Ideas on Postwar Economic Policy
December 8, 2017
Mises Institute-Peru is proud to present this
English-language version of an article written by Ludwig von Mises that, until
now, was only available in Spanish. The text was translated by Lucas Ghersi.
This article was first
published in the Mexican journal Cuadernos Americanos, Mexico, Year 1, vol. 4,
July-August 1942. According to Bettina Bien Greaves’ bibliography, an
English or German version of this text is not known (Mises: An
Annotated Bibliography, p. 46). It is likely that the Spanish
version was translated from English, but an original draft in German cannot be
ruled out.
I
We hope that one day this
awful war will end and men may, once again, occupy themselves with the works of
peace. Then, the production of arms and other instruments of crime will be
substituted by the production of consumer goods for men, women and children. No
longer will people think in annihilation and destruction but in establishing
and increasing human wellbeing.
This return to peace, of
course, presupposes the absolute annihilation of the totalitarian powers since,
if the dictators were to prevail, the consequence of their victory would not be
peace but unending warfare. In these totalitarian powers, a philosophy that
proclaims war, instead of peace, is defended as the natural most desirable
state for men that will provide them with joy. Their longing is not permanent
peace but permanent war; thus, if they achieve triumph, the world will become a
great slaughterhouse.
However, the dictators will
succumb; therefore, the question is:
What must we do to close, as
soon and as thoroughly as possible, the wounds opened in society during these
years of fighting? This is the great problem that should worry us and that will
never concern us prematurely. Even now, when the roar of battle is still being
heard, statesmen and economists must think about the last day of the war. Even
now they should prepare, in their spirits, what will be necessary to put in
practice later.
II
Above all, it is necessary to
make this idea clear: if postwar economic policy is to be successful, it must
be based on measures radically different from those pursued before the outbreak
of this war.
The main characteristic of
policies implemented in the decade that preceded the current war, was economic
nationalism; that is, an economic policy based on the belief that it is
possible to promote the wellbeing of all nationals of a country, or at least of
a specific group of them, through measures harmful to foreigners. It was
understood that deterring or prohibiting, in an absolute way, the importation
of foreign goods; restricting the immigration of aliens; or expropriating,
partially or totally, the capital owned by foreigners could provide an
important service to a country. This is not the appropriate place to analyze if
those measures are suitable to achieve their desired end. The classical
economic theory of free exchange has already proven, beyond refutation, that
the final result of restrictions placed on foreign trade is the general decline
of the productivity of labor and, therefore, of standards of living. In this
way, production ceases to occur in places where a high return may be achieved
and moves to others where, with the same investment of capital and labor, much
lower returns can be obtained. The classic doctrine of free exchange of Hume,
Smith and Ricardo has never been refuted. All objections to it turned out to be
unfounded.
However, protectionism not
only creates economic disadvantages. It also precludes peaceful cooperation
between states leading to a sure war. The Society of Nations’ efforts to stop
the new global conflagration, through a system of collective security, were in
vain because of this environment since all states, big or small, tended to harm
one another by implementing certain economic measures.
If we are unable to overcome
economic nationalism, all hopes of achieving the reconstruction of our culture
will prove illusory. Economic nationalism prevents industrialized States ¾ that
is, all those that are compelled to import foodstuff and raw materials ¾ from
gathering the necessary means to pay for their imports. How would they be able
to pay if not through the exportation of their industrial products? If not
permitted to export their industrial articles, these states would be fatally
forced into autarchy; on the other hand, countries that possess raw materials
would loose markets for the produce of their land. In industrialized states,
this situation provokes the desire to dominate nations that possess raw
materials through military means. We must not fool ourselves: ambitions of
conquest lie behind apparently innocent claims for the equal distribution of
natural sources of wealth and free access to raw materials.
In a peaceful world ruled by
free trade, there would be no problems regarding raw materials. Each country
would be able to buy all the raw materials it could pay for in international
markets. In a world subject to protectionism things happen in a very different
way: in this world the problem of raw materials cannot disappear; and for small
countries, that is those that are weaker militarily, having mines or a fertile
soil within their borders represents a danger.
All arguments regarding the
advantages of peace, international cooperation, the creation of a society of
nations and the reconstruction of the world economy are hollow words if there
is the intention of preserving protectionism. If one is not willing to renounce
economic nationalism, small states will lose their autonomy and become the
vassals of strong militaristic states. Coalitions of Great Powers, armed to the
teeth, will confront one another and take advantage of any momentary weakness
of their adversaries to undertake new campaigns of conquest.
It is necessary to understand
that this new World War (as well as the First World War) is not the consequence
of a natural catastrophe unleashed upon innocent men; rather, it is the
inevitable result of the nationalist economic policy pursued in the preceding
decades. In a world were free trade prevails, despite the dynamism of
Hitler or Mussolini, reaching a state of war would not have been possible. Evil
men will always exist; however, it is important to create an economic order in
which their power to do harm is reduced to a minimum.
In summary, without the
eradication of economic nationalism, it will not be possible to return to peace
and wellbeing.
III
The main problem of the
postwar era will be general poverty; that is, the shortage of capital.
In the last decade, politics
seemed uninterested in the problem of formation and maintenance of capital.
Governments acted as if the availability of greater or lesser amounts of
capital for production had no importance for the wellbeing of the people.
Through their policy of taxes and public spending, these governments not only
slowed down the formation of capital but also ¾ at least in recent years and in
many countries ¾ caused the consumption of available capital. Thus, they did
not practice a policy aimed at increasing general prosperity and raising
standards of living but one aimed towards the impoverishment of the people.
After the end of the current war, it will not be possible to maintain this
policy unless we deliberately seek the destruction of what we nowadays call
Western Civilization.
What made possible the
development of this civilization, the greatest that has ever existed, was
precisely, at least regarding economics, the continued accumulation of capital
goods. In the days before this time of world wars and dictatorships, a greater
number of people lived, including in this Western Civilization, than in the
days before the Industrial Revolution; and each of these men lived much better
than their ancestors a century or two before. Each year brought rising living
standards for the masses; each year, new products became available for the
average man, which made his life healthier, more agreeable, and more
stimulating. Contemporary men would find the life of the nobility in
pre-capitalist times indignant, not to mention the living conditions of the
commoners.
All of these increases in
living standards are due to the fact that, year after year, production exceeded
consumption. The surplus was gathered and invested; that is used to develop the
production apparatus. In this way, means of transportation were developed and
new installations were created to achieve a better and cheaper production of
all sorts of goods for consumption. The individual labor of each man yields
more today because, for a given quantity of labor, there is a much greater
quantity of capital goods than before. Thus, the marginal productivity of labor
has been growing and, consequently, real wages have increased. If the standard
of living of the masses has increased, it was because the supply of capital in
the economy surpassed population growth.
But the masses did not only
benefit from the increase of real wages: the modern organization of financial
techniques, of systems of credit and of joint stock companies enabled these
very masses to become owners of capital. Most holders of deposits in saving
banks, bonds and insurance policies are even members of the working class. In a
capitalist state, thrift and the formation of new capitals are not the
privilege of a minority, but are generalized; and their fruits, in one way or
another, benefit everyone.
Governments and politicians
have refused to recognize that the increase of capital is the lifeline of
economic progress; on the contrary, they made everything they could to take
away people`s desire for thrift. They confiscated part of that capital through
taxes and impaired small savings by means of inflation. They carried out
expropriations thus eroding the stocks of capital that had been achieved.
As an example, we can mention
the way Hitler acted in relation to German railroads in the Reich. A long time
before the First World War, diverse German states ¾ Prussia, Bavaria, etc. ¾ bought
railroads built with private capitals, paying for them with bonds. Since
these bonds lost their value due to inflation, in a way, the Government
acquired these railroads for free. Hitler managed this vast supply of capital,
equivalent to more than 60,000 kilometers of rail, in the most irresponsible
way. He did not substitute vehicles (locomotives and railcars) that had been
worn out by use, nor did he maintain rails and signal equipment as it would
have been convenient; he also completely unattended fixed equipment. The
situation is similar in the railroads of southern and eastern Europe. When the
current war is over, the greater part of the railroads of Europe will be a heap
of stones and scrap metal. In this way, capital worth thousands of millions has
been consumed in the strictest sense of the word.
The destruction of capital caused
by the war far surpasses that which happened before the war. When the struggle
is over, we will see everywhere huge installations dedicated to the production
of arms and other materials for war, however these installations cannot be
utilized for the production of the goods that are required in peacetime. The
capital immobilized in them will be lost and, instead, there will be lack of
capital where it is most necessary. Old installations meant to produce goods
necessary in peacetime will be useless, either because they have been converted
to serve the needs of rearmament, or because they have been ruined after
several years of disuse.
IV
What could we do to alleviate
this shortage of capital as quickly as possible?
There is only one
solution: to produce more than what is consumed; that is, practice thrift and,
in this way, form new capital. The more one produces, and the higher the
proportion of that production that is invested rather than consumed, the sooner
the hard times of capital shortage will be over. All those that propose
solutions different from the one explained above are either fooling themselves
or trying to fool others.
There are no magical financial
procedures to remedy the shortage of capital. The expansion of credit cannot
alleviate it and much less, suppress it. On the contrary, the boom artificially
produced by the expansion of credit creates distortion and, therefore, a waste
of capital by immediately promoting overconsumption; that is, the reduction of
capital. Inflationist experiments will only make the ailment worse. What is
necessary in this case is, precisely, a monetary and credit policy that
guarantees the stability of monetary value.
Governments will have to
renounce to all confiscatory measures: they will have to radically change their
tax policy.
In many countries, taxes on
rent and inheritance have been transformed into ill-disguised measures of
confiscation. The continuity of this system is not compatible with the
existence of private property and is pointless unless we wished to transit to a
communist regime and make standards of living fall to the permanent state of
misery that prevails among the Russian masses. Within the limits of a
non-communist system, these measures only produce an effect of immobility and
destruction. They stimulate the consumption of capital since; what logic is
there in thrift for a man who knows that only a small part of his inheritance
will go to the hands of his children?
If we wished to preserve an
income tax, it would be necessary to transform it into a tax on consumed rent.
Incomes that are not consumed, but saved and invested, should be exempt from
all taxation since it is of public interest to form as much new capital as
possible.
All large corporations are
developed through the consumption of only a small part of their profits and the
investment of the rest. Due to the simultaneous existence of national and local
duties, the current system increased the taxation of larger incomes to rates of
100% or more. This system makes it impossible to create new industries or
develop those that already exist. For the benefit of the North American people,
the development of corporations that supply markets with a variety of cheap
goods did not stop some years ago; however, current efforts to prevent new competitors
from emerging cause harm to consumers while granting unjustified protection to
the incapable heirs of existing corporations. Tax legislation, considered by
its supporters to be in favor of the people, only produces the
antisocial effect of hindering the supply of consumer goods.
The decrease of government
revenue, as an inevitable consequence of these reforms in the tax system, must
be compensated with the restriction of public spending. It is necessary to
break free, once and for all, from the illusion that the State has money for
everything and everyone. The State cannot give to somebody what it has
previously not taken away from others. In order to plan the State’s expenses,
it is necessary to carefully assess whether the profits to be obtained from the
desired expense are more beneficial than the required increase in taxation and
its economic consequences are harmful. It will no longer be possible to give
away subsidies or issue bonds to finance the reelection of members of
parliament. It will be necessary to return to the economic management of old
parliaments, which understood that an ordered budget is preferable to the
supposed happiness of leveled budgets.
Capital shortage will probably
be less severe in the United States of America than in the British Empire and
less oppressive there then in the European continent. In central, eastern and
southern Europe, the situation will be completely catastrophic. The
industrialized nations of Europe, the most densely populated places on earth,
cannot feed their people without exporting the products of their industry,
which are largely manufactured from imported raw materials. Those countries
will be forced to compete in global markets with their industrialized products
and this will not be done successfully unless they rebuild their apparatus of
production, which was destroyed by hostile policies towards capital in the
previous era and by the war itself, to the levels of capital that existed
before the outbreak of the war. They will have to completely renovate their
transport infrastructure and the machinery of their factories; in other words,
completely address all the problems of industrial production again. But before
achieving it, they will have to endure years or decades of hunger and misery.
It is clear that, in these
circumstances in Europe, particularly in central and southern Europe, the
activities of labor unions will not be possible for a long time. The tendency
of labor unions to forcefully obtain higher wages and shorter working hours for
their members, through unionist means, must be forgotten wherever
capital is completely lacking. Workers will have to satisfy themselves with a
job that can protect them from misery. To whom will they address their
complaints in a country where there is no capital to set industry in motion?
Low salaries, low standards of living, and a general decline of culture: these
are the sad but inevitable consequences of the shortage of capital.
When they notice the pitiful
luck of their European peers, North American workers must realize that they
have effective means to remedy the situation: opening up American borders to
European immigration would create a tendency to equate the level of European
wages to those of the United States. However, if restrictions to immigration persist,
wages in Europe, where natural conditions of production will be worst and
capital shortage most acute, will be much lower than those in North America.
Thus, it is clear that, after
the war, the shortage of capital will produce radical changes in domestic
policy. Now we shall examine what the consequences will be regarding foreign
policy.
V
The development of
international markets for capital and currency during the 19th
century was a great achievement of far reaching worldwide political
consequence. The peoples of Western Europe, which where the first to create
political and economic institutions favorable to the formation and conservation
of capital, made part of their wealth available to less favored nations through
a system of credit. The excess savings of Europe where invested around the
world and helped the peoples of Eastern Europe and Asia overcome their state of
economic backwardness; it also provided Americans and Australians with the
means necessary to exploit the riches of their land. European culture provided
all humanity, not only the fruits of modern technique, but also the material
means to transform the economy according to the demands of modern technique.
Billions poured from Europe (and later also from the United States) to all the
countries of the earth and, as payment, European capitalists, men of business
and thrift, received property rights and industrial values.
This international
organization of credit is now in ruins; the same countries that, once,
prospered because of it have destroyed it. Neither the debts’ interest nor
their principals were paid either because debtors openly defaulted on their
obligations or because governments cancelled the rights of creditors through
inflation or currency controls. Businesses belonging to foreigners were
expropriated or taxed in such a way that their owners where left with nothing
but hollow legal titles. Creditors and foreign capitalists have been completely
dispossessed of their rights.
In these circumstances we
cannot expect that, after the war, the least ruined countries will make their
capital available to the most ruined. The experience of capitalists and
businessmen, regarding the concession of credit and participation in foreign
ventures, is sufficiently explicit for them to feel inclined to expose
themselves to the dangers of such adventures. Maybe the United States,
motivated by old friendships, will invest some capital in Anglo-Saxon countries
or in Mexico, as help to a neighbor. However, even this is doubtful since
American trade unions tend to regard exports of capital as contrary to their
interests and, therefore, demand measures aimed at preventing them. In any
case, it is certain that other peoples will not expect foreign capital, to help
rebuild their economies, unless the dire condition of foreign capitalists
changes radically.
Energetic reforms in
international law are necessary to set the international mechanisms of capital
and credit in motion again. Only states willing to accept great restriction on
their sovereignty can hope to obtain credit or direct investment from abroad.
In all matters related to foreign capital, these states will have to renounce
their autonomy in favor of the Society of Nations; that is, in all that affects
monetary and credit policy as well as mercantile and fiscal powers over foreign
capital, they will have to submit unconditionally to the jurisdiction of
international courts and tolerate the decisions of those courts to be executed
through an international coercive power.
Undoubtedly, all this may seem
very strange and the leaders of most states will simply consider it
unacceptable. But, above all, it is necessary to consider two things: firstly,
every state will be free to submit or not to these conditions and to accept or
decline the assistance of foreign capital; secondly, it is inevitable to
liquidate a conception of state sovereignty that is no longer in harmony with
current circumstances. In no way is it possible to accept that cases such as
those of Austria, Albania or Ethiopia can repeat themselves. Great Powers must
award effective protection to small states from violations such as these. The
ambitions of states that secretly practice a policy of rearmament must be
contained through an international police force. It will be necessary to treat governments
that disturb the peace in the same way as bandits and murderers are treated
within states. By establishing such a system, restrictions of sovereignty
regarding financial and fiscal policy will not seem intolerable and much will
have been gained.
However, we must point out
that all these measures will not be able to completely remedy the shortage of
capital. What may be achieved is a more equitable distribution of existing
capital and with this much will have been gained.
VI
After the current war, the
world will not be a paradise. Men will be poor and have to endure the spiritual
and moral consequences of poverty.
Not all peoples will suffer in
the same way the consequences of war. Latin American countries will probably be
among the least affected ones. Thus, their backwardness in relation to
Anglo-Saxon countries will be compensated in part. A new era will begin in
which the handicap of Latin America will be smaller.
The supposed backwardness of
Central and Southern America, that always made ordinary Cook tourists
smile compassionately, was only due to the shortage of capital in those
countries. Since capitalism reached Latin America two centuries late in
relation to other countries, certain institutions familiar elsewhere were
lacking in the region. The low level was not moral or intellectual: it
was nothing else than a relatively higher shortage of capital.
But now, more or less, all
countries will begin again; and, therefore, with the passing of the years,
these differences may gradually fade. Through a wise economic policy, it may be
possible that Latin American countries can conquer the place in the World
Economy to which they are predestined by the genius and industry of their
citizens and the wealth of their land.
Ludwig von Mises was the acknowledged leader of the Austrian School of
economic thought, a prodigious originator in economic theory, and a prolific
author. Mises's writings and lectures encompassed economic theory, history,
epistemology, government, and political philosophy. His contributions to
economic theory include important clarifications on the quantity theory of
money, the theory of the trade cycle, the integration of monetary theory with
economic theory in general, and a demonstration that socialism must fail
because it cannot solve the problem of economic calculation. Mises was the
first scholar to recognize that economics is part of a larger science in human
action, a science that he called "praxeology."
