Turkey was founded. It was the knowledge that guided the last Shah of Iran.

What changed this and fostered the revival of Islam as a cultural force has been the flood of money that began to pour into leading Islamic countries in the 1970s and which has continued until the present day. This money has come in not because of any positive productive accomplishments on the part of the countries concerned but on the basis of a combination of circumstances to which their contribution has been merely one of good fortune. They have had the good fortune to possess vast petroleum deposits. These petroleum deposits became a source of wealth and income to them after foreign geologists discovered them and foreign oil companies provided the capital and the technology to develop them—foreign economic progress having already established a demand for the oil abroad. The only further contribution of these countries was to then steal the foreign investments by means of abrogation of contracts and nationalization.

The possession of oil deposits and the theft of the foreign investments that had developed them would not by itself have been sufficient. It would not have been the source of sufficient wealth and income to enable very many of those who would still have been virtual starving beggars to put on an air of modernity and think themselves fit to pass judgment on the world that feeds them. What made that possible was the vast monopoly profits handed to Arab countries by the environmental movement. The paralyzing grip of the environmental movement on economic policy in the United States has served to protect the members of the Arab-led OPEC oil cartel from the competition of the American energy industries, which has the potential radically to reduce their wealth and income.

Represented by government officials who might as well have been Senators and Representatives from districts in Saudi Arabia or Iran, rather than in the United States, supported by influential newspapers that might as well have been headquartered in Riyadh or Teheran rather than in New York or Los Angeles, the environmental movement has been able to prohibit the production of additional American oil. It has blocked oil production in Alaska, offshore on the continental shelf, and in the vast areas set aside as wildlife preserves and wilderness areas. In addition, it has prevented the construction of any new atomic power plants for several decades, and has greatly restricted the mining and use of coal as a source of energy. These measures have substantially held down the supply of oil and, by restricting the availability of substitutes, increased the demand for it, making oil much scarcer and more expensive than it needs to be. This in turn has greatly increased the revenues and incomes of the Arab oil-producing states and thus their ability to finance poisonous religious propaganda around the world, the purchase and production of modern weapons, now including atomic weapons, and acts of international terrorism.

If the grip of environmentalism could be broken in the West, what has aptly been called Islamo-fascism would likely fall of its own weight in the Middle East, because those who finance it and advocate it would justly go back to starving until they found a productive way to live.

Until the grip of environmentalism is broken, Middle Eastern lunatics will go on blowing themselves up in order to gain an alleged reward of seventy-two virgins in the afterlife. What will enable them to do so is Western lunatics urging the destruction of industrial civilization in order to manipulate the average mean temperature of the world and the height of sea-levels in future centuries.

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.

Incitement to Class War at The New York Times/Pravda

The lead article in today’s New York Times/Pravda is titled ”Real Wages Fail to Match a Rise in Productivity.” The piece is a denunciation of capitalism and its offshoot “globalization” for allowing such a thing to happen. In the print edition of the newspaper, the subhead ominously declares, “POLITICAL FALLOUT IS SEEN.”

As the means of providing a thinly veiled statement of the doctrine of class warfare, the article quotes the publisher of “a nonpartisan political newsletter”:

“There are two economies out there,” Mr. Cook, the political analyst, said. “One has been just white hot, going great guns. Those are the people who have benefited from globalization, technology, greater productivity and higher corporate earnings.

“And then there’s the working stiffs,’’ he added, “who just don’t feel like they’re getting ahead despite the fact that they’re working very hard. And there are a lot more people in that group than the other group.”

The main “expert” cited in the article is an economic illiterate employed by the Economic Policy Institute, a leftist “research group.” He opines, “`If I had to sum it up,’ . . . `it comes down to bargaining power and the lack of ability of many in the work force to claim their fair share of growth.’” Apparently, this “expert” believes, as does the Times and the left in general, that the relationship between profits and wages is determined by some form of “bargaining” and that whatever goes to profits is at the expense of what goes to wages and wage earners.

The fact, of course, is that the number of workers employers seek to employ is determined by the wage rates that they must pay, and is the larger, the lower are wage rates, and the smaller, the higher are wage rates. (This relationship goes under the name “demand” and is typically illustrated by means of a downward sloping line called a “demand curve.” The Times and its “experts” should attempt to make themselves familiar with the concept.) In a free market, wage rates must simultaneously be low enough on the demand curve for labor, to make possible the employment of all those able and willing to work and high enough to limit the amount of labor sought by employers to the supply of labor available.

Attempts to force wage rates higher, through “bargaining,” i.e., the coercive “collective bargaining” of monopoly labor unions serve only to cause unemployment, by reducing the quantity of labor demanded below the supply available.

Often, the unemployment caused in this way in a given line of work, can be offset by expanded employment in other lines of work. For example, skilled electricians and carpenters who are prevented from working as electricians or carpenters because of the artificially high wages imposed by their respective unions, may very well end up being employed in other, lesser lines of work. But when they are, wage rates in those lesser lines have had to fall, in order to absorb the increase in the supply of labor resulting from the reduction in jobs offered in the unionized lines. Or, if these lines are unionized too, or if their wage rates simply follow union scales, and so cannot fall when the available supply of labor increases, then the employment of the displaced electricians and carpenters shifts the unemployment to other workers.

In sum, the formula of the Times and the rest of the economically ignorant left for raising wages relative to profits is to cause either unemployment or arbitrary inequalities in wage rates among different occupations. In both cases, the further result is less production, higher prices, and a lower standard of living.

This is not the place to address the numerous further fallacies that center on the belief that what goes to businessmen and capitalists as profits in a free economy is at the expense of what goes to wage earners as wages. Those fallacies must be the subject of future articles.

I remind readers that what actually does help to explain the rise in profits at the expense of wages in today’s highly interventionist economy is environmental legislation. In essence, this has served to create an artificial scarcity of land and natural resources relative to labor and to elevate the income derived from their ownership—income which the classical economists called land rent—relative to wages. Land rent, of course, appears in the economic statistics as profit. (For further details, please see my July 24 article ”How Environmentalism Raises Profits at the Expense of Wages.”)

Government budget deficits are also a factor. Such deficits represent government spending that is financed with funds raised at the expense of private capital spending, which spending includes both wage payments and expenditures for capital goods. The effect of the deficits is not only that wage payments in the economic system are smaller, but also that profits in the economic system are artificially increased. This last occurs because while business sales revenues in the economic system remain the same, with government spending taking the place of private spending, the costs that business firms deduct from their sales revenues end up being less than they otherwise would have been. Costs are less because the expenditure that gives rise to costs—i.e., precisely the spending for labor and capital goods by business—is less. The deficits take funds away from business spending and thus later on from the costs that reflect prior business spending. In this way, their effect is to make profits higher as well as making wages lower.

Whoever wants to raise the wages of the average worker should not be advocating monopoly labor unionism and the unemployment and higher prices that it causes, but the repeal of environmental legislation, which raises land rents at the expense of wages. And, of course, in addition, he should be advocating the end of government budget deficits and the repeal of all other legislation that stands in the way of saving and capital accumulation or otherwise undermines the productivity of labor. Saving and capital accumulation both raise the demand for labor, and thus wage rates, and also serve to increase the supply of consumers’ goods and thereby reduce their prices. (They increase the supply of consumers' goods by equipping the average worker with more and better capital goods, which increases his ability to produce.)

The principal obstacle in the way of saving and capital accumulation and thus the rise in real wages is government welfare-state spending. It is what necessitates the taxes, budget deficits, and inflation of the money supply that deprives business of the funds with which to pay wages and buy capital goods. (Inflation can provide everyone with more money. But it cannot provide enough additional money to enable business firms to replace their assets after paying taxes on the overstated profits that it causes.)

Finally, whoever wants to raise the wages of the average worker must oppose the massive and ever-growing body of government regulation that serves to raise costs of production. Contrary to the naive view of the left, increases in costs do not come for very long at the expense of profits. If they did, profits would long since have disappeared. Instead the general rate of profit remains more or less the same. Increases in cost serve either to raise prices or to reduce wage rates, or both. They are the enemy of the standard of living of the average person. Ignorant fanatics who are responsible for causing them in the pursuit of this or that allegedly benevolent social reform—whether it be safety legislation, day care, maternity leave, or whatever—are in fact the enemies of the average worker. In the last analysis, they cause him to earn less and pay more.

When it comes to economic understanding, the mentality of The New York Times and of the left in general is one of soft, mushy ignorance encased in an impenetrable shell of super-hardened self-righteous ignorance. It is on the basis of such a mentality that it seeks to foment class warfare.


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.

More from Böhm-Bawerk on Cost of Production as a Determinant of Prices

The following adds to my previous post about what Böhm-Bawerk says concerning the explanatory role of cost of production in Austrian economics. The quotation is from his essay “Value, Cost, and Marginal Utility,” (trans. George Reisman, Quarterly Journal of Austrian Economics, vol. 5, no. 3, pp. 43-44).

[I]n order to rule out every doubt and every misunderstanding, I want to make a few explicit declarations:

(1) We too [i.e., we “marginal-value theorists,” as he describes his school, i.e., we Austrian economists—GR] fully recognize the sway of a “law of costs” for goods that are reproducible at will. “There is a law of costs”—I once wrote—“costs exercise an important influence on the value of goods.”[18] “That costs of production of goods exercise an important influence on their value is a fact so well verified by experience that it absolutely cannot be doubted.”[19] “One is in fact correct, when one says that costs govern value.”[20]

(2) We too recognize the necessity of “supplementing” the universal law of marginal utility by means of special provisions that relate to the value of goods reproducible at will and that the substance of these is precisely the law of costs. And we have accomplished this "supplementing” in full detail, both for the field of subjective value and for that of objective value and prices.[21]

(3) We too understand the law of costs in such a way that we ascribe to the height of the costs of production, that is to say, to the value of the means of production, the status of a cause—though, to be sure only an intermediate cause—in relation to the value of those products to which the law of costs generally applies. “In our present case (that of goods reproducible at will and of higher direct marginal utility), the value of the product must accommodate itself” (to the value of the means of production). “The value of products of higher direct marginal utility. . . comes to them from the side of the means of production.”[22]

(4) In connection with this, we too acknowledge that changes in the conditions of producing goods reproducible at will never fail to bring about a change in the value of those goods and, to be sure, even without a change in the supply of finished products necessarily having to take place.[23]

[18] “Grundzüge der Theorie des wirtschaftlichen Güterwerts,” new series, vol. 13, p. 73.

[19] Ibid. p. 61.

[20] Ibid. p. 71.

[21] “Grundzüge,” pp. 61ff., 534ff. Positive Theorie des Kapitals
(Innsbruck, 1889), pp. 189ff. and esp. pp. 234ff. [The material referred to appears in English translation in Eugen von Böhm-Bawerk, Capital and Interest, 3 vols., trans. George D. Huncke and Hans F. Sennholz (South Holland, Ill.: Libertarian Press, 1959), vol. 2, pp. 168–76 and 248–56. Vol. 2, pp. 173–76 are on line at http://www.capitalism.net/excerpts/boehm_q.htm.]

[22] “Grundzüge,” p. 70.

[23] Thus, for example, on one occasion, Wieser says: “Cases of the kind last discussed are conspicuous in that the effect of cost on the value of the products takes place without the quantity of products being affected” (Der naturliche Wert [Vienna, 1889], p. 171; [Natural Value (1893; New York: Kelley and Millman, 1956), p. 178. (In the QJAE, Natural Value is mistakenly rendered Natural Law.)])

The above footnote references to Grundzüge can now be found in an English-language translation of that volume. The translation is titled Basic Principles of Economic Value, trans. Hans Sennholz (Grove City, Pennsylvania: Libertarian Press, 2005). The footnote references are to pp. 79, 67, 77, 67-80, 161-167, and 76-77, respectively. There are some generally minor differences between my translation of the sentences quoted by Böhm-Bawerk and their translation by Prof. Sennholz.

I consider it extremely unfortunate that neither Rothbard nor Mises explicitly deals with this very important aspect of Böhm-Bawerk’s writings, which I consider to be one of his major contributions to economic thought. Its inclusion, in my judgment, would have considerably enriched their discussions of prices. Mises did, however, implicitly endorse Böhm-Bawerk’s views on the subject when, immediately after singling out the latter’s Capital and Interest, he wrote: “These masterful expositions are unsatisfactory in some minor points and disfigured by unsuitable expressions. But they are essentially irrefutable. As far as they need to be amended, it must be done by a consistent elaboration of the fundamental thoughts of their authors rather than by a refutation of their reasoning.” [Human Action, 3d ed. rev. (Chicago: Henry Regnery Company, 1966), p. 201.]

Böhm-Bawerk’s treatment of cost and its relationship to marginal utility and price is a very prominent feature of Capital and Interest: it occupies the whole of two chapters in Book III of Volume II, which is titled “Value and Price,” namely, Chapter VII of Part A and Chapter IV of Part B; it also occupies the whole of Excursus VIII in Volume III. Mises must certainly have meant to include this material in his endorsement; it certainly could not be described as “minor points” or “unsuitable expressions.”

Beyond this, I was in the fortunate position of learning more of Mises’s views on the subject of the role cost and of his endorsement of Böhm-Bawerk’s views on the subject, as the result of being a member of his seminar at NYU. This made it possible for me to ask him direct questions on the subject. Specifically, I had taken a class from Prof. George Stigler at Columbia University and learned of Dennis Robertson’s attempt to deal with the problem of calculating the marginal product of a tenth hole digger in the face of the availability of only nine shovels. Robertson’s answer, as reported by Stigler, was that the tenth worker could be sent to fetch beer.

I was very dissatisfied with such an answer and began to see serious problems with efforts to derive marginal products and marginal value products from consumers’ goods in many cases. First, I raised the matter with Rothbard, who referred me to various textbooks for the solution. They did not satisfy me any more than had Robertson’s answer. I then raised the matter with Mises. Almost immediately, Mises asked if I had in mind deriving the value of original factors of production or produced factors of production. I replied that I was concerned with both. The value of produced factors of production, he said, was determined by their cost of production.

This was an answer that greatly surprised me. Because until then, I had thought that Mises and all of sound economics totally denied any possibility of value or price being determined by cost. Mises referred me to Capital and Interest for elaboration. The specific reference he gave was to Excursus VII, which is a brilliant essay on the value of complimentary goods and is closely related to Böhm-Bawerk’s views on the subject of costs. Reading it soon led me into the other portions of Böhm-Bawerk’s work that I’ve cited. Mises’s directing me to Böhm-Bawerk on the subjects of imputation and costs, of course, only deepens what for me is the mystery of why he didn’t explicitly incorporate this aspect of Böhm-Bawerk’s writings into Human Action. And as I think back now, a mystery almost as large is why I never thought of asking him.


The quotations from Böhm-Bawerk are copyright © 2002 by Transactions Publishers. The rest of this article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute the article electronically, 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.

The Austrian Economics that Most of Today’s “Austrians” Don’t Know

To the great majority of those who today consider themselves to be supporters of Austrian economics, any suggestion that there are cases in which the direct, immediate determinant of price is cost of production is likely to be greeted as though it were indicative of such profound ignorance as to be cause for scandal. These “Austrians” believe that the prices of factors of production—labor, land, and capital goods of all descriptions—are determined by the prices of their respective products and can never determine the prices of their products.

This, however, was not the view of two of the most important Austrian economists of the 19th and early 20th centuries, namely, Eugen von Böhm-Bawerk and Friedrich von Wieser, who were the two leading disciples of Carl Menger, the founder of the Austrian school. Böhm-Bawerk was also the teacher of Ludwig von Mises, and was probably considered by Mises to be the most important of all Austrian economists, himself included. (Mises, I think, could sometimes be unduly modest about his own enormous accomplishments, which, in fact, surpassed those of Böhm-Bawerk, great as the latter’s were.)

Without further ado, I am simply going to quote Böhm-Bawerk from his masterwork Capital and Interest, using the same quotation I’ve been permitted to use in my own book.

Böhm-Bawerk on How and When Costs Determine Prices

Up to this point in our discussion the law of the value of production goods was developed subject to the simplifying hypothesis that every group of means of production admits of utilization only to one very definite purpose. That hypothesis is in real life only very rarely in agreement with the facts. It is preeminently production goods, far more than consumption goods, which are characterized by egregious heterogeneity. The overwhelming majority of them will be capable of service in several productive fields, some are adaptable to thousands of such productive services. Examples are iron, coal, and above all, human labor. Of course, we have to take these factual circumstances into account in conducting our theoretical investigation. We must observe what modifications, if any, affect the law that the value of a group of goods occupying remote orders is governed by the value of their product.

Let us alter the order of the presuppositions of our typical example accordingly. Someone possesses a rather large supply of means of production of second order (G2). From each of these groups he can produce at will a consumption good of the category A, or one of category B or finally, of category C. He desires, of course, to take advance measures toward balanced provision for his various wants, and will therefore draw simultaneously on various parts of his supply of means of production to produce consumption goods of all three categories. And he will produce amounts in each in accordance with his needs. If there is genuinely balanced provision, the quantities produced will be so regulated that needs of approximately equal importance depend upon the last specimen in each category, and that thus the marginal utilities are approximately equal. In spite of that it is not impossible that there will be differences—possibly even quite considerable differences—in the marginal utilities because, as we already know, the gradation of concrete wants occurring in any one category is not always either uniform or continuous. The first stove in my room will afford me a very considerable utility, say one we might designate with an index of 200. A second stove will afford no utility at all. I shall most emphatically call a halt in providing stoves when I have a single specimen with its marginal utility of 200, even though in other areas provision for needs may see a dropping off of the average of marginal utility to as little as 120 or even 100. And so it is permissible and necessary, if our example is to be true to nature, to assume that the marginal utility of a specimen will be different in each of the categories A, B and C. Let us call it 100 for A, 120 for B and 200 for C.

Now the question arises, “What is the value, under these circumstances, of a group of means of production, G2?”

We have had so much practice with selective decisions of a similar nature that we can give the answer without hesitation. The value will be equal to 100. For if one of the available groups of means of production should be lost, the owner would naturally shift the loss to the least sensitive area. He would not curtail production in category B where he would be sacrificing a marginal utility of 120, and certainly not in category C where the sacrifice would go as high as 200. He would quite simply produce one specimen fewer of category A where the reduction in well-being is only 100. Let us express it in general terms. The value of a unit of means of production is governed by the marginal utility and the value of that product which has the least marginal utility among all those products for the making of which the unit means of production could have justifiably been used.

All the relations which we had declared to be plainly in force with regard to the value of means of production and their products under the simplifying assumption of only a single possible disposition, are therefore generally valid as between the value of means of production and value of its least valuable product.

And what is the situation with respect to the other categories of products, B and C? That question brings us to the origin of the “law of costs.”

If under all circumstances the marginal utility attainable by a good within its own category were determinative, then the categories B and C would have to receive a value divergent not only from that of category A, but also from the value of its costs G2. B would then have a value of 120, C a value of 200. But here we are confronted with one of the cases where, through substitution, a possible loss in one category is transferred to another, and as a result, the marginal utility of the latter becomes determinative for the other as well. Thus, if a specimen of category C is lost, it is not necessary to forgo the marginal utility of 200 which the specimen would have delivered directly. Instead, it is possible to convert one unit of the means of production G2 into a new specimen C, and in its place rather produce one specimen fewer in that category in which the marginal utility, and hence the loss in utility is least. And indeed that possibility becomes a reality. The category in question in our example is the category A. Because of the opportunity which production offers for substitution, a specimen C is therefore not valued in accordance with its own marginal utility of 200, but in accordance with the marginal utility of the least valuable related product, the product A; its value is therefore 100. The same applies, naturally, to the value of category B, and would apply generally to every category of good which is “productionally related” to A, and of which the direct marginal utility is also greater than that of category A.

This leads to some important consequences. The first is that in this way the value of goods having a higher individual marginal utility occupies the same rank as the value of the “marginal product”; and hence also the same rank as the means of production from which both emanate. The identity which exists in principle between “value” and “costs” therefore obtains in this instance as well. But it is to be carefully noted that here the coinciding is brought about in quite a different way from that which was followed in the case of costs and marginal product. In the latter instance the two coincide because the value of the means of production accommodates itself to the value of the product. The value of the product is the determinant factor, the means of production is the factor that is determined. In our present case it is the other way around, and it is the value of the product that must do the accommodating. Ultimately it accommodates only to the value of another product. But initially it accommodates also to the value of the means of production from which it emanates and which brings about its substitutional connection with the marginal product. The transmission of value proceeds, so to speak, along a broken line. First it goes from the marginal product to the means of production, fixes the value of the latter, and then ascends in the opposite direction from the means of production to the other products which it is possible to produce from them. In the end product, then, the products of higher immediate marginal utility derive their value from their means of production. Let us translate the abstract formula into terms of concrete practice. Good B or good C is, in general, a product of higher immediate marginal utility. If now we consider what good B or C is worth to us our first response is, “Just exactly as much as the means of production are worth to us from which we can at any moment replace the product.” If we then inquire further and ask how much the means of production themselves are worth, we arrive at the marginal utility of the marginal product A. But on innumerable occasions we can spare ourselves this further inquiry. Time and again we already know the value of the goods that comprise the cost, without any necessity for working it out from its foundation and proceeding onward from case to case. And on all these occasions we simply determine the value of products by their costs, and in doing so we are taking advantage of an abbreviation which is as accurate as it is convenient.

And now the whole truth about the celebrated law of costs is revealed. It is indeed quite correct to say that costs govern value. Only it is imperative to remain aware of the limits within which this “law” is valid and of the source from which it derives its virtues. In the first place it is only a particular law. It is valid only so long as the possibility is present of furnishing, through production, substitute specimens in any quantity and at any time they are desired. If there is no possibility of substitution, then in the case of each product, value must be determined by its immediate marginal utility in its own category. In that case its value no longer coincides with that of the marginal product and of the intermediate means of production. Therein lies the explanation of the empirically established principle that the law of costs is valid only for the goods that are “reproducible at will,” and that it is a law of only approximate validity. For it does not bind the goods over which it holds sway to slavishly meticulous adherence to costs. On the contrary, it permits fluctuations above and below such costs, depending on whether production at the moment lags behind demand or outstrips it.

A second and still more important consideration is that even where the law of costs is valid, those costs are not the final, but only an intermediate cause of the value of goods. In the last analysis, they do not give value to their products, but receive it from them. That is clear as crystal in the case of production goods for which there is only one productive use. Surely no one will wish to deny that it would be erroneous to assert that Tokay wine is valuable because Tokay vineyards possess value; everyone will concede that the truth is the other way around, and those vineyards have a high value because their product is highly valued. It is just as hopeless to deny that the value of a quicksilver mine depends on that of the quicksilver, the value of a wheatfield on that of wheat, the value of a brickkiln on that of brick, and not vice versa. Only because of the manysidedness of most cost goods is it possible for the situation to present the opposite appearance. As the moon reflects the light of the sun upon the earth, so do the manysided cost goods reflect the value which they receive from their marginal product on their other products. (Eugen von Böhm-Bawerk, Capital and Interest. 3 vols., Sennholz and Huncke translation (South Holland, Illinois [Grove City, Pennsylvania]: Libertarian Press, 1959), vol. 2, pp. 173-176. Quoted with permission of Libertarian Press. See also ibid., vol. 3, Excursus 8, and Böhm-Bawerk’s article “Value, Cost, and Marginal Utility,” George Reisman, trans., Quarterly Journal of Austrian Economics, vol. 5, no. 3, pp. 43-45.

As I wrote in Capitalism, what Böhm-Bawerk has shown in these passages is that when the price of goods whose own, direct marginal utility is extremely high is determined on the basis of cost of production, precisely then is its value determined on the basis of marginal utility—the marginal utility of the means of production used to produce it, as determined in other, less important employments. The buyer of an automobile fan belt or any other essential automotive part, for example, does not pay a price corresponding to the value he attaches to his car, but a much lower price corresponding to the marginal utility of the materials and labor required to produce fan belts or whatever—a marginal utility that in turn is determined by the marginal utility of products other than fan belts or whatever. As Böhm-Bawerk develops the law of diminishing marginal utility, it is no more surprising that the price of vital components and parts, or any necessity, is in conformity with its cost of production rather than its own direct marginal utility than it is that the marginal utility of the water on which our physical survival depends is no greater than the utility of the marginal quantity of water we use. Determination of price by cost is merely a mechanism by means of which the value of supramarginal products is reduced to the value of marginal products. The only complication is that the marginal products in this case are physically different and lie in other lines of production.

Here I must add that Böhm-Bawerk’s demonstration has the potential to accomplish two very major results: One, is to overthrow the core of contemporary “microeconomics” and its fixation on “marginal revenue” and the concomitant alleged ability of all significant sized firms to exploit marginal revenue at the expense of consumers. Böhm-Bawerk’s doctrine implies that wherever there is legal freedom of entry into an industry, the concept of marginal revenue becomes largely irrelevant. Price will be determined on the basis of cost, irrespective of the degree of inelasticity of demand and potential willingness of buyers to pay higher prices.

The second major result is a very substantial narrowing of the gap that is perceived as separating Austrian economics from British classical economics. As I’ve shown throughout Capitalism, there is enormous value in classical economics that has been overlooked for no genuinely good reason. If what is of value in classical economics could be added to the already great strengths of Austrian economics, the result would be a far more powerful defense of economic freedom and assault on statist intervention than is now possible.

But the most important, the overriding and sufficient reason for accepting Böhm-Bawerk’s analysis here is simply that it is profoundly enlightening—it’s the enlightenment yielded by the principle of marginal utility all over again, on a higher plane.


The quotation from Böhm-Bawerk in this article is copyright © 1959 by Libertarian Press and may not be reproduced without the permission of Libertarian Press. If that can be obtained, permission is hereby given to reproduce and distribute the rest of the article, which is copyright © 2006, by George Reisman, 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.