“One of the amazing phenomena of the present election campaign is the way in which speakers and writers refer to the state of business and to the economic condition of the nation. They praise the administration for the prosperity and for the high standard of living of the average citizen ‘You never had it so good,’ they say, and, ‘Don’t let them take it away.’”
The above statement sounds like something Republicans say in supporting Donald Trump for reelection. The White House proclaims the successes of the Trump economy while those who side with the Democrats say that Obama should also be given credit for any current economic successes. Both sides give presidents too much credit for our standard of living.
However, the quote above comes from a speech that Ludwig von Mises gave in October 1952. As with so much of Mises’ work, this speech is timeless. Much of this talk, “Capital Supply and American Prosperity,” applies to current events.
It’s true that government policy affects the economy. And Trump should get credit if any of his policies have reduced the governmental burden on our businesses. But the fundamental reason wages in the U.S. are higher than in most countries is not because of marginal policy changes. Our economic well-being is largely due to our capital accumulation, not the benevolence of our elected officials.
In this speech, Mises hammers away at this point, “It is implied that the increase in the quantity and the improvement in the quality of products available for consumption are achievements of a paternal government. The incomes of the individual citizens are viewed as handouts graciously bestowed upon them by a benevolent bureaucracy.”
This statement reminds me of the recent Democratic debates where the candidates were each trying to outdo one another with promises of new programs of federal largesse. They seem to believe that all of our economic problems are due to ungenerous government officials. The current federal budget deficits demonstrate the fallacy of this position.
Mises continues,
“It is hardly possible to misrepresent in a more thorough way the fundamental facts of economics. The average standard of living is in this country higher than in any other country of the world, not because the American statesmen and politicians are superior to the foreign statesmen and politicians, but because the per-head quota of capital invested is in America higher than in other countries. Average output per man-hour is in this country higher than in other countries…… because the American plants are equipped with more efficient tools and machines.”
That’s right. Our economic prosperity is due to our capital accumulation. And why do American businesses have so much capital? “Capital is more plentiful in America than it is in other countries because up to now the institutions and laws of the United States put fewer obstacles in the way of big-scale capital accumulation than did those foreign countries.”
But why did this happen in the U.S.? How do we account for our economic prosperity? The answer: capitalism.
“What begot modern industrialization and the unprecedented improvement in material conditions that it brought about was neither capital previously accumulated nor previously assembled technological knowledge…. the early pioneers of capitalism started with scanty capital and scanty technological experience. At the outset of industrialization was the philosophy of private enterprise and initiative, and the practical application of this ideology made the capital swell and the technological know-how advance and ripen.
“One must stress this point because its neglect misleads the statesmen of all backward nations in their plans for economic improvement. They think that industrialization means machines and textbooks of technology. In fact, it means economic freedom that creates both capital and technological knowledge.” (Italics added for emphasis.)
Mises also provides us with a stern warning that we face dire consequences if we destroy the engine of capital accumulation:
“The main problem for this country is: will the United States follow the course of the economic policies adopted by almost all foreign nations, even by many of those which had been foremost in the evolution of capitalism. Up to now in this country the amount of savings and formation of new capital still exceeds the amount of dissaving and decumulation of capital. Will this last?”
Mises provides us with the answer: “One must substitute sound economic ideas for fables and illusions.” We must influence public opinion. We must promote capitalism. We must explain the necessity of having economic freedom and free enterprise. In short, we must popularize Misesian ideas.
But what about income inequality? Won’t some people suffer under capitalism? Again, Mises provides us with an answer to this question.
“There are, of course, also Americans whose material conditions appear unsatisfactory when compared with those of the great majority of the nation. Some authors of novels and plays would have us believe that their gloomy descriptions of the lot of this unfortunate minority is representative of the fate of the common man under capitalism. They are mistaken. The plight of these wretched Americans is rather representative of conditions as they prevailed everywhere in the pre-capitalistic ages and still prevail in the countries which were either not at all or only superficially touched by capitalism. What is wrong with these people is that they have not yet been integrated into the frame of capitalist production. Their penury is a remnant of the past. The progressive accumulation of new capital and the expansion of big-scale production will eradicate it by the same methods by means of which it has already improved the standard of living of the immense majority, viz., by raising the per-head quota of capital invested and thereby the marginal productivity of labor.”
Yes, a capitalist society will have income inequality. In order to help the poor we must build and maintain institutions that promote capital formation. Redistributionist solutions to reduce income inequality will continue to destroy capital formation trapping more people in poverty.
This wonderful essay, “Capital Supply and American Prosperity,” can be found in one of my favorite short books, Mises’ Planning for Freedom: Let the Market System Work . If you haven’t read this compilation of essays, I recommend that you add it to your reading list.
The Mises Institute exists to promote teaching and research in the Austrian school of economics, and individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. These great thinkers developed praxeology, a deductive science of human action based on premises known with certainty to be true, and this is what we teach and advocate. Our scholarly work is founded in Misesian praxeology, and in self-conscious opposition to the mathematical modeling and hypothesis-testing that has created so much confusion in neoclassical economics. Visit https://mises.org