Capitalism Encapsulated: Mises in Four Easy Pieces
Ludwig von Mises boiled down capitalism to the essential features that he believed every citizen needed to know.
Mises.org, June 17, 2018
One day in 1959, hundreds of students, educators, and grandees filled the enormous lecture hall of the University of Buenos Aires to capacity, overflowing into two neighboring rooms. Argentina was still reeling from the reign of populist presidente, Juan Perón, who had been ousted four years before. Perón’s economic policies were supposed to empower and uplift the people but only created poverty and chaos. Perhaps the men and women in that auditorium were ready for a different message. They certainly got one.
A dignified old man stepped before them and delivered a bold, bracing message: what truly empowers and uplifts the people is capitalism, the much-maligned economic system that emerges from private ownership of the means of production.
This man, Ludwig von Mises, had been the world’s leading champion of capitalism for half a century, so his message was finely honed. Not only a creative genius but also a superb educator, he boiled down capitalism to the essential features that he believed every citizen needed to know. As his wife Margit recollected, the effect on the crowd was invigorating. Having spent years in an intellectual atmosphere of stale, stagnant ideas:
The audience reacted as if a window had been opened and fresh air allowed to breeze through the rooms.
This lecture was the first in a series, the transcriptions of which are collected in the book Economic Policy: Thoughts for Today and Tomorrow, edited by Margit.
Life (and Death) Before Capitalism
To demonstrate in his lecture how revolutionary the advent of capitalism was in world history, Mises contrasted it with what he called the feudalistic principles of production during Europe’s earlier ages.
The feudal system was characterized by productive rigidity. Power, law, and custom prohibited individuals from leaving their station in the economic system and from entering another. Peasant serfs were irrevocably bound to the land they tilled, which in turn was inalienably tied to their noble lords. Princes and urban guilds strictly limited entry into whole industries and precluded the emergence of new ones. Almost every productive role in society was a caste. This productive rigidity translated into socio-economic rigidity, or “social immobility.” As Mises reminded his Argentine audience:
…a man’s social status was fixed from the beginning to the end of his life; he inherited it from his ancestors, and it never changed. If he was born poor, he always remained poor, and if he was born rich—a lord or a duke—he kept his dukedom and the property that went with it for the rest of his life.
Over 90 percent of the population was consigned to food production so as to precariously eke out sustenance for their own families and contribute to the banquets of their domineering lords. They also had to make their own clothing and other consumers’ goods at home. So, production was largely autarkic and non-specialized. As Mises highlighted, the small amount of specialized manufacturing that existed in the towns was devoted largely to the production of luxury goods for the elite.
From the High Middle Ages onward, production in western Europe was higher and the average person much less likely to be a chattel slave than during antiquity and the Dark Ages. But the economic system was still fixed and moribund; the common man had no hope of progressing beyond a life teetering between bare subsistence and starvation.
It was then and there that capitalism entered the scene, saving the lives of millions, and vastly improving the lives of millions more.
And in the 18th century, in the Netherlands and England, said Mises, multitudes were about to go over the Malthusian ledge, because the population had grown beyond the land then available to employ and sustain them.
It was then and there that capitalism entered the scene, saving the lives of millions, and vastly improving the lives of millions more.
Four key distinguishing features of capitalism can be gleaned from Mises’s lecture. What follows is an exposition of those features, which can be thought of as, to paraphrase Richard Feynman, "Mises in four easy pieces."
It is important to note that, as Mises fully noted elsewhere, what emerged in the 18th century and developed subsequently was never a purely free market. So, the following characteristics have never been universal. But these features did come into play far more extensively in this period than ever before.
1. Dynamic Production
Under what Mises called “capitalistic principles of production,” feudal productive rigidity is replaced by productive flexibility and free entry. There are no legal privileges protecting anyone’s place in the system of production. Lords and guilds cannot exclude new entrants and innovations. And an upstart enterpriser’s capital, products, and proceeds are secure from the cupidity of princes and the jealousy of incumbents.
Free entry/exit is the logical corollary of liberty: inviolate self-ownership and private property.
Of course, free entry amounts to very little without the corresponding right of free exit. With capitalism, peasants are free to leave their fields and former masters for opportunities in the towns. And proprietors are free to sell or hire out their plots of land and other resources to the highest bidder. (Although, during the transition between feudal and capitalist production, it really should have been the peasants doing the selling and hiring out, as they were owed restitution never delivered for their past serfdom and expropriation.)
Free entry/exit is the logical corollary of liberty: inviolate self-ownership and private property. It is the freedom of an individual to put his labor and earnings to whatever productive use he finds advantageous, irrespective of the pretenses to privilege of vested interests.
Under capitalism, no longer can nobles rely on a captive labor force and “customer” base, or enjoy the impossibility of having resources bid away by more efficient producers. No longer can these robber barons turned landed barons rest on such laurels of past armed conquest.
Free entry/exit imposes the stimulus and discipline of competition on producers, impelling them to strive to outdo each other in satisfying potential customers.
Mises identified resentment of this fact as a prime source of anti-capitalism, which thus originated, not with the proletariat, but with the landed aristocracy. He cited the consternation of the Prussian Junkers of Germany over the Landflucht or “flight from the countryside” of their peasant underlings. And he related a colorful story of how Otto von Bismarck, that prince of Junkers who founded the welfare state (with the express purpose of co-opting the masses), grumbled about a worker who left Bismarck’s estate for the higher wages and pleasant beer gardens of Berlin.
Under capitalism, no longer can tradesmen idle in old methods and old markets. To do so is impossible in a world in which any man with savings and gumption is a potential underseller and overbidder. Industry incumbents also loathe the competition, so their special pleading is another major source of anti-capitalist rhetoric.
Free entry/exit imposes the stimulus and discipline of competition on producers, impelling them to strive to outdo each other in satisfying potential customers. As Mises proclaimed in Buenos Aires:
The development of capitalism consists in everyone’s having the right to serve the customer better and/or more cheaply.
Production, formerly adrift in the standing water of feudalistic stagnation, sets sail under capitalistic dynamism, driven by the bracing winds of competition.
2. Consumer Sovereignty
When producers vie with each other to better serve customers, they unavoidably act more and more like devoted servants of those customers. This is true of even the biggest and wealthiest producers. As Mises brilliantly expressed it:
In talking about modern captains of industry and leaders of big business… they call a man a “chocolate king” or a “cotton king” or an “automobile king.” Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all, he serves. He does not reign over conquered territory, independent of the market, independent of his customers. The chocolate king—or the steel king or the automobile king or any other king of modern industry—depends on the industry he operates and on the customers he serves. This “king” must stay in the good graces of his subjects, the consumers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.
With capitalism, just as producers play the role of servant, customers play the role of master or sovereign: in a figurative sense, of course. It is their wishes that hold sway, as producers strive to grant them. And strive they must if they want to succeed in business. For, just as a sovereign of the ancien regime was free to withhold favor from one courtier and bestow it upon another, the “sovereign” customer is free to take his business elsewhere.
This relation is even expressed in the language we use to describe commerce. Customers are patrons who patronizeshops and other sellers. These sellers say, “thank you for your business” or patronage, and insist that “the customer is always right.” The polite, respectful deference formerly given by the ancient Roman cliens (client) to his patronus(patron) is now instead given by the producer to his customer/patron, except generally in a much more self-respecting and less groveling manner.
Thus, with capitalism, it is the consumers who hold ultimate sway over all production.
If the customer is himself also a producer on the market, he must pay forward that same solicitousness and deference to his own customers, lest he lose their business to competitors. Thus, his desires for goods from his eagerly attentive suppliers are shaped by his own eagerness to fulfill the desires of his own customers. Therefore, the higher-order producer, by striving to make his customer happy, indirectly strives to make his customer’s customers happy as well.
This series terminates with the customers who have no customers: namely, the consumers, who are therefore the “engine” of this “train” of final causation. Thus, with capitalism, it is the consumers who hold ultimate sway over all production. Mises referred to this fundamental characteristic of capitalism as, speaking figuratively, consumer sovereignty.
Again, this is constrained to the extent that state intervention hampers capitalism. “Leaders of big business” can and often do use the state to acquire powers and privileges that enable them to flout the wishes of consumers and acquire wealth through domination instead of service.
3. Mass Production for the Masses
In a lecture by David Gordon I once attended, the scholar drew from his limitless reservoir of scholarly anecdotes to relate that Maurice Dobb, a British economist and communist, replied to Mises’s point about consumer sovereignty by averring that this feature of capitalism hardly does the common man any good, since the most significant consumers are the wealthiest. Dobb’s mistake, of course, is to neglect the fact that the relative importance of single consumers is not the issue here. The combined purchasing power of the preponderance of typically wealthy consumers vastly outstrips that of the atypically wealthy.
Therefore, as Mises pointed out, the capitalist’s main route to becoming one of those few wealthy consumers of extraordinary means is through mass-producing wares that cater to the masses of consumers of ordinary means. Even a small per-unit profit margin, if multiplied millions or billions of times, adds up to some serious dough. Boutique enterprises catering only to the elite, as feudal era manufacturers did, simply cannot compare. And that is why, as Mises informed the stunned Perónistas:
Big business, the target of the most fanatic attacks by the so-called leftists, produces almost exclusively to satisfy the wants of the masses. Enterprises producing luxury goods solely for the well-to-do can never attain the magnitude of big businesses.
That is why, as Mises never tired of saying, capitalism is a system of mass production for the masses. It is overwhelmingly the masses of “regular folk” who are the sovereign consumers whose wishes are the guiding stars of capitalist production.
Capitalism flipped feudalism on its head. With feudalism, it was the elite (the landed aristocracy) whose will dominated the masses (the enserfed peasants). With capitalism, it is the wishes of the masses (ordinary consumers) that hold sway over the productive activity of the entrepreneurial elite, from retail giants to dot-com millionaires.
As Mises’s address implied, the yearned-for “people power” always promised by demagogues like Perón, but which invariably turns to ashes in the mouths of the masses, as it did with the Argentines, is the natural result of capitalism, a system so often derided as “economic royalism.”
Imagine his audience’s surprise!
With capitalism, the working people really do hold ultimate sway over the means of production.
But the full truth that Mises was imparting was even more surprising than that. Not only does capitalism fulfill the broken promises of economic populism, but, as Gordon remarked in his lecture, it also follows through on the more specific promise offered by syndicalists and Marxian socialists: worker control over the means of production. That is because, as Mises stressed in his lecture, the vast majority of the masses of ordinary “sovereign” consumers are also workers.
With capitalism, the working people really do hold ultimate sway over the means of production. They just don’t do it in their role as workers but in their role as consumers. They exert their sway in checkout aisles and website shopping carts, and not in the halls of labor unions, syndicates, soviets (revolutionary councils of workers), or a “dictatorship of the proletariat” that reigns in their name while it rides on their backs.
Capitalism has the charming arrangement of empowering the working person, while still preserving economic sanity by placing means (factors of production, like labor) at the service of ends (consumer demand).
4. Prosperity for the People
Capitalism not only empowers the working person, but uplifts him.
Capitalism, as its name implies, is characterized by capital investment, which was the solution to the crisis of how the marginal millions of 18th-century England and the Netherlands were to integrate into the economy and survive.
Labor alone cannot produce; it needs to be applied to complementary material resources. If, with given production techniques, there is not enough land in the economy to employ all hands, then those hands must be placed upon capital goods, if the connected mouths are to eat. During the Industrial Revolution, such capital goods were lifelines that the owners of new factories threw to countless economic castaways and that pulled them from the abyss and back into the division of labor that kept their lives afloat.
Knowing this truth of the matter, Mises was rightly appalled at the anti-capitalist agitators who “falsified history” (Gordon identified Thomas Carlyle and Friedrich Engels as among the worst offenders) to spread the now dominant myth that capitalism was a bane to the working poor. He set the issue right with passion:
Of course, from our viewpoint, the workers’ standard of living was extremely low; conditions under early capitalism were absolutely shocking, but not because the newly developed capitalistic industries had harmed the workers. The people hired to work in factories had already been existing at a virtually subhuman level.The famous old story, repeated hundreds of times, that the factories employed women and children and that these women and children, before they were working in factories, had lived under satisfactory conditions, is one of the greatest falsehoods of history. The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into factories because they had no kitchens, and if they had a kitchen they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying. And all the talk about the so-called unspeakable horror of early capitalism can be refuted by a single statistic: precisely in these years in which British capitalism developed, precisely in the age called the Industrial Revolution in England, in the years from 1760 to 1830, precisely in those years the population of England doubled, which means that hundreds or thousands of children—who would have died in preceding times—survived and grew to become men and women.
And as Mises further explained, capitalism not only saves lives, but it vastly improves them. That is because capitalism is also characterized by capital accumulation (which is why Mises embraced the term, in spite of it originating from its enemies as an epithet), which is the result of cumulative saving and perpetual reinvestmentbeing unleashed by greater security of property from meddlesome laws as well as grasping princes and parliaments. Capital accumulation means ever-growing labor productivity, which in turn means ever-rising real wages for the worker.
These higher wages are the conduits through which workers acquire the purchasing power that crowns them with consumer sovereignty. And they are no petty sovereigns either. Thanks to his capital-enhanced high productivity, a modern worker’s wage-powered consumer demand guides the deployment of a globe-spanning, dizzying plethora of sophisticated machines, factories, vehicles, raw materials, and other resources, as well as the voluntary labor of the other workers who use them, all of which conspire to churn out a cornucopia of quality household staples, marvelous devices, amazing experiences, and other consumers’ goods and services for the worker to choose from for his delectation. Purchasing such goods with his higher wages is how the worker claims his portion of the greater abundance, which approximatesto his own capital-enhanced contribution to it.
And higher wages are not the only way that the average working person can enrich himself through capitalism. Especially since the advent of investment funds, he can supplement and, upon retirement, even replace his wage income with interest and profit by putting his high-wage-fed savings to work and partaking in capital investment himself.
Because of these characteristics, as Mises proclaimed to those assembled:
[Capitalism] has, within a comparatively short time, transformed the whole world. It has made possible an unprecedented increase in world population.
He returned to the subject of England for one of the more paradigmatic examples of this:
In 18th-century England, the land could support only 6 million people at a very low standard of living. Today more than 50 million people enjoy a much higher standard of living than even the rich enjoyed during the 18th century. And today’s standard of living in England would probably be still higher, had not a great deal of the energy of the British been wasted in what were, from various points of view, avoidable political and military "adventures."
In one of those wonderful flashes of dry wit that would illuminate his discourse from time to time, Mises urged his auditors that, should they ever meet an anti-capitalist hailing from England, they should ask him:
…how do you know that you are the one out of ten who would have lived in the absence of capitalism? The mere fact that you are living today is proof that capitalism has succeeded, whether or not you consider your own life very valuable.
Mises furthermore cited the more general and clearly evident fact that:
There is no Western, capitalistic country in which the conditions of the masses have not improved in an unprecedented way.
And in the decades following his speech, the conditions of the masses improved incredibly in non-Western countries (like China) who partially opened up to capitalism as well.
Mises concluded his talk by urging his Argentine fellows to seize the day and strive for the economic liberation that would unleash the wonderworks of capitalism, and not to sit and wait for an economic miracle:
But you have to remember that, in economic policies, there are no miracles. You have read in many newspapers and speeches, about the so-called German economic miracle—the recovery of Germany after its defeat and destruction in the Second World War. But this was no miracle. It was the application of the principles of the free market economy, of the methods of capitalism, even though they were not applied completely in all respects. Every country can experience the same “miracle” of economic recovery, although I must insist that economic recovery does notcome from a miracle; it comes from the adoption of—and is the result of—sound economic policies.
Conclusion
If the subsequent policies adopted in Argentina, South America, and the world are any indication, Mises’s message, as lucid and affecting as it was, did not propagate far beyond the auditorium walls that day. Perhaps in the age of camera phones, YouTube, and social media, it would have. But his brilliant encapsulation of the beneficence and beauty of capitalism did not dissipate vainly into the Argentine air. Thanks to his Margit and to institutions that spread his works online (like FEE, the Mises Institute, and Liberty Fund), his message was preserved for the ages and is now only a mouse click away for billions.
Ludwig von Mises can still save the world by posthumously teaching its people the unknown truth about the inherently populist nature of capitalism in a way which speaks to their hopes and longings: that private property means dynamic production, which means a competitive, consumer-steered economy, which means a production system geared toward improving the lives of the masses, which first means widespread succor and ultimately ever-rising prosperity for the people of the world.
